Corporate Taxes 101 for California Business Owners
Business taxation structure differs in every state. The legal entity of a business in California determines whether the income of a business is submitted through personal income tax or corporate tax. This is paramount to note in the state of California because the state taxes businesses differently based on their legal entity.
Legal Business Entities are subject to corporate taxes and pay a combination of three taxes: corporate income, franchise, and alternative minimum. This type of tax is determined by the legal form of the business.
Sole Proprietorship Businesses is when the income of the business is given to the owner. That being said, when it comes to taxation, the owner’s personal tax return is taxed. This form of business is classified as a ‘pass through entity”. Pass through entities also include general partnerships.
Limited Liability Partnerships (LLP) does not have pass-through taxation, but has to pay a franchise tax that starts at $800.
Corporate Taxes If your business entity is classified as a corporation it will fall into either a S or C corporation category. If the business is classified as a S Corporation, it does not have to pay corporate taxes, but is taxed at two levels: 1.5% of the net income franchise tax and the owner’s income is taxed on their personal income tax returns. If the corporation is classified as a C corporation, the business pays a corporate tax on net taxable income to California.
Limited Liability Companies (LLC) The more complicated tax structure is in place for LLCs. LLCs are taxed on separate levels. First, a flat rate is determined by a business’ gross income. Gross incomes are measured in a tier system: tiers range from businesses earning less than $250,000 to $5 million a year. Depending which tier your business falls, you could be taxed $800 to tens of thousands of dollars. Once tier taxes are established, income is taxed on a personal level.