Llc Advantages For Rental Property
One of the biggest LLC advantages for a rental property is shielding your assets.
If your rental property is owned by an LLC, anyone who wants to sue you can only go after what your LLC owns and cant touch your assets.
For example, lets say that you own a rental property and have an irresponsible tenant. Your tenant isnt paying attention one day and their kid nearly drowns in the pool, so they want to sue you for that.
Because the property is shielded by an LLC, that tenant cannot sue for anything you own. They can only sue for the LLCs assets, which will prevent you from losing everything you have to a frivolous lawsuit.
A less obvious benefit among various LLC advantages for rental property is the professional appearance. You will be taken more seriously as a landlord by investors, tenants, repair people, and others if you have an LLC as opposed to not having any formal business structure in place.
If you have a rental property and want to set up an LLC, email me at to begin.
What Are The Tax Implications In California Between An Llc And A Corporation
Its probably best to understand the difference between LLC, S Corporation and C Corporation first before we can sort out the tax implications between LLC and Corporation.
There are two legal business entities that relate to this question. One is LLC and the other is C Corporation . S Corporation is an election by limited liability companies or traditional corporations to be taxed as such. In other words, both limited liability companies and traditional corporations can choose to be taxed as S Corporation.
And heres an excerpt from 3 minutes version that summarizes the differences, which might be helpful to you:
LLCFirst, there are no tax advantages to forming an LLC. In fact, forming an LLC wont change a thing for Federal income tax purposes. Single-owner LLCs are taxed just like sole proprietorships, and multiple-owner LLCs are taxed just like partnerships.
You should, however, be aware that forming an LLC might subject your business to additional state taxes. Certain states subject LLCs to franchise taxes in addition to a typical income tax.
Also, you should be aware that S-corporations are significantly more complicated from a tax and legal standpoint than LLCs. So if you form an S-corp, know that youre going to be spending a great many more billable hours with your accountant/attorney.
Regarding the tax differences between LLC and S Corp, BusinessKnowHow offers the following information:
Llc Is Attractive To Foreign Investors
Although LLCs are relatively new in many states of the US, they have been in operation overseas for over a century. Thus, when investors from other parts of the world are looking to invest, they are familiar and comfortable with the LLC structure.
This can also be plus when it comes to counting the advantages of LLC. Also, investing in an LLC is less imposing than bigger corporations, so they provide a great place for foreign investors to enter the American market.
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How Do I Set Up An Llc For A Rental Property In California
When setting up your LLC for a rental property in California, you must first come up with a unique name for your business. The name you select must not be the same as or similar to an already existing name listed in the California Secretary of State records.
If you already have a name in mind, you will want to make sure it is available before submitting your application. When creating your business, make sure that you put LLC or Limited Liability Corporation after your business name. For example, if your business name is Lucys Salon Studios, it will need to look like Lucys Salon Studio LLC.
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Initial And Biennial Tax
From the date you file your LLC Articles of Organization, you will have 90 days to file the initial information statement through the Secretary of State’s website.
The filing fee for the initial statement is $20, and you can file online or by mail.
Every LLC in Califonia is under the obligation to repeat this process every two years. The biennial statement fee is $20, and you can submit it online or by mail.
The filing deadline for updates to your LLC’s articles of organization is two years following the anniversary month of its founding.
The statement of information should include the following information:
- Information about the LLC’s officers, managers, or members.
- The address of your business in California and any changes to that location.
- A statement indicating if there have been any changes made to its management structure since it was originally formed.
- Your registered agent information
California Llc Corporation Taxes
Single-member and multi-member LLCs in California can choose to be taxed as corporations by filing Form 2553.
California taxes corporate profits at a flat corporate rate.
The annual franchise tax in California is currently calculated at a fixed 8.84% of net income from business transactions conducted in the state.
If your LLC is taxed as a corporation, you will need to pay this LLC tax and use the state’s corporation income tax return for it.
Keep in mind that there’s a difference between an S corporation and a C corporation in how they pay the taxes.
You pay federal income tax on your C corporation profits, as well as any money you earn as a business owner or employee.
The owners of S corps, on the other hand, report the LLC’s revenue on their personal tax returns as personal income.
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Sole Proprietorship Vs Llc California
It is beneficial for a business owner to form a Sole Proprietorship in California, but the state-specific benefits of this structure are different than a California LLC.
Unfortunately, Sole Proprietors in California do not have the same liability shields and tax advantages that LLCs or S Corps would. A Sole Proprietor is still 100% personally liable for all debts and actions the LLC undergoes. They also must pay tax on all income earned by the business.
The one advantage of forming a Sole Proprietorship in California is the simplicity of the process. Because all taxes and liabilities are passed right onto the business owner, there arent any specific state filing requirements.
This makes the structure extremely easy for just about any person to form, which can be a relief for someone who might not be able to form an LLC in California.
How Do I Maintain An Llc In California
To keep your California LLC in good standing with the state, youll regularly need to:
- File a Statement of Information
- Pay your $800 Annual LLC Tax
- Pay your LLCs California Taxes
If you dont file your Statement of Information or taxes on time, the state will charge late fees. If you continue to ignore these requirements, the state will also suspend or shut down your California LLC.
For more details on how to file your Statement of Information, watch our video lesson here.
If you want to learn about your California LLC tax obligations, then check out this video lesson. How long does it take to form an LLC in California?
The state will approve your California LLC in 3-5 business days.
Also, if you form your LLC during peak filing season , approval can take up to 6-7 business days.
You can form your California LLC online or by mail. We recommend the online filing as its easier. You can find instructions for both here: California LLC filing instructions.
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Do I Have To File Taxes For An Llc If It Has No Income
If you elected to have your LLC taxed as a corporation, you will need to file taxes for your LLC even if it has no income. By law, corporations are required to submit annual corporate tax filings, regardless of whether they have any earned income. Additionally, LLCs in California also need to file Form 568.
File Articles Of Organization
The next step to form your LLC is to file articles of organization with the state of California. You can file the form online for faster processing, or print and submit the form by mail or in person.
In California, LLC articles of organization must include the following:
Address of the LLCs California office.
Registered agent information.
Whether the LLC will be member-managed or managed-managed.
Name and signature of the organizer who is filling out the form .
The filing fee for articles of organization is $70. Make sure youre filling out the correct form for your company. Domestic LLCs LLCs that are based in and organized under the laws of California must fill out Form LLC-1. Foreign LLCs those that are formed under the laws of another state but want to do business in California must fill out Form LLC-5.
Once you submit your articles or organization, the state of California generally takes about one week to process your articles . If approved, the state will send you a stamped copy of your articles of organization. You should also receive a 12-digit identification number that you will use on other state paperwork.
If youve reached this point, congratulations! Youre now authorized to do business in California as an LLC. But there are still a few more steps you need to follow to ensure that your LLC remains in good standing with the state.
Image courtesy of Sos.ca.gov.
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Reasons To Start An Llc In California
California is one of the best states to set up an LLC. With a GDP of $2.3 Trillion, Californias economy has become one of the strongest ones in the last few years. Having an LLC in the state of California is not only easy but also economically profitable for any start-up. Among 130 businesses, the top 20 businesses have their business home in California. The reason mostly is the tax benefits. There are some government regulations under which LLCs get incentives and grants.
California is the heart of the business, where you can get vast potential customers for your business. The state has a lot of opportunities for entrepreneurs. The best part of the state is that you can get business funds easily for your business. For example, there are small banks for small business to support. These business banks have loan facilities for informal business structure as well. Besides, if you have a woman-owned business, then you might get tax benefits. Along with providing limited liability protection, LLCs have fewer tax liabilities. Besides, you may get professional liability insurance to protect your professional assets along with personal asset protection. Here are some benefits of having an LLC in the state of California,
Personal Liability Protection
Low-Cost LLC Formation
The cost of LLC formation in California is much lesser than in the District of Columbia, Connecticut, and Delaware.
Is California The Best State To Form My Llc
Youll want to form an LLC in California if: your business is located in California you live in California you own real property in California
If you live in California and do business in California, then yes. If not, then youll be better off forming an LLC in the state where you reside and/or do business.
Many people preach about the so-called benefits of forming an out of state LLC. They say you can save on taxes and other expenses when you form an LLC in places such as Wyoming, Nevada, and Delaware.
Reality check: youll actually have to spend twice the amount if you make and operate an out of state LLC .
Because youll be required to register that out-of-state LLC as a Foreign LLC in California, youll be paying:
- 2 State filing fees
- 2 Annual Report fees
- 2 Registered Agents
Not only that, but youll have the added burden of running 2 LLCs .
Again, save yourself the headache and extra costs: form an LLC in your own state.
For more information on which state is best, please watch this video.
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Options For Federal Tax Purposes
Another major advantage of forming an LLC is that the members involved have options when it comes to federal tax.
Due to the flexibility of an LLC as a business structure, an LLC with a single owner can choose whether they want their LLC to be taxed as a sole proprietorship, an S corporation, or a C corporation.
On the other hand, LLCs with two or more owners can be taxed as a partnership, an S corporation, or a C corporation.
It is important to note that the members of the LLC will only be able to enjoy pass-through taxation as long as they do not opt to have the LLC taxed as a C corporation.
Comply With Tax Obligations
LLCs formed in California, as well as LLCs formed out of state that are registered to do business in California, are required to pay four main types of taxes. The first is an $800 annual franchise tax that all LLCs must pay. The second is a gross receipts tax that varies based on the total revenue of the LLC:
$0 to $249,999 total revenue = no gross receipts tax.
$250,000 to $499,999 gross revenue = $900.
$500,000 to $999,999 gross revenue = $2,500.
$1 million to $4,999,999 gross revenue = $6,000.
$5 million + gross revenue = $11,790.
Members of LLCs must also pay personal state income taxes on their share of the LLCs profits. Unless an LLC elects to be taxed as a corporation, the income of the LLC passes through to the owners personal income tax return.
Lastly, LLCs with employees must withhold payroll taxes from their employees wages and pay the employer share of payroll taxes. Employer payroll taxes in California are 3.5% for the first two to three years, and variable after that based on industry and a number of other factors.
Note that there might be other tax obligations for your LLC. For example, if your LLC elects to be taxed as a corporation, then you would follow Californias corporate tax rules. Businesses must also collect sales taxes for certain products and services.
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How Much Is Llc Tax In California
State taxes are another thing to consider when you calculate the costs of running an LLC in California. You cant legally avoid them, even if you form your LLC in another state.
Youll have to register an out-of-state LLC to do business in California, and youre required to pay taxes and fees the same as any other California LLC.
California imposes a California LLC tax and other fees, paid to the California Franchise Tax Board .
File Your Articles Of Organization
To create your California LLC, you will need to file your Articles of Organization. Your Articles of Organization in California is the LLC-1 form. There is some information you must gather before you submit these documents.
Information needed for your Articles of Organization:
- Information on how you will manage your LLC
- Names of the LLCs members
- The physical business address
- Name and address of your registered agent
You have the option to complete this form on your own online, or you can have someone prepare these forms on your behalf. Keep in mind that if you employ a company to help form your documents for you, they will most likely charge you a fee.
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Tips For Forming An Llc
Now that you know about some of the benefits of LLCs, it’s a good idea to get some tips about how to form one of these companies. While it’s true that starting an LLC does require formal registration and covering formation costs, the effort will be well worth it once you have created your company.
Getting a name is the first step of forming an LLC. Before you name your company, you should search registered business names in your state. This will save you time and will prevent you from choosing a name that conflicts with another business name. Typically, your company name will need an indicator such as Ltd. or LLC. You’ll also need to avoid using restricted words in your company’s name.
Filing Articles of Organization for your LLC is the next step of forming your company. Depending on your location, this document may also be called a Certificate of Formation or a Certificate of Organization. Regardless of the name, you will use your Articles to notify your state of important information about your business, including:
Tax Flexibility Of An Llc
An important feature of an LLC is that the Internal Revenue Service allows business owners to choose the way their business will be taxed. They can choose to be taxed as a sole proprietor, a partnership, an S corporation or a C corporation. You choose how youll be taxed by filing IRS Form 8832.
There are some limitations on the aforementioned choices. An LLC with multiple owners cant choose to be taxed as a sole proprietor, for instance. The IRS will automatically tax an LLC as a partnership if it has more than one owner. You can learn more about rules for taxing LLCs from the IRS backgrounder on Form 3402, covering the taxation of LLCs.
The table below breaks down four common to pay taxes for an LLC:
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