To LLC or Not to LLC

That is the question

by Peter Girolamo, C.P.A., M.B.A.

If Shakespeare was writing today, this question would likely have been on his mind as he began his publishing career. It is a question that virtually all new start-ups have, and in most cases there is not an easy answer.

An LLC, or Limited Liability Company, is a form of business legal entity. There are similarities to the corporation structure in that it provides (in most cases) legal liability protection for the business. And it is simpler to create and maintain than a corporation.*

If we stop there, it seems like the LLC's the thing. But as it turns out, all that glitters is not gold. At least in California.

The issue of taxes becomes important in this decision. The Internal Revenue Service and California Franchise Tax Board don't recognize the LLC structure. For tax purposes an LLC must choose how it intends to be taxed, as a sole proprietorship, partnership or corporation. While that doesn't seem like a big deal on the surface, it becomes a bigger deal when you consider California LLC taxes.

All sole proprietorships and partnerships organized as LLCs are subject to a California LLC tax, and at certain levels of income an LLC “fee” is also levied based on revenues earned in California. The LLC tax is $800 per year and is payable even if your company loses money. The LLC fee is calculated on a sliding scale, as follows for 2010:

Equal to or over But not over LLC Fee Is
$250,000 $499,999 $900
$500,000 $999,999 $2,500
$1,000,000 $4,999,999 $9,000
$5,000,000 and over   $11,790

Compare this to a sole proprietorship or partnership that is not an LLC. In these cases your net profit or loss is exactly the same as it would be as an LLC, but there is no California LLC tax or fee to pay. You get a better tax deal as a sole proprietor or partnership, since you will save some money on taxes by simply not organizing as an LLC. So now the questions for the business owner are: How big is your small business, how much is the liability protection worth, and is it really necessary? Can insurance provide enough protection without organizing as an LLC?

A California LLC taxed as a corporation is different. Such LLCs are taxed exactly the same way that they would be if they were organized as corporations. There is a state income tax, which is a minimum of $800 per year, whether the corporation earns a profit or not. However, the corporation tax may be higher depending on the amount corporate profits and whether the entity is taxed as a C corporation or an S corporation. An LLC taxed as a corporation is not required to pay the annual LLC fee referred to previously.

Bottom line is that an LLC is neither good or bad, but thinking makes it so. If you're establishing an LLC and doing business in California, be sure to consider the peculiarities of the California tax code so you are making an informed choice. For more information refer to the Franchise Tax Board Website here (

* Please consult with an attorney about the legal aspects of creating a business entity. I am not an attorney and therefore I can not provide legal advice.

If you have any questions or need to speak with a CPA, feel free to contact us.

Peter Girolamo, CPA specializes in bookkeeping, payroll, tax services and related advice for small businesses and their owners. His office is located in Thousand Oaks California, but he serves clients in several states. Peter can be reached or by phone at 805-778-9277.