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Converting LLCs to S-Corporations

Dear Clients and Friends:

The California Limited Liability Company (LLC) fee based on gross California receipts could be costing your company thousands of extra dollars each year.  A California LLC paid the following fees based on California gross receipts (this fee is in addition to the $800 yearly minimum tax):

 

Gross Receipts: Equal to or over –But not over –The fee is:
$   250,000$   499,999$     900
500,000999,9992,500
1,000,0004,999,9996,000
5,000,000And over11,790

 

In many cases choosing an LLC as a form of doing business is a great choice, LLC’s grant a great deal of freedom and flexibility.  Among the many advantages of an LLC which are not available to S corporations are:

  • Unlimited number of LLC members
  • Special allocations of income, loss, and distributions are allowed
  • An LLC may have a C Corporation, various types of Trusts, or non-US citizens/residents as its owners

With that said, the California LLC fee is charged regardless of what the company’s net income is and it may be to your advantage to convert your LLC to an S-Corporation.  California does not charge annual fees based on gross receipts for S-Corporations, instead California charges a 1.5% tax on the corporation’s net income.  For example, ABC Company has $1,500,000 in sales and a taxable net income of $200,000, if ABC Company is doing business as a LLC it would be subject to a California LLC fee of $6,000.  If instead, ABC Company was doing business as an S-Corporation it would be subject to California S-Corporation tax of $3,000 and potentially save $3,000 in that year.

Before deciding to convert your California LLC into an S corporation you’ll need to contact your attorney to understand the legal ramifications of such conversion.  There may be other future benefits to keeping your LLC intact even if it costs you extra California LLC fees today.  To determine if an S corporation is a more appropriate form of doing business compared to an LLC or any other type of choice of entity issue please contact our office at (949) 910-2727 to discuss further.

Very truly yours,

WRIGHT FORD YOUNG & CO.

Certified Public Accountants and Consultants, Inc.

 

Please note that any tax laws or regulations discussed in this memo may not necessarily be effective after the date of drafting this article.

To ensure compliance with the requirements imposed by the Treasury Department Regulations (Internal Revenue Service), Wright Ford Young & Co. is required to inform you that any tax advice in this written or electronic communication was not intended or written to be used, and it cannot be used, by a client or any other person or entity for the purpose of avoiding penalties that may be imposed on any taxpayer.