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Why Incorporate your business in California?
This explains the procedure to incorporate in California as well as post incorporation operations. There is a big difference between filing articles of incorporation and incorporating. The procedure to incorporate in California is similar to the incorporation process in other states, but not identical.
Incorporation in California takes about one week if done by expedited processing. With normal processing, incorporating takes about a month. Our MBA Moms handles the full scope of pre-incorporation and post-incorporation matters, from filing Articles of Incorporation to preparation of all the documents, resolutions and certificates necessary to incorporate. We prepare and file all the necessary documents for you, and take care of any publication requirements or miscellaneous filings.
Selecting a name for a California corporation.
The first step to incorporate is selecting the name for the company. If available, the name can be reserved with the California Secretary of State for 60 days. Incorporating protects the name from being used by another corporation in California. The name cannot infringe on a trademark or service mark. To protect the name from use by non-corporate entities, it can be registered as a trademark or service mark, which is a separate process.
Articles of Incorporation must to be filed with the California Secretary of State. While filing Articles begins the existence of the corporation, it doesn't provide any structure to the entity. The corporation must be completed with Bylaws, the appointment of the Board of Directors, the issuance of stock, and other steps discussed below. There is a big difference between "filing Articles of Incorporation" and "incorporating in California".
Bylaws commonly include provisions of the law, rules regarding voting and calling meetings as wells as other structural and operational issues. The bylaws will provide for the number of Directors on the Board of Directors. The incorporator who executed and filed the articles of incorporation will also execute an Election of Directors documenting the appointment of the initial Board of Directors.
Organizational Meeting of Directors.
To complete the process of incorporating, directors hold the First Meeting of the Board of Directors to elect officers, authorize issuance of stock, adopt the Corporate Bylaws and such other matters as designating the location of corporate office and its place of banking. Minutes (signed by the Secretary of the Corporation) of the organizational meeting must be prepared to provide evidence of the actions authorized by the Board. Many companies will forgo the formality of holding a formal meeting documented by Minutes by having all the Directors execute a "Consent to Action Without Meeting" to document the corporate resolutions.
Ongoing Affairs After Incorporating
After the articles of incorporation, first meeting of directors, and stock issuance are completed, the formation of the corporation has been formally established. The California Corporations Code, courts, and Internal Revenue Service require observance of formalities in operating a Corporation for the directors and shareholders to have limited liability against claims on the corporation.
Federal Employer Identification Number
A Federal Tax Identification Number for the company (also called an "EIN" or "Employer ID Number") can be obtained from the IRS for taxation purposes and for opening a corporate bank account. Since a Corporation is a taxpayer, it will file tax returns and maintain evidence that it is operating as an entity separate from its owners. The number is obtained by filing IRS form SS-4.
Issuance of Stock
If stock is issued in exchange for assets contributed to the corporation, a list of contributed assets should completed and maintained with the corporate records to document the transfer of assets in exchange for stock. Before stock is issued, a permit must be obtained from the California Department of Corporations. However, if the shareholders of the corporation are limited to less than 35 persons, then it is possible to issue stock by registering with the Dept. of Corporations under Corporate Code Section 25102(f), which is a simplified and common method to issue stock. The company is also required to file an annual Domestic Stock Statement, providing information to the Secretary of State of California regarding the company's principal place of business, as wells as the names and addresses of the corporate officers and directors the company's registered agent for service of process.
Fictitious Name Statement
If the Corporation will conduct business under a fictitious name, a Fictitious Business Name statement must be filed with the County Clerk in the county of the company's principal place of business. The statement must be filed within forty days of the commencement of business, and within thirty days after filing a Fictitious Business Name Statement, the registrant must publish the statement in a newspaper of general circulation in the same county once a week for four consecutive weeks. An affidavit of publication will need to be filed with the County Clerk's office as proof.
Business Licensing for a Corporation
Many cities and counties require a license to do business within the city. If a business intends to operate within the incorporated area of a city, the city government may require a business permit.
Subchapter S Corporation
Subchapter S Corporation status is acquired by filing IRS form 2553. This form should be filed within 75 days of the filing of the Articles of Incorporation. All the shareholders of the Corporation must sign the form for the S corporation status to be accepted by the IRS. The S Corporation acceptance from the IRS should be maintained in the corporate records book.
In California, there is no requirement for resident director to incorporate. Foreign nationals can act as a director of a California company. However, a California company is required to have a resident agent in California for acceptance of service of process.
California Sales Tax Number
If you sell goods or taxable services, this is your Seller's Permit and Registration as a retailer with the State of California. This account number also allows you to buy goods for resale or export and not pay any State sales tax.
California Securities Exemption Disclosure Form
Whenever Securities are sold in California, the issuer is required to qualify them under the securities law of California, unless they fall within an exemption. The issuance of securities for your corporation will fall under one of these statutory exemptions, and such you are required by law to file the applicable disclosure documents with the Department of Corporations.
California Retailer's Resale & Exemption Certificates
State and local tax laws require that vendors have in their files properly executed Exemption Certificates given to them in good faith by all of their customers who claim California Sales Tax Exemption. We can prepare a set of Exemption Certificates for you to give to vendors from whom you intend to buy goods for either resale or export to be exempt from paying State or local sales taxes.
While this should help clarify the incorporating process, it is not intended to be a complete guide. A number of problems can arise from the failure to establish and maintain the corporate structure, such as unanticipated tax liability or shareholder disputes. If a corporation is not properly set up, the business structure may not provide protection from personal liability, and shareholders may be personally liable for the company's obligations.
CALIFORNIA LLC FORMATION
There is a big difference between filing Articles of Organization and forming an LLC in California.
Steps to form an LLC in California
Background. Since California's enactment in 1996 of The Beverly-Killea Limited Liability Company Act, which provides for the formation of the limited liability company, this form of business has become a popular alternative to incorporating. In 1997, the IRS began to allow LLC's to elect tax treatment. Now, by default, a Limited Liability Company is taxed as a partnership, (with pass-through tax treatment) unless the members specifically designate to be taxed at the entity level in the same manner as a corporation. California has amended the Beverly-Killea Act to expressly authorize the formation of a single-member LLC. State law also now allows for perpetual duration of a limited liability company existence. At the bottom of this page are links to many governmental agencies and publicly available information to support the statements made in this writing.
Subject to any limitations contained in the articles of organization and to compliance with any other applicable laws, a limited liability company may engage in any lawful business activity, except the banking business, the business of issuing policies of insurance and assuming insurance risks, or the trust company business. In order to form a limited liability company, one or more persons shall execute and file articles of organization with, and on a form prescribed by, the Secretary of State and, either before or after the filing of articles of organization, the members shall have entered into an operating agreement. The person or persons who execute and file the articles of organization may, but need not, be members of the limited liability company. A limited liability company shall have one or more members. The existence of a limited liability company begins upon the filing of the articles of organization. For all purposes, a copy of the articles of organization duly certified by the Secretary of State is conclusive evidence of the formation of a limited liability company and prima facie evidence of its existence.
The Secretary of State shall include with instructional materials provided in conjunction with the form for filing articles of organization a notice that filing the registration will obligate the limited liability company to pay an annual tax for that taxable year to the Franchise Tax Board pursuant to Section 17941 of the Revenue and Taxation Code. That notice shall be updated annually to specify the dollar amount of the tax.
Forming an LLC in California
The creation of an LLC begins with filing of articles of organization and the execution of an operating agreement by the members of the company.
The Articles of Organization are filed with the California Secretary of State's Office and disclose: the name of the limited liability company. The LLC's purpose. The agent for service of process. A description of the type of business that constitutes the principal business activity of the limited liability company. A statement to indicate if the LLC will be managed by: one manager; more than one manager; a single member; or all limited liability company members.
Articles for the LLC need to be filed in the Sacramento office of the Secretary of State of California. The San Diego and Los Angeles locations only accept corporate articles of incorporation for filing. The effective date, which the existence of the Limited Liability Company begins, is the date of the filing of the company's Articles of Organization. While filing Articles of Organization begins the legal existence of the LLC, it doesn't provide any structure to the entity. The Secretary of State may cancel the filing of articles of organization if a check or other remittance accepted in payment of the filing fee is not paid upon presentation. Upon receiving written notification that the item presented for payment has not been honored for payment, the Secretary of State shall give a first written notice of the applicability of this section to the agent for service of process or to the person submitting the instrument. Thereafter, if the amount has not been paid by cashier's check or equivalent, the Secretary of State shall give a second written notice of cancellation and the cancellation shall be effective at that time. The second notice shall be given 20 days or more after the first notice and 90 days or less after the original filing. Limited Liability Operating Agreement. In California all LLC's are required under state law to have a Limited Liability Company Operating Agreement (see Corporation C §17050(a)).
The operating agreement may be entered either before or after the filing of the articles of organization and should address at least the following items: the rights and duties of members. Contribution of cash, property, or services by members and other issues relating to capital structure. Maintenance of accounting records and delivery of financial reports and tax information to the members. Distributions of profits to the members. Allocations of losses. Management duties. Meetings of members and managers. Voting requirements. Disposition or assignment of ownership interests of members. Termination, expulsion, withdrawal and admission of members. Dissolution of the LLC. Procedures for amending the operating agreement.
Statement of Information. Under California Corporation Code §17060, the LLC must file with the Secretary of State a Statement of Information (Form LLC 12) within 90 days of the filing of the Articles of Organization. The Statement of Information includes: The names and addresses of the managers if manager managed, or of the members if member-managed. A statement of the nature company's business activity. The name and address of the agent for service of process; and the address of the company's principal business office. Each limited liability company shall maintain at the office all of the following: a current list of the full name and last known business or residence address of each member and of each holder of an economic interest in the limited liability company set forth in alphabetical order, together with the contribution and the share in profits and losses of each member and holder of an economic interest.
A copy of the articles of organization and all amendments thereto, together with any powers of attorney pursuant to which the articles of organization or any amendments thereto were executed. Copies of the limited liability company's federal, state, and local income tax or information returns and reports, if any, for the six most recent taxable years. A copy of the limited liability company's operating agreement, if in writing, and any amendments thereto, together with any powers of attorney pursuant to which any written operating agreement or any amendments thereto were executed.
Copies of the financial statements of the limited liability company, if any, for the six most recent fiscal years. The books and records of the limited liability company as they relate to the internal affairs of the limited liability company for at least the current and past four fiscal years. An LLC member may lend money to and transact other business with the limited liability company and, subject to other applicable law, has the same rights and obligations with respect thereto as a person who is not a member. Upon request of an assessor, a domestic or foreign limited liability company owning, claiming, possessing, or controlling property in this state subject to local assessment shall make available at the limited liability company's principal office in California or at the office required to be kept or at a place mutually acceptable to the assessor and the limited liability company, a true copy of business records relevant to the amount, cost, and value of all property that it owns, claims, possesses, or controls within the county.
Meetings of members may be held at any place, either within or without State of California, selected by the person or persons calling the meeting or as may be stated in or fixed in accordance with the articles of organization or a written operating agreement. If no other place is stated or so fixed, all meetings shall be held at the principal executive office of the limited liability company. A meeting of the members may be called by any manager or by any member or members representing more than 10 percent of the interests of members for the purpose of addressing any matters on which the members may vote.
Whenever members are required or permitted to take any action at a meeting, a written notice of the meeting shall be given not less than 10 days nor more than 60 days before the date of the meeting to each member entitled to vote at the meeting. The notice shall state the place, date, and hour of the meeting and the general nature of the business to be transacted. No other business may be transacted at this meeting. Any report or any notice of a members' meeting shall be given either personally or by mail or other means of written communication, addressed to the member at the address of the member appearing on the books of the limited liability company or given by the member to the limited liability company for the purpose of notice, or, if no address appears or is given, at the place where the principal executive office of the limited liability company is located or by publication at least once in a newspaper of general circulation in the county in which the principal executive office is located. The notice or report shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication. An affidavit of mailing of any notice or report in accordance with the provisions of this article, executed by a manager, shall be prima facie evidence of the giving of the notice or report.
If any notice or report addressed to the member at the address of the member appearing on the books of the limited liability company is returned to the limited liability company by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice or report to the member at the address, all future notices or reports shall be deemed to have been duly given without further mailing if they are available for the member at the principal executive office of the limited liability company for a period of one year from the date of the giving of the notice or report to all other members. The operating agreement may provide that the interest of a member or assignee in a limited liability company may be evidenced by a certificate of interest issued by the limited liability company, and may make other provisions not inconsistent with this title with respect to the transfer of interests represented by those certificates or with respect to the form of those certificates.
The operating agreement may provide that the certificate may be signed by a manager or officer of the limited liability company, whose signature may be a facsimile. In case any manager or officer of the limited liability company who has signed or whose facsimile signature has been placed upon a certificate has ceased to be a manager or officer before the certificate is issued, it may be issued by the limited liability company with the same effect as if the person were a manager or officer at the date of issue. If a certificate is worn out or lost, it may be renewed on production of the worn out or lost certificate or on satisfactory proof of its loss together with such indemnity as may be required by the manager or managers or a resolution of members.
Foreign LLC. The laws of the state or foreign country under which a foreign limited liability company is organized shall govern its organization and internal affairs and the liability and authority of its managers and members. A foreign limited liability company may not be denied registration by reason of any difference between those laws and the laws of this state. Before transacting intrastate business in this state, a foreign limited liability company shall register with the Secretary of State.
A limited liability company may be classified as an association taxable as either a C corporation or an S corporation. California and federal laws treat these limited liability companies as corporations subject to all corporation tax laws. Limited liability companies classified as C corporations must file Form 100, California Corporation Franchise or Income Tax Return. If they are classified as an S corporation they must file Form 100S, California S Corporation Franchise or Income Tax Return.
LLCs classified as partnerships or disregarded entities are subject to an $800 annual tax if they are doing business in California, or the California Secretary of State accepts their articles of organization or certificate of registration. The annual tax is pre-paid for the privilege of doing business in California and is due on the 15th day of the fourth month after the beginning of the taxable year. LLCs must file a Limited Liability Company Tax Voucher (FTB 3522) to pay the annual tax. LLCs are also subject to an annual fee based on their total income. Total income is defined as the sum of worldwide gross income plus cost of goods sold (California Revenue and Taxation Code Section 24271). The LLC fee is due on the original due date of the return, which is the 15th day of the fourth month following the close of its taxable year. Use Form 568 (Limited Liability Company Return of Income) to report income and the fee.
If an LLC has non-resident members, it must file Limited Liability Company Non-resident Members' Consent (FTB 3832) with Form 568. If the LLC fails to obtain form FTB 3832 on behalf of any non-resident member by the original due date of the tax return, then the LLC is responsible for payments of tax on each of its nonconsenting non-resident members' distributive share of income. This income is taxed at the members' highest marginal tax rate and is due with Form 568. Use Schedule T, Nonconsenting Non-resident Members' Tax Liability (found on Form 568, Side 2) to calculate and report this tax liability.
The pages of this web site contain information that has been collected from many independent sources. Each article or new item offers a different points of view and resources. This information is for for general information only. If you desire to ask a specific question, feel free to contact CPA Moms at:
- S Corporations
One of the most widely used, second only to the sole proprietorship, is the S corporation; what is the S corporation and how does it work? Lets attempt to answer those questions in the next few paragraphs.The...