Running a business of any kind will come with expenses. Even a freelance business that you operate from your own home will incur costs that your profits will need to cover. You already know this, but you might also be wondering how much owning an LLC in California will really cost you. For example, are there fees involved in registering your business legally, as well as in maintaining its LLC status?
Well, we have some good news and some bad news for you. The bad news is that, if you are forming and running an LLC in California, it will cost you a bit more than it would if you were working in another state. But the good news is that most of those costs (like one-time fees for forming the LLC, ongoing LLC maintenance fees, and annual California LLC taxes) will be tax deductible business expenses. So it isn’t all bad. Phew!
To dive deeper into what it will cost to form and maintain an LLC in California, check out the information below. While we’ve made every effort to ensure that this information is accurate and up-to-date, it doesn’t constitute legal advice, nor should it be considered a substitute for legal advice. Always consult with your attorney to address any questions or concerns you might have about your LLC.
How Much Does It Cost to Form an LLC?
You will only need to form your LLC once, so you will only need to pay the fees associated with forming the LCC once as well. The list of fees below might help give you an idea of how much you will need to pay, but keep in mind that fees could change over time.
Formation costs include the following:
You’ll need to pay two filing fees to form an LLC in California.
There will be a $70 fee to file articles of organization with the California Secretary of State’s office.
There will also be a $20 fee to file a Statement of Information, Form LLC-12, with the California Secretary of State.
LLC name costs
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 will help prevent another businessperson from registering the same name, or a similar name, before you have the chance to register your business.
Check out our Freelancer’s Guide to Naming an LLC in California for more information on all things related to naming your business
It’s also recommended that you conduct a trademark search to determine if an LLC name that you want to use could end up violating someone else’s trademark rights. The cost of this trademark search will depend upon whether you perform the search on your own or you have it done by a professional, so it might cost you just a few dollars or several hundred dollars.
Want to know more about trademarks? Read our Freelancer’s Guide to Trademark Research
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. And the best part is that there might not even be an additional cost involved with getting this done, especially if you use a service like Hyke. We can provide you with a free LLC operating agreement that’s been written by a professional attorney. On the other hand, if you do choose to draft your own customized LLC operating agreement with the help of a lawyer, your costs might be anywhere from $500 to $1,000.
To discover more about LLC operating agreements, click here for our [Freelancer’s Guide to Operating Agreements[(#)
The simple act of completing and filing all of the required paperwork for your LLC can also come with some costs.
Hiring an attorney to help you fill out and file your paperwork may cost you quite a bit, 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 might very well be just a few dollars, or perhaps even zero. Of course, you should factor in the time that it will take you to learn how to do everything yourself, and time is money. So you may realize that it is, in fact, better to hire an expert for assistance.
Your other option could be to hire a service like Hyke. We can help you at every step as you work on registering your LLC, and we can help you save money along the way.
Our Freelancer’s Guide to LLCs in California has more information on the benefits of establishing an LLC
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 can vary widely, but for a small business, it’s usually $50 to $100.
How Much Does It Cost to Maintain an LLC?
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.
What are some of the costs associated with maintaining an LLC? Well, they include:
Cost of registered agents
Having a registered agent, who will be able to 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. That comes after the arduous search for the right agent. Thankfully, when you use Hyke to get your LLC going, we can even help you find the best registered agent for your needs.
Learn more about the perks of having a registered agent by reading our Freelancer’s Guide to Registered Agents
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 with acquiring your business license and paying the upfront fee. Nope, oftentimes, you also have to periodically renew your business license. And that means a new fee will need to be paid. 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 in the county where your LLC is located in order to do business under a name other than your legal business name, 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. Basically, if your LLC is located in California, you’ll have to register your out-of-state LLC in order to be able 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.
So, here’s the gist of it: 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 that’s 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.
Annual LLC Fee
Higher income LLCs also have to 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 will depend on your LLC’s gross income.
Check out this chart, which should help clear things up a bit:
|If total LLC income is:||The annual LLC fee is:|
|$250,000 to $499,999||$900|
|$500,000 to $999,999||$2,500|
|$1,000,000 to $4,999,999||$6,000|
|$5 million or more||$11,790|
For these purposes, your LLC’s gross income will include all income from all sources that are derived from, or attributable to, California. Generally, this will include all income that your California-based LLC earns, except for income earned as a member of another LLC that pays the annual fee.
We know it’s a bit confusing, let’s use an example for further clarification.
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 have to pay the $800 annual tax, plus a $900 LLC fee (see chart above). That totals $1,700.
As another example, if your LLC only made $200,000 in gross income, you would only need to 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, as you’ll still be required to pay the $800 annual tax.
Which LLC Costs Are Tax Deductible?
As mentioned earlier, 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 costs incurred to complete articles of organization, as well as LLC filing fees, the costs of drafting an LLC operating agreement, attorney fees, and 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 may deduct the first $5,000 in formation expenses the first year that you’re in business, and any excess over the first 180 months. But the first-year deduction will be reduced by the amount by which your organizational expenses exceed $50,000.
- The costs that you pay after your LLC is formed are also tax deductible. You may deduct California’s $800 annual tax, along with any annual fee you pay, from your federal taxes. You may also deduct maintenance costs for your LLC, including business license fees and registered agent fees.
Save Money with Hyke!
Wow, that’s a lot of information to take in! Rest assured, though, that it doesn’t have to be so complicated. Signing up with Hyke is a great way to take away some of the headache that comes along with naming, organizing, registering, and maintaining your business. For a $250 fee, we can 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. Contact us today to learn more!
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.