California is the most populated state in the country. It also presents some of the best business opportunities. Though it has a reputation for lots of regulations and rules, California’s laws about LLCs aren’t too difficult, as long as you know the basics and who to go to for advice.
One thing your new California business will always need is money. Apart from filing fees and costs, you’ll also have to make sure that you comply with California law, get the necessary business licenses, and stay up to date on your taxes. To that end, this article will help you make a budget for starting an LLC in California.
- The required costs for every LLC
- Extra costs we recommend you incur
- The different ways you can form your LLC, as well as the pros and cons of each
Total California LLC Cost – $129 and up
The California Secretary of State’s fee schedule tells you all the filing costs for any paper you’d need to file with that office for your LLC. The state doesn't charge a lot of fees to start your LLC. The total you need is $90, made up of these items:
- Articles of Organization filing fee: $70
- Statement of Information filing fee: $20
- Operating Agreement: $39 and up
Note that while California law does require LLCs to have an operating agreement, it is technically possible to have solely an oral agreement. However, if you don’t have a written agreement, it will be very difficult to prove that you have complied with the law. We therefore strongly recommend that you pay to have a written operating agreement drafted.
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How Much it Costs to Start a California LLC – the Basic Costs
There are a lot of things to think about when forming your LLC. Some costs you won’t be able to avoid. Others you might want to skip, but it’s not a good idea. First, let’s look at what you have to spend.
Articles of Organization Filing Fee – $70
Of all the papers you’ll create for your LLC, this one is the most important. Your LLC’s articles are like its birth certificate. Without articles of organization, your company doesn’t exist. Thus, you need to make sure this is done first and done right.
This may sound hard, but don’t panic. While you can draft the LLC articles from scratch if you want, there’s no need. California gives you a basic fill-in-the-blank form (LLC-1) with all the information you need.
If you have a complicated business or ownership structure, you may need an attorney to draft your LLC articles of organization. In most cases, though, the form should be fine.
Statement of Information filing fee – $20
You don’t have to file this the same day as your articles, but you do have to file it within the next 90 days. Statements of information are how California LLCs update their key information with the state about:
- The name and address(es) of your LLC
- Your LLC’s main business
- The Secretary of State’s file number for your LLC, which you get after filing your articles.
- Your registered agent’s name and address
- An e-mail address for the LLC (the agent’s e-mail address is fine)
- The names and addresses of your LLC’s manager(s), CEO, or members
As with the articles, the state also provides a form statement (LLC-12).
Operating Agreement – Variable
An operating agreement is a contract that states the rules of your LLC. It says who the members are, how they leave, and how new members can be added. It also has rules for meetings, paying out distributions, and almost anything else you can think of. If something unexpected happens (and it will), you’ll need one of these contracts to see what to do next.
Unlike most other states, California requires LLCs to have an operating agreement. (You don't have to file it with the state, though your LLC must keep a copy available for review.) The statute does allow the possibility of an oral agreement, but this is not a realistic option in most cases.
If you don’t have a written agreement, it will be tough to prove that you have complied with the law. Worse, no one will agree on what the contract said if there is a dispute. We thus strongly recommend that you pay to have a written operating agreement for your LLC.
A lawyer would likely charge you by the hour for drafting a California LLC operating agreement. While that agreement would be a good one, it could also run you at least a few hundred dollars. You can have a good contract drafted, though, for as little as $39.
California LLCs – Optional Costs to Consider
The fact that $129 is the minimum you need to get off the ground doesn’t mean you shouldn’t plan on spending more. There are several costs you should also plan for to give your LLC the best start it can get.
Preclearance Service – $250 to $500
Mistakes in your LLC’s articles of organization can cost you money and time. If you want to make sure that doesn’t happen, you can get preclearance service, in which you take your articles to the Secretary’s Sacramento office in person, and the staff will review them to tell you if they look okay before you file them.
Note that you also need preclearance service if you want to use some expedited service options.
There are four levels of preclearance service, depending on how quickly you need a response:
- Class I service ($500): you will get a response within 24 hours.
- Class II service ($400): you will get a response within 72 hours.
- Class III service ($300): you will get a response within 5 business days.
- Class IV service ($250): you will get a response within 10 business days.
Expedited Filing Service – $350 to $750
Processing time varies in California, though as of the writing of this article, online filings are being processed without about 15-16 calendar days, and mail/in-person filings are taking over a month. (You can check the most up-to-date processing times here.)
No one could blame you if you didn’t want to wait that long to form your LLC. That’s why California offers three tiers of expedited filing service:
- Class A service ($500): you will get a response within 4 hours. You must have preclearance approval to use the Class A service.
- Class B service ($750): you will get a same-day response (by 4:00 p.m.) as long as you submit your articles no later than 9:30 a.m.
- Class C service ($350): you will get a response within 24 hours of filing your articles.
Note that Class B service is more pricey than Class A because it doesn’t require preclearance service.
The Sacramento office is the only one that accepts expedited LLC filing service requests. You must go to the public counter located at 1500 11th Street, Room 390, on Monday through Friday from 8:00 a.m. to 5:00 p.m.
Business License – $50 and up per year
Your California limited liability company may or may not need a license, depending on what kind of business it does and where it is located. Contact your county and city governments for the exact requirements for your particular company.
Registered Agent Fee – about $100 per year
When you file your articles, you’ll have to name your LLC’s resident agent so that the state and the public can timely communicate with your LLC. (This is really important if someone decides to sue your LLC, so you can know what’s happening.) You don’t pay an extra fee to name an agent, but you should still think about hiring a company to serve as your company’s agent.
Many owners are tempted to serve as their LLCs’ agents. This is not a good idea. It involves making your address public and always being available just in case someone wants to sue your company.
It’s an easier and more cost-efficient plan to hire a California registered agent service for your LLC. These registered agent services usually charge $100 per year and take care of all your agent needs. It’s money well spent.
DBA Fee – varies by county
After filing your articles, you might find that you want to use a shorter or slightly different name for your business. That’s a common need. California LLC owners with this issue need to get a fictitious name, also known as a DBA (doing business as) name.
Registration of DBAs in California is done with the county or counties in which you do business. In San Francisco, for example, you’ll pay at least $58 for a DBA. In San Diego, the prices start at $42. Visit your county clerk’s office for more information.
Name Reservation Fee — $10
Maybe you have a good plan and the perfect business name for your company, but you’re not ready to start just yet. If you want to make sure that you can use a certain name when you are ready, you can file a name reservation request with the Secretary of State for $10.
Note that if you file your request in person, there is an extra handling fee of $10.
Domain Name — about $20 per year
In this day and age, small businesses need a presence on the Internet. The first step in creating a good website is to get your own domain name. While this might have been pricey in the past, it is now very affordable.
You should secure your domain name as soon as possible, even if you don’t have plans for a website right now. If you don’t, a competitor could buy your ideal domain and its variations to block you from using them. Domain squatters also sift through newly registered LLC names and will buy their domains only to relist them with huge markups.
In general, a domain ending in .com will be more expensive than a .net or .info domain, and some names will likely be taken, meaning you will have to do some searching (and maybe compromising).
A domain name from GoDaddy.com or a similar registrar may cost you between $20 and $50 per year, with regular specials and sales where you can get substantial discounts.
Registering with the State Tax Office – Free
All LLCs should register online with the state tax office so that they can pay taxes, like sales and use tax or employment taxes. Note that your LLC will also have to calculate and pay the franchise tax to California.
Getting an Employer Identification Number (“EIN”) – Free
An EIN is a number created and assigned by the IRS to a business for paying taxes. (Think of an EIN as a social security number for a business.) Some LLCs need them, and some don’t.
Regardless of whether the IRS says you need one, we recommend that you get an EIN. Many banks won’t allow your company to have its own account without one. Having an EIN can also simplify the process of getting credit.
You can apply online and get an EIN for free in minutes, or you can apply for one through the mail or fax. Whatever you do, don’t pay someone else to get an EIN for you. It’s too easy to pay someone else to do it unless it is part of a broader service package.
Read More: How to Get an Employer Identification Number in California
Foreign LLC Qualification Fees – about $100 per extra state
If your business takes off, congratulations! You may soon start thinking about expanding to new locations. If one of those places is in another state, you’ll have to pay for the privilege of doing business there. You won’t have to re-form your business, but you will have to register as a foreign limited liability company with the Secretary of State there and pay some extra fees.
The exact fees will depend on the state in which you are registering. As a rule of thumb, expect to pay about $100 in filing fees to register your LLC in another state.
Writing Formation Costs Off
The formation costs discussed in this article are a necessary part of making your California LLC a reality. In most cases, they can be deducted from your taxes as business startup costs.
The IRS has a lot of guidance on this matter, and you should compare your specific costs to the materials on the IRS website.
Keep in mind that, in most cases, an LLC is taxed by both the state and the IRS as a pass-through entity. Generally speaking, LLC owners can deduct up to $5,000 of their business startup expenses in the first year.
While there are some differences between federal and state business deductions in other places, in the area of startup costs, California’s tax laws are identical to those of the federal government.
Cassie is forming a business so that she can work as a fortune teller for tourists in Bakersfield, California. She is the sole owner and worker at the business, which she runs out of her home.
Her formation costs are as follows:
- Basic LLC formation: $129
- Preclearance service (class II): $400
- Expedite fees (class A): $500
- Kern County Business License: $130 (note that this cost may vary by type of business)
- Resident agent fees: $100
- DBA fee: $43 (specific fee for Kern County)
- Web domain costs: $50
Cassie’s business startup costs, which will form her deduction, total $1,352. Her total annual income before the deduction was $49,000, which would put her in the 8% tax bracket for the California income tax and the 22% tax bracket for the federal income tax.
Cassie set up her LLC to be treated as a pass-through business entity by both the state and the IRS. On her California tax return, she will report the income and business startup deductions on her Schedule K-1.
With the deduction, her taxable income in California will be reduced to $47,648. That takes her down to the 6% bracket for California, which saves her $93.32 on her state taxes.
The IRS treats Cassie’s income and deductions the same way, so she reports both her income and deductions for the business on a Schedule C to her federal income tax return.
Both before and after the deduction, she would be in the same federal tax bracket (22%). If she can find $7,123 more in deductions, however, she would go down to the 12% tax bracket.
Keep in mind that if Cassier had more than $5,000 in expenses, she would likely be able to claim those, but she could not do them all in the first year.
Cheapest Way to Start an LLC in California
Now that you know the basics, you likely want to know the most cost-effective way to get started.
The exact services you need will depend on your company, but there are a few options you’ll want to take a look at.
Formation Service – $39 + state fees
One of the most popular options for people starting a new company is a business formation service.
These are companies dedicated to helping entrepreneurs bring their visions to life. They have not only the knowledge of all the state laws you need to know, but also forms, documents, and procedures to make your life as easy as possible.
Formation services are quick and complete ways to handle formation needs for most LLCs.
- They’re easy. In most cases, a formation service will have helped hundreds of people through the exact process you are struggling with now. They have all the documents, information, and expertise you need right on hand.
- They don’t cost much. Because formation services have such a large volume of business, they don’t have to charge their clients that much money.
- They’re reliable. All of the formation services’ products and procedures have been tested hundreds of times over in the real world. That kind of experience should give you peace of mind and confidence going forward.
- They’re fast. Formation services have seen almost every business formation situation already. Chances are, they have many solutions for you that are ready right now before you even know you need them.
While formation services can be great for most people, they are not always the best choice. Some cons for these services are:
- They’re not the best solution for complex LLCs. If you are forming a complicated company or one in a heavily regulated industry, you will have concerns that probably need more focused expertise in that area of business.
- Even if a formation service is a good fit, you can expect upselling. Formation services have to make money too, and some of them may pressure you to buy formation products you don’t need. Even when you are using a formation service, you need to be a smart and informed consumer.
Using a professional LLC formation service can be a great way to set up a business. Check out our Best LLC formation services article for some of our suggestions.
Attorneys are licensed, reliable, and powerful resources for business formation. They are, however, very expensive. Let’s go back to our example of Cassie and her fortune-telling LLC in Bakersfield.
Cassie doesn’t need that kind of power and expertise for her simple one-woman operation. Also, an experienced business attorney would likely cost her hundreds of dollars per hour on top of her already significant formation costs.
Despite the expense, sometimes hiring a lawyer is the best choice.
- Lawyers help you manage risk. If you are starting a business with complicated legal issues, hiring a lawyer would be the best choice. For example, let’s say Cassie is planning on starting a legal marijuana-growing operation. In that case, she should spend the extra money on a lawyer with expertise in cannabis law.
- Lawyers offer more customization when you need it. Do you need specific things put in an LLC operating agreement? Is your company going to have a unique ownership structure? You may need an attorney to make sure these issues are handled properly.
For most people, getting an attorney comes with considerable downsides that outweigh any benefits.
- Lawyers cost more than any other option. The price tag alone should convince you that if you don’t need a lawyer, it’s not worth hiring one.
- Finding a lawyer takes a long time. Getting a lawyer who specializes in what you need, costs what you’re willing to pay, and can work with you well is a tall order.
- Lawyers also take longer to form a business than a formation service. Because lawyers are also very careful people, they will generally take much longer to form your company than non-lawyers would. Fortunately, most people don’t need a lawyer. In 90% of cases, a formation service will do just fine.
Do it Yourself
Many people, having researched the topic on the Internet, decide to try forming their new LLCs themselves. This process can teach you a lot, but remember that time is money. If you are spending hours on forming your LLC, that’s time you’re not spending doing business.
In most cases, then, it is more cost-effective to pay a formation service $39, knowing that everything has been done correctly, rather than try to reinvent the wheel yourself.
- You’ll learn a lot. A DIY owner will learn a lot about the process while forming their own business, and they will likely retain that knowledge for years.
- It costs less upfront. If you don’t figure out the value of your time, a DIY solution is the cheapest option.
- You’re losing money when you consider how much time it takes to DIY. If you figure out that your time is worth $30 per hour, and you take 20 hours to complete your business formation, you have essentially spent $600 on business formation.
- You risk making a mistake. DIY business owners can easily make a mistake with all the paperwork that can cost them even more time and money.
- It’s a headache. State workers are very helpful, capable people. But they will also tell you that the laws and rules governing business formation are not easy, and they follow those rules for a living. It’s going to be even harder for you.
Annual California LLC Fees: How Much Will it Cost to Maintain your LLC?
Once your business is up and running, there are regular costs for which you will have to budget. These include state and local business fees, including:
- Biennial (once every two years) statement of information: $20
- Local business license (per year, if needed): $50-$100
- Annual LLC franchise tax: $800 plus an extra tax on any annual receipts over $250,000.
Also, keep in mind that any small business should have an accountant. Costs for accounts vary significantly, but you should spend an average of $2,000 to $3,000 per year on an accountant in most cases.
How Much are LLC Taxes in California
Apart from the income taxes discussed in Cassie’s example above, California does tax LLCs annually for the privilege of doing business in the state. Most businesses in the state will pay $800 per year for this tax.
If you are one of the lucky LLC owners who make more than $250,000 per year, though, your tax will be more. The exact amount of your taxes will vary. Consult with your accountant and use Form 3536 to figure out what you owe.
California LLC Formation Costs Quick Links
- California Form LLC-1 (Articles of Organization)
- California Form LLC-12 (Statement of Information)
- California Franchise Tax Board — information regarding LLCs and state income tax
- California Secretary of State Business Entities Fee Schedule
- California Secretary of State — Current Processing Dates
- California Secretary of State — Name Reservation Request
- California Secretary of State — Preclearance and Expedited Filing Services
- IRS information regarding the federal tax treatment of LLCs
- Kern County — Business License Application
- Kern County — DBA information
- San Diego County — DBA information
- San Francisco County — DBA statement
California LLC Formation Costs FAQs
How much does it cost to start an LLC in California?
The basic fees are $129. This price is comprised of $90 in state fees and at least $39 for a written LLC operating agreement. If you want it done more quickly, or you need help from an attorney or formation service, you will pay more.
What is the cheapest way to start an LLC in California?
A do-it-yourself approach will have the lowest price tag, but it isn’t the cheapest in terms of your time. The best balance of price and time, for most people, is to use a formation service.
Do I need to hire an attorney to form an LLC in California?
No. Most people will not need to invest the considerable expense and time of hiring a lawyer. A formation service or DIY approach will work for most business owners.
Can I pay to form an LLC more quickly in California?
Yes. Formation services will generally complete formation tasks faster than business owners acting on their own. You can also pay the state to expedite your business filings once they are ready.