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I have a California LLC and wish I didn't. It has been nothing but an albatross around my neck. I am almost certain I will shut it down at the end of this year.

I have a California LLC and wish I didn't. It has been nothing but an albatross around my neck. I am almost certain I will shut it down at the end of this year. Look, if you're reading articles like this one, don't do it. Just don't do it. Get competent legal and accounting advice first. I formed my LLC four years ago when an interesting contracting project came my way. I'd worked as a 1099/Schedule C contractor in the past, but this client wanted me to have an LLC. OK, no big deal. Then it turned out they also required the LLC to be taxed as an S Corp. No big deal there either, it's a simple IRS form to make that election. Now guess what? You have to start filing 1120S corporate taxes plus the California equivalent. All the LLC/S Corp income flows right through onto your personal tax return, but you also get to get to file 940 and 941 payroll tax forms and the state equivalents. And whether your LLC is taxed as an S Corp or not, you have to pay the $800/year California minimum tax on it. Yes, even though the LLC/S Corp really has no net income of its own (as it all flows into your personal tax return), you will owe that $800/year. Even if you create your LLC in another state. Do not try to do this yourself. You will get it wrong and will pay many thousands of dollars in penalties as I have. I finally realized I would be much better off just working for another company and letting them deal with all these headaches. They have an entire team to deal with it! If I had a time machine, I would have stuck with regular employment instead of thinking of myself as an independent business. Forget about the fabled "corporate veil". If the IRS and FTB decide they want their money, they are going to get it. If you do think this still sounds like a good idea, you must use a payroll service to pay yourself. After my initial fiasco of trying to do it myself, I started using Gusto [1] and they are pretty great. For filing the LLC itself, I used SunDoc Filings [2] and they are really good too. They helped me on very short notice when I made a mistake on my LLC filing that would have caused it to be rejected. But really, think twice, or a dozen times, before you open this can of worms. Sorry for all the italics. :-) But this is something where I have some painful experience, and if I can help steer people away from it I hope it will be helpful. [1] https://gusto.com/ https://gusto.com/ [2] https://www.sundocumentfilings.com/ https://www.sundocumentfilings.com/

c17r 6y ago
I've never run into a case where the client cared how I reported my taxes. How would they even know? Did they give you a reason for this?
- Stratoscope 6y ago
  Thanks for asking. They were a California company, and this state has gotten very strict on such things, doing their best to shut down the ability for people to work as independent contractors. It really sucks, but you can't fight city hall. The idea was that the LLC/S Corp would give my client some protection against anyone claiming that the client would owe employment taxes on what they paid me. So I had to be my own corporation paying myself through a payroll service, to make sure the state and the feds would get their cut. Put more simply: "Nice business you've got there. Be a shame if something happened to it."
  - arrosenberg 6y ago
    I think that was more about the client having a hang up than the state or AB5. You either pay payroll taxes as an S-Corp, or you pay self-employment taxes if you take pass-through taxation. Regardless of which taxation method you selected, the company would still be on the hook if you later complain to the Department of Labor that you were misclassified.
  - gamblor956 6y ago
    You clearly misunderstood something because that's not a CA law and that isn't how a consultant or contractor would prove their legal entitys existence to a client.
    - ende 6y ago
      My guess is that they were trying to shield themselves from the possibility of reclassification via IRS audit.
      - gamblor956 6y ago
ISL 6y ago
Seconded. Filing the 1040 is straightforward compared to the 1120S, and the minimum taxes are real (my experience was NYS, with incorporation in NH for historical reasons). The 1040 instructions are maddening but nigh-complete. A thoughtful person with enough time on their hands has a prayer of figuring out even relatively subtle tax issues. The 1120S instructions as recently as ~2015, on the other hand, feel like vague guidance. If the phrase, "Write down your income, write down your expenses, now write down your tax. Sign that you have made no mistakes under penalty of law." makes you nervous, consider expert advice or an arrangement that avoids forming an S-corp. The state forms are generally dependent upon the federal ones, so if you make an error on the federal form, the error will flow through to the state (which may have similarly vague instructions). If I ever need to form another corporation, I will absolutely seek professional advice and hand off the filing to a trusted CPA. @Stratoscope is doing the right thing in using plenty of italics.
- gamblor956 6y ago
  The calculation of business income tax really is that simple... It only gets complicated of you want to make it complicated.
  - ISL 6y ago
    Perhaps I missed it on my annual reads through the instructions, but I cannot recall seeing a statement: "This is the definitive path to figuring your tax." For the personal income tax instructions, that pathway is clear for almost everyone.
    - gamblor956 6y ago
      Take your business income items, and add those up. Take your business expense items, and add those up. Subtract expense from income. Done... Personal income tax is much more complicated than small business income tax. Large corporations and partnerships are more complicated than small businesses, but those types of businesses want the additional complexity.
jameslk 6y ago
I have a California LLC too. It's not any harder than the steps explained in the article. Certainly don't form an LLC unless you need one. You'll know you need one when you need one. > Now guess what? You have to start filing 1120S corporate taxes plus the California equivalent. All the LLC/S Corp income flows right through onto your personal tax return, but you also get to get to file 940 and 941 payroll tax forms and the state equivalents. This not true of all LLC's, just corporations. If you're forming a small LLC, especially a single member LLC, you can create a pass through entity that avoids all of the ceremony you're explaining. Mentioning all this makes it sound like it's obligatory to establish a corporation when you form an LLC, but that was only necessary in your specific case (probably for the company you were trying do business with to avoid AB5).
- Stratoscope 6y ago
  That's a really good point, thanks for mentioning it. Looking back on this, if it had been just an LLC it would have been no big deal at all. It would be a "disregarded entity" with ordinary 1099/Schedule C income, no different from any of my previous clients, with an easy tax return like the ones I'd done many times before. It was the S Corp election which this client required that really messed everything up. In hindsight, this truly was the proverbial "client from hell". It was an interesting project, albeit quite an experimental one. I got paid for only a week of work after spending a full month on it, and then I got the ongoing heartache of the S Corp nonsense to boot. Thanks for pointing out the distinction between the LLC and the S Corp.
  - jameslk 6y ago
    It definitely sounds like a terrible client, especially making you jump through these hoops just to work with them. Sometimes it's hard to know until you've started working with them how the relationship will turn out. A client forcing you to form an S-corp and put yourself on payroll doesn't exactly establish trust and is probably a bad sign of things to come. Despite this, I wouldn't let it sour your view of self-employed work. I was an independent contractor for 6 years and then started a more formal business after. The freedom of picking where, when and how you work, who you work with, how much you'll charge, and most rewarding of all, building and owning your own thing, can be very fulfilling. Maybe you had other reasons to desire employment again, this is certainly not for everyone, but if it's all interesting to you, it's worth it just for the personal growth.
gamblor956 6y ago
Somehow thousands of people can form and run CA LLCs and S corps just fine without issue. If you can't handle a little bit of paperwork you have no business trying to run a company.
ende 6y ago
> I finally realized I would be much better off just working for another company and letting them deal with all these headaches. They have an entire team to deal with it! If I had a time machine, I would have stuck with regular employment instead of thinking of myself as an independent business. It’s almost as though that is all by design, put in place by state legislators who are owned by big corporations that want to keep their primary labor pools enslaved under the W2 regime. I think all the labor / socialist parties may have gotten it wrong - the worker’s revolution would never be realized through labor unions etc, but rather by organizing incorporation and all the benefits it confers upon the individual. Let every man, woman and child be their own corporation. Wouldn’t that be a different form of capitalism to behold.
jiveturkey 6y ago
> Do not try to do this yourself. You will get it wrong. I did it myself and got it right? I closed my LLC last year, not for reasons related to managing the LLC itself. It's not "hard". It just requires a lot of knowledge of process and filings required. Most folks are best using a CPA to handle it. It is absolutely best to contract under an LLC or S Corp umbrella, vs personally. You need the liability protection. Perhaps not as much for software, I suppose. But if an average plumber / salon owner / painter / tradesman can get it right, so can you. > you must use a payroll service to pay yourself. you don't need to. it's way easier to do the payroll taxes, so you absolutely should, but it's not a hard requirement. but you don't need to be on the payroll at all. you can take a draw, or take distributions instead. there are tradeoffs for all 3 methods. > Forget about the fabled "corporate veil". If the IRS and FTB decide they want their money, they are going to get it. The corporate veil isn't about taxes, at all.

c17r 6y ago

I've never run into a case where the client cared how I reported my taxes. How would they even know? Did they give you a reason for this?

Stratoscope 6y ago
Thanks for asking. They were a California company, and this state has gotten very strict on such things, doing their best to shut down the ability for people to work as independent contractors. It really sucks, but you can't fight city hall. The idea was that the LLC/S Corp would give my client some protection against anyone claiming that the client would owe employment taxes on what they paid me. So I had to be my own corporation paying myself through a payroll service, to make sure the state and the feds would get their cut. Put more simply: "Nice business you've got there. Be a shame if something happened to it."
- arrosenberg 6y ago
  I think that was more about the client having a hang up than the state or AB5. You either pay payroll taxes as an S-Corp, or you pay self-employment taxes if you take pass-through taxation. Regardless of which taxation method you selected, the company would still be on the hook if you later complain to the Department of Labor that you were misclassified.
- gamblor956 6y ago
  You clearly misunderstood something because that's not a CA law and that isn't how a consultant or contractor would prove their legal entitys existence to a client.
  - ende 6y ago
    My guess is that they were trying to shield themselves from the possibility of reclassification via IRS audit.
    - gamblor956 6y ago

ISL 6y ago

Seconded. Filing the 1040 is straightforward compared to the 1120S, and the minimum taxes are real (my experience was NYS, with incorporation in NH for historical reasons). The 1040 instructions are maddening but nigh-complete. A thoughtful person with enough time on their hands has a prayer of figuring out even relatively subtle tax issues. The 1120S instructions as recently as ~2015, on the other hand, feel like vague guidance. If the phrase, "Write down your income, write down your expenses, now write down your tax. Sign that you have made no mistakes under penalty of law." makes you nervous, consider expert advice or an arrangement that avoids forming an S-corp. The state forms are generally dependent upon the federal ones, so if you make an error on the federal form, the error will flow through to the state (which may have similarly vague instructions). If I ever need to form another corporation, I will absolutely seek professional advice and hand off the filing to a trusted CPA. @Stratoscope is doing the right thing in using plenty of italics.

gamblor956 6y ago
The calculation of business income tax really is that simple... It only gets complicated of you want to make it complicated.
- ISL 6y ago
  Perhaps I missed it on my annual reads through the instructions, but I cannot recall seeing a statement: "This is the definitive path to figuring your tax." For the personal income tax instructions, that pathway is clear for almost everyone.
  - gamblor956 6y ago
    Take your business income items, and add those up. Take your business expense items, and add those up. Subtract expense from income. Done... Personal income tax is much more complicated than small business income tax. Large corporations and partnerships are more complicated than small businesses, but those types of businesses want the additional complexity.

jameslk 6y ago

I have a California LLC too. It's not any harder than the steps explained in the article. Certainly don't form an LLC unless you need one. You'll know you need one when you need one. > Now guess what? You have to start filing 1120S corporate taxes plus the California equivalent. All the LLC/S Corp income flows right through onto your personal tax return, but you also get to get to file 940 and 941 payroll tax forms and the state equivalents. This not true of all LLC's, just corporations. If you're forming a small LLC, especially a single member LLC, you can create a pass through entity that avoids all of the ceremony you're explaining. Mentioning all this makes it sound like it's obligatory to establish a corporation when you form an LLC, but that was only necessary in your specific case (probably for the company you were trying do business with to avoid AB5).

Stratoscope 6y ago
That's a really good point, thanks for mentioning it. Looking back on this, if it had been just an LLC it would have been no big deal at all. It would be a "disregarded entity" with ordinary 1099/Schedule C income, no different from any of my previous clients, with an easy tax return like the ones I'd done many times before. It was the S Corp election which this client required that really messed everything up. In hindsight, this truly was the proverbial "client from hell". It was an interesting project, albeit quite an experimental one. I got paid for only a week of work after spending a full month on it, and then I got the ongoing heartache of the S Corp nonsense to boot. Thanks for pointing out the distinction between the LLC and the S Corp.
- jameslk 6y ago
  It definitely sounds like a terrible client, especially making you jump through these hoops just to work with them. Sometimes it's hard to know until you've started working with them how the relationship will turn out. A client forcing you to form an S-corp and put yourself on payroll doesn't exactly establish trust and is probably a bad sign of things to come. Despite this, I wouldn't let it sour your view of self-employed work. I was an independent contractor for 6 years and then started a more formal business after. The freedom of picking where, when and how you work, who you work with, how much you'll charge, and most rewarding of all, building and owning your own thing, can be very fulfilling. Maybe you had other reasons to desire employment again, this is certainly not for everyone, but if it's all interesting to you, it's worth it just for the personal growth.

gamblor956 6y ago

Somehow thousands of people can form and run CA LLCs and S corps just fine without issue. If you can't handle a little bit of paperwork you have no business trying to run a company.

ende 6y ago

> I finally realized I would be much better off just working for another company and letting them deal with all these headaches. They have an entire team to deal with it! If I had a time machine, I would have stuck with regular employment instead of thinking of myself as an independent business. It’s almost as though that is all by design, put in place by state legislators who are owned by big corporations that want to keep their primary labor pools enslaved under the W2 regime. I think all the labor / socialist parties may have gotten it wrong - the worker’s revolution would never be realized through labor unions etc, but rather by organizing incorporation and all the benefits it confers upon the individual. Let every man, woman and child be their own corporation. Wouldn’t that be a different form of capitalism to behold.

jiveturkey 6y ago

> Do not try to do this yourself. You will get it wrong. I did it myself and got it right? I closed my LLC last year, not for reasons related to managing the LLC itself. It's not "hard". It just requires a lot of knowledge of process and filings required. Most folks are best using a CPA to handle it. It is absolutely best to contract under an LLC or S Corp umbrella, vs personally. You need the liability protection. Perhaps not as much for software, I suppose. But if an average plumber / salon owner / painter / tradesman can get it right, so can you. > you must use a payroll service to pay yourself. you don't need to. it's way easier to do the payroll taxes, so you absolutely should, but it's not a hard requirement. but you don't need to be on the payroll at all. you can take a draw, or take distributions instead. there are tradeoffs for all 3 methods. > Forget about the fabled "corporate veil". If the IRS and FTB decide they want their money, they are going to get it. The corporate veil isn't about taxes, at all.