As the end of the year approaches, many entrepreneurs begin to think about taking the leap to start a business, and look to the limited liability company ("LLC") as the vehicle to protect their personal assets from the debts and liabilities of their business. When it comes to LLCs, California has a little-known mechanism for avoiding certain tax-related requirements when forming an LLC that is only available at the end of the year. This mechanism, which is based on the "15-day rule," is only available to newly formed California LLCs, so new businesses and startups need to do a little planning in order to take advantage of it.
Creative Vision Legal goes the extra step to give small business owners something they can't get from online legal service websites-comprehensive legal advice with every formation package. Click here if you want to form your LLC now. Corporations can also take advantage of the 15-day rule; click here if you want to incorporate now. Whichever entity you choose, the firm's business formation lawyer Michael J. Thomas will guide you through the formation process, and can help you take advantage of California's 15-day rule. Here is some important information about this rule and its advantages.
What Happens If You Do Not Take Advantage of California's 15-Day Rule When Forming an LLC?
1. A Newly-Formed LLC Will Have to Pay the LLC Minimum Tax Twice Within a Year, and Maybe Twice Within a Very Short Amount of Time.
Without taking advantage of the 15-day rule, newly formed LLCs will have to pay the California Franchise Tax Board minimum tax of $800 twice in less than a year. This is because the tax is due by the 15th day of the 4th month after LLC formation, and then again in the next tax year on April 15th.
For example, without the 15-day rule, an LLC formed in February would have to pay its initial $800 tax by May 15th, and then again 11 months later on April 15th. In the worst-case scenario, an LLC formed on December 1st would have to pay the tax by March 15th, and then again just one month later on April 15th.
However, by taking advantage of the 15-day rule, a newly-formed LLC would only have to pay the minimum tax by April 15th the following year (and every year thereafter on this date).
2. A Newly-Formed LLC Would Have to File a Tax Return After Less Than a Year of Existence.
Without taking advantage of the 15-day rule, a newly-formed LLC would have to file a tax return for its first, partial year of existence, no matter how short that tax year is. For example, an LLC formed on November 30, 2017 would have to file a tax return the following April 15th, 2018 for the 32 days it was in existence during the previous year. Using the 15-day rule, an LLC would not have to file a tax return until April 15th 2019.
How Can Small Business Owners and Entrepreneurs Looking to Form an LLC Take Adavantage of the 15-Day Rule?
There are two requirements for taking advantage of California's 15-day rule:
- Form your LLC anytime during the last 15 days of the year (December 17th-December 31st).
- Do not conduct any business during for the rest of the year.
For example, if you form your LLC on December 20, 2017, your "tax year" for 2017 would be 12 calendar days. Therefore, to utilize the 15-day rule you would have to refrain from doing business for 12 days (December 20th-31st), and would not be able to start conducting business until January 1, 2018.
Practical Considerations When Forming an LLC and Utilizing the 15-Day Rule
Utilizing the 15-day rule will require some planning, and in some instances, you may have to incur extra costs to form your LLC. The problem lies with the fact that California still relies on old-fashioned "snailmail" for filing LLC Articles of Organization (the document necessary to form an LLC), or in-person drop-offs at the Secretary of State's office in Sacramento. Here are the options and considerations for each, from the least expensive (but the most uncertain) to the most expensive (but most certain).
Least Expensive (But the Most Uncertain) Option: Mail the Articles
When you send your Articles to the Secretary of State using regular first-class mail, there is a lot of uncertainty about whether your LLC will be formed within the 15-day window. For starters, you have to rely on the U.S. Postal Service. Second, your paperwork will fall into the "line" with other documents waiting to be processed, which during normal times ranges from 5-10 days. However, during the end-of-the-year rush, these times can expand to greater than 2 weeks.
The best way to manage the uncertainty but still keep costs down is to begin monitoring the processing times on the Secretary of State website around December 1st and use overnight delivery to try and time the filing.
More Expensive (But More Certain) Option: Drop-Off at the Secretary of State Office
The next best option is to use the Secretary of State's "Special Handling (Drop-Off) Service". Articles of Organization filings can only be dropped off at the Sacramento office. A $15.00 special handling fee is charged for the filing. Dropping off moves your filing to the "head of the line," but you will still be limited by the processing time in effect at that time. And if you don't have the time or resources to make it all the way to Sacramento, you will have to incur more costs to hire a messenger service to drop the Articles off for you.
Most Expensive (But Most Certain) Option: Drop Off + Expedited Filing
The only way to know with absolute certainty when your LLC will be formed is to (1) drop-off at the Secretary of State Sacramento office, and (2) use one of three expedited service options. The three expedited service options are:
- 24–Hour Filing Service ("Class C") ($350.00);
- Same Day Filing Service ("Class B") ($750.00): The document must be received by the Secretary of State no later than 9:30 a.m.
- 4–Hour Filing Service ("Class A") ($500.00)
And in case you are thinking that the 4-hour filing service looks like a steal at $500 vs. $750 for same-day filing, think again: using "Class A" service requires preclearing and approval of a document before filing, which can cost anywhere from $250 to $500 extra. Preclearance involves review of the Articles by Secretary of State staff to determine whether the document meets the standards necessary for filing. Preclearance services come in four classes:
- 24–Hour Preclearance Service (Class I) ($500.00)
- 72–Hour Preclearance Service (Class II) ($400.00)
- 5–Day Preclearance Service (Class III) ($300.00)
- 10–Day Preclearance Service (Class IV) ($250.00)
Whichever option you choose, Creative Vision Legal will take care of all the steps, and give you legal advice at all the critical points, to ensure that forming your LLC is effortless, so you can focus on getting your business up and running in the New Year.