What was that about me waiting to blog till I find a subject that won't piss someone off? To hell with that. I have every intention of pissing someone off.
--------------------------------------------
The following is a public service message for anyone contemplating the formation of an LLC in the State of California. Please follow closely; you will thank me for it later.
A Limited Liability Company offers some important legal protections, particularly for a small organization with limited resources, in any state; in California, most of the little film companies form as LLCs. (Look at the end-credits of any movie, and there will almost always be a line about, say, "Good Night and Good Luck LLC." That means that although there were various producers and studios involved, the "author" of the movie is this LLC that was formed for this one purpose.) Obviously, that means there are an awful lot of LLCs in California, maybe a disproportionately higher number than in other states. I don't know for sure, but maybe.
In any event, in the State of Californa there is a price to be paid for forming an LLC, and that price is a minimum of $800. What they don't tell you is that unless you can afford to pay professional accountants right from the git-go, your $800 will be, to put too nice a word on it, supplemented by some extra money: penalties and fees. This is because the state's Franchise Tax Board, the entity that oversees California's tax-collection efforts, has rigged the game long before you ever got here.
There are two principal ways they do this. They are both tax variations on a shell game: while you're looking over here, they get you over there.
Trap No. 1: Let's say your new LLC was incorporated in mid-November of this year. You don't know it yet because no one tells you, and the information that does tell you is buried miles deep under tax-code language that you are required to find yourself, but at the moment you incorporate you already owe $800 to the state. That amount is not pro rated at all: you owe $800, no questions, period. (The only exception is if you incorporate within the last 15 days of the calendar year--after Dec. 17, as long as you don't actually conduct any business, you're fine.)
So. You incorporated in mid-November of 2005, and you do what seems to you to be due diligence, and you find out that in April of 2006 you must file Form 568 with the Franchise Tax Board. You work very hard to interpret all the language and to fill out what is a very complicated form, and you write your check and you pay your $800 and you forget about it all until next year. You don't know it, but you're already screwed.
Here's what you probably won't have noticed: the tax return, the Form 568, will read at the top "2005." But the voucher that accompanies your payment will read "2006." Turns out there's a reason for this: your payment was due the moment you incorporated, as I said. It was supposed to have been paid by January 15 of the following calendar year. The FTB will do one of two things: apply your check to 2005 and then charge you penalties for paying in April rather than January, or apply your check to 2006 and charge you penalties for never having paid for 2005.
And bear in mind, they wait at least six months before sending these notices out. This allows the interest to build up nice and high before you even know there's a problem. And the notice they send to inform you of these penalties and interest? It will contain a single line to "explain" the problem, with reference to a set of codes that supposedly explain the explanation, but good luck because those codes are even more arcane than anything you've seen heretofore. (And these contain yet further references, to FTB publications that supposedly make it all clear.) Long story short: if you happen to get caught in Trap No. 2, you may think that that is why you're being penalized, and never realize till the next year that instead you got caught in this other trap. (Which is exactly what happened to us.)
So what is Trap No. 2? Glad you asked.
That $800 amount is due regardless of whether your LLC has generated any income or not. If you've made nothing whatsoever, too bad, you still owe $800. Now there are two lines on Form 568, one right below the other. Line 2 is where you report the LLC fee amount; line 3 is where you report the LLC tax amount. Now anyone would think this: a flat amount due regardless of whether there is or is not income, that would be a fee; an amount that applies only after you have income above a certain amount, and then varies depending on how much income there is, obviously that would be a tax.
Wrong. Reverse it. The $800 amount is the tax; the other variable amount is the fee. So when you fill out your form and put $800 on line 2, you have just filled out your form incorrectly. The FTB will wait six months, then send you a notice that you filled out your form incorrectly and owe penalties and interest. (That's what happened to us last year.)
Why does the FTB do this? I'm convinced that this offense against logic has only one reason: to generate more money for the State of California. The $800 amount would seem to be egregious enough, but by inserting this blatant bit of illogic into the code they are guaranteed to confuse a very high number of small businesses that cannot yet afford professional accounting help, and really the only way to discover the problem is to get fined for it. It's what I call official extortion, and there oughta be a law against it, but the legislature writes the laws and the legislature writes the tax code, so guess what? Too bad for you and me.
Rat bastards.
Please, I beg you: if you're thinking about ever forming an LLC in California, print out this post and keep it somewhere safe and close. Because the only way to get back at the FTB is for everyone to get this nonsense right; that would then force them to rewrite the tax code in some other massively confusing way, which might actually succeed in causing them ten minutes of trouble.
That's about the only solace we get. Now if you'll excuse me, I have to go find a ridiculous amount of money that does not actually exist in any of my accounts. Good luck to you--you're gonna need it.
No comments:
Post a Comment