Running a business of any kind comes with expenses. Even a freelance business that you operate from your own home will have costs that your profits need to cover- and these are just your operating expenses!
But what about the cost of owning and running an LLC in California? Are there fees involved in registering your business legally, as well as in maintaining its LLC status? We have some good news and some bad news for you. The bad news is that, if you form an LLC in California, it will cost you a bit more than other states.
But the good news is that most of those costs (like your formation and ongoing maintenance fees) are a tax-deductible business expenses. So it isn’t all bad.
To dive deeper into what it costs to form and maintain an LLC in California, check out the information below.
How Much Does It Cost to Form an LLC in California?
Since you only need to form your LLC once, you’ll only pay the fees associated with forming the LCC one time. Here’s a list of fees you’ll pay to start your LLC in California:
You’ll pay two filing fees to form an LLC in California:
- A $70 fee to file articles of organization with the California Secretary of State’s office
- A $20 fee to file a Statement of Information, Form LLC-12, with the California Secretary of State.
Although this is optional, you might choose to pay a $10 fee in order to reserve your preferred LLC name with the Secretary of State.
This prevents another business from registering the same name or a similar name before you have the chance to register your business. It’s also recommended that you conduct a trademark search to make sure that your LLC name doesn’t violate someone else’s trademark rights.
The cost of this trademark search depends on whether you do the search on your own or have it done by a professional. It might cost you just a few dollars or several hundred dollars.
Note: If you’d like to operate your business under a fictitious name that isn’t the same as your legal name, you’ll need to submit a fictitious name statement, along with the required fee.
Costs of creating an operating agreement
Even though an operating agreement isn’t legally required, it’s highly recommended that you have one written for your LLC.
The best part is that there might not even be an additional cost involved with getting this done, especially if you join Collective. We provide you with a free LLC operating agreement that’s been written by a professional attorney.
If you decide to write your own customized operating agreement with the help of a lawyer, it could cost anywhere from $500 to $1,000.
The simple act of completing and filing all of the required paperwork for your LLC also comes with some costs.
Hiring an attorney to help you fill out and file your paperwork can cost a lot, with averages ranging from $500-$1,000.
Are you taking a DIY approach to your paperwork, perhaps with the help of a template or book? Then your costs could be just a few dollars, or even zero.
Of course, you should factor in the time that it’ll take you to learn how to do everything yourself, and time is money.
Business license fees
Depending upon the nature of your business and where it’s located, you might also need to get a local business license from your city or county.
The cost varies widely, but for a small business, it’s usually $50 to $100.
Cost to Maintain an LLC in California
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How Much Does It Cost to Maintain an LLC in California?
Your work isn’t done—and you aren’t done paying fees—once your LLC is formed. Now you need to deal with ongoing maintenance expenses. It’s all just part of doing business.
Cost of registered agents
Having a registered agent, who will accept court papers and other important documents on your LLC’s behalf, is a great idea. The annual cost of having a registered agent is typically $75 to $150.
Statement of Information costs
Even after your business is up and running, you’ll be required to file a new Statement of Information with the California Secretary of State every two years. With that comes a $20 filing fee, so be sure to mark your calendar and set aside some money in your budget to take care of this.
Business license fees
Yep, we’re talking about business license fees again, because it doesn’t always end after you get your business license and paying the upfront fee. Oftentimes, you also have to periodically renew your business license. And that means paying a renewal fee.
Whether you have to renew your business license every year or more or less often, setting aside the money to pay the fee is a smart move.
Fictitious Name Statement fees
If you filed a fictitious name statement then you’ll need to renew that statement every five years. So, in addition to paying the fee for your first fictitious name statement, be prepared to pay the fee again when you need to renew it.
What About Taxes?
Taxes are another thing to consider when it comes to calculating the costs of running an LLC in California. And you can’t avoid them, even if you form your LLC in another state.
Even if you form your LLC in another state, if your LLC is located in California, you’ll have to register your out-of-state LLC in order to to do business in California. On top of that, you’ll be required to pay the same taxes and fees as any other California LLC.
Here’s the gist: California imposes special taxes and fees on LLCs that are organized in the state. LLCs are subject to two different taxes, both of which are paid to the California Franchise Tax Board.
Annual LLC Tax
Every LLC registered to do business in the state of California must pay an $800 annual tax.
Fun fact: this is the highest minimum LLC tax in the country. Okay…so maybe that fact wasn’t so fun.
Annual LLC Fee
Higher income LLCs also pay an annual fee, on top of the $800 Franchise Tax.
Don’t let the name fool you—this is another tax even though it’s called a “fee.” In fact, it’s really a gross receipts tax. The amount that you’ll need to pay depends on your LLC’s gross income.
Check out this chart, which should help clear things up a bit:
Gross income includes all income from all sources that are derived from, or attributable to, California. Basically, if you make the money in California, then it’s part of your gross income.
We know it’s a bit confusing, so let’s explain:
Let’s say that your LLC earned $300,000 in gross income during the year. Great work! But, now you need to pay up. How much? Well, you’d pay the $800 annual tax, plus a $900 LLC fee (see chart above). That totals $1,700.
If your LLC only made $200,000 in gross income, you would only pay the $800 annual tax (refer to the chart above, which starts at $250,000 total income).
What if your LLC earns $0? You’re not off the hook. You’re still required to pay the $800 annual tax.
Which LLC Costs Are Tax Deductible?
The good news is that all of these LLC costs are tax-deductible.
You can deduct up to $5,000 of the costs of forming your LLC in a single year. This includes:
- The cost of completing articles of organization
- LLC filing fees
- The costs of drafting an LLC operating agreement
- Attorney fees
- Other fees you incur for setting up your business
Single member LLCs are typically considered “disregarded entities” for tax purposes. This means that they’re taxed like sole proprietorships. In this case, the IRS does not allow you to deduct organizational expenses over $5,000.
Instead, any expenses over that amount must be capitalized, and that means that they won’t be deductible until the LLC dissolves. So, are you forming a single member LLC? Then it’s best to avoid spending over $5,000 in organization expenses.
If you elect to have your LLC taxed like a corporation you can deduct the first $5,000 in formation expenses the first year that you’re in business, and anything over $5,000 in the first 180 months. But if your organizational expenses exceed $50,000, then your first-year deduction will be reduced by the amount over $50,000.
The costs that you pay after your LLC is formed are also tax-deductible. You can deduct California’s $800 annual tax, along with any annual fee you pay, from your federal taxes. You can also deduct maintenance costs for your LLC, including business license fees and registered agent fees.
Save Money with Collective!
Wow, that’s a lot of information to take in! Rest assured, though, that it doesn’t have to be so complicated.
Joining Collective is a great way to take away some of the headache that comes along with naming, organizing, registering, and maintaining your business. After signing up with an account, we’ll assist you through the LLC formation process. Then, we’ll help you stay on top of all of the steps necessary to succeed as a freelancer.
Stephen has dedicated his career as an attorney and author to writing useful, authoritative and recognized guides on taxes and business law for small businesses, entrepreneurs, independent contractors, and freelancers. He is the author of over 20 books and hundreds of articles and has been quoted in The New York Times, Wall Street Journal, Chicago Tribune, and many other publications. Among his books are Deduct It! Lower Your Small Business Taxes, Working with Independent Contractors, and Working for Yourself: Law and Taxes for Independent Contractors, Freelancers & Consultants.