Rules for LLC California Secretary of State include instructions for forming an LLC and filing your taxes.

What is a Limited Liability Company (LLC)?

Limited liability companies are business entities that can have an unlimited number of members. These members can be people, foreign entities, other corporations or LLCs. LLCs can also have a single member, and in that case, they are created to protect that person against personal liability.

An LLC is considered a separate entity legally. So, the member will be kept from experiencing fallout from the LLC's liabilities, such as litigations or creditor attacks. Also, the member does not need to pay self-employment tax on the LLC's profits.

File S Corporation Election

LLCs are not recognized by the IRS as a taxable entity. Often, an LLC with multiple members will be taxed as a partnership. LLCs with a single member pay taxes as sole proprietorships. LLCs can also be taxed as corporations.

You may choose to be taxed as an S corporation. To do so, you need to fill out IRS Form 2553. This should be completed in the first 2 months and 15 days of the tax year where the change will take effect. You can also file Form 2553 in the year before the change will take effect. By default, an LLC will be taxed as a C corporation, if it's taxed as a corporation at all. You must elect to be taxed as an S corporation instead. Taxation as an S corporation is beneficial because you can use various tax benefits of corporations but avoid being double-taxed in certain instances, as a C corporation would be.

Does it make sense for an LLC to be taxed as an S-Corporation?

Speak with a CPA or an attorney to gain clarity on whether you should make the optional election to be taxed as an S corporation. You may be getting taxed excessively if your business generates more profits than what owners could reasonably generate through their work.

Self-employment taxes for partnerships and sole proprietorships amount to 15.4 percent of profits. S corporation taxation lets the LLC pay members a wage, which reduces the LLC's profits.

The wage portion will incur self-employment taxes. The profits of the LLC are distributed to members afterward, and they are not subject to self-employment tax. Only members who are actively working in the business are eligible to receive a wage. Thus, passive members will not get this tax benefit. Usually, this results in lower taxes for active members. Note that wages must be reasonable for the person's role; in other words, they can't be too low. Consult your CPA or tax attorney to determine whether the wages you pay members are "reasonable".

Restrictions on the S Corporation Election

  • The LLC cannot have members who are non-resident aliens, partnerships, or corporations.
  • The LLC cannot have over 100 members.
  • The LLC may not have non-voting and voting members, or any other separate categories of ownership.

How to Form an LLC in California: Choose a Name for Your LLC

California law states that an LLC's name should end with any of the following: LLC, L.L.C., or Limited Liability Company. Additionally, you may abbreviate "Company" to "Co." and "Limited" to "Ltd.". An LLC cannot use words such as insurer, insurance company, corp, corporation, inc, incorporated, trust, trustee, or bank in its name. University, bank, and attorney are examples of restricted words that require licensing and paperwork. Any words that could cause your business to be confused with a government entity, such as FBI or treasury, are also not allowed.

Your LLC name cannot be too similar to an LLC name that already exists in California. Check the California Secretary of State's website to see if your name is similar to one that's already in existence. Search terms are checked against the California SOS' list of registered LLC names.

You can fill out a name reservation request form to reserve your name for up to 60 days. The form requires a $10 fee, and it can be mailed to the California SOS or delivered in person. There is more helpful information about naming an LLC in the Secretary of State's publication "Business Entity: Name Regulations & Additional Statutory Requirements and Restrictions", which can be downloaded from their website.
