Running a business, regardless of its scale, incurs expenses. Even a solo entrepreneur operating from home faces startup costs. For Californians, there’s both good and bad news.
The downside is that forming an LLC in California is somewhat pricier compared to other U.S. states. However, the upside is that most expenses are tax-deductible, allowing you to offset them.
To establish an LLC (or a single-member LLC) in California, you must pay a filing fee, a business license fee, and annual fees and taxes for each year you’re in operation. This guide details the fees and what you can deduct to save money.
The Franchise Tax for your first year of operation is due by the 15th of the fourth month following your LLC’s incorporation with the state.
When launching your California business, you’ll need to cover fees for filing a Limited Liability Company (LLC) to formalize its status. While forming an LLC isn’t mandatory, the structure offers legal protection and tax benefits that many business owners, including freelancers or solo entrepreneurs, find valuable.
Summary of California LLC Fees
Below are the fees for forming an LLC in California:
- LLC filing fee: $70
- Statement of Information: $20
- Registered agent (optional): $75 to $150
- Business license: Varies by municipality
- Reserve LLC name (optional): Varies by municipality
- Fictitious Name Statement (optional): Varies by municipality
- Operating Agreement (optional): $0 to $1,000
Starting an LLC in California – Filing Fees
To establish an LLC in California, you’ll encounter two primary filing fees:
- A $70 fee for submitting the Articles of Organization to the California Secretary of State.
- A $20 fee for filing a Statement of Information, Form LLC-12, with the same office.
The Articles of Organization provide fundamental details about your company, such as its proposed name, the names of the owners, and its purpose. The Statement of Information is filed when forming the LLC and every two years thereafter, containing basic information like the LLC’s name, address, business type, and owner names.
Business Licenses for LLCs in California – Associated Costs
In many California counties and cities, an LLC must obtain a business license to operate. The state doesn’t mandate or issue a statewide business license; the only requirement is filing the Articles of Organization to form an LLC.
Depending on your business location, you may need to acquire a city or county business license. Use the governor’s CalGold site to discover the specific permits your business requires. Costs vary, typically ranging from $50 to $100 for small businesses, with annual renewals at a similar rate.
Additional Costs for Setting Up an LLC in California
Beyond initial fees, your business income after expenses, or net income, is subject to California state income tax, which ranges from 1% to 13%.
LLC Name Costs
Reserving an LLC name incurs no cost if it is available in California and does not infringe any trademarks. To secure your desired name before filing, you may reserve it for a nominal fee, which varies by locality. Conduct a trademark search to ensure compliance, which can be done at no cost if you do it yourself or hire a professional for a fee.
Fictitious Business Name Statement Fees
Operating under a brand name different from your LLC’s legal name requires filing a Fictitious Business Name Statement (FBN) or Doing Business As (DBA) Statement with your county or city, involving a filing fee that varies by location. The FBN must be renewed at least every five years or whenever the information changes.
Operating Agreement Costs
An operating agreement outlines how your business will be run, detailing decision-making, profit distribution, and dispute-resolution processes. Although not legally required in California, it is advisable, especially with multiple owners. Custom agreements drafted by a lawyer can cost between $500 and $1,000, though Collective members receive this service for free.
Paperwork Costs
Filing LLC paperwork independently incurs only the filing fees, but hiring an attorney to assist will incur additional legal fees. Consider the time investment of researching and completing the paperwork yourself versus hiring a professional or using a service like Collective.
Registered Agent
A registered agent, or “agent for service of process,” is responsible for accepting legal documents on behalf of your LLC. You can act as your own registered agent or hire someone else, such as a lawyer, employee, or service company. This role extends beyond formation to receiving tax notices, lawsuits, and license renewal notices. Hiring a third-party registered agent typically costs between $75 and $150 annually.
California LLC Tax Overview
When considering the costs of running an LLC in California, state taxes are a crucial factor. You cannot bypass these taxes by forming your LLC in another state, as you’ll need to register any out-of-state LLC to conduct business in California and comply with local tax regulations. This includes paying the California LLC tax and various fees to the California Franchise Tax Board (FTB).
Annual Fee for an LLC in California
All LLCs registered to operate in California must pay an $800 annual fee, known as the Franchise Tax Board Fee or Franchise Tax. This minimum tax applies as long as your LLC exists, regardless of its activity level or financial performance.
First-Year $800 California LLC Fee
The Franchise Tax for your first year of operation is due by the 15th of the fourth month following the formation of your LLC. In subsequent years, the tax deadline is the 15th of the fourth month of your fiscal year—typically April 15 for most businesses.
Additional Annual Fees
LLCs with gross income of $250,000 or more are required to pay an additional annual fee at tax filing, in addition to the Franchise Tax. This fee is based on your business’s gross income, and you must estimate and pay it by June 15 each year for the current tax year. Gross income includes all revenue earned in California before expense deductions.
LLC Gross Annual Income and Fees:
- Less than $250,000: $800 Franchise Tax
- $250,000 to $499,999: $900 + $800 Franchise Tax
- $500,000 to $999,999: $2,500 + $800 Franchise Tax
- $1,000,000 to $4,999,999: $6,000 + $800 Franchise Tax
- $5 million or more: $11,790 + $800 Franchise Tax
In addition to these fees, you’ll incur California state income tax on your net income, which ranges from 1% to 13%. Note that these are state-level taxes; your business must also comply with federal tax obligations, including payroll and federal income taxes.
Deductible LLC Expenses in California
The silver lining is that these LLC-related costs are tax-deductible on your federal taxes. You can deduct up to $5,000 of your LLC formation expenses in one year, including:
- Articles of organization filing costs
- LLC filing fees
- Fictitious Business Name Statement fees
- LLC operating agreement drafting costs
- Attorney fees
- Paperwork costs
- Registered agent fees
- Other business setup expenses
In special circumstances, you might choose to have your LLC taxed as a C corporation instead of an S corporation, allowing you to deduct more than $5,000 in formation expenses over your first 180 months.
The annual $800 Franchise Tax and any additional fees are also deductible on federal taxes. Ongoing maintenance costs, such as business licenses, permits, registered agent fees, and Statement of Information filing fees, can also be deducted.
Summary: Starting an LLC in California
Establishing an LLC in California involves base costs similar to other states, including filing fees and potential attorney fees. However, the $800 annual Franchise Tax and potential gross receipts taxes make operating in California costlier than in most states. Fortunately, these costs are deductible on your federal income tax, offering some financial relief.