Starting your first California business is a great idea. Dealing with taxes and the Internal Revenue Service (IRS) can shake that confidence, but don\u2019t let it.<\/p>\n\n\n\n
By following my expertise and familiarizing yourself with the different business structures and entity types, you will know what to expect and minimize your business's tax worries.<\/p>\n\n\n\n
The state of California Franchise Tax Board has a franchise tax similar to other state\u2019s privilege taxes. In return for being allowed to do business in California, you must pay the state\u2019s franchise tax. <\/p>\n\n\n\n
If a C corporation doesn\u2019t report a net income, it will need to pay the franchise tax. Pass-through entities, such as S corporations, LLCs, limited partnerships, and limited liability partnerships, must also pay the California franchise tax. Sole proprietorships and general partnerships do not pay the state franchise tax. <\/p>\n\n\n\n
The franchise tax is calculated differently for the various business structures and entity types.<\/p>\n\n\n\n
Limited partnerships and limited liability partnerships pay a flat rate of $800 per year under the franchise tax rule. <\/p>\n\n\n\n
The rate for LLCs is calculated per the income range the net income value falls within. Their franchise tax rate can range from $800 to as high as $11,790 if an LLC\u2019s net income is above $5,000,000. <\/p>\n\n\n\n
S corporations pay a minimum franchise tax of $800 or 1.5% of their net income, whichever amount is the largest. This can be easily calculated by multiplying the net income of the business by 1.5% or 0.015.<\/p>\n\n\n\n
The California State Franchise Tax Board requires individuals and some businesses to pay California state income taxes. The income tax is a marginal income tax rate, meaning your rate will differ according to your tax bracket and the amount of income you made over a certain amount. <\/p>\n\n\n\n
The California Franchise Tax Board provides tables of that information on their site<\/a>.<\/p>\n\n\n\n Residents are required to file FTB Form 540<\/a> to pay their state income tax.<\/p>\n\n\n\n Some businesses are taxed exclusively due to the products they sell or deal with. I recommend reviewing this list of various taxes and fees<\/a> from the California Department of Tax and Fee Administration. These taxes and fees are collected by the state to help fund local and state services and programs. <\/p>\n\n\n\n Here\u2019s a description of the different business structures and their taxes:<\/p>\n\n\n\n Sole proprietorships are the most common and basic business structure. For legal and tax purposes, the owner is the business. The owner conducts and manages the work of the business. Selling products, such as refurbished motorcycles or cupcakes, or providing a service, such as mobile oil changes, are examples of possible sole proprietorship businesses. Obviously there are thousands of possibilities. <\/p>\n\n\n\n The IRS and the government see you and your business venture as one entity under this business structure. Legally and financially they are one entity. This structure does not separate your personal assets from your business assets. This means that should you get sued your personal assets could be targeted. <\/p>\n\n\n\n No fear, you have options to protect you and your personal assets. You can learn how to create a limited liability corporation (LLC)<\/a> and protect your possessions. As an LLC, the business is separated from your personal assets. <\/p>\n\n\n\n Being a single entity, your business and personal income will need to be combined and reported to the IRS on your state tax and federal tax return. The net income of the business will be the reported number. <\/p>\n\n\n\n Sales minus expenses will be your net income and the amount you will file on your tax return. The sales will be money your business brought in while expenses are the costs of running your business. <\/p>\n\n\n\n Calculating your tax burden as a sole proprietor is easy to do. Let\u2019s you are a mobile oil change specialist. <\/p>\n\n\n\n By keeping an accurate record of your sales, you total your calendar year sales to be $10,000. That is one of the numbers you need. The other is going to be your expenses and deductions. These will include your equipment, the wear you put on your company vehicle, fuel, and possible advertising you purchased to promote your new business. <\/p>\n\n\n\n By saving receipts and tracking your mileage, you are able to add the costs up for a total of $5,000. <\/p>\n\n\n\n You are going to need to report your net income, which is your sales ($10,000) minus the business expenses ($5,000) for a total profit of $5,000. This is the reportable and taxable income for your business. <\/p>\n\n\n\n If you have a separate job, your job\u2019s salary in addition to your business income will be reported and taxed at the federal tax rate on your tax return. Thankfully sole proprietorships do not pay any business taxes in California. <\/p>\n\n\n\n You will only need a few IRS forms to report your taxes to the federal government as well as California. These forms include the standard Form 1040 for personal federal income tax returns and a Schedule C Form. The IRS recommends filing these federal forms quarterly throughout the year for your business.<\/p>\n\n\n\n The Schedule C Form is the Profit or Loss from Business form from the IRS. This is where accurate record keeping and receipts will help you calculate your business\u2019s total income and expenses. The IRS totals these expenses into various categories, including vehicles, insurance, office supplies, travel costs, meals and entertainment, and utilities.<\/p>\n\n\n\n Use California Resident Income Tax Return, Form 540, to file your state tax return. <\/p>\n\n\n\n There are plenty of easy-to-use tax reporting software that can walk you through the process of putting the numbers together. <\/p>\n\n\n\n Business partnerships are a type of business structure and they come in three different forms in California: general partnership, limited partnership, and limited liability partnership. They involve two or more people that have ownership of the business. <\/p>\n\n\n\n Depending on the partnership type, whether it is a pass-through entity or not, will determine if the business must pay a California franchise tax. <\/p>\n\n\n\n A general partnership pays no business taxes, but also has no liability protection. Each of the partners in a general partnership can make executive decisions for the business. If the business gets sued, the personal assets of the partners are potential vulnerabilities.<\/p>\n\n\n\n At the establishment of a general partnership, the business is set up and organized by an official agreement, often called an operating agreement<\/a>. The profits and losses at the end of the year are split according to that agreement. The partners will each be responsible for their share of the tax burden of the company profits. If you decide to go this route, ensure you trust and are confident in your partners due to the potential exposure of your personal assets.<\/p>\n\n\n\n General partnerships also do not pay a California franchise tax.<\/p>\n\n\n\n A limited partnership requires two or more partners, usually a general partner along with limited partners. The general partner manages and operates the business. The limited partners are hands off. The general partner is responsible for the business debt, while the limited partners are only at risk up to the amount of money they invest into the business venture. <\/p>\n\n\n\n A limited partnership is a pass-through entity, so the partnership is required to pay the $800 California franchise tax. They are taxed again on the income earned and reported by each of the partners on their individual tax return. <\/p>\n\n\n\n Limited liability partnerships protect each of the partners from actions taken by their partners. Under an LLP, the individual partners are protected should an individual partner be sued. This liability protection does not protect the assets of the business itself.<\/p>\n\n\n\n Similar to a limited partnership, a limited liability partnership is a pass-through entity and will be required to pay the $800 franchise tax for conducting business in California. A limited liability partnership in California is subject to double taxation because the partners will also pay taxes on their share of the business income. <\/p>\n\n\n\n Like I said above, the partners will pay taxes on their share of the business income. The business itself, not including general partnerships, will be required to pay the California franchise tax. <\/p>\n\n\n\n The partners will report their business income on their state tax and federal tax returns along with any other income including jobs or other businesses. The reported income will account for the expenses and deductions from throughout the year, much like the sole proprietorship example. <\/p>\n\n\n\n Since partners are not employees, they will not be given W-2 forms. <\/p>\n\n\n\n Filing their federal taxes, the partnership will need to file and submit a Form 1065, Return of Partnership Income. This is a partnership version of the Schedule K form. Additional documents will be required for the taxes collected throughout the year. These forms can be found on the IRS partnership website<\/a>. <\/p>\n\n\n\n As an individual partner of a partnership, you will need to file Form 965, for tax liabilities, and Schedule E, for supplemental income, alongside the standard Form 1040 for the federal income return.<\/p>\n\n\n\n For California you will need to complete FTB Form 565 \u201cPartnership Return of Income\u201d to report your earnings from the partnership. <\/p>\n\n\n\n If you have an ownership interest in other partnerships or LLCs, you will be required to file Schedule EO 568 \u201cPass-Through Entity Ownership\u201d as well. <\/p>\n\n\n\n Limited liability companies (LLC) are pass-through entities. The profits and losses are handed to each of the LLC members. Individually, they will be taxed for their portion of the LLC's profits.<\/p>\n\n\n\n Companies elect to be LLCs for the liability protection they provide to their members. By separating personal and business assets, only the business may be a target of lawsuits. <\/p>\n\n\n\nCalifornia Business Taxes<\/h2>\n\n\n\n
Sole Proprietorship<\/h2>\n\n\n\n
Sole Proprietorship Taxes<\/h3>\n\n\n\n
Tax Documents<\/h3>\n\n\n\n
Partnerships (Including Limited and General)<\/h2>\n\n\n\n
General Partnership <\/h3>\n\n\n\n
Limited Partnership<\/h3>\n\n\n\n
Limited Liability Partnership<\/h3>\n\n\n\n
Partnership Tax Information<\/h3>\n\n\n\n
Tax Documents<\/h3>\n\n\n\n
Limited Liability Companies (LLC)<\/h2>\n\n\n\n