Considering an LLC for a 30% Margin Business?
Hello everyone! I currently have an LLC in California and I’m in the process of filing my taxes. I started my business last year, generating $15K in revenue but unfortunately, I incurred losses of $17K. Looking ahead to 2025, I anticipate achieving a 30% profit margin on sales, with total revenues expected to be between $100K and $120K, as I provide outsourcing services and a significant portion of my income goes to contractors.
To my surprise, my CPA informed me that I’m required to pay 8% on total revenue rather than profits or losses. This realization has led me to consider a couple of things: 1) I should seriously think about relocating from California (since I recently moved to Florida), and 2) perhaps an LLC isn’t the best business structure for me (should I consider transitioning to an S Corp?).
I would appreciate any advice on this matter. How can I best structure my business to accommodate my expected 30% profit margin? Thank you!
One response
It sounds like you’re navigating some important decisions regarding your business structure and tax obligations. Here are a few points to consider:
California LLC Tax Obligations: In California, LLCs are subject to an annual minimum franchise tax of $800, plus an additional fee based on total income. This can feel burdensome, especially with a slim profit margin. If you’re moving to Florida, you’ll potentially avoid California’s high costs and taxes on LLCs.
Switching to an S Corporation: Many business owners consider converting their LLC to an S Corporation to potentially save on self-employment taxes, especially if they’re generating a profit. An S Corp allows you to pay yourself a reasonable salary and take additional profits as distributions, which might decrease your overall tax burden. However, there are additional administrative responsibilities and requirements.
Future Tax Strategies: Given your anticipated profit margins, it might be advantageous to consult with your CPA on a tax strategy that maximizes your deductions and minimizes your tax liability. This can include scrutinizing expenses related to contractors, business needs, and more.
Consult with a Professional: Before making any decisions, consider consulting with a tax professional or accountant who understands both California and Florida tax laws. They can provide personalized advice based on your specific situation and help you weigh the pros and cons of maintaining an LLC vs. converting to an S Corp.
State Considerations: Since you’ll be operating in Florida, be sure to familiarize yourself with Florida’s business tax environment, as it generally has a more favorable tax structure for small business owners compared to California.
Ultimately, the best structure and approach depend on your unique business goals and financial situation. Take the time to research and seek professional guidance to find the optimal solution for your outsourcing business.