The Limited Liability Company (LLC) structure is fairly new in the world of business. Despite its relative newness, it has quickly become one of the most popular types of company structures for many small and medium businesses. It is, in some ways, a “hybrid” business structure, because it manages to combine the relative ease of approval and application that comes from a DBA/sole proprietorship but provide business owners with some of the financial protection that is associated with a larger corporation.
When forming an LLC, you can expect the Secretary of State to review and approve your application as long as you meet all the requirements. Once you get your LLC status, you will have to start looking at some of the financial documentation required for running a business. In this case, you’ll need to fill CA Form 568 on an annual basis. But what is this, and how do you fill it out? Follow these CA Form 568 instructions to make sure you stay compliant with California tax law.
What Is CA Form 568?
CA Form 568 is a tax document. For an LLC, it is probably the most important tax document. All the other additional financial records and tax documents must agree and comply with whatever ultimately ends up on CA form 568. You can think of CA form 568 as your LLC’s “master tax document.”
This form reflects your company’s overall financial activity and health for the year. You will also have to fill out other documents for taxation purposes. But, you should outline all the information you put in those documents based on what you disclose in CA Form 568. Everything should be consistent with what appears there.
Who Needs To File Form 568?
Generally, all LLCs operating in California need to file this form. Along with Form 3522, you will have to file CA Form 568 if your LLC tax status is either as a disregarded entity or a partnership. Thus, you will need to file both if you are running a small business.
A disregarded entity is usually a single person or married couple working in partnership, who are choosing the LLC structure rather than DBA/sole proprietorship business status. In this case, a disregarded entity means a business entity that is financially separate from its owner. However, the terms of ownership are the same.
So, for example, a person running a small business is both the owner and operator. With DBA status, there is no distinction between the person and the person’s business. That is why financial liability can access that person’s finances. A disregarded entity is legally considered a separate thing from the person running the business for liability purposes. But, when tax time comes, that single person files as the disregarded entity. In effect, the individual is owning up to being responsible for that business.
A partnership is, of course, more straightforward. It involves two or more people that are not married but are agreeing to equal stakes, investment, management, and responsibility for that business. In the state of California, people in a legally recognized marriage or union can be considered a single entity to run a company on request. But outside of that circumstance, a partnership is generally required for two or more people running a business together.
The Partner Document
A business owner cannot file this document on its own. There is another tax-related document that always goes along with CA form 568, and that is Form 3522. Form 3522 consists of your LLC’s franchise tax. In California, it currently sits at a minimum of $800. However, it breaks down depending on your declared income.
- $250,000 – $499,999 = $900
- $500,000 – $999,999 = $2500
- $1,000,000 – 4,999,999 = $6000
- Over $5,000,000 = $11,790
However, new business owners should note that this isn’t the “final tax” that one has to pay. The franchise tax is a fixed amount every company with LLC or corporate status pays every year in addition to the taxes they file as determined by CA Form 568. It is, in effect, a “fee” levied for doing business in the state of California.
What To Put In
The CA form 568 instructions are detailed but straightforward. When filling out this form, you are laying out your complete financial activity for the year. You should include details like:
- Use Tax
- Property Distributions
- Members’ Shares of Income, Deductions & Credits
- Annual Tax for the LLC
- LLC Fee
- Total Income of the LLC
The LLC fee is something you have to pay upon the formation of your LLC. However, you have to file the other categories every year. Honesty and consistency are key to smooth filing and submission of CA form 568. If there are inconsistencies or contradictions between what appears in CA Form 568 and other tax documents, there may be an investigation, and, in the worst-case scenario, fees and penalties.
However, as long as you are accurate and meticulous about your business finances, then following CA form 568 instructions should not be complicated. Thus, it will result in a clean financial “bill of health” for your company when it is time to submit documents.
Business Filing Section