Tax season is a stressful time for all. Between paperwork and combing through your budget, it can take a toll on any business owner. Although a Limited Liability Company or LLC offers flexibility in filing taxes, choosing the right business structure has its own legal and tax consequences.

Since there are no set tax rules to how an LLC is taxed in California, the IRS allows you to operate under a partnership, corporation, or a single-member LLC. Understanding each business structure will help you figure out what is the best tax classification for your LLC.

Go through tax season with ease and avoid penalties. Learn about the differences between a single-member LLC, partnership, and S corporation’s tax classification here.

How Is an LLC Taxed in California? Understanding LLP, Corporation, and Single Member LLC California Taxes

Limited Liability Company or LLC is a special type of business entity. The tax classification for LLC varies so that companies can choose depending on their setup. The choice depends on whether you are a sole owner or if you have a partner. 

  • A single-member limited liability company (SMLLC) applies if your company has only one member. For federal tax purposes, your SMLLC is also classified as a disregarded entity.  
  • If your company has more than one owner, you can register as a Partnership type. The sub-types include: limited liability partnership, limited liability limited partnership, or series limited liability company.  
  • Your company can operate as an LLC but taxed as an S corporation.  

Single Member LLC or Disregarded Entity  

This may sound slightly confusing, but the concept of Single Member LLC (SMLLC) is straightforward. In a nutshell, an SMLLC is a combination of a corporation’s limited liability and the tax benefits of companies classified as sole proprietorship. It is also called a disregarded entity if an SMLLC does not want to be elected as a corporation.  

It is a limited liability company with only one member and that member is also the owner. So, how is an LLC taxed in California if it falls under SMLLC? For federal tax purposes, the tax for this type of business is attributed to the owner’s income tax return. This also gives the owner tax benefits and limited liability protection.  

Limited Liability Partnership 

A Limited Liability Partnership type of for-profit company has two or more owners. It involves a written agreement to formalize the partnership. All the partners can manage the company and share the liability. In terms of taxes, partners are taxed based on their individual profit share. This is called pass-through taxation. Using the IRS form 1065 Schedule K, a partner should report their share of the company’s loss of income.  

In some states, a franchise tax is imposed on LLPs, but not in California. 

S Corporation 

An S corporation is a type of “pass-through” business entity also known as S subchapter. One of the advantages of being an S-Corp is that it can directly pass the business income, losses, deductions, and other credits directly to the shareholders and not pay federal corporate taxes if it meets the specific Internal Revenue Code requirements. 

Shareholders of S corporations must be individuals, estates, tax-exempt organizations, or trusts. You can register as an S corporation if you meet the following requirements: 

  • Incorporated within the US 
  • Have no more than 100 shareholders 
  • Shareholders meet the IRS’ eligibility requirements 
  • Have one class of stock 

What Differentiates an SMLLC and S Corporation?

The complicated issue of tax election is better understood with a business lawyer. There are many details to learn about the type of entity your business has and the taxes you have to pay. What many limited liability companies find confusing are S corporation and single-member LLC tax classifications.

An SMLLC or disregarded entity has one member and one owner, so the income tax is attributed to the individual’s income. The same goes with S corporations. Technically, they don’t differ, except with the employee identification number (EIN) application.

With S corporation, it matters what entity is applying for the EIN.  Is it an individual (sole proprietor or corporation), an LLC, partnership, or trust? During the application for EIN using the SS4 form, this tax election issue comes up.

An attorney can give you sound guidance on how an LLC is taxed in California.

Get Premium Legal Services for Your LLC Business Taxes

At first, it will be hard for you to get the hang of how an LLC is taxed in California with all the technical details, tax forms, and IRS policies you need to be familiarized with. It will take you time to study all of the issues surrounding business entities and how you can benefit from tax payments.

Without an attorney to assist you with proper tax filing, you are prone to errors and delays resulting in fines and penalties. With our help, you can get past the hard part and focus on your business. Leave all the paperwork up to Incorporation Attorney and move forward with the more important business matters.

Incorporation Attorney’s premier business lawyers have a long list of clients that have benefited from our premium legal services. We have a legal team that’s committed to helping you with incorporation and tax matters.

Find out more about how we can help you. Schedule a kick-off call with us to get initial legal advice!