Running a business of any kind comes with expenses. Even a Business-of-One operating out of your own home involves costs to get started.
Californians, we’ve got good – and some bad – news for you.
The bad news is that starting an LLC in California is a little bit more expensive than forming an LLC in other states across the U.S.. The good news? Most of the costs are tax-deductible – so you can write them off.
To start an LLC (or single member LLC) in California, you’ll pay a filing fee and a business license fee, as well as some annual fees and taxes each year you’re in business. This guide covers the fees and exactly what you can deduct to save money.
You have to pay the Franchise Tax for your first year of operation by the 15th in the fourth month after the incorporation of your LLC with the state.
When you start your California business, you’ll have to pay fees associated with filing a Limited Liability Company (LLC) in the state to make it official. You’re not required to form one to do business, but the business structure gives you legal protection and tax benefits many business owners find useful. – even as a freelancer or Business-of-One.
California LLC fees – Summary
Here are the LLC fees you’ll pay in California.
Alt text: California LLC annual fee chart
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Starting an LLC in California – fees to file
You’ll pay two filing fees with your LLC application in California:
- $70 fee to file articles of organization with the California Secretary of State’s office
- $20 fee to file a Statement of Information, Form LLC-12, with the California Secretary of State.
Articles of organization include the basic information about your new company – including your proposed LLC name, owners’ names, and the company’s purpose.
The Statement of Information is a form you’ll file when you form the LLC, plus every two years as long as you operate in California. The form includes basic information about your LLC, including its name, address, type of business, and names of owners.
An LLC needs a business license to operate in many California counties and cities.
The state of California doesn’t require or provide a statewide business license. The only statewide requirement is to file your articles of organization to become an LLC.
You may need to get a business license from the city where your business is headquartered. And check your county’s requirements – you may have to get a license from the county as well.
You can see which permits your type of business requires through the governor’s CalGold site.
The cost varies widely. For a small business, it’s usually between $50 and $100. In most cases, you have to renew your business license annually for a similar fee.
Alt text: Business license when starting an LLC in California
Additional costs to set up an LLC in California
In addition to these special fees, you’ll pay California state income tax at a rate of between 1% and 13% on your business income after expenses, or net income.
LLC name costs
You don’t have to pay anything to own the name of your LLC. It just needs to be available in the state of California and not violate any trademarks.
You have the option to reserve the name you want before filing your articles of organization, in case you’re worried about another business registering the same or similar name before you. Reserving an LLC name comes with a small fee, which varies by the county or city.
To make sure your name doesn’t violate trademarks, you can conduct a trademark search. If you do it yourself, it won’t cost you anything – but you could pay a professional, like a business attorney, to do it instead.
Fictitious Business Name Statement fees
You have the option to operate your business under a brand name that’s different from the LLC’s legal name. For example, if you set up an LLC as Jane Doe, Ltd. and you might sell hand-knitted berets under the brand Jaunty Jane’s.
To use this name on things like your bank account and credit card statements, you have to file a Fictitious Business Name Statement (FBN) (a.k.a. DBA or Doing Business As Statement) with your county and/or city. That comes with its own filing fee, which varies by location.
You’ll need to renew your FBN statement at least every five years – or anytime the information changes.
Costs of creating an operating agreement
Different from articles of operation, an operating agreement for an LLC is a legal document that establishes how you’ll run the business. It includes things like how you’ll make decisions, distribute money and resolve disputes.
You’re not required by California or any other law to create an operating agreement for an LLC, but it’s a good idea to have one to avoid confusion or disputes about the operation of your business, especially if you have more than one owner.
Working with a lawyer to create a custom operating agreement could cost anywhere from $500 to $1,000, but we provide the service free for Collective members.
If you complete and file LLC paperwork yourself, you won’t incur any costs beyond filing fees. But you could hire an attorney to help you fill out and file the forms – and you’ll pay attorney’s fees for that.
Even if you do the work yourself, factor in the time it takes you, including the time to research and learn everything you need to know, and weigh the cost of your time against what you’d pay a professional or a service like Collective to handle it for you.
A registered agent, or “agent for service of process,” is the person or company that accepts court papers and other important documents on your LLC’s behalf. You can designate yourself as your LLC’s registered agent or hire someone else – like a lawyer, employee, or service company – to handle it for you.
You’ll retain a registered agent beyond just forming your LLC. They also receive legal documents in other events, like tax notices, lawsuits and renewal notices for licenses and permits.
The annual cost of a third-party registered agent is typically between $75 and $150.
How much is LLC tax in California?
State taxes are another thing to consider when you calculate the costs of running an LLC in California. You can’t legally avoid them, even if you form your LLC in another state.
You’ll have to register an out-of-state LLC to do business in California, and you’re required to pay taxes and fees the same as any other California LLC.
California imposes a California LLC tax and other fees, paid to the California Franchise Tax Board (FTB).
What is the annual fee for an LLC in California?
Every LLC registered to do business in the state of California must pay an $800 annual fee called the Franchise Tax Board Fee or Franchise Tax.
This acts as a minimum franchise tax for your company, so the fee applies as long as your LLC exists, even if it’s inactive or operating at a loss.
Do you have to pay the $800 California LLC fee the first year?
You have to pay the Franchise Tax for your first year of operation by the 15th in the fourth month after you form the LLC with the state.
Every year after that, the tax is due on the 15th of the fourth month of your tax year — April 15 for most businesses.
Additional annual fees
An LLC that earns $250,000 or more in gross income has to pay an additional annual fee at tax filing time, on top of the Franchise Tax. The amount depends on your business’s gross income, and you have to estimate income and pay the fee by June 15 each year for the current tax year.
Gross income, or total income, includes all income you earn doing business in California (“California income”), before deducting expenses.
In addition to these special fees, you’ll pay California state income tax at a rate of between 1% and 13% on your income after expenses, or net income.
Note that these taxes are at the state level only. Your business will also be subject to federal taxes through the IRS, including payroll taxes (the self-employment tax) and federal income tax.
What expenses can an LLC write off in California?
Remember the good news? All of these LLC costs are tax-deductible on your federal taxes.
You can deduct up to $5,000 of the costs of forming your LLC in a single year, including:
- The cost of completing articles of organization
- LLC filing fees
- Fictitious Business Name Statement fees
- The costs of drafting an LLC operating agreement
- Attorney fees
- Paperwork costs
- Registered agent costs
- Other costs you incur for setting up your business
In rare cases, you might elect to have your LLC taxed as a C corporation instead of an S corporation. In that case, you could deduct more than $5,000 in formation expenses during your first 180 months in business.
Every year after that, the tax payments are due on the 15th of the fourth month of your tax year — April 15 for most businesses.
Plus, California’s LLC annual fee is tax deductible for federal taxes. You can deduct the $800 Franchise Tax – and any additional annual fee you pay.
You can also deduct your ongoing costs to maintain the LLC, including fees for business licenses and permits, registered agent costs, and Statement of Information filing fees.
TL;DR: How to start an LLC in California
Forming an LLC in California has base costs similar to other states. You’ll pay a fee to file your paperwork and potentially incur attorney fees if you hire someone to help you complete and file the forms.
The additional $800 annual Franchise Tax and potential gross receipts tax on LLCs make doing business in California a little more expensive than doing business in almost any other state. But the costs to form and maintain your California LLC are deductible on your federal income tax, so you can find some savings!
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.