Form a California LLC in 10 minutes for $70 | Hacker News Reader

Form a California LLC in 10 minutes for $70

blog.bookandledger.com

494 pointsmmckelvy269 comments

Maybe I’m biased but, this is one of those times where the advice is just enough to get you into trouble.

No mention of single member vs multi-member LLC, and lack of certain liability protections with single member LLCs. Most people will have expectation of liability protection, and those single member LLCs may be surprised to find the assets of their single member LLC at risk for their personal liabilities.

No mention of tax treatment, by default single member LLC is pass through (no need to file separate federal return), but can elect to be taxed as a Corporation or S-Corporation. No mention multi-member is taxed by default as a partnership but can elect tax treatment as Corporation or S-Corporation.

No mention of an Operating Agreement, which is the controlling document; therefore, without one the LLC is governed by California Code. These issues are of great importance, example: you may have a partner and the death of the partner may result in dissolution of the LLC or maybe having a new, unwanted partner(s) (spouse and/or heirs of the deceased partner), but without the operating agreement California Law will dictate.

Yeah this article is meant as a simple how-to for someone that has already decided they want to form an LLC in California and understand the pros and cons.

I cover some of the issues you cite in another post:

https://blog.bookandledger.com/topics/business-formation/int...

Yeah the original article is almost worthless.

The 2nd article you just linked is much better, and usefully informative. However, it still needs:

- info about the need for an operating agreement

- more detail about piercing the corporate veil

- discussion of FTB and IRS reclassifying as hobby business

You are advertising to a very technical audience and should address these things at a deep level.

I strongly disagree with "almost worthless"; assuming you've made the decision to form a CA LLC, this post is very useful.

You're making some quite strident demands of some random person on the internet here ;)

Having said that, I too would be interested in the extra topics that you listed, particularly the operating agreement piece. I looked into this recently and NoLo offers a $100-300 service [1] which comes with options, vs. free Operating Agreements like this random one on UpCounsel[2].

I have no idea what the parameters are on this, and in the past I've just leant on a lawyer friend to do this for me; I'd like to understand the details.

[1]: https://store.nolo.com/products/online-california-llc-ptlca-... [2]: https://www.upcounsel.com/single-member-llc-operating-agreem...

I paid $1000 to a lawyer for an operating agreement. It was fine.

For my 2nd LLC I just copied a free template (different than my expensive lawyer'd one) since I now had a really good understanding of what needs to be there.

At first yes it's scary to think you might be getting it wrong, but you learn that it's not rocket science. It's basically the agreement between the members of the corporate structure. I haven't read the NOLO one but I bet it's good value for money.

You will generally have to present the operating agreement to the bank to open a business account, to get business financing, maybe for insurance, stuff like that.

My experience (IANAL) is that for friendly partners, the nolo template is going to be fine. If you're selling shares to folks that you don't have a history with, you may want to have the assurance of expert, personal legal advice from someone you can also go back to with future concerns. And for that kind of bigger LLC anyway, the $1000 or so is a reasonable expense.

I’m not sure a template is the way to go with multi member. If you are going multi member you should really both get a lawyer to explain the details and review the docs. I’ve had to unwind a multi member LLC into a single member one and gaps in our operating agreement were suddenly all too relevant.

I don't think it's very nice to call the work of someone trying to contribute information to the group "worthless".

I call it that because it's trivial information, easily obtained anywhere. It doesn't need to be re-re-re-told.

First google result for the obvious 'how to file llc california':

https://howtostartanllc.com/california-llc

Just as readable as the original article and goes into some more useful admin details, such as the need to get a business license, seller's permit, etc.

Good for you. You should read this: https://xkcd.com/1053/

Lol! Glad you at least liked the second article a little better.

I have some plans for future posts that will delve a little further into the weeds on various structuring / finance / tax topics.

> Yeah this article is meant as a simple how-to for someone that has already decided they want to form an LLC and understand the pros and cons.

I think you mean "has already decided they want to form an LLC in California "

Yep! Fixed.

If you're at that point I have to wonder whether you'd be looking at this article.

Why? It's not as though someone goes from no-understanding-whatsoever to complete-mastery.

I remember when I decided to form an LLC the next step was do decide which state to do it in--specifically, whether to do it in Delaware or my home state. Cost and convenience (what this article is about) was a consideration.

Then after I decided to do it in my home state, I needed to decide whether to a) do it myself, b) use an online service, or c) use a local attorney. That meant more reading on that particular question.

And so on...

People do this thing called 'research'. It is a method of finding information that, among other things, allows them to mentally model future possibilities. Accurate overview information is really useful for this - one doesn't need to know that the answer to question 14a on form 6735n has tax implications in order to get an idea of the process, compare to other states, etc.

Thanks for the gratuitous condescension, but my point here is that I see the potential audience is quite possibly either too advanced to find the article useful or else not advanced enough to recognize its limitations.

I'm sorry you didn't find my humor funny, I wasn't trying to be mean.

But fine then; we disagree. I found the article worth reading - it is exactly the sort of thing I'd want if I found myself with a mostly-idle interest in what the process looks like.

Last time I did incorporate, I spent substantially more time and money on the question (and would never do so in CA, but that's a different discussion). But that's because I was actually doing it, not just curious.

Leaving alone tax implications of owning a US corporation and making an income from it if you're a foreign national/tax resident.

If you are a foreign national outside the US, forming a California LLC is not generally a recommended course of action.

Wow! why so complicated?

Single Member LLC's also have the downside of being "bullied" by lawsuits.

In most States, you will be required to have a lawyer represent yourself. You cannot represent yourself (pro se). So in cases where a lawsuit is frivolous, it can be incredibly expensive, whenever you could of just filed a Motion to Dismiss, etc, yourself.

But if the LLC can't afford it, no one will come after the owner's assets, right?

That is the basic idea of using an entity like an LLC in the first place.

I marvel at your “just” in relation to a motion to dismiss. Having practiced as a lawyer for 24 years, I’ve never found that opposing or filing an MTD to be trivial or routine.

This is also a good way to lose $800 as the minimum tax for an LLC in California when a simple DBA would work just as well for many cases.

And you can form an LLC in South Dakota (annual fee: $50) in about as much time. Florida is also good, well designed web app and it’s all laid out nicely, but the annual is $138 if I remember right.

If you do business in CA you're required to file as a foreign corporate entity, and still pay the $800 in taxes. You can't open a bank account in a CA bank without proving that you've made that filing.

> You can't open a bank account in a CA bank without proving that you've made that filing.

I have not found this to be the case, at all.

If your business is headquartered in another state I'm not sure why you'd need a California bank account unless you want to use a bank that only exists in California.

I did it less than a year ago with a Florida LLC. Walked into a California branch of a very large international bank and walked out twenty minutes later with a temporary ATM card and checks.

Off topic: but South Dakota has a cottage industry of relatively untraceable companies. I am unsure of the exact term for the type of company, but it seems to be pretty popular to distance yourself from your assets

Check out registered agent fees as well, which can easily go over $100 first year. I used a ‘service’ about $100 to setup LLC in a low tax state. No complaints.

If you do business in California, which basically means you live in California you will still have to pay the California LLC $800 flat tax and CA income taxes.

I'll commit the cardinal sin of not reading the article before posting, but even if it is written there it's worth repeating. See a tax accountant before you do anything. An hour of the accountant's time will almost certainly save their fee many, many times over.

I'm in Japan, but I don't think US tax law is any less complicated ;-) When I started my company I waited until after talking to the lawyer and doing all the legal paperwork to engage an accountant. Big mistake! There were a lot more options than I knew about (and that my lawyer told me about). Even engaging my accountant when I did, he still saved me his yearly fee in about 5 minutes. I think it's not a stretch to say that he's saved me about 10% net year to year.

For those without much of a network, how do you recommend finding one to talk to?

As strange as this sounds, my wife actually found our accountant by googling. That got her to a referral service and they set up an interview with someone in our area. The account pays the referral service and offered to consult with us for an hour or so for free. Based on that, we hired him. I spent quite a long time (probably 20-30 hours) reading Japanese tax law so that I understood the basics. I also spent and equivalent (or probably longer, actually) learning dual entry accounting and practicing it. That way, when I got to speak the the accountant I had at least some idea for judging his competence. I asked to see some examples of his work and also chatted to him about his style, etc. Pretty much like any job interview ;-). It's been 3 years now, and although he was the first and only person we talked with I'm very happy with my choice. However, remember that it's a buyer's market and you do have a choice. Try to make sure that you have plenty of time to set up your company because you don't want to rush through these things. Accounting and taxes is important. Also, I would also advise not to judge primarily on price. Good accountants are worth a lot, so pay them appropriately. However, you can also get accountants that attempt some slimy practices and leave you on the hook if it all goes wrong, so make sure the person isn't over promising. Get them to show you what kinds of actions they will take. It should be pretty clear how they do things.

Google. If for some reason you don't trust yourself to filter out the bad or mediocre folks, find a professional association in the area and ask them for a referral.

Who would you recommend?

If you are in Shizuoka prefecture Japan I can give you a good contact :-) Otherwise I'm afraid I don't know. If you do happen to be in Japan, definitely ping me (or anyone else for that matter) and I'll be happy to give you whatever advice I can.

Sounds like a lot of "premature optimization" to me.

> those single member LLCs may be surprised to find the assets of their single member LLC at risk for their personal liabilities

Not to discount that but aren't LLCs usually formed to avoid personal liability for company liabilities? Not sure if I misunderstood your comment but it sounds to me that you said personal liabilities (e.g. credit card debt) would have to be paid out of the company. I think the main reason most people form an LLC is the other way around, preventing that a lawsuit not only ruins the company but also you personally. Or is that also easier in a single member LLC?

> > those single member LLCs may be surprised to find the assets of their single member LLC at risk for their personal liabilities

> Not to discount that but aren't LLCs usually formed to avoid personal liability for company liabilities?

That’s officially why they’re formed, but that doesn’t mean they provide what the owner expects.

Years ago, when I was a bank teller, I noticed that one of our clients — a CPA — had not incorporated her business, or set up an LLC, LLP, etc. She mentioned that the limited liability wasn’t absolute; people are often able to pierce the veil ( http://lawprofessors.typepad.com/business_law/2017/11/no-nee... ), so she wasn’t convinced it was worth the trouble. I found out later that courts are willing to pierce the veil in cases that don’t make sense (often, the courts pierce the veil for contract lawsuits where the injured party failed to write in the contract that the LLC’s owners would personally guarantee the performance, but if a car owned by an LLC was in an accident, courts would respect the limited liability; this seems backward since the victim of the accident didn’t pass up a chance to get the owner to personally take liability: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=236967 ).

If you separate everything, I dont expect lawyers to take your home upon something awful happening.

Ive heard the stories of LLCs going bankrupt, but I dont know of people losing their personal assets.

If the LLC members personally guarantee performance, piercing the veil isn't involved (because they are personally liable ab initio.)

If they don't, standard analysis of both the way the company is operated is done, the same as would occur with a noncontract liability where veil-piercing is sought.

So, it's certainly possible for the veil to be pierced in a contract case but not an auto accident liability case, but it's just as possible the other way around. The features you've specified and intuited are the basis for the decision to pierce the veil (and from which you have concluded that the logic is reversed from what would make sense if you were deciding based on those features) simply are not the ones that control the determination of whether the veil will be pierced.

> If the LLC members personally guarantee performance, piercing the veil isn't involved (because they are personally liable ab initio.)

I agree. That’s half my point: why set up an LLC if every bank and company you deal with has you personally accept liability anyway?

> If they don't, standard analysis of both the way the company is operated is done, the same as would occur with a noncontract liability where veil-piercing is sought.

That’s how it’s supposed to work, yes.

> So, it's certainly possible for the veil to be pierced in a contract case but not an auto accident liability case, but it's just as possible the other way around. The features you've specified and intuited are the basis for the decision to pierce the veil.

I’m not the one doing the intuiting; it was one of UCLA’s corporate law professors. I will acknowledge that his proposal is twenty years old, and the “intuition aspect” is based on whether the approaches used by various states actually achieve the expected policy outcome. That is, if the courts don’t decide whether to pierce the veil based on questions like “is this simply an attempt to get another bite at the apple?” then it’s hardly a surprise that many attempts to get a second bite at the apple succeed. And if the question of whether I can personally sue the owner of a pizza restaurant or have to live with the restaurant’s limited liability is based on whether he has copies of the minutes from his formal board meetings, it’s likely that the decision to pierce or not to pierce won’t actually advance the desired policies.

----

It does look like I had the wrong paper, though. The one I linked to makes the argument that veil piercing is unprincipled, but https://scholarship.law.berkeley.edu/cgi/viewcontent.cgi?art... gives the numbers (eight years old, at this point).

> That’s half my point: why set up an LLC if every bank and company you deal with has you personally accept liability anyway?

Tort liability (like copyright claims, employment-law claims, and, from. your example, personal injury and property damage claims.)

In the case of the CPA I knew, she wasn’t worried about personal injury claims against her from people she didn’t know. Obviously, other jobs are more exposed to personal injury claims (and, potentially, a non-client could slip on her front steps, so she wasn’t completely in the clear).

If you’re the sole employee, you’re almost certainly going to be sued personally if the LLC gets into trouble. So all of your assets are going to be at risk.

To clear up some misconceptions:

An ownership interest in the LLC (and its share of assets) is always at risk for the member's personal liabilities just like any assets of an individual debtor. LLCs merely afford liability protection against personal liability for the company's debts.

A pass-through LLC MUST file a tax return and issue Schedule K-1s to the partners (a pass-through LLC is considered a partnership by the IRS) so they can pay their taxes, even though the LLC does not pay taxes itself. You must also file a California state tax return to report payment of the $800 annual minimum franchise tax.

It is correct that just filing the papers and paying the fees to the state does not constitute proper LLC formation. An Operating agreement must be executed and other formalities completed. There's something like an 11-point test for disregarding a corporation and any one them can bring personal liability. Forming an LLC can be done yourself, but research it, and follow the rules closely. The key is to keep the LLC as a separate entity and not to overlap or commingle your personal assets and the assets of the company. If you do everything for the company as you would do for another person, such as separate address and phone number, bank account, etc., you should be fine.

Actually, I looked into it a little deeper and a single member LLC can report on an individual's tax return without filing its own return.

Not to quibble with you, but I don’t recall seeing a requirement for having an operating agreement separate from the certificate of formation in the Uniform Act or anywhere else. As far as piercing the corporate veil, that’s a matter of state law and very fact-dependent, and exceptionally rare.

Remember that California minumum tax for an LLC is $800. EVERY YEAR. that is what you have to pay even if you lose money or do nothing. don’t form an llc in 10 minutes and then screw yourself over with thousands of dollars of debt just because it makes you feel cool.

A hardware engineer just came into my office earlier with a prototype for a cheap server with a good GPU for AI tasks. He incoporated in California in 2013 and still hasn't actually gotten a product out or made sales. Meanwhile he paid 6 years of taxes * $800 = $4800. He could have bought an iMac Pro, or invested in the business in some way if he had not incorporated. You don't need to officially be an LLC or corporation for your project to be real.

If you really do need to legally form a company to separate out finances and liability, depending on what you’re doing, you might want to look at starting a Delaware C corporation (they have a minimum franchise tax of $350 plus I think a $50 filing fee). If you’re thinking of taking investment the rules and laws of Delaware are very well understood and there is a substantial amount of case law that makes it a lot more predictable to use their courts as almost everything that can happen has happened. So for certain types of companies it’s cheaper and better. For smaller things a C corporation may be overkill and an LLC or S Corporarion may work better if you do not need to raise money.

You do realize if you do business in CA you have to pay CA taxes, right? You're mentioning Delaware but that would be for corporations and dispute management. You're not going to get away from taxes...

We ARE talking about corporations.

No, we are talking about LLCs. LLCs are not corporations.

They are a form of corporation. It even says so in the name.

The “C” stands for company: http://www.professorbainbridge.com/professorbainbridgecom/20... .

Limited liability companies and corporations are distinct legal structures:

https://www.thebalance.com/what-is-the-difference-between-an...

https://www.dos.ny.gov/corps/llcguide.html

LLCs are not incorporated.

Right but using the example there aren’t any profits to tax, so his friend would’ve saved several thousand dollars by having the entity registered in another state with a lower minimum. Florida, for example, is less than half of Delaware and SD is even lower. Much better choice for a one person early stage experiment.

If you live in CA you're required to file as a foreign corporate entity, and still pay the $800 in taxes. You can't open a bank account in a CA bank without proving that you've made that filing regardless of where the corp was registered.

I could be wrong but one could open a bank account in a different state. In this case he formed a business but did not make a profit or sale or employ anyone for 6 years. It doesn't make sense to form an llc unless you require it. Start smaller.

If you live in CA and are operating your business in CA, you're probably going to have a hard time arguing you don't have to pay CA tax.

Right, but the point is that he isn't operating a business at all, seeing as there's no product nor sales. So what does he have?

Maybe he doesn't need an LLC at all right now.

That is not true. I speak from personal experience of less than a year ago, with a gigantic international bank.

Dare I say that after hammering away for 6 years with no profitability, it's not the $2.19/day in LLC tax that's bleeding him dry, it's the fact that the market is sending him a message about his offering.

True, but there was no offering yet. This is not uncommon among aspiring entrepreneurs I think, and they are mostly finding things out of their own pocket.

Not to mention that if you fall to pay the LLC tax on time you can be hit with literally thousands in fines.

If you register a foreign (outside of California) corporation or LLC (and probably LLP, for the same reason, but I don't recall.actuslly seeing that) but do any intrastate business in California, you will legally be required to register with California as a foreign entity and still pay the California tax applicable to your particular form of limited liability entity.

So, “jist set up an entity wherever the setup costs are cheapest” may actually just layer that jurisdiction's tax on top of CA tax, depending on your business details.

https://www.nvsilverflume.gov/home

Nevada has SilverFlume for many years. Also, no income taxes. Also, no Employment Development Department. Also, real estate at $1/sqft. Also...

...a largely tourism and mining based economy that has failed to attract high-tech talent.[1][2]

[1] https://www.cnbc.com/2016/08/09/zappos-ceo-tony-hsieh-what-i...

[2] https://qz.com/875086/five-years-in-tony-hsiehs-downtown-pro...

I wouldn’t say Vegas failed to attract high tech talent. After 20 years in San Francisco and San Jose, we moved our tech businesses (and ourselves) to Las Vegas. Best decision ever.

The Downtown Project was highly ambitious - area is just now starting to take off.

Have you ever used it? Complete POS compared to Florida and South Dakota’s vastly superior web apps.

You can also do it in Florida entirely online but for $130. Wonder why the huge difference in cost.

More info:

http://dos.myflorida.com/sunbiz/start-business/

To actually create one:

https://efile.sunbiz.org/llc_file.html

Florida has no state income tax on individuals. I don't have any data to back it up but it seems that states with lower income tax receipts usually attempt to make up some of the revenue by charging higher rates for various other government services that aren't immediately visible to most of the voting/tax base.

Also Florida requires and annual filing and associated fee of $200 I believe.

$130 up front and $200 a year beats the heck out of $70 up front and $800 a year.

If you do business in California with a FL-registered LLC, all that you have accomplished is that you now pay $130 to Florida once to register plus $200/year, then another $20+ to CA to register as a foreign LLC plus $800/year.

What does “do business in California” mean? If my LLC opens up a shop on Etsy and I ship to California customers am I supposed to register as a foreign LLC and pay $800/year?

If so, that’s nuts and we need some beefier Commerce Clause jurisprudence.

No of course not. They mostly mean you literally are doing business in CA. Usually for small businesses it’s because you are living there.

This right here. Office in California, business assets in California, etc will trigger the tax on profits generated from those assets. Shipping goods to California doesn’t.

You can actually skirt them a bit as well even with employees or offices in CA, as long as they fall under certain defined thresholds.

Expanding on this: can someone recommend resources (books/videos/articles/etc) on holding structures (interested in US and Europe)? This is such a scammy industry and Googling only brings you so far. To clarify: I DO NOT want to evade taxes, just separate operational risk.

> can someone recommend resources (books/videos/articles/etc) on holding structures (interested in US and Europe)?

Get a bottle of Scotch, clear a week-end and grab an annotated copy of Delaware’s General Corporation Law [1]. Read it. Book two hours with a top-tier lawyer. Ask them questions. DE law will give you an overview with which to ask the right questions for across the U.S.

Pedantic overkill? Yes. Satisfying if you’re the right personality type? Absolutely. (Caveat: the law is complex and unforgiving. Use this to ask a lawyer good questions versus pretending to be a lawyer yourself.)

[1] https://store.lexisnexis.com/products/delaware-corporation-l...

Disclaimer: I am not a lawyer. This is not legal advice. Do not form a legal entity without speaking to a lawyer.

A side note, has anyone actually ever sued anyone for not having a disclaimer? It seems a lot like don’t use a hair dryer in the shower.

“I am suing because some dude on Hacker News suggested..”

It’s more so someone doesn’t think I’m a lawyer, follow my Internet commentary and then come to harm themselves. The disclaimer is my way of saying “I am speaking beyond my circle of competence, but still think what I have to say is interesting.”

How does the annotated copy differ from that provided by delaware itself, (other than cost)? https://corp.delaware.gov/DElaw.shtml

I put together an "intro guide" on business structures and tax classifications in another blog post: https://blog.bookandledger.com/topics/business-formation/int...

It should hopefully be a good starting place for you.

Good grief if you are this worried about these fees your company doesn’t have enough revenue to justify its existence. Yes I had a Delaware c-Corp with a foreign qualification for Massachusetts, no I would not have cared about these annual fees if my company was meeting growth targets.

Please just spend a little time educating yourself about corporate structure and spend a lot of time building a company with real value. The former can typically be changed without a lot of fuss if the latter requires it.

Sure, but that doesn't really justify the fees. I keep hearing from Americans that we in Scandinavia are so heavily taxed. Very strange from me to hear about a $800 minimum tax fee. Also, not every company is a high flying startup. It might be a small hairdresser salon. $800 isn't pocket change for a small biz. In my case I have a company that has pretty much been inactive for many years as it just exists to have stocks in my previous and current startup. Wouldn't be happy about spending $800/year to keep it alive.

This is for a specific type of corporate organization in a particular state. You can start a business without forming an LLC. If you really want to pretend you are for real, you would form a delaware corporation. Delaware is a tiny state that many years ago decided to create a very well defined and (permissive) legal framework for corporate law. Virtually any reasonably sized corporation is a Delaware corporation.

Delaware does benefit from this... they get all the filing and other miscellaneous fees out of the deal as well.

Oregon has something similar. Was surprised how easy and fast it went through.

People saying why not form in another state: it was my understanding that while you can do this you'd still have to register with the state you're actually in so you're not saving on taxes and just spending more money by registering twice? Maybe I'm just misinformed...

In California the trigger is 'doing business in, or having facilities in California.' There were lots of interesting cases here around Amazon and others try to dodge California taxes (my mother-in-law was a CPA and had some really interesting stories about this).

One of the more interesting was an attempt to tax one of the casino owners (I believe it was Harrahs but I don't have access to the records) because they lived in California (South Lake Tahoe). That was denied because the casino did not do any business with anyone in California and the guy they were chasing didn't do any work for the casino from home.

I think this points out a significant reason "why to incorporate in CA" (as is being discussed elsewhere in the comments, as in "... instead of Delaware")

Could somebody clarify? Say I want to create a corporation, and will probably do work for it from home living in California. Does incorporating in Delaware now mean I will be paying the $800 tax (or some other) for CA, in addition to whatever Delaware charges?

If you’re not profitable, then the minimum fees matter. If you are turning a profit and you’re living in California and working from home (and assuming you have no employees) then there’s no real reason to incorporate in Delaware.

The franchise fee is 1.5% with a minimum of $800 for all profits from business generated in California. So yes you’d pay the franchise fee for CA and the $250 to Delaware

Might want to explore if California is really where you want it. Look at the yearly annual report costs for one.

Also, with Trump's tax plan, C corps might be taxed less than you as flow through via your LLC. If your tax rate is above the new ~22% c corp rate, you might want to look at that and do a Delaware C or S Corp. Attorney; just sayin'

IANAL, but pretty sure CA LLCs allow you to elect to be taxed as an S- or C- corporation.

It would have to be pretty low to get ahead with a c-corp. Because to pay yourself passthrough on the c-corp, you will be getting the lower Trump corporate tax, but you still have to also pay capital gains tax when you receive it. (not to mention you still have to pay yourself a reasonable salary).

I don't think cap gains tax plus corporate tax will end up less than even the highest earned income rate.

Note that each state handles different aspects of LLC's differently. There is a reason many companies form LLC's in Nevada or Wyoming - those states have tons of legal precedence for different things pertaining to LLC's. So for example, avoiding certain types of litigation, or remaining anonymous are features of LLC's in those states.

Note, I'm not a legal person, but these are things I was told to consider when picking a state to form your LLC.

This is the first I’ve heard of anyone incorporating in those 2 states. It’s always either Delaware or the state you’re located in.

For LLC its wyoming or nevada. Corp C/S i hear delaware.

What are the advantages of incorporating an LLc in wyoming or nevada vs other locations?

Especially if you don't live there.

I register all my LLCs in Wyoming even though I've never stepped foot in the state in my life.

> remaining anonymous are features of LLC's in those states

Let's say you want to remain anonymous (not for any illegal reason, just pure privacy paranoia). Does that mean a california LLC won't work?

What's the difference between those other states and using a registered agent for the mailing address in CA?

Wyoming also has precedent against "charging orders" (piercing of the corporate veil in single member LLCs), which is nice.

You can also form a Wyoming LLC without even being a US citizen or resident. It's comically simple to setup and the annual fees are a joke. There's a large registered agent industry there.

FYI we publish guides like this for all 50 states and have comprehensive guides including checklists for the top 7 states: https://www.mycompanyworks.com/states.htm

PSA: $800/y minimum tax for a CA LLC.

Can anyone explain the pros/cons of LLC vs. a Delaware C corp?

> LLC vs. a Delaware C corp?

Both Delaware and California offer LLCs, as well as incorporation options. Are you contrasting an LLC versus a C Corp, or a Delaware LLC with a California LLC?

>Are you contrasting an LLC versus a C Corp, or a Delaware LLC with a California LLC?

A Delaware C corp vs. a California LLC

See http://www.calstartuplawfirm.com/business-lawyer-blog/califo....

TL; DR If you’re raising outside financing, Delaware. Otherwise, California is probably fine. (Assuming you have a nexus in California.)

Disclaimer: I am not a lawyer. This is not legal advice. Don’t make these decisions without a lawyer.

What about a California C Corp LLC in Delaware?

> California C Corp LLC in Delaware

I don’t understand. “C Corp LLC” doesn’t make sense; you can’t be both.

Sure can. An LLC can elect to be treated as a C corporation for tax purposes with a very simple IRS form.

> An LLC can elect to be treated as a C corporation for tax purposes

Still an LLC. We’re talking about entity formation and comparing jurisdictions; being legally precise becomes important in this context.

Disclaimer: I am not a lawyer. This is not legal advice.

Still an LLC. We’re talking about entity formation and comparing jurisdictions; being legally precise becomes important in this context.

Right. It's still an LLC, for specific state legal purposes. And it's generally a C-corporation for tax purposes, federal and international law.

> it's generally a C-corporation for tax purposes, federal and international law

A single-member LLC electing to be taxed as a corporation will still be sued as an LLC (i.e. it can be pierced more like an LLC and less like a corporation), dissolved and maintained as an LLC and enter into contracts, open bank and brokerage accounts as an LLC, and have the same difficulties raising outside capital as an LLC.

Disclaimer: I am not a lawyer. This is not legal advice.

I break down the differences among entities in another post from the same blog: https://blog.bookandledger.com/topics/business-formation/int...

For a traditional startup, that will (i) raise money from investors or (ii) give equity to employees, you should just be a Delaware c-corporation. Those are streamlined, known, and easy processes with a Delaware corporation. Every lawyer in this space has forms for that and can read those documents with a baseline of familiarity. If you try to innovate here and set up a startup as an LLC or a California corporation, you are complicating every corporate transaction you'll do and adding cost to every interaction with your lawyer and the counterparty's lawyer. And you will prohibit investment from certain VCs who aren't able to invest in pass-thru entities because some of their LPs manage retirement money and are subject to ERISA.

There are other businesses where an LLC makes sense, including possibly for a bootstrapped startup that will have one stockholder for its whole existence. But that's not my area.

Not even going to include a disclaimer about this not being legal advice, because I am a lawyer and this is good advice :)

I would just add that tax classification and the liability protection entity are two different things. You can form an LLC and elect to be taxed as a C Corp. The upside is most states have fewer admin requirements for LLCs (e.g. you don't have to keep minutes, name officers, etc.)

As for Delaware vs. your home state (CA in this case), I think it depends on the business. If you are a multi-national corp, sure go with Delaware. But if you live in CA, the other owners live in CA, and you're mostly doing business in CA, I'm not sure you'd need a Delaware corp. Delaware has franchise taxes of its own, so you'll end up paying taxes and fees in two states because you'll have to register as a foreign corp in your home state (CA).

No dispute from me that you can save a little bit on taxes by forming a California corporation if you're in California. Specifically the ~$400 of Delaware franchise taxes. But my point is that any company doing typical startup activities will spend more than $400 extra the first time they interact with their lawyer, an investor's lawyer or the state of California.

For example - this week I'm helping someone with a simple filing in California, and the processing time is 10-12 days, unless we pay California an extra $350 expedite fee, whereas Delaware will turn the same filing around in 2-3 days with no expedite fee.

Or, for another one - in California you can't submit an electronically signed document for a filing, so you and your lawyer get to spend the extra billable time dealing with scanning PDFs instead of DocuSign.

And you get to deal with the lottery of attorney reviewers who will sometimes reject Articles of Incorporation over things that have been OK in every other document you've ever filed.

And this is all separate from the fact that the lawyers on both sides of your transaction are secretly scratching their heads while they dust off their copy of the California Corporations Code and billing your for the time they spend figuring out what's different from Delaware.

It's just not worth it for the $400.

Yes, I wouldn't dispute there are a lot of situations where organizing somewhere other than your home state is a good idea.

I'm just trying to point out that "Delaware C Corp" may not always be the right answer. It may actually only be the right answer for a very specific use case.

And on top of that, when you eventually do realize you want to change the domicile to Delaware, you find out that California corporations don't allow direct conversions into Delaware corporations, so you have to pay lawyers an extra couple thousand dollars to prepare merger documents to move the entity to Delaware.

Lawyer, but not your lawyer.

I would never advise someone to setup a Delaware C corporation unless they were very narrowly focused on raising VC funding, going public in the near term, or creating a subsidiary of a large, profitable company that uses the corporate structure. A C-corporation is the least tax-efficient and least capital-efficient structure, and you don't even get the benefit of limited liability over the LLC form because LLCs also get limited liability.

This thread is really interesting, let me tell you why.

1) Forming an LLC, or a trust, or similar things, has always been considered complex, expensive, and requiring human supervision. I guess and assume that a large percentage of the population still believes it is the case.

2) This thread, however, confirms that people are ready to see #1 challenged and eventually removed. And there are numerous examples of websites, resources, etc, pointing at simple and elegant solutions that would apply to MOST cases. (deciding whether your case belongs to "most" or not might not be too simple though).

3) There is so much unexpressed potential in the ability for people to put these matters into their own hands. Don't get me wrong, experts are and will still be required in many cases, but the point still stands.

An example? Everybody owning property should use some form of legal entity to own/manage that property. Why? Because in its simplest form (a trust) it is literally cost-free, and brings several benefits out of the gate (no probate on death; legal separation between trustee and beneficiary; etc). For slightly more specific needs, an LLCs or other similar vehicles also provide great benefits (although require tax reporting, and some state and local tax to be paid each year). And these tools shouldn't be expensive. Not for most people.

In my recent experience, I have been dealing with the structure of a land trust to facilitate real estate transactions (using the Blockchain to record these transactions - before you say anything, we're not crypto fanatics, the crypto part is actually quite straightforward and not too crazy like many projects out there).

We are a startup, and we invested a significant chunk of our initial funding in fees (legal and otherwise). We intend to open source most of our outcomes eventually, and hope that MOST people will be able to actually benefit from this, instead of spending several orders of magnitude more to have it done the old way.

In that regard, the "setting up an LLC in 10 minutes for $70" is exactly how these things should be. (again, provided that you belong to the "most cases" category).

All in all, I'm really happy that this is happening.

As a side note, if you have experience with trusts and LLCs used for real estate investment, I would be very happy to chat with you - I come from the IT world (Amazon, etc) and still have a lot to learn from experienced people.

The $800 annual tax is worth people knowing about.

This should be top comment!

I gave up the LLC protection after a couple years of this price gouging.

This. Forming a company in CA is stupid, no other state has this insane tax.

Most states have minimum franchise taxes. CA charges on the higher side because CA offers the biggest market. In effect, CA is taking advantage of the libertarian free market principle of supply and demand. They have the largest supply of potential customers, and there is a large demand of businesses wanting access to those customers, and the minimum franchise fee reflects that.

You're free to set up shop in South Dakota (no minimum) and see just how many customers you find there...

You can incorporate in any state, it doesn't matter where your customers are. Most CA companies (and most companies, across all states) form in Delaware for legal reasons. CA is not a popular place to incorporate in.

But if they're located in CA, which many of them are, they still have to pay the $800.

FYI (and standard IANAL/IANACPA stuff too):

If you do business in CA, which is to say you earn revenue in CA (and file a corporate/partnership tax return in CA), you’re paying the $800 annual fee regardless.

So even if you form a Delaware LLC or Delaware C-Corp or Florida LLC and you earn money in CA, you’re paying the franchise tax.

Yes definitely. I tried to highlight it in the "Before you begin" section of the post.

There is also an LLC fee once you hit a certain income threshold.

I gave up on writing Apps because of this. Too high a risk of a patent shakedown without LLC protection for a few fun apps.

The LLC wouldn’t have provided much protection anyway.

https://ipbreakdown.com/blog/owner-liable-for-his-companys-c...

In general, most people misunderstand then “limited liability” of LLC’s.

We first incorporated under a CA LLC. It was worthless. If you ever plan on raising money in the US, form a Delaware C-Corp through Clerky. It’s cheap, fast and easy, and it will allow you to raise from VCs or any other outside investor. One reason: Delaware’s jurisprudence on almost any business issue is an established matter of record, which derisks investments.

I've never really understood the desire to "save" on lawyer costs up front. Lawyer money is the cheapest money you'll ever spend, if you use it right. Having a lawyer set up your company correctly from the start is not expensive. Where it does get expensive is when you try to get investment, or bought or some other event and they have to spend months unraveling the gigantic mess you've made by doing all the legal yourself based on some blog posts you read.

To save on costs, don’t go to a big firm, they are expensive. Ask around and find a solid boutique firm that specialises in your area. They will often do some kind of deferment if you are really small, although there’s usually a retainer.

Get it done right, the first time, and you won’t have to spend money on it again. This applies to anything legal; incorporation, contracts, employment agreements, licences, etc.

Dealing with the California Franchise Tax Board for a single member LLC ever afterwards is a pain. You need to file a 568 with them every year, on paper even if you e-file your CA state taxes, which includes the same data. You need to pay them $800 every year through their terrible website and its Web Pay system. Just getting an account on their website involves them sending you a magic access code in a letter which takes a week and if it doesn't work you have to start again and wait another week. If you ever forget to file something on time they fine you and charge you interest, and threaten to suspend your LLC. I wish I'd just filed a "doing business as".

Yeah, I don't know about this advice.

If you are by yourself, starting a company, just go register a d.b.a (doing business as) at your local courthouse.

And yes, a CPA will cost you money, but it is something you must have right and is worth the cost. By having a CPA, you will avoid falling into a situation where you end up paying a fine, or have unexpected fees/taxes, or, more often than not, the CPA will actually show you how to structure/operate in a way that will SAVE you taxes and fees. If you are going into a partnership or S/C Corp with different owners, than the money spent on a lawyer as well as the CPA is very much worth it.

Save yourself down the road and spend the money now to do it right.

I would love to see a startup package in the US (for genuine startups). No franchise taxes for three years, no employee tax—-or a simple contractor system—a simple and inexpensive corporate healthcare plan, a simple tax form for companies with little or no revenue. Running a startup is hard enough already then you have to put up with all of this admin nonsense when you’re just trying to keep your head above water. Why waste all this money on lawyers and accountants when it could be put into your business.

FYI, it costs $20 to file a statement of information (every other year) to establish and maintain an LLC. But it costs $800 a year in state taxes.

It's important to remember that in some jurisdictions if you decide to fold your business you have to file a dissolution. Many also require that you file a yearly report. There's a few businesses that help with incorporations and it may be worth the extra fees to tap into their knowledge.

This blog lists the steps to take to get a corporate file number issued from the state. It is only a subset of the steps required to fully form a corporation. If you want to form a corporation yourself, there are many books on Amazon that can walk you through the entire process.

You could also use something like ZenBusiness which is free https://www.zenbusiness.com/pricing . They are a startup out of Austin TX.

Hey Mark - who do this in CA and not in DE?

Also, a lot of students I know would be interested in learning more about bookandledger - do you have 40 minutes to give a talk about the new co. and your past experiences?

If one forms an LLC as a holding entity for child C-Corporations, would that allow the C-Corps' access to financing or would investors see the parent LLC and be turned off?

What do you mean by "allow access to financing"? A fair number of founders maintain their stock ownership through an entity like an LLC. This could be for all sorts of reasons (tax planning, separating assets/liability). I would expect a potential investor (or their lawyers) to ask for the reasoning behind the structure, but assuming it's a relatively simple answer, that would be unlikely to have any major effect on the investment decision.

Sorry, I meant 'affect' not 'allow'. But you figured it out :)

My guess is they would be turned off because control of the LLC could be transferred without their approval and could potential shield the owner of the LLC from litigation by the investors.

They want your personal name on there so they can come after you personally in case something fishy happens.

and minimum $800 fee each year to CA for no reason whatsoever

What's the best way to do this in Texas for cheap?

can anyone give me advice? im starting a small online service that will charge customers -- i guess you could call it a "saas." i am the only person whatsoever involved with this project. am i required to incorporate if i start charging people for my online service? do i have to file taxes as a business? isnt there a clear and straightforward guide for this kind of thing?

You would want to talk to a lawyer (which, if you are starting a business, you will want to have one), but you are not required to incorporate your business if you don't want to. However, incorporation does offer several benefits, which is why some people choose to do it.

this is what frustrates me. i cant afford a lawyer. from the looks of it, i cant afford to incorporate either. how is anyone supposed to bootstrap themselves these days?

You definitely do not need a lawyer. And you don't need an LLC either. Both of which are definitely "premature optimization".

If you are in the US, you can just use your SSN and sign up directly with your payment processor as a sole proprietor.

If things take off, you can start worrying about talking to a lawyer. You really won't have any reason to form an LLC until you need to hire real employees (W-2 employees).

Same way you'd bootstrap if you needed developers, and couldn't afford to hire developers. You can either study and try to do it yourself, you can offer equity (although lawyers are generally smarter than developers in this area, and few will take just equity, but you might be able to find someone), or you do it the old fashioned way and get a small business loan from a bank.

Although, as has been said, you don't need an LLC if your business is not "there" yet.

Lawyer here, but not your lawyer. We're just talking about generalized nonspecific hypotheticals here.

You aren't required to incorporate at all (but in many cases it's the best course for mitigating risk). People start businesses all the time without forming a separate entity. However, in the eyes of the law, that means that you and your business are one and the same. So if the business does a Bad Thing, you as an individual are responsible for all of the consequences of such Bad Thing. Similarly with taxes, all of the business' income gets attributed to you as an individual. Most people don't want these two things to happen, so they form an entity. You can go without, but it comes with significant risk, and you may end up forfeiting favorable tax treatment as a result.

These same issues get more complicated as soon as you involve others. Talk to your accountant. And consider what your risks are and how much your business is going to make. Find legal assistance for small businesses, or talk to a business lawyer as soon as you can.

If the company is worth something, 70 or or 200 isn't much apart. But if it isn't than even a 70 USD is a baggage.

I liked the 10 minute part though.

800 dollars a year even if you have no income? yeesh

Isn't that low for a business? I mean unless you're running a lemonade stand.

I fail to see the benefit of a California LLC over an LLC in one of the other 49.

It seems to me like choosing CA over some state with less onerous taxes and is like loading a gun and pointing it at your foot. If you wind up doing business that wouldn't be subject to CA taxes then the CA taxes on that would be money down the drain.

Before I read the whole article, do I have to be a US citizen to create the LLC?

Don't forget, you will need to pay 800$ every year in CA sos LLC taxes

The USA sucks for incorporation. Here in Canada, I can create a fully fledged federal corporation that is as bulletproof as any for personal liability, for $200.

Annually, I have to pay $20 to file an annual return. Taxes you can do yourself if they are simple - as in a single consultant.

We don’t have LLCs.

You do have to file 2 tax returns and suffer double taxation for your Canadian corporation. The benefit of a LLC is that it's pass through and reported on your personal tax return. It can minimize tax prep and taxes (YMMV).

Well, it’s not really double taxation because you can just flow through the income to yourself, leading to a loss for the company and a profit to you personally.

But you are correct about the two tax return thing. That is a slight bummer.

might want to look at the advantages of other states, Nevada for instance. You can start you LLC in any state. doesn't have to be where your business is located

... and then get ready to be taxed into Bankruptcy.

CA has 1 of the highest business taxes. LLCs have to pay the State $800 every year, even if your business is losing money or has no revenue and even if you are a single-member LLC, in which case IRS regards it as a pass-through entity.

On top of that, if you form your business in San Francisco, you are mandatory charged a 4% "Healthy San Francisco" city tax that is supposed to helps pay for employee's healthcare.

> 2008 Health Care Security Ordinance, which provides health care to San Francisco residents without insurance (the Healthy San Francisco program) and requires businesses to help fund health care for their employees in San Francisco.

Source: https://www.tripsavvy.com/restaurants-healthy-san-francisco-...

Restaurants were busted running a scam where they passed on this tax to the customer and pocketed the $$ themselves, but that's a whole different story (see Source link above).

> ...taxed into Bankruptcy.

Given that you're taxed on profits (reductive, I know) isn't this literally impossible?

God forbid Californians value healthcare and that a city 45 minutes from the HQ of the richest company in the world, in the midst of a homelessness crisis, attempt to improve the lives of its at-risk citizens

http://sfist.com/2017/06/26/2017_san_francisco_homeless_cens...

It is impossible. He’s just repeating talking points he heard but does not understand.

What is impossible? The minimum franchise tax? Are you sure that you understand?

https://www.ftb.ca.gov/businesses/faq/712.shtml

>> Minimum tax is the amount you must pay the first quarter of each accounting period whether the corporation is active, operates at a loss or does not do business. The current minimum tax is $800.

"taxed into Bankruptcy"

If you're not making $800 then you don't have a business - you have a hobby.

There's no number on the amount of money you have to earn to be a business. Corporate structures can be useful even if they don't directly earn money.

Either way, yes it's just a cost of doing business in California, and so profits need to be greater than the cost for the business to be sustainable. Perhaps it's not a great description to say "taxed into bankruptcy" but it's no different than "did not meet costs and ended in bankruptcy", with the costs specifically being taxes.

Sure, there is no minimum (tho it could be argued that $800 is the minimum tbh) but even if you only charge minumum wage ($11) that’s less than two weeks work.

More likely the hourly equivalent will be a lot higher. A dog walker would make that in 4 days at worst. A week or two if they are casual ones.

So to not make that it’s not the taxes that are killing your business.

Some Californian counties and cities [1] tax top line and fixed franchise/license taxes, irrespective of profitability.

[1] https://www.sidley.com/en/insights/newsupdates/2013/09/phase...

Correction: Just San Francisco. It even says so in the linked page.

The $800 "minimum tax" on LLCs and C-corps is assessed whether you have any revenue or not.

If you can't come up with US$ 800 a year to pay a business tax you're pretty much bankrupt already and it wasn't the tax that killed you.

That isn't true at all. Most small businesses start out extremely lean and at risk.

$800 to obtain the privilege of operating in one of the world’s largest economies seems like a bargain to me. Were I one of those small businesses I would find some way to get that funding. A loan, a credit card, something. There are plenty of reasons people want to be in CA to do business, and that’s not that big of an expense for the value of operating there, in my opinion.

And by the way I’m not in agreement with most taxes; I am almost a Libertarian. I’m also not a Californian. I’m just saying, I think it’s not that big a deal in the grand scheme.

Calling "starting a business" a privilege completely moves you very far away from the libertarian space.

It’s the world we live in. Ask me personally what I think and I’ll tell you it’s a God-given right to start a business with little government mettling. In the real world, especially one largely run by statists, it’s considered a privilege.

I'm using the language of statists because most people today are statists. It doesn't necessarily follow that I also personally agree with the idea, though I can see why you'd draw that conclusion.

From personal experience: Hiring your designer buddy who lives in San Diego while the two other guys in your company lives elsewhere entitles you to pay $800 a year in somewhat unexpected tax, even though you're not selling any services to any CA companies. Yea, jumped in feet first, but really did not enjoy the $800 bill that came with it.

> From personal experience: Hiring your designer buddy who lives in San Diego while the two other guys in your company lives elsewhere entitles you to pay $800 a year in somewhat unexpected tax, even though you're not selling any services to any CA companies

No, it doesn't, you can do that as a sole prop or (non-LLP) partnership, and not pay the $800 tax applied to corporations, LLPs, and LLCs.

Asking the public at large to absorb for you (by granting you a personal liability shield) the risk that that the resources you give to the business plus those it is able to earn will not be able to meet the businesses liabilities is what you pay the $800 for. Which is why only the limited liability entities pay the tax.

> $800 to obtain the privilege of operating in one of the world’s largest economies seems like a bargain to me.

It might be, but that's not what the tax is for. The $800 tax applied to LLPs, LLCs, and corporations isn't a tax on the privilege of operating a business in California: sole props and non-limited-liabilty partnerships can operate as businesses in California and don't pay the tax.

The privilege you pay for with the tax is that of offloading business failure risk onto the public while protecting your own personal assets with a publicly granted corporate liability shield.

Many small businesses start out as sole proprietorships or general partnerships that don't pay the tax for the privilege of a corporate-style liability shield for investors that applies to LLCs, LLPs, and corporations.

They often convert to an LLC or corporation if they scale beyond a very small operation, because at any but the smallest scale $800/year is nothing (it's less than the wages—not total cost—of a full time minimum wage employee in the state for two weeks.) But, you only need to start that way when you have or are seeking early investors that are protecting substantial assets outside the business; lots of people starting a small business sink most of their personal assets into them initially anyway, so the corporate liability shield isn't protecting anything: if the business fails, they are personally wiped out with or without it, and their exposure is limited more by personal bankruptcy than anything else.

What’s the benefit to the business of that $800 fee? Why is it almost 4 times more than Delaware? Do I get a nice engraved plaque or something? I am being serious: WHY does it cost $800 just to exist?

No, you get to do business in the 6th largest economy in the world. If you don't like it don't do any business here.

There's a few businesses I wanted to try but paying $800 was absurd so I forgot it

You do know you don't have to form an LLC to try out a business? Just got for it as a sole proprietorship and file an LLC later if it starts working.

No you can get sued pretty quick

And when you are sued, your one man, tiny operation LLC will offer essentially zero protection. Unless you are selling parachutes to base jumpers, you'll be fine.

That type of thinking has pushed entrepreneurs and businesses to move to more friendly and competitive states.

It's simply a bad policy to start aspiring small businesses in debt. $800 isn't much to many of us on here but it is for a lot of people that want to be entrepreneurs in different fields from different backgrounds. Most businesses have other startup costs as well.

California already has the highest state income taxes. The privilege of doing business here is already accounted for. The franchise tax fee is just a bad policy and it's regressive.

> $800 isn't much to many of us on here but it is for a lot of people that want to be entrepreneurs in different fields from different backgrounds.

And, so, they start businesses as sole proprietorships, or general or limited partnerships, and reorganize as LLCs or corporations once they've proven the idea. They are exposed to more (and the public exposed to less) risk of unmet business liability, but they can still run a business.

We always see entrpreneurs praised for taking risk, why are we hearing so much complaint that California charges for the privilege of offloading risk on to the public?

> That type of thinking has pushed entrepreneurs and businesses to move to more friendly and competitive states.

Or simply get an LLC from another state. Seems like there are states (Utah?) where there is no annual fee/tax.

I believe you only need a CA LLC if you hire employees in CA.

Not quite that simple but you’re right that if you can be physically present outside the state and do business for California clients then you’re probably not going to pay the franchise tax.

But no state allows you to register any entity for free. Lowest I’ve seen is South Dakota at $50 per year with no other tax on receipts.

ND is $50 to renew, but $150 filing fee. Wyoming is $100 filing fee and also $50 to renew.

> California already has the highest state income taxes.

California has a pretty progressive income tax. It's the highest at the top income bracket (> $1 mil is taxed at around 13%), but it's significantly lower at the low end than many other states including Alabama, Arizona, Connecticut, Kansas, Maine, Maryland, Minnesota, New York, Oregon, Rhode Island, Vermont, West Virginia, Wisconsin, and DC.

That is much more a result of the much higher basic cost of living vs those other states than it is CA's progressiveness when it comes to taxes.

I'd be willing to bet that if you adjusted the brackets for cost of living, CA is taxing the poor more than those other states are.

> I'd be willing to bet that if you adjusted the brackets for cost of living, CA is taxing the poor more than those other states are.

Why bet when you could actually look up the figures yourself? California has a very progressive income tax with more brackets (ten) than other states, starting at 1% for the lowest bracket. Meanwhile North Carolina charges a flat 5.75% and Wisconsin's lowest income tax bracket is 4%.

Because a cursory lookup doesn't tell you much. Taxes are much more nuanced than a tax table. There are studies showing that a flat tax without loopholes or special deductions is a higher effective rate for the wealthy than a "higher" marginal rate in a progressive system. Additionally, states vary in what is deductible or non-taxable income.

If you don't like it don't do any business here.

Ask Detroit how that worked out for them.

Seems to me like all the states where its so easy to do businesses there are no businesses. Maybe that's why they are making it so easy because no one comes there. You are complaining about CA but forget why it grew in the first place. CA governments have been leading the way for many years on what is required to be done for the economy.

> What’s the benefit to the business of that $800 fee?

Doing business in California: both local and foreign LLCs doing business in CA pay it.

> Why is it almost 4 times more than Delaware?

Why shouldn't it be?

> WHY does it cost $800 just to exist?

You can do business as a sole proprietor or general (or limited, but not limited liability) partnership without the franchise fee. You are paying for the right to do business in CA with a liability shield. The potential value to you (and cost to the public) of such a shield, all other things being equal, is greater in a bigger market. California has more than 30 times the population and 40 times the GDP of Delaware.

Delaware is 5x South Dakota for exactly the same thing, just to exist. At a certain level of receipts it doesn’t matter and the tax rate is more important, or what the corporate law structure is like.

But yeah, there’s really no valid reason other than the fact that California can get away with it.

> If you can't come up with US $800 a year to pay a business tax

That is not only condescending but also insulting to people who are working very hard to just survive.

I would respectfully request you to come down from your ivory tower of tech employment and notice the small people. My brother has an LLC and does landscaping. After paying all sort of bills and liabilities his company made $4K profits last year. $800 is pretty big amount compared to those profits. The profits might look negligible but he was able to employ 2-3 people on hourly wages, invest in buying a vehicle, equipment and so on.

When we talk about inequality we should realise that $800 flat tax hurts the poorest of poor lot more than people like you and me. This eventually adds up into making poor people even more miserable than rich people.

It could have been lot more sensible to say don't pay any taxes if you are making less than $20K profits. That would help poor people more.

I am not saying this about you but I come across so many people in tech industry who claim to have bleeding heart for poor and yet are totally ignorant of reality of poor people.

Interesting how given the tax does exist, the city with the HQ of the richest company in the world is in a homelessness crisis in the first place. Perhaps these taxes are not actually useful?

don't troll

It's commentary on the situation existing and a question on whether the taxes are effective. Why the sensitivity and how is your post constructive?

Apple is registered in Delaware. Again, reductive, but as other commenters said... don’t troll.

Why did you mention Apple in your comment then? Also operating in California means paying taxes in California and the minimum franchise tax is assessed regardless of corporate status or income: https://www.ftb.ca.gov/businesses/faq/712.shtml

What is reductive about wondering why a situation that you outlined exists for decades when there are specific extra taxes to help battle it?

Or mayhaps the tax rate is too low and should be much higher for them?

For who? Also I'm asking about effectiveness, not necessarily the amount.

If they are not useful unless they are at a certain amount, then what would that be and why aren't they at that level already? And wouldn't that just mean that anything below that level actually is useless if it doesn't meet the minimum needed to do anything?

Turns out, providing a baseline of healthcare costs money. I'd rather restaurants didn't line-item it and just raise the cost of food (maybe they have to line-item it? not sure) but in either case I'm happy to pay extra given that when we weren't paying, it simply meant a bunch of people were wandering around playing healthcare bankruptcy roulette.

I think there will be a lot of "growing pains" as businesses adjust to "actual cost of an employee." Typically my friends back in Texas make fun of me for this after my move to SF, then turn around demanding the removal of illegal immigrants... despite the fact that every one of their favorite restaurants out in Houston exists because of their ability to underpay unreported workers. I see very little difference (costs go up because employees actually get healthcare now vs costs go up because historically underpaid employees have to be paid at least minimum wage because they're reported now).

Companies that do business in California must pay California taxes no matter where they are incorporated.

Correct. This fact seems misunderstood by many people but the rules are very clearly written.

Not the franchise tax.

> All LLCs (not classified as a corporation) that are doing business in California, or file an article of organization or certificate of registration with the Secretary of State must file Form 568, Limited Liability Company Return of Income, pay the annual minimum franchise tax of $800, and LLC fee (if applicable).

https://www.ftb.ca.gov/businesses/Structures/Limited-Liabili...

Yep. The limitation though is that a foreign entity only has to pay the tax on its California receipts. So if 10% of your $1 million annual profits are derived from California, you pay the 1.5% (min $800) on that $100,000 and not the whole thing.

And btw that’s the rule in every state. They all want to tax whatever revenue is generated in that state (unless they don’t have a business tax at all, which is somewhat rare)

Define do business.

If an LLC, say software services, incorporated in DE provides some consulting to a firm in California, that counts?

Depends on a lot of things, including where that LLC has its principal place of business, whether it owns property in a California, where its employees perform their duties, etc. Talk to a CPA or better yet a tax attorney with California experience

CA has 1 of the highest business taxes.

If you want to do business in California, you will be paying that tax whether you register in California or another state. Consequently, if you're in California there's no reason to consider exposing yourself to the jurisdiction of another state.

You mind find the "startup mechanics" video from YC's startup school 2017 pretty interesting. The case is made that resolving disputes in Delaware (by being incorporated in Delaware) is greatly preferred to any other state (CA for example).

IIRC it is generally preferable to incorporate in DE for dispute resolution but doing so does not exempt you from paying CA taxes & fees. You will still need to pay the minimum tax amount if you are doing business in CA.

Agreed.

Yes this is correct. I have an LLC in Nevada and I still have to register an LLC in California because I live and work here. It's a foreign LLC entity.

Could you expand on that?

I really don't understand.

In this case, a foreign entity is an LLC that is registered in another state, but does enough business in CA to require registering in CA. In this case you register as a "foreign entity".

If you get to the point of having more than 50% of your employees outside of CA, I believe you can avoid registering as a foreign entity.

Direct link to the video: https://www.youtube.com/watch?v=2_IpVq6vKR0

PS: It seems the original startup school video is gone. This version is linked by their page: https://www.startupschool.org/?course=1

"Do business in California" is nebulous. Many startups are at the stage of being a single-member LLC working out of their own garage. No property rental, no payroll, no customer transactions (yet). Legally speaking such an entity could be registered anywhere. Doing so in California for the first year or two is needlessly inefficient of your scarce resources at that stage.

Funny though.. ALL taxes are passed to the customer. Businesses don’t pay taxes, customers do.

Then customers don't pay taxes, their employers do. You can keep going around in circles adding another link to who pays pointing to where they got their money. Saying anyone else but the entity signing the check pays a tax gets silly.

The only time you can dispute this is when the tax is directly on an activity that requires two participants. Who pays sales tax, the buyer or the seller?

This is in fact not an irresolvable metaphysical dispute but an introductory undergraduate economics problem, and the answer is that it depends on the elasticity of the market.

tax incidence is not nearly as simple as you are making it out to be. how much the tax cuts into the business's surplus vs the customer's totally depends on the situation.

> On top of that, if you form your business in San Francisco, you are mandatory charged a 4% "Healthy San Francisco" city tax that is supposed to helps pay for employee's healthcare.

This is misleading right-wing B.S. This only kicks in once you employ 20 or more people.[1] Anyone reading this on HN, if they eventually do employ 20 people, probably would want to offer them health insurance by that time.

[1] http://sfcityoption.org/hcso-compliance/employer-spending-re...

What makes it right or left wing bs? Can't it just be an incorrect statement? It could just be me, but I didn't detect any political undertones to the parent comment.

Misrepresenting the taxation level and/or financial solvency of California is a regular right-wing trope, targeting the general attitude that governments should provide social services.

> This is misleading right-wing B.S.

LOL. No. I campaigned for Barack Obama and met him in 2008. That's how 'right wing' I am.

> Anyone reading this on HN, if they eventually do employ 20 people, probably would want to offer them health insurance by that time.

That's a benevolent attitude, but practically, it will drive your business bankrupt if you are paying the CA-rate health care costs. That's the single biggest reason why even big corps like Wells Fargo, Charles Schwab and Bank of America are relocating many of their employees to Arizona and Colorado and elsewhere.

Obama is a New Democrat who lean right-wing ("conservative") on fiscal/economic issues.[1]

> CA-rate health care costs [are] the single biggest reason why even big corps like Wells Fargo, Charles Schwab and Bank of America are relocating

Source?

[1] https://en.wikipedia.org/wiki/New_Democrats

But they should be the ones to decide, right?

I just recently moved and also moved my single member California LLC to a single member Tennessee LLC. While there is NO INCOME TAX in the beautiful state of Tennessee, it still costs around $400 a year to register the LLC in Tennessee. So not a huge savings over the $800 LLC fee in California.

And then owe $700 a year for minimum franchise taxes

$800

Step 1. Don't.

Step 2. Go anywhere but California.

This is stupid. California is the worst tax choice for everything.

And yet it remains one of the top destination for start-ups. Which indicates that getting rid of taxes and regulation (which states/countries do to get more business) can bring business in the short-term (companies forming subsidiaries and channelling business) but doesn't help the economy in the long term. If you have the right environment for companies to form, higher taxes don't destroy that. Sweden also appears to be a good example, high taxes and stricter regulation (partly through the EU) and still a very active start-up scene.

Sweden offers more benefits for it's taxes though. I think California is only attractive because of the SV hype.

Most of those benefits are the safety net you get if your startup fails. I think the main benefit for a startup is having similar companies close by.

Safety net not only if your startup is failing, but also while you're starting out, money to start your startup, amazing public transport, a functioning public education system which gives you employees that don't need the highest pay to service their loans, ... the list could go on for a long time.

There is practically zero state-level regulation that could pose a significant challenge to a tech startup, and tech startups are not really in the business of generating taxable profits either.

The downside is that you are going to be left with a California LLC.

Under a certain amount of revenue, the double taxation treatment of a C Corp actually saves you money compared to the pass through taxation most people elect as an LLC. And by the time you’re making larger revenues, you’ll want to be a C Corp anyway.

How would that be?

You still have to pay yourself a reasonable salary which would be taxed at regular earned income rates.

And then for any dividends you pay yourself, you are going to pay corporate tax of 21% (after Trump tax changes hit) plus 15% or more capital gains.

Unless you have a very good reason do not register your company in California. Most certainly not because it costs $70.

California is very backward in all sort of regulations and you will get into trouble as your company goes bigger and bigger. Always register your company in Delaware.

There is a good reason why most companies are register in Delaware or Florida and not in Communist Republic of California !

haha no. Unless I specifically need US for some reason I'd rather go anywhere else. And if I have to do US it'll be a Delaware partnership.

This is an incredibly misleading title. They charge you $70 in filing fees, yes - and then over $800/year in annual LLC fees.

How is it misleading? It costs $70 to form the LLC, just like the title says.

Because your newly formed LLC will disappear if you don't pay $800 more?

My Ferrari costs only $1! Well, it also costs $2000/mo, but let's just ignore that.

Yep, a buddy and I kicked around the idea of doing a startup and we thought it would be best to do it right by writing up a simple operating agreement and officially registering with the state. Several months later we realized we didn’t have a realistic plan and decided against continuing. We still owed that tax though! That $800 (and additional $400 to an accountant to make sure we didn’t screw up any paperwork around CA taxes) was far and away our largest “business expense”. We might as well have lit it on fire—what a waste.

I've done the same thing multiple times. My current preference is to validate a concept before forming an LLC, and preferably before even looking for a partner.

$800 is a lot of money for someone pretending at business but it's a trivial cost for a real business actually earning money.

And that's the point. It's a filter to weed out those that can't afford $800/year or aren't serious enough about their business activities to put up with the expense.

The Franchise fee is a separate issue and is charged on any company doing business in CA\... Only way to avoid it is not to be in California at all.

\edit: according to my tax attorney. Get your own legal advice, etc.

>charged on any company doing business in CA

That's not correct. It's not charged to sole proprietorships.

A sole proprietorship is not a distinct legal entity from its owner.

I don't believe Sole Proprietors are charged a franchise fee.

If you intend to be a single member LLC, then from most angles is the only difference vs a sole proprietorship is that you'll pay $800.

IANAL and all that.

The difference between a sole proprietorship and an LLC is that an LLC is a legal entity and an SP is a guy pretending to be a business.

An LLC--even a single-member LLC--has limited liability for legal purposes, though the practical effect is usually limited if the business is under-funded or with respect to third-party loan security requirements.

A single member LLC with one employee is also just a person pretending to be a business. You are going to have very limited legal protection in the case of a small one man operation that has an LLC.

Iowa has it good, $50 every two years for an LLC. The funny part is that they don't even have a form to fill out. You just have to print the right words on a paper and mail it to the Secretary of State's office with a $50 check...

Yes there are ongoing fees/taxes, but forming it is $70. I highlight this fact in the "Before you begin" section of the post.

My goal was to point out that you don't necessarily have to shell out $500 - $1,500 bucks just to get the LLC paperwork done.

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