DISCLAIMER: This In Brief section offers a series of business, real estate, employment, estate planning and tax bulletins prepared by the attorneys at Buynak, Fauver, Archbald & Spray, LLP. This is not exhaustive, nor is it legal advice. You should discuss your particular situation with us or with your own attorney. Our legal representation is only undertaken through a written engagement letter and not by the distribution or use of this information.
Q: I’ve got a business that has high gross income and a small percentage of profit each year, like a restaurant, retail shop, flower or cannabis operations, or marketing entity in California. Should I have a limited liability company (LLC) or corporation as my entity for doing that business?
Each business and its operations are different – and thus, the type of entity is eventually governed by the tax imposed on gross income or profit. Generally, the above business operations (high income and low profit) mean that your entity should be an “S” California corporation – because California taxes on the basis of gross income and not profit.
Thus, you could have a lot of income and no profit and still owe up to $13,000 of franchise taxes to California. Other states are different – taxation of “S” corps and LLCs are similar. But, you are operating in California and are taxed in accordance with its taxing structure.
There may be reasons for a different decision so it is best to check with your attorney. Accountants usually do tax returns and don’t remind you of the “bigger play” with the type of entity and how there can be substantial tax savings. For example, if you are a sole proprietorship, you should run (don’t walk) and form an “S” corp, thus shedding all those self-employment taxes you are paying.