LLC Fee Increase

LLC PROS AND CONS

Limited Liability Companies (LLC's) allows its owners to limit their personal responsibility for losses or legal claims to what they have invested in the LLC. (But, they can't avoid personal liability for most acts they do personally). Regular and Sub S Corporations also offer limited liability much as LLC's.

Regular corporations are taxed on income. They can pay their stockholders dividends. But the corporation has to pay income tax on their earnings before dividends. Then the stockholders have to pay tax on the dividends they receive. (That is why the tax on dividends was reduced in 2003.

Sub S corporations and LLC's pass income through to stockholders without double taxation. However, capital gains advantages may be lost by using an LLC.

Unlike Sub S corporations. an LLC can have an unlimited number of owners, and other flexibility. But an LLC cannot have unlimited life like a Corporation. The maximum life is determined by the state laws involved.

Watch out that you don't sign personal guarantees that overcome limited liability! These are typically required by banks (as security for bank loans), and sometimes even by suppliers. [If you are a supplier - It won't hurt to try to get a personal guarantee from someone at the LLC! You might get paid faster.]

California has allowed LLC's since 1994, but the laws for them have improved since then. Still, much of LLC tax & legal details haven't been tried in a court of law. Sub S's have been in existence much longer, and I personally prefer Sub S entity form over LLC form.

Limited Liability Companies that are not classified as Corporations for California Franchise or Income tax purposes have two taxes imposed on them as follows:

• They have a $800 Privilege Tax that is like the Privilege Tax imposed on Limited Partnerships (No General Partner).

• The second tax imposed is a fee based on level of (gross) income - see below.This tax has been declared illegal but the State of California is appealing two separate decisions. You may need to file a protective claim for refund if you have paid this.The California tiered annual fees payable by limited liability companies (LLCs) doing business in the state, organized in the state, or registered with the California Secretary of State are permanently set, applicable to tax years beginning after 2000. The permanent fee schedule is based on four ranges of total (gross) income - see below, as follows:

$900 if total income is at least $250,000, but less than $500,000
$2,500 if total income is at least $500,000, but less than $1 million
$6,000 if total income is at least $1 million, but less than $5 million
and $11,790 if total income is $5 million or more

• The definition of "total income" is revised to remove allocations or attributions of income, gain, or distributions to one LLC in its capacity as a member of, or holder of an economic interest in, another LLC if the allocations or attributions are directly or indirectly attributable to income that is included in determining the annual fee payable by the other LLC. The prior definition of "total income" caused some income to be included more than once in determining the annual fee payable to California. (Ch. 391 (A.B. 898), Laws 2001, applicable as noted above.)

I am NOT an expert on LLC's! My clients have used Sub S corporations successfully for many years. I do prepare LLC returns, but I can't advise in depth about LLC planning aspects or choice of an LLC as a preferred entity.

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