LLCs are a popular topic among online tax experts, but be cautious. Many people follow online advice, only to regret it later.
A Single Member LLC (also known as a disregarded entity) is primarily a legal structure, not a tax strategy. It functions the same as a sole proprietorship for tax purposes—no extra tax benefits from being an LLC. The legal protection is the primary advantage. LLCs don’t provide more deductions; the same deductions apply whether you’re an LLC or not. Consult a lawyer for legal advice, as we cannot assist with LLC formation.
To gain tax benefits, an LLC must be taxed as an S-Corp for example (while remaining an LLC at the state level). Research the tax benefits and additional requirements of an S-Corp, including payroll and paperwork.
In California, LLCs pay a minimum annual fee of $800, plus $500-1,000 for LLC tax returns (tax prep fees), in addition to other yearly fees. If you seek legal protection, an LLC might be worth the cost, but it offers no income tax benefits over a sole proprietorship. So make sure you are prepared for these costs if you form an LLC.
Avoid the myth that forming an LLC in another state will help you avoid California fees. You’ll likely need to register as a foreign entity in California and still pay state fees.
Be cautious when listening to online tax experts, especially if you’re in California—they often overlook key details.