According to the California Secretary of State, the number of LLCs formed in California has been steadily increasing in recent years. In 2021, the state saw a total of 278,057 LLC formations, which was up from 256,400 in 2020. One of the most important decisions you’ll make is choosing the right legal structure for your business, and Limited Liability Companies (LLCs) have emerged as a popular choice among entrepreneurs for their flexibility and protection of personal assets.
However, before you take the plunge, it’s crucial to understand the costs involved in creating and running an LLC in California, which can be a significant investment that requires a bit of foresight and financial planning. In this article, we’ll take a closer look at the expenses you can expect to incur, including formation fees, ongoing costs, and taxes, so you can make informed decisions and set your business up for success.
Formation Fees
The first cost you’ll encounter when creating an LLC in California is the formation fee. The state requires a filing fee of $70 to register a new LLC, which is non-refundable. This fee must be paid when you submit your Articles of Organization, which is the document that officially creates your LLC. You can file online, in-person, or by mail, but each method has its own processing time and additional fees. For example, expedited service costs $350 and reduces the processing time to 24 hours, while in-person filing has a $15 counter fee.
In addition to the state filing fee, you may also need to pay for legal assistance to help you draft your Articles of Organization. This is not a legal requirement, but it can ensure that your documents are filed correctly and in compliance with California state law. Legal fees can vary greatly depending on the complexity of your business structure and the level of customization you require. On average, you can expect to pay between $500 and $2,000 for a lawyer to assist with your LLC formation.
Ongoing Costs
After your LLC is formed, there are ongoing costs that you will need to consider. The most significant of these is the California Franchise Tax, which is an annual fee that LLCs must pay to the state. The Franchise Tax is based on your LLC’s net income and is calculated as either $800 or 1.5% of your LLC’s net income, whichever is greater. This means that even if your LLC has no income in a given year, you will still be required to pay the $800 minimum fee. The Franchise Tax must be paid every year by the 15th day of the 4th month after the close of your LLC’s fiscal year.
LLCs in California are also required to file an annual report with the Secretary of State. The report must include information such as the LLC’s name, address, and the name and address of its registered agent. The fee for filing the annual report is $20, and it must be submitted online by the 15th day of the 4th month after the close of your LLC’s fiscal year.
If you have employees, you’ll need to factor in payroll costs as well. This includes salaries, payroll taxes, and any benefits or insurance you offer. You may also need to pay for workers’ compensation insurance, which is required in California if you have employees. The cost of workers’ compensation insurance can vary widely depending on the type of business you have, the number of employees you have, and your location.
Taxes
In addition to the Franchise Tax, LLCs in California are also subject to federal and state income taxes. LLCs are considered pass-through entities for tax purposes, which means that the business itself does not pay taxes. Instead, the profits and losses of the LLC are passed through to the owners, who report them on their personal tax returns.
The federal tax rate for pass-through entities varies depending on the owner’s income, but it can be as high as 37%. California also has a state income tax that ranges from 1% to 12.3%, depending on the owner’s income.
LLCs in California are also subject to sales and use taxes if they sell goods or services in the state. The sales tax rate in California is 7.25%, but it can vary depending on the county and city where your business is located. If your business sells goods, you’ll need to collect and remit sales tax to the state. If your business provides services, you may be exempt from collecting sales tax, but you’ll still be responsible for paying use tax on any items you purchase for your business that are used in California.
Other Costs
Aside from the costs mentioned above, there are other expenses you may need to consider when starting and running an LLC in California. These may include:
- Business licenses and permits: Depending on your business type and location, you may need to obtain various licenses and permits from the state or local government. The cost of these can vary widely.
- Accounting and bookkeeping: To keep your business finances organized and compliant, you may need to hire an accountant or bookkeeper. This can be an ongoing expense that varies depending on the complexity of your business.
- Marketing and advertising: To attract customers and grow your business, you’ll need to invest in marketing and advertising. The cost of this can vary widely depending on your approach.
- Office space and equipment: If you plan to rent office space or purchase equipment for your business, this can be a significant expense. The cost can vary depending on your location and the type of equipment you need.
Know you know
Starting and operating an LLC in California can be a significant investment, but it also has the potential to be a profitable venture. When considering the costs associated with an LLC, it’s important to factor in both the initial formation fees as well as the ongoing costs such as the Franchise Tax and other expenses. By doing your research and planning ahead, you can ensure that you have a clear understanding of the costs involved in starting and running an LLC in California, and can make informed decisions about your business.
