While this reads like a bad ad on late-night TV it is actually true: In the wake of the pandemic the State of California wants to encourage business formation. With the enactment of Assembly Bill 85 for tax years beginning on or after January 1, 2021, and before January 1, 2024, LLCs that organize, register, or file with the Secretary of State to do business in California are not subject to the annual tax of $800 for their first tax year. In addition, the initial $85.00 filing fee for LLC formation with the Secretary of State has been waived for the period July 1, 2022 – June 30, 2023.
When we engage in estate planning, we often find that families, couples, and individuals should reevaluate existing legal relationships and structures. It’s a good time to bring your house in order. Here we want to focus on how to bring business interests into the trust, typically a revocable living trust, and in what form.
With the annual minimum $800 tax to the California Franchise Tax Board, maintaining a Limited Liability Company (LLC) in California has been more expensive than anywhere else in the United States. Not surprisingly, most small business owners in California continue to operate as sole proprietorships or other unprotected entities such as partnerships. While operating costs and recurring reporting requirements are lower this way, there is no creditor protection. Separating your personal liability from that of your business is always a good idea, especially as the business dealings get more complex, sales have grown, and legal risk has increased.
Many business owners know that a revocable living trust (as opposed to a properly constructed irrevocable trust) does not protect against creditors. It is not an asset protection tool. In contrast, an LLC provides liability protection and allows for pass-through taxation. For more California relevant information visit the Franchise Tax Board.
Let’s assume you are a sole proprietor or are member of partnership. By forming an LLC, you separate your personal liability from that of the business. There are two ways an LLC can relate to a revocable trust: 1) The trust holds an LLC or 2) the LLC holds a trust. The reason to mention both is to avoid confusion when you do independent research.
1. The trust holds your interest in the LLC. For example, if the LLC has 3 members (assume previously partners) you may have a 1/3 interest in the LCC. This interest would go into the trust. This is the typical scenario, combining the advantages of probate avoidance and liability protection.
2. The LLC holds a trust (better, the LLC has a trust as a single member). All assets in an LLC owned by a revocable trust as a single member are vulnerable to the grantor’s creditors. There only are few specialized uses for this arrangement.
If you run a small business, you may want to consider forming an LLC or another form of organization that gives you liability protection. If unsure of what would be best for you, consult a lawyer. The process for LLC formation is very easy, and you can do it yourself. We routinely assist our clients in closely-related business matters as part of comprehensive estate planning.
