KEN KIRSCHENBAUM, ESQ ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE You can read all of our articles on our website. Having trouble getting our emails? Change your spam controls and white list ken@kirschenbaumesq.com ****************************** entity structure and taxes / LLCs not permitted in CA as of January 1, 2024 November 30, 2020 ******************** entity structure and taxes / LLCs not permitted in CA as of January 1, 2024 ******************** Ken I have an alarm / low voltage company in California that I started several years ago. It is currently formed as an LLC. I was thinking about switching to S corp. My net is about 120,000 a year. One of my goals is to take a salary and leave money in the business to invest back in the business rather than be taxed personally on all of the income. What is the process to change entities and do you recommend this change? I know I have to pay taxes on that income, but I think the S corp pays taxes on the income and I can take a salary of $100,000. Leaving $20,000 in the business for growth. May sound silly but I don't want to make that much money for tax purposes, alimony purposes, health insurance purposes. Besides these potential tax situations, would it benefit me and my company to be an S corp? I should ask it this way- what corp can pay me a salary so I get taxed on 100K if that is my salary and the 20K profit can stay with corp and still get taxed but stay with the corp instead of pass through to me as an individual? anon ********************* Response ********************* You are not going to accomplish your goal your way, or any way, though changing from an LLC to a corporation may make sense because you're in California. In California you presently have added insurance and reporting requirements as an LLC, and, as of January 1, 2024 an LLC is no longer permitted to operate as a licensed alarm company. See license law below. A LLC [Limited Liability Company] and a S Corporation [which is a business corporation who has made a Subchapter S election with the IRS] are both taxed as a partnership for income tax purposes. That means that the taxes are passed through the entity to the members, in the case of the LLC, and to the shareholders, in the case of a corporation. So if you have $120,000 net profit and take $100,000 salary, you will be deemed to have received the remaining $20,000 and you will be taxed personally on $120,000. The $20,000 will remain in the LLC or S Corporation and you could take it tax free at a later time. But you pretty much get to the same place if you take the $120,000, pay your tax and if your entity needs money you can make a loan. The LLC and the corporation [S or C corp] will shield you from personal liability for contract debts and other debts, not all though. You remain liable in tort for your own acts. As a C corporation you can be doubly taxed, first as a corporation and then personally when you take out what's left. I don't recommend a C corporation except perhaps for very large corporation carrying large inventory. Your accountant or tax advisor is in a better position to guide you. Between LLC and S corp I recommend the S Corp. Taxes are treated the same and there is a better body of law for corporations than LLC. Since you're in California you have the added incentive to change to the S corporation now [and plenty of incentive to move out of California altogether, but that's another discussion not necessarily related to the alarm industry]. Here's the current license law in California.
Chapter 11.6 Alarm Companies [7590 - 7599.80] 7599.34. (a) A licensee shall not conduct a business as an individual, partnership, limited liability company, or corporation unless the licensee holds a valid license issued to that exact same individual, partnership, limited liability company, or corporation. A violation of this section may result in a fine of five hundred dollars ($500) for each violation. (b) As a condition of the issuance, reinstatement, reactivation, or continued valid use of a license under this chapter, a limited liability company shall, in accordance with the provisions of this section, maintain a policy or policies of insurance against liability imposed on or against it by law for damages arising out of claims based upon acts, errors, or omissions arising out of the alarm company services it provides. (c) The total aggregate limit of liability under the policy or policies of insurance required under this section shall be as follows: (1) For a limited liability company licensee with five or fewer persons named as members pursuant to Section 7593.5 or 7599.32, the aggregate limit shall not be less than one million dollars ($1,000,000). (2) For a limited liability company licensee with more than five persons named as members pursuant to Section 7593.5 or 7599.32, an additional one hundred thousand dollars ($100,000) of insurance shall be obtained for each person named as members of the licensee except that the maximum amount of insurance is not required to exceed five million dollars ($5,000,000) in any one designated period, less amounts paid in defending, settling, or discharging claims as set forth under this section. (d) Prior to the issuance, reinstatement, or reactivation of a limited liability company license as provided under this chapter, the applicant or licensee shall, in the manner prescribed by the bureau, submit the information and documentation required by this section and requested by the bureau, demonstrating compliance with the financial security requirements specified by this section. (e) For any insurance policy secured by a licensee in satisfaction of this section, a Certificate of Liability Insurance, signed by an authorized agent or employee of the insurer, shall be submitted electronically or otherwise to the bureau. The insurer issuing the certificate shall report to the bureau the following information for any policy required under this section: name, license number, policy number, dates that coverage is scheduled to commence and lapse, and cancellation date if applicable. The insurer shall list the bureau as the certificate holder for the purposes of receiving notifications related to the policy’s status. (f) (1) If a licensee fails to maintain sufficient insurance as required by this section, or fails to provide proof of the required insurance upon request by the bureau, the license is subject to suspension and is automatically suspended pursuant to this subdivision until the date that the licensee provides proof to the bureau of compliance with the insurance coverage requirement. (2) Prior to an automatic suspension, the bureau shall notify the licensee, in writing, that the licensee has 30 days to provide proof to the bureau of having the required insurance or the license shall be automatically suspended. (3) If the licensee fails to provide proof of insurance coverage within the period described in paragraph (2), the bureau may automatically suspend the license. (g) Where the license of a limited liability company is suspended pursuant to subdivision (f), each member of the limited liability company shall be personally liable up to one million dollars ($1,000,000) each for damages resulting to third parties in connection with the company’s performance, during the period of suspension, of any act or contract where a license is required by this chapter. (h) On and after January 1, 2019, a licensee organized as a limited liability company shall report annually to the bureau the date and amount of any claims paid, during the prior calendar year, from any general liability insurance policy held pursuant to this section. The licensee shall report the information on a form provided by the bureau. The licensee shall report the claim information no later than March 1. The creation of the form shall not be subject to the requirements of Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code. (Amended (as amended by Stats. 2016, Ch. 800, Sec. 62) by Stats. 2018, Ch. 406, Sec. 22. (SB 904) Effective January 1, 2019.) 7599.345. Notwithstanding any other law, commencing January 1, 2024, a licensee shall not conduct business under this chapter as a limited liability company. (Added by Stats. 2018, Ch. 406, Sec. 24. (SB 904) Effective January 1, 2019.) ****************** To order up to dateStandard Form Alarm / Security / Fire and related Agreements, click here: www.alarmcontracts.com ************************* CONCIERGE LAWYER SERVICE PROGRAM FOR THE ALARM INDUSTRY You can check out the program and sign up here: https://www.kirschenbaumesq.com/page/concierge or contact our Program Coordinator Stacy Spector, Esq at 516 747 6700 x 304. *********************** NOTICE: You can always read our Articles on our website at ww.kirschenbaumesq.com/page/alarm-articles *********************** THE ALARM EXCHANGE
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