An LLC is a business entity created under state law that can shield you from personal liability. LLCs are becoming the most popular way to start a business due to their ease and flexibility. Forming an LLC is an excellent way for business owners to shield their personal assets. LLCs are also very beneficial to real estate investors. LLCs are one of the best means for holding real estate and other appreciating assets.
Two major reasons for forming an LLC are:
The two major reasons for forming a corporation are:
Personal Liability Protection
What is the right entity choice for your business?
Because of the gross receipts and self-employment taxes associated with LLCs, they are recommended
only in certain situations:
Businesses operated or invested in by non US residents;
Real estate ventures with anticipated revenues less than $250,000; or Businesses with other entities
(corporations, LLCs, trusts, estates) as investors. What is "Self-Employment Tax"?
Self-employment (SE) tax is a 15.3% tax on income. This rate, 15.3%, is a total of 12.4% for social security
(old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).
Normally these taxes are withheld by your employer. However, if you are self employed, it is your responsibility to pay them yourself. The SE tax rate for business owners is 15.3% tax of the first $90,000 of income and 2.9% of everything over $90,000. S corporations have a significant advantage when it comes to the payment of SE taxes.In an S corporation, only the salary paid to the employee-owner is subject to employment tax.
The remaining income that is paid as a distribution is not subject to SE tax under IRS rules.Owners of LLCs, partnerships and sole proprietorships, however, pay SE tax on their respective share of profits rather than salary.Certain types of LLC income, however, are not subject to self-employment tax. For example,
rentals from real estate and capital gains are not considered to be self-employment income, so real estate LLCs
often need not be concerned with self-employment tax.
If I am a non-resident alien, can I form an LLC?
Yes. A non-resident alien (a person who is not a citizen or national of the United States and who is in this country on a visa or temporary basis and does not have the right to remain indefinitely) can be an owner of a LLC. An S-corporation cannot have a non-resident as a shareholder.
In addition to the minimum franchise tax, some California LLCs taxed as partnerships must pay an annual entity
level tax based on the "total income" which is worldwide gross income, plus the cost of goods sold, paid or incurred
in connection with the LLCs business. This "gross-receipts tax" only applies to LLCs grossing
over $250,000 a year. In 2006, the tax ranges from $900 to $11,790, as follows:
An LLC taxed as partnership for federal tax purposes must pay an annual fee based on total
gross revenue pursuant to California Revenue and Taxation Code Section 17942.
This "gross receipts tax" can range from $900 for annual gross receipts less than
$500,000 to as much as $11,790 for annual gross receipts greater than $5 million per year.
The gross receipts tax does not apply to an LLC taxed as a corporation.