Why is California LLC so Expensive?
For anyone that owns an LLC in California, you probably already know the answer to “why is a California LLC so expensive?”
Besides the higher formation fees, California has a few tax laws that may make it more expensive to have an LLC than other types of business structures.
Here is everything you need to know about forming an LLC in California and the costs you should expect.
California LLC Costs:
- California state fee $70
- Statement of Information $20 every two years
- Annual franchise tax fee $800/year
- Registered agent fee $100 – $300 per year depending on who you use
- Gross Receipts Tax $900 – $11,790 depending on your income
- Self Employment Tax is 15.3% for FICA in addition to the ordinary federal and state income taxes
The annual fee just to have an active, registered LLC in the state of California is roughly $1,040.
This only takes into account the California state fee, statement of information filing, annual franchise tax fee, and registered agent fee.
It does not include the Gross Receipts Tax or the Self Employment Tax mentioned above.
California Gross Receipts Tax
To get an idea of where your business might fall under the gross receipts tax, see the table below:
|LLC Gross Receipts Tax||“Total Income” for California LLC|
|$900||$250,000 – $500,000|
|$2,500||$500,000 – $1,000,000|
|$6,000||$1,000,000 – $5,000,000|
It is important to note that the California Gross Receipts Tax is only imposed on California LLCs, not corporations.
Just like all of the other forms of businesses which include sole proprietorships, partnerships, and trusts, corporations are only subject to taxes on its net taxable income.
Every business pays the $800 annual franchise tax, which is applied to taxes owed, but LLCs are the only ones subject to California Gross Receipts tax.
This is one of the biggest reasons why a California LLC is so expensive.
Higher Self-Employment Tax
Net income generated by an LLC in the state of California is subject to a 15.3% self employment tax (FICA) in addition to the normal federal and state taxes due.
S-Corporations only pay 7.65% employment taxes.
This is only applicable if the LLC has more than one owner or member.
Corporations in California do not pay any self-employment tax and are only required to pay 15% capital gains on on profit distributions.
As you can see, the higher formation fees and multiple tax burdens make owning a California LLC quite expensive compared to other states.
However, there are times when having an LLC vs another business structure in California make sense and this is where a tax professional can help.
If you are not sure how to structure your California business, we highly recommend speaking to a qualified tax professional or business lawyer.
They can give you the pros and cons of each business structure as it pertains uniquely to you and your business.
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