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DanielleCPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 793
Experience:  Years of Experience in Business & Personal Taxes
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I am starting an LLC and would like to pay as little tax as

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I am starting an LLC and would like to pay as little tax as legally permitted. I have heard that you can base your LLC in certain states that have lower taxes than where you will be conducting most of your business. I am in California, and most of my business will be conducted here, but I plan to expand into internet sales within 3 years, so hopefully I would sell nationally or even internationally. I assume that the first year or 3 I will be in the red, so this is a real concern for me at this time.

Welcome and thanks for your question

If you live in California and will primarily be conducting your business there, I recommend that you set-up your LLC in California. California does have a high minimum LLC tax compared to other states, but I still recommend that you setup there.

The idea that you can set-up in your LLC in another state with lower taxes and avoid paying tax in the state where you will be conducting most of your business is, unfortunately, a common misconception. Even if you set up your LLC in another state, you would still need to register it in California because you have a sufficient connection to that state. In multistate taxation, this concept is known as nexus. In your case, the connection is that your primary place of business is located there.

I understand that you plan to expand into other states in the future. Keep in mind that if you establish nexus with other states in the future, then you may need to register with those states. In most states, Internet sales is not currently enough of a connection to create nexus, but this is currently a hot issue within the world of multistate taxation, so that may change in the future.

Please let me know if you have any follow-up questions or need any clarification and I will gladly assist you. Have a wonderful evening!

DanielleCPA and other Tax Specialists are ready to help you
Customer: replied 3 years ago.

Can you tell me how California's taxes compare between an LLC and a sole proprietorship? Are the tax benefits different at different levels of income? Are the liability limits more advantageous for one or the other?

I would not recommend a sole proprietorship for liability protection purposes. In a sole proprietorship, a creditor could levy your personal assets to satisfy a business debt. A LLC will greatly limit the ability of your personal assets to be used to satisfy a business debt.

Because single member LLCs are disregarded entities for federal tax purposes (meaning that they do not have to file a separate business tax return), the tax benefits for a sole proprietorship versus an LLC are identical. Both are reported using Schedule C of your 1040 individual income tax return.

The difference is that California still requires a separate LLC tax return, which has a minimum $800 fee. California taxes its LLCs at their corporate tax rate, which is 8.84%.