LLC in California -- 800$ franchise tax waived

by booyakasha1989. Posted on Sep 15, 2020    12    12


I was reading the Governor is going to waive year 1 LLC franchise tax of 800$ starting Jan 1 2021. Do I REALLY need to wait until January to reap this benefit? I have a product I want to launch and dont want my personal assets liable, thus why I want an LLC. Could I start by producing inventory of product, and then buy them from myself as an equipment / goods purchase (thats a liability against the company for the books, correct?) and then pay myself back, so I will be ready for a Jan 1 2021 launch? I cant risk spending 800$ due Jan 15 and then another 800$ due June 15 -- I need to really have a runway for testing products, not paying the GOV $1600 to try... im willing to light 5k on fire not 6600 if that makes sense. Its not about the money its about getting the most value in this circumstance and not waisting 1600$ quick on taxes...

Also second question -- if I invest say 5,000 of my own money into my sole proprietorship, I how would I define that in the books, as I would eventually like to pay myself back the initial investment not at a profit, if you will. Would it be an owners draw or do I sell myself stock? I just dont want to get taxed on the amount. Or do I write the initial investment off as schedule C Loss, and then give myself a schedule C gain when I pay myself back the 5k?

Thanks for the information!!!


Comments

extremely_unlikely 1

Leave the state.

Live a happier life.

donnieZizzle 2

I can't speak to producing prior to incorporating as an LLC, but I can hopefully speak to giving the company a $5000 cash injection.

Basically, if you are giving the company cash, you would account for it as cash in your assets, and either a stock purchase or owner's liability on the other side of the equation. If you're instead giving product/equipment with a value of $5000, then you account for that appropriately on the left side, and again it either becomes owner's equity or stock on the right. It's been a while, but if I remember correctly, you would want to use a stock purchase if there are other owning interests, but if you are the only owner then you should be fine with an increase in owner's equity. Later, when the company is ready to repay you, you can either draw from owner's equity or declare a dividend, although in the case of multiple owning interests, dividends become more complicated. Either way would become income for you personally.

The other method I can remember for giving a company cash would be to account for the cash/equipment as a note payable to yourself. You can probably charge yourself a 0% interest, but laws in your area may be different. Depending on how your taxes work and whether you can issue and repay the note within a single tax year, you might not even see a change in your income. Otherwise you'd probably have account for the note as an expense on your personal taxes and then the repayment would be considered income (which should balance itself out and might even help to spread your income out over a few years).

I am not an accountant though, just took some classes and help run my company's books. This is something than an accountant will need to give definitive advice on, but hopefully I gave you a starting point, and helped you when you do speak to an accountant.

  booyakasha1989 1

Ty! That’s what I figured something along those lines. Thanks!

major1256 2

If you don't have a good accountant in your corner already, better start looking, else you may end up with more than a $1600 tax bill to worry about. As I don't know about your jurisdiction, I can only say that in general, an LLC can incorporate with assets from a sole proprietorship, but your books should clearly delineate the assets of the proprietorship from your personal assets, and the easiest way to do that is with a business bank account separate from your personal, to be used only on the business.

  booyakasha1989 1

In this case I would start production on a product, and in essence buy the inventory from myself (LLC bank account to pay person ie myself for materials.

grumpyGrampus 3

First year LLC minimum franchise tax is already waived in California.

​

See, for example, https://www.stimmel-law.com/en/articles/minimum-franchise-tax-california-waived-first-year-basics-and-limitations

And talk to your lawyer ;)

sbayz92 2

Interesting. I’ve never seen this either. Are you sure that’s not updated and referring to businesses that have started after 2000, and switched to llc this year?

  booyakasha1989 2

What is the new bill for 2021 then?

grumpyGrampus 3

I was mistaken above. The current exemption is for corporations but not for LLCs. Apparently this bill will extend the same waive to LLCs, LPs, and LLPs.

From the legislative digest for AB85:

>(6) The Corporation Tax Law imposes an annual minimum franchise tax of $800, except as provided, on every corporation incorporated in this state, qualified to transact intrastate business in this state, or doing business in this state, and exempts a corporation that incorporates or qualifies to do business in this state from the payment of the minimum franchise tax in its first taxable year. Existing law imposes an annual tax in an amount equal to the minimum franchise tax on every limited partnership, limited liability partnership, and limited liability company doing business in this state, as specified.
>
>This bill, for taxable years beginning on or after January 1, 2020, and before January 1, 2024, in which a specified appropriation is made in any budget measure, would exempt a limited partnership, a limited liability partnership, and limited liability company that files, registers, or organizes to do business in this state, as provided, from the payment of the annual tax in its first taxable year.

  booyakasha1989 2

It says 2020 below — is this retroactively in effect? Or would I have to wait until Jan 2021 to take the full benefit?

grumpyGrampus 2

It says "for taxable years beginning on or after January 1, 2020, and before January 1, 2024"