In an ideal world, we could just have a business idea, form an LLC, and declare it to exist, and that’s all it should take. Unfortunately, there are fees to pay and requirements to meet before a business can be legally recognized by the government and get the benefits of limited liability. Some states have fewer requirements and lower costs, but California isn’t that simple. There are some of the expectations that come with forming an LLC in California, including drafting an operating agreement, understanding taxes, submitting an annual report, considering the option of a single-member LLC, and ensuring asset protection for your business.
A Limited Liability Company (LLC) is a business entity structure that provides liability protection and tax advantages similar to a corporation. Forming one can help protect personal assets by separating them from those associated with the company. It’s a great option when forming a business if you’re looking for flexibility and tax benefits, and it’s relatively simple to form compared to a corporation.
There are several costs to consider when starting an LLC. These costs vary from state to state. In every state, you must pay an LLC filing fee that can cost as little as $40 to as much as $500. Then on top of that, depending on the state there are fees that you must pay annually, biennially, or sometimes both. California is costly when compared to states like Wyoming. Your initial startup costs can be as much as $900.
Forming an LLC will provide a benefit at some costs. Those costs generally include an initial filing fee for the articles of organization, an initial Statement of Information fee, and possibly a name reservation fee. Depending on if you need extra business licenses or certifications, that can add to startup costs. Annually you will also have to pay the $800 franchise tax unique to California, as well as Statement of Information updates biennially. If for some reason you need to update your Articles of Organization, there is an update charge.
Forming an LLC can be done in a few easy steps, and each one may have a cost involved. The first potential step is to come up with a name for your company. If that name is available, you may want to reserve it, keeping it as such. First do a business search and see if it’s available. You can then reserve any available name by submitting a name reservation request form. The cost is $10 if submitted by mail, plus an additional $10 handling fee if delivered in person, and the name will be reserved for 60 days.
After that, you’ll pick an agent for service of process and submit your Articles of Organization. Submitting this online or by mail costs $70, plus an additional $15 handling fee if submitted in person. Once this one is submitted your LLC will officially exist.
Depending on the location you form you may need to purchase a specific business license. They can run anywhere from $50 - $100 for a small business license, and you may need an additional industry-specific license. These licenses might last perpetually, while others may need to be renewed year-to-year.
Every state has a type of annual report associated with updating your business information with that state’s government. In California, it’s called the Statement of Information. This form is filed initially, shortly after the Articles of Organization, then again every other year. Every submission costs $20, except for submitting an update to only your agent for service of process. Failing to update your Statement of Information comes with hefty penalties including a $250 late fee, and possible dissolving of your LLC.
Outsourcing a registered agent is an optional expense that can cost between $100 - $300 annually. You can be your own registered agent if you can manage all the responsibilities.
If you have to amend your Articles of Organization in the future, that costs $30. There’s also a cost for receiving certified copies of your previous business filings. The formula for that cost is $1 for the first page, plus $0.50 for each page after that, plus a $5 certified fee. If requested in person, add another $10 handling fee on top.
Then there’s the big one. In California, every foreign or domestic business must pay an $800 annual franchise tax. In the event your LLC’s annual gross revenue exceeds $250,000 there is an additional annual fee, depending on how much you exceed that number.
If your LLC is formed in 2021, 2022, or 2023, then you may be exempt from the initial year you form in. Every year afterward, you must pay this fee, even if your business has zero earnings during that year.
The decision to form an LLC is a huge step in the direction of your personal business growth. Thankfully it’s a simple process, and knowing the fees ahead of time is important. Keeping track of these fees is vital to maintaining compliance in your state. If you are forming an online business it may change which state you decide to use as your base of operations. While we recommend Wyoming, here’s a list of every state and the average costs involved with initial filing and annual fees.
| State LLC | LLC Filing Fee | LLC Annual/Biennial Fee |
|---|---|---|
| Alabama LLC | $200 | $10 minimum (every year) |
| Alaska LLC | $250 | $100 (every 2 years) |
| Arizona LLC | $50 | $0 (no fee and no information report) |
| Arkansas LLC | $45 | $150 (every year) |
| California LLC | $70 | $800 (every year) + $20 (every 2 years) |
| Colorado LLC | $50 | $10 (every year) |
When you form an LLC, you have more tax options due to the flexibility provided. Sole proprietorships, corporations, or partnerships all provide different advantages and disadvantages, and you get to decide which one works best for you. It may be that pass-through taxation saves you the most money, or you might get the most out of being taxed as a corporation. An LLC provides you the ability to shift between a single-owner business, a partnership, or a multi-member structure as best suits your needs from year- to-year.
Corporations also have a limit on shareholders while LLCs have no limit to the amount of members. Therefore, an LLC can be as large or small as it takes to accomplish business goals.
There are multiple details that should be sorted out before you form an LLC. Here is a list of things you will need in order to form an LLC:
Customers need to know what to call your business. Having a name that shares a theme with your business will help people understand what you’re all about.
This is also known as form LLC-1. This contains basic information about your LLC and filing this will establish your business as a legal entity.
This is a legal document required by the state of California and is something that can be stored within the company. This will help settle disputes between members of the LLC and in some cases overwrite default state laws when dealing with those disputes.
Depending on the type of business you start and the city you form in, you may need additional licenses. Contact your local government office to figure out what else you might need.
Every business needs a person who interacts with the state government. This is your registered agent who will be your designated representative for your business.
Every new LLC must file this to remain in good standing and avoid being dissolved. After the initial filing, this report must be filed with the Secretary of State biennially. It contains general information about your business.
An EIN is provided by the Internal Revenue Service to identify your business for tax purposes. It’s essentially like a Social Security Number, in that it’s a government assigned number that helps them keep track of your business.
Depending on how much you make, you might have different tax forms to submit. Keeping up with these is the trickiest part of operating your business in California.
An LLC is a great option for someone seeking to protect their personal assets, who wants a flexible management team structure, and is looking to avoid unnecessary red tape when creating their business. If you’re expecting a certain level of gross income, or are hoping to attract more investors, a corporation might be a better choice. However, it never hurts to start as an LLC and shift entity types in the future.
Creating an LLC is a relatively simple process, but that can change from state to state. California is among the most difficult states to work with when it comes to doing business. Having a business lawyer at your disposal can streamline the process and ensure all the important details are taken care of. Contact us today, and we’ll answer any questions and help you form your LLC!