LLCs (Limited Liability Companies) are flexible and relatively easy to form, which makes them a popular option for people that are starting their own businesses. However, LLCs must file tax returns just like any other business. LLCs that fail to file their taxes in California can expect to face penalties that can affect their ability to do business in the future. To learn more about what will happen if your LLC fails to file its taxes in California and how you can use the services of the Sacramento and Roseville, CA tax preparation attorneys from The NewPoint Law Group, LLP, continue reading.
Understanding Taxes for LLCs in California
LLCs are a type of business that blends different elements found in other business structures such as partnerships and corporations, which can allow members to have access to specific benefits. Members of LLCs have the right to participate in the management of the LLC, as well as the profits that are made, which can make it an attractive business structure for entrepreneurs. Also, individual owners and members of LLCs are generally not liable for debts and obligations incurred by the LLC, meaning that creditors are not usually able to seize LLC members’ personal assets.
The tax rules for LLCs are similar to the tax rules for other types of businesses. However, it is important to understand the nuances of these rules and work with a tax attorney if you have any doubts about whether your filings are correct.
Penalties for LLCs That Don’t File Their Taxes in California
Whether or not an LLC in California will face penalties for not filing their taxes depends on the number of owners the LLC has. The following is information about the different types of LLCs and their tax requirements according to California law.
Single-Owner LLCs
LLCs with only one member are treated like sole proprietors by the IRS, which means that the LLC itself is not required to file a tax return with the IRS or pay taxes – single-owner LLCs typically won’t face penalties if they fail to file income tax returns for the LLC. Sole owners of LLCs must report all of their profits and losses on Schedule C and submit with their 1040 tax return. In California, single-owner LLCs are also referred to as “disregarded entities.” Although they are not required to file taxes, single-owner LLCs are required to pay a yearly LLC fee.
Multi-Owner LLCs
LLCs with multiple owners are treated like partnerships by the IRS. Similar to one-member LLCs, co-owned LLCs don’t pay taxes on their business income. Instead, each LLC owner pays taxes on their share of profits when they file self-employment taxes (they can use Schedule E and attach it to their 1040 tax return). Each member’s share of profits (their “distributive share”) should be included in their LLC operating agreement; if an LLC would like to split up profits and losses in a way that isn’t proportional to each member’s distributive share, it is known as a special allocation and has special rules set by the IRS. LLC members pay taxes on their distributive share, not the amount of money that actually gets distributed to them.
Each member of the LLC is responsible for setting aside money from their income to be able to pay taxes on their individual share of the profits from the LLC. Members are required to estimate the amount of tax they’ll owe for the year and make payments to the IRS and appropriate state tax agencies quarterly.
Even though LLCs with multiple owners don’t pay their own income taxes, they must file Form 1065 with the IRS. This is an information return that is reviewed by the IRS to ensure that all LLC members are reporting their income accurately. The LLC must also provide each member of the LLC with a Schedule K-1. This form breaks down each member’s share of the profits and losses made by the LLC, which each member can then use to report profit and loss information on their individual Form 1040 with Schedule E attached.
Multi-owner LLCs have the option of electing to be taxed as a corporation, which can be done by filing IRS Form 8832, Entity Classification Election, and checking the box for corporate tax treatment. Regular “C” corporations are taxed at a rate of 21%, which is lower than the individual tax rate, which means that LLCs can save money by electing to be taxed as a corporation. However, the money distributed from a C corporation may be subject to double taxation, first from the corporate and then from the income tax that shareholders must pay on their dividends.
Multi-owner LLCs that have unfiled tax returns in California can face fines as a penalty. LLCs that are treated as partnerships will have to pay $10 for each partner or member per month for up to 12 months. LLCs that don’t pay their taxes will have to pay a penalty for the underpayment of their annual tax, their LLC fee, and their non-consenting non-resident tax, if they apply.
Our Sacramento and Roseville Tax Planning and Preparation Lawyers are Ready to Work with You
If you need guidance on filing your taxes for your LLC, get in touch with an experienced Sacramento and Roseville tax lawyer from the NewPoint Law Group, LLP as soon as possible. The legal team that works with the NewPoint Law Group, LLP have decades of experience that they can put to use to help LLCs and small businesses throughout the Sacramento and Roseville areas. To schedule an appointment for a free consultation to discuss your tax liability, call 800-358-0305 today.
