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Transcript of California State Controller’s Office Webinar: Sole Proprietorships vs. LLCs

The California State Controller’s Office and the California Franchise Tax Board teamed up for a webinar on sole proprietorships and limited liability companies on Oct. 10, 2012. Watch video of the presentation here and see a PDF here. Read the transcript below:

Moderator Jason Montiel:

Good morning!

Welcome to State Controller John Chiang’s California Strong business webinar.

I’m Jason Montiel with the Controller’s Office and I’ll be your moderator.

Today’s webinar will help you understand the basics of sole proprietorships and limited liability companies, also known as LLCs.  This webinar will last about 45 minutes.

The State Controller’s Office would like to thank the Franchise Tax Board for partnering with us to host this event and for providing us with today’s guest speaker, Brenda Voet.

We’ll kick things off soon with a message from Controller Chiang. But first, I want to take a moment to explain how the control panel on your screen works. In the upper right-hand corner of your screen, you should see a tab. Just click on the arrow on the tab to expand out your control panel.

This slide shows an image of a control panel that is similar to the one on your screen.  On it, there are the various parts of the control panel and their function. Please use this as a reference to guide for your use of the control panel during the presentation.

Notice that your control panel has a dial-in number and access code on it.  If at any point during the presentation you lose our signal, or if you can’t hear the audio, please call the number listed on your screen to hear this webinar over the phone.

At the bottom of your control panel there’s a place for you to type in your questions.  Please feel free to type in your questions for our presenter at any time during the webinar. We’ll do our best to answer those questions at the end of our presentation or to respond back to you directly.

At this time I’m going to ask everyone joining us online to do us a big favor.  If you have a Twitter account, please log on and send out a tweet right now letting all your followers know about our webinar.  Use the hashtag: #castrongwebinar when tweeting your post. We hope that you’ll help us share this information with others in your network.  And, we look forward to reading your tweets online!

If at any point you have to leave during today’s webinar or you miss a portion of it, you can catch a replay on our YouTube channel in the next week or so or by visiting our California Strong webpage at www.californiastrong.ca.gov.

Finally, at certain points during the webinar we’re going to ask you to respond to poll questions.  We want to help connect you to the most relevant information to your business. By answering our poll questions, we can get a better sense of what information will be relevant to you and your business for future webinars. 

Let’s start by taking our first poll right now!

Our first question is: How did you hear about today’s webinar? 

You’ll have about 20 seconds to answer this question and we’ll start the time now.  We want to know if you heard about our webinar through one of our email blasts, from the Franchise Tax Board’s TaxNews, a social media website such as Twitter or Facebook, a news story or online publication, or some other source such as a friend or colleague.  We’ll take about another five seconds to receive your answers, so if you’ve not yet entered a response, please do so at this time.

Alright, we’ve closed the poll and we’re now waiting for the results.  And we should have them any second now. And there you have it! It looks like most of you, well a lot of you, heard about it through the Controller’s Office email and many of you also heard it through FTB’s excellent TaxNews. Thank you for sharing your responses. Now we’re going to start our presentation. Let’s begin with some opening remarks from State Controller John Chiang.

Controller John Chiang:

Good morning, and thank you. It’s a pleasure to welcome you to today’s California Strong event.

We have designed these events to help California families, businesses and communities grow financially.  Thanks to the partnerships we’ve formed with community groups, non-profits and chambers of commerce, we’ve found a way to cut through the red tape in order provide you with resources to thrive in today’s economy.

I am so excited about this event because it’s the first time my office is presenting this information via webinar.  Thanks to technological innovation, we are able to connect with you more than ever before.

In a moment we’re going to share lots of information to help your business.  Before we begin, I want to share why helping self-employed small business owners is important to me. 

California has more than 1.4 million self-employed people, making our state home to more self-employed individuals than anywhere else in the country.

As self-employed individuals, the businesses you run play a valuable role in our community.  As your business grows, the economy will grow, and we can put more people back to work.  That is why your businesses’ success is integral to California’s economic recovery. 

But in order for your business to succeed, it’s important to know your tax filing requirements. And, you will want to determine which tax structure is most suitable for the business you are running.

That is what we are going to help you with today. 

This webinar was designed to connect you to an expert who can give you guidance on the basics of sole proprietorships and LLCs, ítems such as the tax implications and filing requirements of each business structure, making sure you claim all of the tax credits you have earned; determining appropriate business expenditures and deductions, and last, but not least, additional resources that can assist you in setting up a business.

We want to help your business succeed and be in compliance.  So please, take advantage of all of the information in today’s webinar and ask questions if you need help. 

Finally, I want to encourage all of you to stay up to date on free upcoming California Strong events in your community by visiting www.californiastrong.ca.gov.  There, you will also find a link to search unclaimed property that may be waiting for you.  More than $6 billion in lost or forgotten accounts from financial institutions, insurance companies and private businesses can be claimed by the rightful owners or heirs.  I urge all of you to search for your names, those of your friends and families and for your businesses.  It’s time that we got that lost or forgotten property back in the hands of hard working Californians like you.

Enjoy the rest of today’s webinar and thank you for all of your efforts to keep California Strong.

Moderator Jason Montiel:

Thanks to State Controller John Chiang for providing those opening remarks.  And with that we’re ready to turn things over to our guest presenter, Brenda Voet from the Franchise Tax Board. 

Brenda has more than 25 years of experience with the Franchise Tax Board. She’s spent 20 years as an auditor, hearing officer and subject matter expert and has a master’s of science degree in taxation. Some of you may know Brenda from our in-person events we’ve held in various cities across California.  Brenda, thank you so much for presenting today and take it away!

Presenter Brenda Voet:

Jason, it is delightful to be here and to share some good information for those of you that are starting up new businesses or maybe have existing businesses and want to learn a little bit more about forms of ownership.

So, let me begin with a story. This is Sally. Sally is a new business owner and she has got an amazing product – better than even sliced bread. It’s unique and she can’t wait to sell it, but she’s really concerned about what form of ownership would be best for her.

She’s got millions of questions but the first one she wants to get out of the way is, What am I getting myself into with the forms of ownership, and what do I need to know about those? So, to help Sally out, I’m going to share with you and Sally a little bit about forms of ownership that she can choose from.

The first forms of ownership are the most simple forms of ownership here in the state of California. They’re the sole proprietorship and the general partnership.

For sole proprietorship, it is easy to enter into because you and the business are one and the same. So the income and expenses are all your income and expenses. Not a business, not you, but all the same. And it’s very easy to enter into. You don’t have to register with the Secretary of State. You don’t have to keep official books and records, although you are encouraged to keep separate books and records for your personal and business, and I’ll talk a little bit more about those later.

But most people who are starting out will start off as a sole proprietorship. They’ll get what they need to do to open up the business and go into business, and this is an easy way to do it.

The next easiest form is a partnership. And basically, a partnership is two people (who) come together. And you can even open up a partnership over a handshake, but I would strongly encourage you to get everything in writing.

You usually have the general partner, and (have) two or more owners. So, this is where both people come together, and one will either be providing the management skills and the resources, or both of them will. It all really depends on your ownership agreement, your partnership agreement. And all the profits and losses, just like with a sole proprietorship, are the partners’. They are responsible for all the income and expenses being reported on tax returns, and also for paying all the business liabilities. And there’s no distinction between them and the business, so any debt of the business is also their debt. So it’s when two or more people are the business, and the business is them.

Now the next forms of ownership that we have in California are actually separate legal entities that can be formed. And these legal entities are artificial persons, and they have to be created through a formal process, and it will allow them to defend themselves in the California courts. I commend you today for coming to, giving up the time for this webinar because entering into a separate legal entity, I kind of like to tell people, is kind of like entering into quickie marriage when you’re in Las Vegas. You go to Las Vegas, it sounds good at the time, you enter into this legal agreement. Then you get home and there’s a lot of money that has to go into keeping it up and there’s a lot of paperwork that has to go. And there’s just a lot of responsibilities for maintaining that relationship. And more importantly, if you’ve entered into a form of ownership that’s not right for you, just like a quickie Las Vegas wedding, it can be really expensive to get out of. So, I commend you for spending the time here to learn more about this. So let me tell you about some of these separate legal entities that we have available in California. 

The first one is the limited partnership. A limited partnership is different than a normal partnership because it has one general partner. And this general partner is responsible for managing all the business affairs. Sounds similar, but the difference is when you have the limited partners. The limited partners come in and they usually provide just capital, and that’s usually cash. The limitation is they’re only liable for the losses up to the amount of cash that they actually contribute, where the general partner is liable for everything. So this separate entity is something that a lot of people will look into when they have someone who’s got a great idea, but may not have the resources to implement it.

The next is the limited liability partnership, and this legal structure may only be formed by persons licensed to practice in the field of public accounting, law or architecture.

With both of these forms of partnership, there’s a requirement to file with the Secretary of State. The limited partnership is filing the certificate of limited partnership form LP-1, which is available at the Secretary of State’s website at www.sos.ca.gov. And for the limited liability partnership, they file an application to register a limited liability partnership, form LLP-1, also available at the Secretary of State’s website. And each of these forms of ownership is also responsible for filing their own returns, and also paying a minimum tax of $800 a year because they are a separate legal entity that can defend itself in the California court and protect their owners from being personally liable. So that’s for the benefits and protections of this form of ownership.

The next forms of ownership are corporations and limited liability companies.

Corporations we’re all very familiar with. Those are separate legal entities. We see quite a few of those listed on the New York Stock Exchange, and there’s two different ways that you can file for income tax purposes when you’re a corporation. 

The first is a C Corporation and the second is an S Corporation. And we find the rules in the Internal Revenue Code under the Subsection C, for C Corporations, or under Internal Revenue Code Subsection S for S Corporations.

So C Corporations are the (ones) we normally see. They’re listed on the New York Stock Exchange. You can have many, many types of shareholders, different shareholders. But there’s a lot of formalities that go into maintaining a C Corporation. You have to have bylaws. You have major decisions that are made by a board of directors and day-to-day decisions are made by officers. So you have two different governing boards. You must maintain separate bank accounts, books and records. You have to hold annual meetings. You have to keep written minutes. And a corporation is taxed on its income. And then if it distributes any of that earning down to its shareholders in the form of dividends, they’re also taxed. So there’s a lot of formalities in a C Corporation.

The other tax ability is through the S Corporation, and this blends the C Corporation rules but also the partnership rules. And basically what this means is that you maintain the books and records at this S Corporation level, but the profits and losses are distributed down to the shareholders. Whether they’re actually distributed or not, they’re given down to the shareholders and the shareholders report that income or loss on their personal income tax returns. There’s some limitations to an S Corporation. You can have no more than 100 shareholders. Shareholders must be an individual, estate or certain trust and all the stock must be exactly the same.

The final form of ownership is the limited liability company, and this also is a separate entity. There’s no limit to the types of members. Members can be a combination of individuals or businesses. You’re not required to hold annual meetings or keep written minutes, but you must keep and maintain separate banks accounts, books and records. And then for taxpayer purposes, the uniqueness of the limited liability company is in that you can be a sole proprietorship, keep your books and records just as you did as a sole proprietorship. We call this a single-member LLC. Or, as a general partnership if two or more people come together. Or you can choose to keep your books and records as a C Corporation without having to keep all the formalities, or as an S Corporation, and not have to be subject to all the limitations. So the limited liability company can give you a lot of different freedoms on how to choose how you want to keep your books and records for tax purposes, but gives you the protections of just having the one limited liability company.

A C Corporation is required to register with the Secretary of State. They file articles of incorporation with the Secretary of State, and the limited liability company files articles of organization with the Secretary of State. And both are also subject to that $800 minimum tax.

Well, now I’d like to take a break here and turn it back over to Jason so we can ask you the next poll question.

Moderator Jason Montiel:

Thanks, Brenda. Now that you’ve covered the basics of each business structure, we’d like to reach out to our audience to ask a question. For those of you joining us online, we want to know more about your business. So your next poll question is, What type of business structure do you currently operate under? You’ll have about 20 seconds to answer this question, and we’ll start the time now. We want to know if your business is a sole proprietorship or LLC. Or, if you currently do not own a business, or haven’t started a business yet, we want to know that as well. Finally, if you operate under a business structure different than a sole proprietorship or LLC, we want to know. We’ll take about five more seconds for your responses, so if you have not yet entered a response, please do so at this time. Alright, we’ve closed the poll. And we’re now waiting for the results. Great, well it looks like, wow, it looks like most of you are operating with a sole proprietorship. And thank you for sharing your responses. This information will be helpful to us as we plan future webinar topics. And Brenda, now back to you!

Presenter Brenda Voet:

Great, and we’re going to go back to Sally and her story. Well, now that Sally has an understanding of what types of forms of ownership are out there, she knows that she does not want to go into business with anyone else. So, partnerships are not something she’s interested in. She’s not an accountant, lawyer or architect. She also doesn’t really want to keep all the formalities of a corporation right now. She’s just starting out and having to keep the minutes and the stockholder meetings and all the filings that are required of her is just a little overwhelming right now. So Sally would like to look into what are the differences between a sole proprietorship and a limited liability company, and what would be the best form of ownership for her.

So, Sally decides she would really like to talk with somebody who knows about this and seeks out a professional that can help her to gain a better understanding. In a meeting with this person, she learns that no matter whether she’s a sole proprietor or a limited liability company, she’s gonna need to create a business plan (to) give her a map to help her understand where she’s gonna go, how she’s gonna get there, and what she wants to do.

She also needs to obtain any necessary business permits that will allow her to operate her business, open a separate bank account for her business so that she can run all the money through that bank account, and keep her personal income and business income separate, keep track of all business income and expenses. I’ll be talking more about those later and sharing with you the importance of doing this. She will also need to pay estimated taxes throughout the year. California is a pay-as-you-go taxing state, and estimated payments make it so that when April 15th comes around, or when the due date of the return is around, the payments will already be made, and no penalties will be there for late payments. Or she won’t have to come up with a large amount of cash at the end of the tax year for her.

So, in looking at these, she’d like to know what some of the differences are between the two. Well, with the sole proprietorship, she doesn’t need to register with the Secretary of State, so that makes it really simple. To file her income tax returns for her sole proprietorship, she would simply fill out a Schedule C -- that is a federal form -- and on that form she would report all of her income, deduct all of her expenses, to come up with either her net income or her net loss. And then that amount is actually reported on her personal income tax return. So that’s simple enough.

The limited liability company, on the other hand, has the requirement to register with the Secretary of State. And because it is a separate legal taxable entity, it is also required to file a separate tax return to California. So, it would file a limited liability company return. On this return, she would indicate that she’s a single-member limited liability company, and that she’s gonna be reporting the income and expenses from this limited liability company on her personal income tax return.

Then, just like the sole proprietorship, she’s also gonna complete the federal Schedule C, report all of her income and expenses, come up with a net income or loss, and that amount’s gonna be reported on her personal income tax return. But the limited liability company also is subject to that $800 annual tax because it is a separate taxable entity. But it may have … A limited liability company fee may apply, depending on how much she brings in revenue each year. So to give her a better understanding of this, the professional tax consultant helps her to understand this through an example. And I’d like to share with you that example now.

Hypothetically, Sally could earn gross income of $260,000. From this, she would deduct $160,000 for her cost of goods sold, leading to a gross profit of $100,000. Then she would have to deduct out, add up and then deduct out, all of her business expenses, such as office supplies, phone, mailing, home office and mileage. And in this example, it’s $67,000. So, Sally’s net income for this entity would be the gross profit less the total expenses, for a net income of $33,000. So, how’s this going to be reported for tax purposes?

Well, for the sole proprietorship, all those income and loss items are going to be reported on the Schedule C. The $33,000 is going to be reported on her personal income tax return. There’s going to be no fees involved, and if Sally’s single and has no dependents, and this is her only source of income, she’s gonna have a tax responsibility of $1,012.

Now, if Sally chooses to be a limited liability company, she’s also gonna have the Schedule C with the income and expenses reported on it. She’s gonna report that $33,000 on her personal income tax return. But, the limited liability company is also subject to a $900 LLC fee in this situation. The LLC fee is based on the amount of gross income. Gross income in this situation was $260,000. So, what you would do is you would look at … There’s a table for the LLC fee. It can range from $900 to $1,790 depending on how much annual income there is. It's grouped, and it’s a stepped-up amount on each of these. So, Sally is subject to the $900 limited liability company fee because the gross receipts (were) $260,000. (She's) also subject to the $800 limited liability tax. So, the total amount that Sally would need to pay for herself and for the single-member LLC would be $2,712.

So let’s talk about some of the advantages and disadvantages of being a sole proprietorship. Well, as we shared before, it’s very easy to establish a sole proprietorship. Your business losses can offset your personal income. So, let’s say you had, you were filing a joint return and your spouse had income coming on in, and you had a loss from your sole proprietorship. You could offset your spouse’s income with the loss from the sole proprietorship and reduce your actual taxes paid as a married filing joint couple. And there’s also no entity-level tax.

The biggest disadvantage, though, is that because the sole proprietor is one and the same with their business, they’re liable for all the business debts. So if the business debts aren’t being paid timely, then the creditors can go after the owner as an individual. And the owner’s taxed on all the income, even if it’s never actually received. So, if the business income stays with the business and never actually comes into the pocket of the owner, the owner still has to pay taxes on that.

So let’s look at some of the advantages and disadvantages of being a single-member LLC. Well, the biggest advantage, and the reason most people enter into becoming a limited liability company, is because the owner is not liable for the business debts, because it is a separate taxable entity. However, one of the advantages also is that just like the sole proprietorship, the business losses can offset the personal income, and it’s really easy to maintain books and records. There’s not the formalities that are required for some of the other business entities.

But the disadvantages are there’s a separate tax return that’s required to be filed for the business entity. There’s the $800 annual tax that needs to be paid each year. There could be a potential annual fee depending on how much gross income comes into the business and the owner is taxed on all the income even if it isn’t actually received.

So, I think this is a good time again to stop for another poll question. And, I am gonna to turn it back over to Jason.

Moderator Jason Montiel:

Great, well thanks, Brenda. You did an excellent job explaining the differences between sole proprietorships and LLCs, and what a legal entity is. Now I want to take a moment to reach out to our audience and find out which of the legal entities they might be interested in learning more about. Think to the future – Where do you envision your business to be in 10 years? Our next poll question is: Which of the following legal entities would you like to learn more about? Members of the audience, you’ll have 20 seconds to answer this question, and we’ll start the time now. We want to know if you’re interested in learning more about limited partnerships, limited liability partnerships, corporations or none of the above. We’ll take about 10 more seconds for your responses. So, if you have not yet entered a response, please do so now. Alright, we’ve closed the poll, and we’re now waiting for the results. Once again, remember that you can take this time also to ask questions of Brenda and she’ll get to those at the end of our presentation. Let’s take a look at the results. Let’s see, most of, wow, we have a lot of interest in a lot of different topics here. But most of you look like you’re interested in corporations, followed up by limited liability partnerships. That’s really helpful to us. Thank you for your responses. Let’s go back to Brenda now.

Presenter Brenda Voet:

OK, I promised you earlier that we would talk about record keeping and deductions and here we go! Record keeping and deductions is part of the job, too. Make sure you keep track of all your spending. Keep your receipts. Log in the different things that you spend for your businesses. One of the biggest things is that people will use their automobile for their business, but they won’t keep a log, and I can guarantee you, you are short-changing yourself on the amount of business expense you’re entitled to. Keep track of the mileage. Always use a separate bank account for personal and business purposes. You don’t want to get yourself into a situation where you’re trying to justify something that could be a personal business expense and not have it allowed if you go through the audit process. Always keep personal expenses separate. And last of all, but not least, keep records. Keep your documents. If you’ve used it to justify something on your tax return, keep it. There’s a four-year statute of limitations for us to be able to audit a tax return, but I would encourage you to keep your tax returns and the documents longer than that four-year period.

The next thing I’d like to share with you is some business deductions. They need to be ordinary and necessary, and those are legal terms. Ordinary and necessary is unique for each business. For example, if you have a bakery, an ordinary and necessary expense would be an oven. But if you had a car wash, an oven may not be an ordinary and necessary expense. So, you need to really look and see what you’re doing, what type of business you’re doing, and what’s ordinary and necessary.

In most situations, you can write off all the costs of the items that you’ve purchased. But, for the example the oven, we’re not going to let you write that off in one year, because you’re going to be using that oven for a long period of time. So what we do is we require you to do something called capitalizing it, and that just means you record it on the books and then each year that you use that oven, we’re going to let you deduct a little bit of the cost of that oven, and we call that depreciation. So, there’s certain items that you have to capitalize, certain items that you can just expense. So you need to be aware of those.

I want to let you know about business tax credits. There’s a lot of credits that are available. Enterprise zone credit is one that’s available for people who are working specific geographical area. Fruits and vegetable credits are ones that are available to people who are actually growing and harvesting and in the farm and agriculture industry. Motion picture and TV production credit – this credit is one for people who are in that industry and trying to make sure that industry stays here in California and doesn’t get sourced out to different states. The new job credit – this is the best-kept secret that we have. You may be entitled to a $3,000 credit if you hire on new employees. You just need to be a small business, have 20 or fewer employees as of December 31st of the prior year, and you need to hire somebody full time. The other one is the research and development credit. As you know, California is one of the greatest research and development spots in the world, and we like to encourage that with the research and development credit that’s available.

Some additional resources that are available for you is the Guide to Forms of Ownership, and that will go over all the forms of ownership that I shared with you today. It’s available online at ftb.ca.gov. Just go to the search box and key in Form 1123. The IRS offers two great publications for small businesses. Those are available online at irs.gov. (IRS Publication 334 and IRS Publication 583) And finally, I would encourage you to subscribe to TaxNews and e-News. They’re publications by both the Franchise Tax Board and the Internal Revenue Service. No cost to you. Direct to your in box. And, it will give you a lot of good information for things that may be occurring tax-wise that could impact your businesses.

And finally, I’d like to share with you a really good resource, and this is Go-Biz. It is a website that has a lot of very good information for you, to help you in making business decisions, such as site selection, how to attract and maintain customers. You can even get assistance with how to get into a government contract. That’s available at www.business.ca.gov.

And now I think would be a good time to go on to find out what types of questions (you have) and hopefully provide answers to you.

Moderator Jason Montiel:

Thank you, Brenda. Well, that concludes our main presentation and now’s the time to take some questions from the audience. Audience, please send in your questions for Brenda at this time. If at any point during the presentation you submitted a question, we’ll do our best in the next few minutes to answer them. And if we don’t get to them, we’ll work on getting you a direct response as soon as possible.

We have our first question. Brenda, a food truck operator in Sacramento operating as a sole proprietor wants to know if he should seek LLC. What do you think?

Presenter Brenda Voet:

Well, I think the first thing that the person should do is talk to somebody. Really make sure that you look at all the facts and circumstances, and especially be concerned about the numbers. When you’re in the food industry, you usually have a very high cost of goods sold. So what this means is you usually have a high revenue. And with a limited liability company, you may be subject to that annual fee that’s in there. And I want to make sure that they know that could be a factor in whether they want to take on that limited liability company entity ownership.

Moderator Jason Montiel:

Well that sort of leads to our next question: Is there any way to avoid the annual $800 tax associated with becoming an LLC?

Presenter Brenda Voet:

Actually, the $800 minimum tax can be waived for the first year if you choose to be a corporation, either filing as a C Corporation or an S Corporation. There is a break for that. But for the rest, the $800 minimum tax and annual fee is required, and it’s for benefits and protections that are received for being a separate taxable entity and getting the courts to be able to have that as a facility to deal with any of the issues that come forward such as lawsuits or any actions taken against the company.

Moderator Jason Montiel:

Great! Well, thank you. We have a question from Kathie. Can you start as a sole prop and then switch to LLC within a year?

Presenter Brenda Voet:

Oh, Kathie, that’s a great question. That’s how most people usually start out. They’ll start off as a sole proprietorship, and if they decide they want the benefits and protections, they can switch. And it’s very easy to do so. What you will have, though, is you’ll have what we call short-year periods. You’ve have a … Part of the year you’ll be a sole proprietorship, and your Schedule C will reflect that you’re just a sole proprietorship, and all the income and expenses up to the date that you choose to become an LLC we be reported on that Schedule C. And then you’ll have the limited liability company will pick up on the next day, and you’ll have a short period return for that. And from that day forward, all the information will be reported on the limited liability company’s books and records.

Moderator Jason Montiel:

Great! Thank you. We have a question now from Robert. Are health care premiums deductible?

Presenter Brenda Voet:

Robert, it all depends on what the health care premiums are. We did conform to a lot of the health care reforms that were done at the federal level. Some of them have some unique differences for California purposes. What I would encourage you to do is to go on to our website at FTB, for Franchise Tax Board, .ca for California .gov, and key in the words “health care premium” in the search box, and search for that information, and be able to make yourself aware of the conformity and the differences that we have.

Moderator Jason Montiel:

Thank you, Brenda.  Our next question is from Mrs. Farmer. Is the LLC fee tax deductible?

Presenter Brenda Voet:

The LLC fee … I believe it is, as a matter of fact. It is deductible as a fee on the, as an expense for the business. But the annual tax, the $800 minimum tax, is not tax deductible because that is a tax.

Moderator Jason Montiel.

And we have another one coming here very soon. And this question is from John. Are there other types of partnerships?

Presenter Brenda Voet:

Well, John, that’s a really good way for me to advertise our Franchise Tax Board forms of ownership brochure that I let you know about. It’s available on our website, and we do have more information about the different forms of ownership, or partnerships that are available in there, and which ones are not necessarily recognized by California. For example, the limited liability limited partnership, which is an LLLP, we describe in the booklet, and in more detail. We also have a couple of corporations that I didn’t talk about that are new to California, and they’re benefit corporations. And it’s just the same type of structure where it would be a C Corporation, but the benefits are that it is allowing the corporation to do charitable works and have some protections against the stockholders and the influence in controlling what types of activities the business does.

Moderator Jason Montiel:

Great! Thank you, Brenda. The next question is from Liseth. Where can I learn more about the LLC fee table? What are the fees?

Presenter Brenda Voet:

Like I said, it’s a range of fees, and the best way to do that is to go on to our website and key in the “LLC fees” in the search box. Another feature that is available on our website, if you don’t want to use the search box, is we have something called LiveChat, and it’s down there in the lower right-hand corner, and if you have any of these questions, and it’s during normal business hours, you can click on that box and you can have someone from our office actually help you to find the answers. And they would be able to take you to the LLC fee table, which is also actually part of the instructions for the limited liability company return.

Moderator Jason Montiel:

Thank you, Brenda. Boy, we are getting really a lot of great questions here. And we’ll have another one very soon. And this next question is from Kamran. If out-of-state LLCs sell to California residents, are the California residents taxed?

Presenter Brenda Voet:

OK, so the sales from the limited liability company are being made to California residents. So now we’ve got an LLC that I’m presuming is not formed in California, but is doing business in California. So now you’ve got a completely different issue, because if you’re making sales in California, this is kind of similar to what the controversy was with Amazon, and how Amazon was making sales to California residents, but they weren’t having the sales tax deducted. So, the limited liability company in this situation, if they are an out-of-state company, they need to register as a foreign company that’s doing business in California. And they’re also gonna be subject to California tax. And the residents that are actually purchasing from this limited liability company may be required to have sales tax withheld, and if that’s not withheld, then the residents could be required to pay use tax to the State of California.

Moderator Jason Montiel:

Great! Thank you, Brenda. This question is from Jose. Do you have to pay the $800 LLC tax even if you generate no sales?

Presenter Brenda Voet:

Unfortunately, Jose, yes. It is called a limited liability. It’s a minimum annual tax that needs to be paid. And it’s for the benefits and protections of working in California and having the court system to be able to protect us in this separate legal taxable entity. So there’s no relief from that $800 minimum tax.

Moderator Jason Montiel:

Brenda, thank you, and thank you to everybody who has asked such excellent questions. Unfortunately, we’ve run out of time for today. Once again, I’d like to thank our guest presenter, Brenda Voet, from the Franchise Tax Board, for her remarks, and for taking questions from the audience. I also want to remind you that a video replay of today’s webinar will be available in about a week. If you’d like to watch or share the replay, please visit the Controller’s YouTube channel. A link will be placed on the Controller’s website at www.californiastrong.ca.gov. Also at that link, you can also sign up to receive updates and information related to future webinars and other events hosted by the State Controller. That’s it for our presentation. Thank you for watching and have a great day!