Taxes in California
What kind of tax will you owe on California business income?
The tax payable by your company depends on your type of operations and the tax structure you adopt.
Federal Taxes
Most businesses don’t need to pay federal income taxes as they enjoy pass-though benefits. Under this structure, what the company is to pay moves to individual members who then pay a tax based on their income from the company.
Even so, you must report your income to the federal government. When filing as a partnership structure, you fill in 1065 and when operating alone, you use the 1040 schedule C. You are also permitted to pay taxes as a corporate in which case, you need to file a corporate tax return.
State Taxes
You may need to register for a state tax when operating in some businesses. For example, people selling physical goods must pay sales taxes, for which you need to register. Additionally, all LLCs must file a biennial report and pay a California LLC franchise tax.
Additional Taxes
Employer Taxes
This will only apply to companies that hire help. In this case, you would have to register with the state authorities and learn what is applicable to you, including unemployment insurance taxes. Where you will go at it alone, you can forego this part.
Sales and Use Taxes
If you will deal with physical goods, the authorities require that you register with them to allow you to collect taxes on their behalf. Return reporting takes place on a periodic basis.
Local
You may also be subject to pay a local tax. To find out what’s what, you should consult local governments to get more information as to what they require of you.
Business license in California
A business license shows that you have the right to conduct a given operation in a jurisdiction. For example, if you want to start a food catering business, it is up to the authorities to assess the operations you have in place. If they feel satisfied with your approach, they can allow you to open shop.
Are they necessary? Yes. A common mistake people make is assuming that once they have their business approval, they can go ahead and set up their operations. But that is not the case. The approval only allows you to start a business, but some operations require you to get additional permits. The approval is thus what helps you get the permits because the authorities can tie these to an entity, making it easier to safeguard the general public.
A key reason why authorities are so keen on these documents is because they want to ensure that the general public is safe. Imagine a situation where someone embarks on constructing a building without the required precautions. If the building collapses and injures residents, the authorities will be to blame. They are tasked with ensuring that commercial activities will not harm the residents. Another reason is to ensure that you do not use your operations as a front for illegal businesses.
You need to have this California business license around, else, you will be in violation of the law, which can hurt your operations. Not only can the authorities shut it down but they can also impose penalties on you, or worse. If you engage in unlicensed activities and someone sues you, your liability protection would not do much to help you. If you want to avoid such situations, you are better off making sure you have all your own specific licenses necessary to proceed.
Is a business license required in California?
Yes. However, there is not one law that governs the state when it comes to these documents. Instead, each locality sets its rules and dispenses the same to residents in the region. If you are not sure where you should start, the state website would be a great choice. It has a wealth of information, enabling you to cut your research workload in half. Plus, you will understand how many documents you need, based on the number of areas you will operate in and what services or goods you want to provide.
Once you understand what applies to you, applications can take place in person (best for if you have other questions), mail and even online.
Fees
Charges vary from one region to the other. In some places, there is a set standard fee that applies to everyone, regardless of the size or nature of their operations. In other places, the fee depends on the scale of the operations and is expressed as a percentage or on a scale. Some places even use a combination of the two. As such, there is no given amount and the best way to figure out what you will pay is to engage the authorities in your area.
The documents are not valid for all time, and instead, you must make payments on a frequent basis to keep them valid. More often than not, this takes place annually, but you should always check first to avoid falling behind schedule.
Annual Report
Do LLCs file annual reports in California?
Yes. These reports are known as statements of information (SOI) and the authorities require that you file these every two years. They work to update your records, such as where you are, what you are doing, who is in charge and other matters that are important in your business.
Failure to file your Annual Report in California can land you in a lot of trouble. You could have done everything that is necessary to enjoy your right of operation but this one small error can cost you your license. On the plus side, you have a 60-day period after the deadline, during which you can make up for your lateness. However, it is not advisable to wait this long.
When should you file the report? There are two instances when this is necessary. One is immediately after you get your business approval. From the date indicated on your approval, you have 90 days to get your first report done. That serves as the base filing, upon which you will add others as time goes by. The second instance is after you have been operating for a while, which should be two years after your approval date. Now, this is where it gets tricky. If you formed your business in March, you have until the end of March two years from the approval date to make your report.
For each filing, you will pay the annual registration fee. But if you are late and the 60 days past deadline have gone by, you will pay an additional $250. If you still do not file, you can lose your license to operate, even if you have kept up with all other obligations.
Processing time is also important. Online California LLC annual report applications only take an average of 3 days. But when working with mail, you can wait up to two weeks. It is thus better to get started early to account for this time.
How do I file an annual report in California?
You need to get this done before the grace period lapses. The good news is that the state will send you a reminder about two months before the due date.
Online
You need to access the state website page to do this. When filing the first time, the fields will be blank and you will need to input details relevant to your business. Where you have already filed in the past, the fields will have data which you can change if you have made any amendments during your course of operation. Otherwise, you can select the ‘no changes’ option and complete your filing.
What do the authorities need?
- Your principal address, which must be physical and not a post office box. Where you have hired someone or a company to act as your point of contact, you can use their details.
- Your mailing address which can be the same as the one above or you can choose to include another option.
- Where you conduct your business i.e., your location
- Who manages the business
- Who acts as your point of contact- it can be you or someone/a company you have hired to do so
- What you do e.g., running a café
- Who holds the CEO position (this section is optional)
- Your email address- this is where you will receive a copy of the filed document. Not to worry though, it will not appear on public records.
- Payment
The option chosen will depend on if you have made any changes to your business. If you have, you will need to download and fill LLC-12. If not, you can file LLC-12NC. Please note the difference between the two and complete the appropriate one. The required details are pretty much what we covered above.
Once done, you can send it to:
Secretary of State
Statement of Information Unit
P.O. Box 944230
Sacramento, CA 94244-2300
In Person
You can also choose to deliver the annual report California in person to:
1500 11th St.,
Sacramento, CA 95814.
Franchise Tax
You have probably come across states where the authorities ask that people operating in the region pay a given fee to continue enjoying these operation rights. This state is not different and it operates based on a California franchise tax base rate of $800. Nobody can avoid paying this fee but the amount you pay comes down to how much you make each year. The cutoff line stands at $250,000. From this, anyone bringing in less than this pays the earlier stated base rate. However, where you bring in more than this, you pay the base rate plus an added estimate.
How does the estimation work? You have to go through your books of account and see what you have made up till the point of paying. From this amount, you can project how much you will have made by the end of the year. You now pay a fee based on a percentage of this projected amount, hence the term estimate.
Can you escape this payment? You see, this fee is a requirement by law, regardless of whether you are in the state or not. As long as you have the right to perform your business activities in the region, you are liable to making this payment. Even if you have not been operating by the time the payment is due, you will still need to pay the authorities. You are thus better off starting early and putting some money aside in preparation for this time.
What happens if you fail to make the payment? The reason the fee is due is because you pay the authorities to allow you to keep operating in the region. Thus, when you do not keep up with your end of the deal, they can take away your right to operate. That would mean closing down your business and if you tried to operate without your permit, you would end up in a great deal of legal trouble. The implications are not only financial but they also touch on the legal aspects of your business. For example, you can even lose the right to defend yourself in a court of law in the event that you get sued. And that’s not all. People can come after you, as you will have been stripped of your legal protection, thus taking away even your personal assets. Not being compliant is quite risky, and to understand more of what could happen, engage your attorney from an early stage.
How can you pay? The authorities provide various forms based on whether you are paying per the base rate or the base rate with an estimate as a bonus. For the first case, you need 3522 and in the second scenario, you should use 3536. One other document you need to have around is the 568 which is a summary of your accounts and payments. The deadline depends on the structure of your organization- either the 15th of March or the 15th of April.
If you opt not to send the documents via online means, you can always deliver them to:
Franchise Tax Board
P.O Box 942857
Sacramento, CA 94257
When should you pay? The first date falls exactly 3.5 months from the time you start operating. That means that if you start your operations in December, your first fee is due in March the next year, by date 15th. If you are paying with an estimate on top, you will use 6 months as your guide such that you would pay by 15th of June.
Given the complexity of these schedules, it would help if you engaged an accountant to help you sort through them. Otherwise, you can end up in a pretty murky situation.