Business Taxation in California
Business taxation structure is based on factors such a legal entity and state regulations. The state of California structures their business taxation based on legal entities. Depending if the business is submitted to corporate or personal income taxes, the legal entity will change, thus tax revenues will change.
Businesses that are legally formed under a corporate umbrella have to pay a combination of the following: franchise tax, corporate income tax and alternative minimum. The amount and rate of this tax is determined by the specific legal form of the business.
A sole proprietorship business is taxed based on the owner’s personal tax return. This is because the income that is given to the owner is the money actually taxed. This bypasses corporate tax (pass-through entity). A limited liability partnership (LLP) is a similar structure, but does not have through pass-through taxation and has to pay a franchise tax.
A business that falls under the corporation umbrella, their taxation changes depending S and C.
-C corporations pay a 8.84% rated corporate tax to the state based on net taxable income. In addition, shareholders of the business are also taxed on their personal income.
-S corporations are not required to pay corporate taxes, but are taxed 1.5% on net income and then pay a franchise tax. In addition, all owner income is taxed on their personal income tax returns.
Limited liability companies (LLCs) have a more complicated taxation scheme. First, a flat dollar amount has to be paid based on the gross income tier. A gross income tier can range from $250,000 business to a 5 million dollar business. In addition to this spectrum franchise tax, owner’s income is again taxed at a personal level.