California LLC question

[Tax Prep by Deb]

I have a client who for many years has ran his business as a sole proprietor. Recently, however, it was suggested to him by his insurance agent to convert his business to a LLC as this will open up much cheaper insurance rates for him and his wife. His wife has MS and the cost to keep her insured is unbelievable. By forming the LLC he and his wife would be the officers, both would be employees of the LLC.

I am totally unfamiliar with just about anything to do with corps weather it be C S or LLC. My thinking is that they would be required to file a corporate tax return each year, and pay the California fee of 800.00. Then after that return is prepared and they have their schedule K we would file their personal return. Is this correct? Or is there anyway of avoiding having to file a corporate tax return?

I have been doing their personal taxes for many years. Now that they are thinking of going a LLC I have suggested sitting down and talking to a CPA of which they are trying to get an appointment. In the meantime we both are trying to collect as much info as possible to determine the practicallity of this move.

Any thoughts would be greatly appreciated!

Deb!

[jainen]

>>anyway of avoiding having to file a corporate tax return?<<

The LLC format is disregarded for federal tax purposes. If the business continues to be operated as a sole proprietorship or qualified joint venture, they would continue to use Schedule C. Otherwise it would be a partnership filing Form 1065. It wouldn't file as a corporation unless it makes a specific election to be taxed as a corporation. In any case, a California LLC must also file an LLC return, pay the franchise fee (minimum $800), and pay the income-based LLC fee if applicable.

I tend to be cautious of changes in insurance plans. You don't always get what you expected, and it is usually too late to go back.

[Tax Prep by Deb]

>>anyway of avoiding having to file a corporate tax return?<<

The LLC format is disregarded for federal tax purposes. If the business continues to be operated as a sole proprietorship or qualified joint venture, they would continue to use Schedule C. Otherwise it would be a partnership filing Form 1065. It wouldn't file as a corporation unless it makes a specific election to be taxed as a corporation. In any case, a California LLC must also file an LLC return, pay the franchise fee (minimum $800), and pay the income-based LLC fee if applicable.

I tend to be cautious of changes in insurance plans. You don't always get what you expected, and it is usually too late to go back.

Thanks Jainen.

I agree, however I know the insurance agent personally, and this man is very good at what he does. He works very hard to find the best plan available at the best price available. I believe his thinking is that moving them into a group plan will lower their costs. They are currently paying over $1,000.00 per month just to keep her covered. He currently is not insured and his daughter is covered under a high deductible HSA insurance. I have asked him to be sure and include the cost to open the LLC as well as the filing requirements, (I referred him out for tax prep on the LLC if needed) into his actual cost of acquiring that insurance to make sure it is feesible.

When you state that they would need to file an LLC return, would this be just for the state? What form number would they need to file?

Thanks,

Deb

[jainen]

>>they would need to file an LLC return<<

Unless they elect to file as a corporation, California LLC's filing as a partnership or disregarded entity must file Form 568 Limited Liability Company Return of Income with an $800 tax, plus an LLC fee if their income is high enough. This is in addition to the partnership or sole proprietor return and taxes. You can find out everything you need from the Spidell website at My link. I recommend their booklet, The Life of an Entity.

[Kea]

On the insurance side of the question --

Perhaps California law & Texas law are different, but I was able to get a group policy by adding my husband as co-owner of my Sch C business. We did not have to set up an LLC or other entity. I now file 2 Schedule Cs, but no corporate fees or forms.

Hope that may help them.

[Tax Prep by Deb]

>>they would need to file an LLC return<<

Unless they elect to file as a corporation, California LLC's filing as a partnership or disregarded entity must file Form 568 Limited Liability Company Return of Income with an $800 tax, plus an LLC fee if their income is high enough. This is in addition to the partnership or sole proprietor return and taxes. You can find out everything you need from the Spidell website at My link. I recommend their booklet, The Life of an Entity.

Thanks for the info.

Deb!