
How to form a California LLC without a lawyer - feross
https://feross.org/form-california-llc/
======
gojomo
The article claims as a second benefit of an LLC:

 _> 2\. Tax benefits. You can deduct qualified business expenses from the
total income of the business. Here’s a simple example: If you spent $1,000 on
servers and your website made $10,000, then you’ll only pay taxes on the
$9,000 in profit._

You don't need an LLC to deduct such expenses. Even sole proprietors can
deduct business expenses against business profits.

~~~
brtkdotse
As a European who also worked a year in the US, it's starling how utterly
_byzantine_ everything related to operating a business in the US is. Why in
the everloving world would I need a lawyer that should be an extremly simple
process? Forming an equivalent to a LLC in the majority of EU is a 5-10 step
web form signed online, followed by some waiting and a sub 100€ one-time-fee.

Furthermore, financial literacy also seem very, very low, almost as if the
powers to be maliciously wanted to misinform people. "You get taxed on
profits, not on revenue" seems like the fundamental axiom of business, yet
here it is, present as "this one weird tip the IRS hates". See also "I don't
want a raise, it'll put me in a higher tax bracket".

~~~
eaenki
That’s not even true. Aside from the U.K. and Estonia, I can’t think of an
European country where 1) it costs less than $1K to incorporate 2) you can do
it online 3) You can DIY

Italy, Germany and SwitzerlanD just to pick 3 I’m familiar with, are nothing
like U.K./Estonia

On the other hand incorporating a C Corp in Delaware costs between $89 and
$399 and you can do it online by yourself

~~~
_31
In the Netherlands it was about €75, filled most of the paperwork out online
although we did have to go in to the KVK (Chamber of Commerce) to complete the
process.

~~~
grenoire
It's €50 right now, but you normally have to spend a bit extra for notary fees
to get the share capital notarised.

~~~
_31
Yeah, 75 was probably all the fees, and I might have been thinking in $USD

------
inoffensivename
You also need to file a California Form 568 tax return with the Franchise Tax
Board and pay the $800 annual tax whether or not you have any income, or you
get a big fine that increases every month you don't file...

Ask me how I know :)

~~~
xur17
> pay the $800 annual fee whether or not you have any income

Really? In the 2 states I've lived in, there is no annual fee for LLC's. I'm
curious what the reasoning behind having a fee that large is.

~~~
bmiller2
If California can tax it, oh they will tax it.

~~~
ende
Unless it’s land that wealthy people owned before 1967 and don’t want to pay
taxes on.

------
la6471
The absolute horrible thing about forming a Llc in California is the $800 FTB
tax, that you have to pay irrespective of wether you have any income or not.
This is really discouraging for any individual who is trying to start a
business and is unsure of the outcome in the initial years.

~~~
juandazapata
That’s ~$67/mo to stay in business. I don’t see how this can be considered a
horrible thing.

~~~
mdorazio
When you're a very small business losing money the first few years of
operating and California sticks you with an $800 bill on top of local taxes
that are _also_ levied regardless of income (business personal property), it's
a giant slap in the face that makes you want to move your business to pretty
much any other state.

~~~
athms
Then move. But remember, if you do business in California, you must still pay
the franchise fee if you have a company that is NOT a sole proprietor or
general partnership. Incorporating in another state will not save you, you
must register with Secretary of State as a foreign entity.

~~~
mdorazio
I closed my business last year and was about to move prior to COVID shutting
everything down. California tax policies are the #1 reason I'm leaving.

------
revel
Not a lawyer but been through the incorporation process a few times: get a
startup lawyer and commit to spending $2-5k just on legal fees in your first
year. Each patent you want is $20k so you should probably not waste your time
or money with one unless you're damn sure you need it and it's essential to
your business.

If you screw up the paperwork it will prevent you from raising money or work
with others and kill your business. Honestly, I know it sucks to have to pay
money that seems unrelated to your startup, but you'll pay it back many times
over and have to set things up properly anyway

~~~
jjeaff
Ya, we hired a top tier SV firm. They just used their own fill in the blank
forms like you would get from legal zoom. And I even had to make corrections
and send it back multiple times because they got the share numbers wrong and
forgot to replace multiple mentions of the last company they used the form on.

------
Stratoscope
I have a California LLC and wish I didn't. It has been nothing but an
albatross around my neck. I am almost certain I will shut it down at the end
of this year.

Look, if you're reading articles like this one, don't do it. Just don't do it.
Get competent legal and accounting advice first.

I formed my LLC four years ago when an interesting contracting project came my
way. I'd worked as a 1099/Schedule C contractor in the past, but this client
wanted me to have an LLC. OK, no big deal.

Then it turned out they also required the LLC to be taxed as an S Corp. No big
deal there either, it's a simple IRS form to make that election.

Now guess what? You have to start filing 1120S corporate taxes plus the
California equivalent. All the LLC/S Corp income flows right through onto your
personal tax return, but you also get to get to file 940 and 941 payroll tax
forms and the state equivalents.

And whether your LLC is taxed as an S Corp or not, you have to pay the
$800/year California minimum tax on it. Yes, even though the LLC/S Corp really
has no net income of its own (as it all flows into your personal tax return),
you will owe that $800/year. Even if you create your LLC in another state.

Do _not_ try to do this yourself. You _will_ get it wrong and will pay many
thousands of dollars in penalties as I have.

I finally realized I would be _much_ better off just working for another
company and letting them deal with all these headaches. They have an entire
team to deal with it! If I had a time machine, I would have stuck with regular
employment instead of thinking of myself as an independent business.

Forget about the fabled "corporate veil". If the IRS and FTB decide they want
their money, they are going to get it.

If you do think this still sounds like a good idea, you _must_ use a payroll
service to pay yourself. After my initial fiasco of trying to do it myself, I
started using Gusto [1] and they are pretty great.

For filing the LLC itself, I used SunDoc Filings [2] and they are really good
too. They helped me on very short notice when I made a mistake on my LLC
filing that would have caused it to be rejected.

But really, think twice, or a dozen times, before you open this can of worms.

Sorry for all the _italics_. :-) But this is something where I have some
painful experience, and if I can help steer people away from it I hope it will
be helpful.

[1] [https://gusto.com/](https://gusto.com/)

[2] [https://www.sundocumentfilings.com/](https://www.sundocumentfilings.com/)

~~~
jameslk
I have a California LLC too. It's not any harder than the steps explained in
the article. Certainly don't form an LLC unless you need one. You'll know you
need one when you need one.

> Now guess what? You have to start filing 1120S corporate taxes plus the
> California equivalent. All the LLC/S Corp income flows right through onto
> your personal tax return, but you also get to get to file 940 and 941
> payroll tax forms and the state equivalents.

This not true of all LLC's, just corporations. If you're forming a small LLC,
especially a single member LLC, you can create a pass through entity that
avoids all of the ceremony you're explaining. Mentioning all this makes it
sound like it's obligatory to establish a corporation when you form an LLC,
but that was only necessary in your specific case (probably for the company
you were trying do business with to avoid AB5).

~~~
Stratoscope
That's a really good point, thanks for mentioning it.

Looking back on this, if it had been just an LLC it would have been no big
deal at all. It would be a "disregarded entity" with ordinary 1099/Schedule C
income, no different from any of my previous clients, with an easy tax return
like the ones I'd done many times before.

It was the S Corp election which this client required that really messed
everything up.

In hindsight, this truly was the proverbial "client from hell". It was an
interesting project, albeit quite an experimental one. I got paid for only a
week of work after spending a full month on it, and then I got the ongoing
heartache of the S Corp nonsense to boot.

Thanks for pointing out the distinction between the LLC and the S Corp.

~~~
SoylentYellow
Why did your client care about how the government taxed your LLC?

~~~
bavell
This is the big red flag - I would have pushed back immediately and bailed if
they didn't acquiesce. Client has no authority to say how your business should
be taxed, that's preposterous. They're doing you a favor by letting you know
in advance how difficult they'll be to work with.

------
jonsno56
Crap. I actually missed 1-2 years of paying the $800 franchise tax because
like a lot of other people on this thread, it’s just used for hobbies, makes
no money, and lies fallow 99% of the time. I’ve never gotten a fine in the
mail for this though. Does anyone know if there’s some sort of online portal
or phone number that is the best place for me to pay all the taxes and fines
and make sure that in their records I am even?

~~~
ghancock
It might be that the LLC is liable for the taxes and not you personally. Do
you really want to pay $1600 for something you aren’t really using or do you
want to abandon it and walk away?

~~~
dboreham
Tax collecting people probably already thought about that problem..

------
flowerlad
You may also need a registered agent for "Service of process". Costs $100 per
year. Without it you risk default judgement in case of a lawsuit.
[https://www.legalzoom.com/articles/what-is-an-agent-for-
serv...](https://www.legalzoom.com/articles/what-is-an-agent-for-service-of-
process)

~~~
feross
You can just use your personal mailing address and check it for mail.

~~~
closeparen
This puts your name, address, and association with your company name into
public record. Not recommended if there is >0 probability of attention from
internet crazies.

------
gamblor956
S corps are generally preferable to LLCs if you are eligible to form one, but
it also depends on your goals, i.e. if you intend to raise money, you need an
LLC or C Corp.

I formed an S corp for my personal protects for tax reasons. I also used
legalzoom, because it's good enough for most small businesses. (And even big
ones; Panda Express is an S corp.)

~~~
shrimpx
Just curious, what are some of the tax benefits you gain with an s corp?

~~~
jccooper
Chapter S election (which an LLC can do, by the way, it's not a particular
type of entity) does pass through taxing, and has a thing where the "profit
distribution" of the corp, after paying shareholders "a reasonable salary",
can be distributed without self-employment taxes, just regular income taxes.
So you can save some 15% on some portion of your income--if you have an income
larger than whatever you may be able to justify to the IRS as a reasonable
salary. Other options may make sense based on how much money is kept in the
company, if you have passive investors, how much money you're making, how much
work the shareholders do, etc.

------
flowerlad
It is best to have at least two persons in the LLC. If there is only one
owner, then you have less protection as the "veil" can be "pierced".
[https://www.nolo.com/legal-encyclopedia/piercing-the-
limited...](https://www.nolo.com/legal-encyclopedia/piercing-the-limited-
liability-veil-single-member-llc.html)

~~~
feross
From the article:

> if you form your small business as an SMLLC, and observe a few basic rules
> (such as keeping business finances separate from personal finances), you
> should be personally protected from most kinds of business liability

Single-member LLCs which are run properly still get liability protection.

~~~
flowerlad
See: [https://denhalaw.com/can-you-protect-yourself-with-a-
single-...](https://denhalaw.com/can-you-protect-yourself-with-a-single-
member-llc/)

 _Courts in a variety of states have “pierced the veil” of a single-member LLC
from the outside and have held that it is not a separate entity and thus may
not be used to protect the assets of the LLC from the creditors of the
member._

You get liability protection, yes, but not as much as you would if you had one
more member. The veil can be pierced for various reasons, so to reduce risk
you want to minimize those reasons as much as possible.

~~~
fountainofage
I think this is interesting in that I don't know many people who view LLC's
protections this way. The classic example is that if your rental property is
in an LLC, then your tenants can't win a suit and get to your own personal
house.

These examples of piercing the veil are from the other direction - a personal
suit getting access to the LLC assets... Which sort of makes sense - the
alternative would be the court ordering the seizure of my assets - which would
be my ownership stake in the LLC. So in their example, I'd still expect to
lose my ownership stake in my LLC by asset seizure even if I was in a multi-
owner LLC... Or had stock in an S-corp.

~~~
brudgers
The rental property investors I’ve known usually form an LP with an LLC as the
general partner. Both entities will be solely devoted to a single piece of
property. The limited partners are often involved in multiple investments. The
LP will often contract a sister LLC for services like property management...so
the rent checks get written to an LLC that can screw up without putting the
real property asset at direct risk.

~~~
fountainofage
The examples cited are how the courts pierced the LLC veil to satisfy
someone's personal liabilities. This seems like it's unavoidable because no
matter how you split it up, the courts will seize your assets to pay that
liability - the effect would be the same if the courts just grabbed the
owner's stake in the LLC's.

Your example is what most people think of - LLC's shielding each other and the
owners.

I'm mostly pointing out that the parent comment's link is a bit of a boogeyman
in that you could have a perfectly structured LLC system, and if you are
personally criminally negligent and liable to pay, then the courts will still
get your stakes in the LLC's.

~~~
Schweigi
That’s why the operating agreement of the LLC should have a charging order
protection. It discourages reverse piercing. A charging order protection will
allow the LLC to stop distributions to a member who lost such a court case.

In case of an LLC taxed as a partnership the creditor will need to pay the
taxes as stated on the K1 but doesn’t receive actual money. Obviously this
will make it very unattractive to the creditor to go for a charging order on
your membership in the first place.

------
kogus
In some states, all you need is a federal EIN, which you can get free on the
IRS site in about five minutes.

[https://www.irs.gov/businesses/small-businesses-self-
employe...](https://www.irs.gov/businesses/small-businesses-self-
employed/employer-id-numbers)

I live in SC, and you don't even have to inform the state that you formed an
LLC. If you do want to, its about $100 and takes another online form.

The idea that you __would __need a lawyer is absurd.

~~~
throwaway0a5e
Putting hurdles up (like $500 LLC fees) in front of the various things that
"legit businesses do" is a form of regulatory capture.

Basically the goal is to force businesses to choose between heavily buying
into the status quo or giving government power of arbitrary enforcement over
them. The licensed plumbers don't want all the journeymen who haven't spent
years getting a license but can install a toilet just as well undercutting
them and stealing their gravy business. By imposing regulatory hurdles at
every step of the way you keep those "I'm not quite big enough to go 100%
above the table" businesses under the table you keep them on the down low and
you keep them from affecting regulatory change. By the time those journeymen
plumbers have licenses of their own and can be 100% above the table they feel
entitled to the gravy and don't want to change anything. (I only picked
plumbing because it's a good example in my state, there's plenty of others).

------
happyjack
In my state it's $100 to file, and a $50 fee each year (if assets are <
$250,000). If you're a single member LLC, you don't even have to have articles
of incorporation. You can even file a sketchy shell company and pay a
registered agent to use their address. Also, no state taxes either. It's about
a 10 minute process.

------
jaja99
Can someone tell me how to form LLC in WA state and not publish our
home/business address? We will be working from home, but we don’t want our
home address to end up in public search records. Any help or recommendation?

~~~
poulsbohemian
I know (because I saw it recently) that if lawyer assists you with forming a C
corp in WA, their address can be used and they become an agent for your
business, IE: they potentially get all your renewal paperwork, etc. I'm
assuming if you had a lawyer form your LLC that they could do the same. That
said - I've had a WA LLC for decades, my partner has formed LLCs in WA, etc...
it's trivial to do yourself and fairly harmless to include your home address.
In the month since she formed her most recent, I think we've had two pieces of
junk mail. I did a search with the DOR a few minutes ago - yes, the address
shows up for my business but not for hers, so who knows whether your address
would even be published?

------
elchin
Cost: $800, repeat every year

~~~
aerodog
So true. And so shitty.

------
giancarlostoro
I had no idea LLC's were so expensive elsewhere, here in Florida it's roughly
$150 last I remember and you can do it online, I think most people I've met
just do it all online.

------
giorgioz
The best resource I found when I was forming a US LLC was
[https://www.llcuniversity.com](https://www.llcuniversity.com)

------
2bitlobster
Why would you want to as opposed to Delaware?

~~~
Stratoscope
If you're in California, they will get their $800 regardless. It doesn't
matter where you create the LLC, California has a minimum $800 tax on it.

~~~
JumpCrisscross
> _they will get their $800 regardless_

California law is convoluted and Californian courts slow. That makes doing
almost everything with a California LLC more expensive than with a Delaware
LLC.

The only reason to form a California entity is if you’re doing business with
the state.

~~~
Stratoscope
If you live and work in California, you _are_ doing business with the state.
You aren't going to avoid that, no matter how hard you try.

~~~
shrimpx
I wonder about this. Suppose you incorporate a LLC in Delaware that buys some
stocks, and some houses in Arizona and rents them out. But you live in
California. Is your LLC “doing business with California”?

~~~
nodamage
Yes. The fact that you manage the LLC from within California constitutes
"doing business in California". See the examples on this page:

[https://www.ftb.ca.gov/forms/misc/3556.html#Doing-
Business-i...](https://www.ftb.ca.gov/forms/misc/3556.html#Doing-Business-in-
California)

 _Paul is a California resident and a member of a Nevada LLC. The Nevada LLC
owns property in Nevada. The LLC hires a Nevada management company to collect
rents and provide maintenance. Paul has the right to hire and fire the
management company. He occasionally has telephone discussions from California
with the management company in Nevada regarding the property. He is ultimately
responsible for the property and oversees the management company. Paul
conducts business in California on behalf of the LLC. The LLC must file Form
568._

------
rayshan
What SaaS product is everyone using for forming companies nowadays? Stripe
Atlas? Clerky? Gust?

~~~
pmayrgundter
Zenbusiness is my friend's, based in Austin

------
bsdadmin
Make sure you do your LLC banking at a different bank than your personal
checking account.

~~~
hartator
Why?

~~~
bsdadmin
The idea is to be able to prove to the IRS and anyone else that might care
that your finances are totally separate. Our accountant strongly recommended
this when we set up an LLC a few years ago.

------
Archit3ch
Can you do this if you're not a US citizen?

I assume you'd need a US-based partner in the LLC.

~~~
cobbzilla
Companies that are entirely foreign-owned are perfectly legal. You do not need
a US-based partner.

But if you're not a US-citizen and want to create a company in the US, I would
highly recommend NOT forming it in California, for cost/paperwork reasons.
There are many other US states that are much more business-friendly to choose
from.

~~~
ramraj07
What if you have to bill clients incorporated in CA?

~~~
cobbzilla
(IANAL disclaimer) Merely having customers in California does not create a
"locus of business" in CA that would require you to pay the $800 annual fee.
On the other hand, if you have an office and/or employees in CA, it probably
would.

~~~
athms
>IANAL

Stop giving legal advice.

Billing clients in California can create a nexus but it depends on the amount
of sales. A company is considered doing business and subject to California tax
laws if state sales or property exceed the following amounts:

* CA sales of $601,967 or 25% of total sales.

* CA real and tangible personal property worth $60,197 or 25% of total property.

Also, if a company engages in any transaction for the purpose of financial
gain within California, the Franchise Tax Board considers that doing business
within the state. An example would be meeting potential clients during a
professional conference and negotiating a sale. This can be done by either a
member of the LLC, an employee, or an agent such as an independent contractor.

------
arthurcolle
What's the best bank to use for a newly formed LLC?

I'm torn on whether or not to use Axos

~~~
toomuchtodo
[https://mercury.com](https://mercury.com)

No relation, just a happy user. Founder lurks on here, answered some questions
in a thread, that’s how I found them.

~~~
arthurcolle
Could you shoot me an email? I'd like to discuss your experience further if
you are interested!

------
flowerlad
Cheaper to register in Delaware. Only $300 per year in LLC tax vs $800.

~~~
stillmotion
You still have to pay a minimum of $800 a year to the franchise tax board for
operating a non-Californian business.

~~~
pianoben
Word. California _always_ gets its cut. If you're in California, or have
customers there, going to other states only increases your potential
obligations.

~~~
feross
Exactly. Which is why I just recommend forming a California LLC directly if
you live in California (like I do).

~~~
CalChris
Yeah. I understand the advantages of a Delaware C corporation if you need a C
corporation. But I don't see the advantages of a Delaware LLC if you will be
operating in California.

------
unstatusthequo
As a lawyer, but not your lawyer, please consider a Delaware LLC. California
is not where you want to litigate and it’s yearly fees are absurd. Delaware is
the gold standard.

~~~
jusob
You still have to pay the $800 to California if you reside there.

~~~
manigandham
Or if you operate there.

