How to Incorporate in California vs. How to Start a California LLC

Here are the main characteristics true of all LLCs and corporations to help you start your decision-making process:

• Maintenance
  Maintaining a corporation requires a high level of maintenance. Corporations are legally required to conduct formalities like electing a board of directors, holding shareholder meetings, and maintaining internal records such as meeting minutes and stock issuance. On the flip side, LLCs only need a minimal amount of maintenance. LLCs require little paperwork, have flexibility in decisions, and low annual upkeep. An LLC will be the best choice if you have a small to medium-sized business and require the lowest amount of maintenance.
• Tax structure
  By default, the LLC is not a taxable entity separate from its owners and members, and requires less paperwork. LLCs are considered pass-through tax entities by the IRS, where income and losses pass through the business and onto the members to report on their personal income tax return. Corporations start off with a default tax structure referred to as a C corporation, but can potentially elect an S corporation tax status if it’s more beneficial. The C corporation is known for what’s called double taxation, where a business’s net income is taxed initially by a corporate tax, and then taxed again on personal income, after shareholders receive their profits and losses (dividends). C corporations typically have tax deductibles such as health care and travel, and and can retain its earnings to be reinvested into the company’s growth. When you elect an S corporation tax status, your corporation becomes a pass-through entity, and is allowed tax advantages such as dividends not subject to self-employment tax.
• Prospective Investors
  Investors are more comfortable handing money over to a familiar and reputable business structure like a corporation. Investors don’t have to worry about complicating their personal taxes when they invest in a corporation, and only get taxed on profits actually distributed to them. Corporations are viewed as a dependable business structure that will provide them with a return on their investment. Having a corporate structure can profoundly impact the ability to raise investment money. In contrast, LLCs can be divided into percentages for investors, making them owners. LLCs owners must pay taxes on their distributive shares, even if they haven’t received a distribution on those profits, and can’t issue stock, which is a turn-off for many investors. A corporation should be considered if you are serious about gaining investors.
• Prestigious Title
  Being able to have the “LLC” or “Inc” ending attached to your business name will give it a level of prestige. These endings convey permanence and encourage trust from potential investors or clients. The appearance of a business starts with its name, and while both entities provide a level of prestige, incorporating provides a higher level of prestige for your business, since the corporation is the oldest and most traditional entity type. Keep in mind the LLC has surpassed corporations in popularity in most states, and their prestige can only continue to grow.

Note that whether you form an LLC or a corporation, you’ll need to file a Beneficial Ownership Information (BOI) Report with the Financial Crimes Enforcement Network (FinCEN) once your company is officially formed with the state of California. This report provides the federal government with identifying information about your company and those with the most control over profits and business operations. However, unlike state filings, the information shared in your report does not go on the public record and there is no filing fee. (Though if you don’t want to file this on your own, we offer BOI filing service for just $25.)

Now that we’ve clarified the main characteristics and differences between LLCs and corporations, next is to learn the specifics of why a California LLC or California corporation would be better for your business. Each state has its own set of statutes and tax laws that govern the way its businesses operate, and these unique details should be taken into consideration when choosing your business entity. The information in this section will provide these specifics for the California LLC and the California corporation.

• California Franchise Tax
  A franchise tax, also referred to as a privilege tax, is a tax charged by the state for the privilege of doing business in that state. Franchise taxes are common among states, and California has a higher-than-average franchise tax rate that often surprises business owners, especially LLC owners. High franchise tax rates combined with other expensive California taxes can make or a break a decision on business formation, and should be considered.The current California Franchise Tax for LLCs is a flat fee of $800. The current California Franchise Tax on corporate net income tax is 8.84% for C corporations, and 1.5% for S corporations, with a minimum tax of $800 for both. C corporations with positive net incomes do not need to pay the franchise tax, and will only need to pay the Alternative Minimum Tax (AMT).
• High-income LLC Fees
  If your LLC will make more than $250,000 per year, you will need to pay an extra progressive fee annually. This fee is significant since most states do not impose a separate large fee like this, and combined with other expensive California taxes, this extra costly fee can make or a break a decision on business formation, and should be taken into consideration.Brackets for this tax are as follows:$250,000 or less: No extra fee
  $250,000 – $499,999: $900 LLC fee
  $500,000 – $999,999: $2,500 LLC fee
  $1,000,000 – $4,999,999: $6,800 LLC fee
  $5,000,000 +: $12,590 LLC fee
• California LLC Interest Foreclosure Vulnerability
  A California LLC is not protected as well as LLCs in most states, and the corporate veil can be pierced enough to foreclose on an LLC. In most states, creditors have one remedy against the debtor of an LLC, which is a charging order that puts a lien on a debtor’s interest (funds and assets) and creditors then have a right to receive any distributions made to the debtor from the LLC, if the LLC makes a distribution. For California LLCs, this same chain of events can happen, except a court can also “order a foreclosure of the interest” (§17705.03) on the LLC. While your personal assets and funds are still safe, this missing layer of the corporate veil should be considered in how it could potentially impact your business.
• LLC Biennial Reports
  In most states, its required to file an annual report for your LLC. In California, your LLC will only need to file a biennial report every other year, saving you a noteworthy amount of time and money. If basic information about your LLC changes before the next biennial report is due, you will need to send in a Statement of Information by postal mail, which is more of a hassle than filing online, but is still worth it to only have to file a biennial report otherwise.
• No Incorporating Online
  Unlike almost every other state, you cannot form a corporation online in California. You must file your Articles of Incorporation by mail with a check or money order, or in person with a check, money order, or credit card. This drawback creates more hassle in incorporating, while LLC formation is possible online and, therefore, simpler.

California LLC vs. California Corporation? Final Answer.

To answer whether an LLC or corporation is best for your business, it comes down to considering the size of your business, level of maintenance you can handle, priority of investors, and the most sensible tax structure for the future of your business.

The California LLC is the user-friendly solution for small to medium-sized businesses. LLCs in this state are less expensive and time-consuming to form and maintain than corporations, and provide easy management, flexibility and liability protection. California LLCs stay true to design in their low maintenance and simpler tax structure. If investors are not one of your top priorities, and you’re looking for liability protection for your business, the LLC is your answer.

Conversely, the California corporation is the answer if your business will be growing substantially and investors will be key for that growth, and you have the means for the amount of paperwork required. A California corporation remains true to character in its extra paperwork, steps to start and maintain, and complex yet beneficial tax structure.

Currently, it costs $100 to file your Articles of Incorporation and $25 to file your initial Statement of Information.

Online filings take about 5 business days. Walk-in filings take around 3 business days.

If all this seems like a lot, why not hire Active Filings to do your filing for you? Our expert staff will prepare and submit your formation documents within one day. We’ll navigate the maze of California business filings so that you can focus on getting your business up and running.

Preclearance services are available, and provide you with an answer on if your formation documents conform to California law. Both of these services must be filed for in person Secretary of State Sacramento office, at the following rates:

Preclearance Timelines & Cost

24 Hour:  $500
72 Hour:  $400
5 Day:      $300
10 Day:    $250

Expedite Timelines & Cost

4 Hour:      $500 (must have already passed preclearance)
Same Day: $750
24 Hour:    $350

Whether you generate your own or use an available template, you will need to have the following information provided:

Starting an LLC can be done by filing the Articles of Organization form with the California Secretary of State. You are not required to submit a specific form, and can create your own form with specific information, or use the one provided on the Secretary of State website.

There are three methods for filing your Articles of Organization:

• Online
• By mail
• In person

How much does it cost to form an LLC in California?
Currently, it costs $70 to file your Articles of Organization and $20 to file your initial Statement of Information.

The standard filing time for LLCs is 5 days if you file online. Expedited services are available, and provide you with an Articles of Organization filing response within a guaranteed time frame.

Why deal with the hassle of filing online or walking your documents into the Sacramento office? Simply hire Active Filings and we’ll do the work for you. Our expert staff will prepare and submit your formation documents within one day. We’ll navigate the maze of California business filings so that you can focus on getting your business up and running.

Preclearance services are available, and provide you with an answer on if your formation documents conform to California law. Both of these services must be filed for in person Secretary of State Sacramento office, at the following rates:

Preclearance Timelines & Cost
24 Hour: $500
72 Hour: $400
5 Day: $300
10 Day: $250

Expedite Timelines & Cost
4 Hour: $500 (must have already passed preclearance)
Same Day: $750
24 Hour: $350

Whether you generate your own or use an available template, you will include the following information:

To keep your LLC or corporation in California in good standing, you will need to complete a few maintenance tasks with the state.

• File your Initial Statement of Information
• File your Biennial Report
• File your State Business Taxes

Below, you’ll find instructions and resources to help you complete your annual maintenance.

California LLC Maintenance:

What is an initial Statement of Information for a California LLC?
An initial Statement of Information is to inform the California Secretary of State of an LLC’s basic information shortly after the LLC is formed, such as the registered agent, business address, and management names.

This initial Statement of Information must be filed within 90 days of forming your business. Since there is only a biennial report due every other year (known as a Statement of Information in California) the California Secretary of State doesn’t want to wait two years to receive the LLC’s basic information.

What is a biennial report (or Statement of Information) for a California LLC?
A biennial report, also called a Statement of Information, is a filing your LLC must complete every two years with the California Secretary of State that keeps your business records up to date with the state, such as registered agent, business address, and management names.

How do I file a biennial report in California for my LLC?
You can file your biennial report for your LLC online at the California Secretary of State website, or by postal mail or in person to the Secretary of State’s office in Sacramento.

How much does it cost to file a biennial report for my California LLC?
The cost to file a biennial report or an initial report for an LLC is $20 each.

When are California LLC biennial reports due?
LLCs in California need to submit a biennial report every other year after formation by the end of the month the LLC was formed with the California Secretary of State. For example, if your LLC is formed on an even numbered year, you will need to file every even numbered year. If your LLC is formed on an odd numbered year, you will need to file in every odd year.

California Corporation Maintenance:

What is an initial Statement of Information for a California corporation?
An initial Statement of Information is to inform the California Secretary of State of a corporation’s basic information shortly after the corporation is formed, such as the registered agent, business address, and management names.

What is an annual report for a California corporation?
An annual report, also called a Statement of Information, is a filing your LLC must complete every year with the California Secretary of State that keeps your business records up to date with the state, such as owner names and addresses.

How do I file an annual report in California for my corporation?
You can file your annual report for your corporation online at the California Secretary of State website, or by postal mail or in person to the Secretary of State’s office in Sacramento.

How much does it cost to file an annual report for my California corporation?
The cost to file an annual report or an initial report for corporations is $25.

When are California corporation annual reports due?
Corporations in California need to submit an annual report every year by the end of the month the corporation was formed with the California Secretary of State.

California’s business taxes are more involved than in most states, and depend in part on the legal form of the business. In this state, there are three different tax types that can apply to your business: the California Franchise Tax, and the Alternative Minimum Tax (AMT), and the annual LLC fee.

The filings can be complicated and you may need the help of a CPA or a tax service to fulfill these requirements. This section will help get you started in understanding your business taxes.

Take a look at our California Business Tax FAQ below:

California Franchise Tax

What is the California Franchise Tax?
The California Franchise Tax, also referred to as California’s privilege tax, is a tax on doing business in California. LLCs pay this tax as a flat fee, and corporations pay this tax as a percentage of their net income.

What are the California Franchise Tax rates?
The California Franchise Tax is either a flat tax or a tax percentage on income, depending on your business entity:
LLCs: flat tax of $800
C corporations: 8.84% of net income tax
S corporations: 1.5% of net income tax
There is a minimum franchise tax for all businesses of $800.

California LLC Fee

What is the California LLC fee?
In addition to the $800 minimum franchise tax, LLCs in California will have to pay a progressive LLC fee if their LLC has an income of $250k or higher.

What are the California LLC fee brackets?
LLC fee brackets are as follows:
Earned income below $250,000 per year will pay no LLC fee.
Earned income between $250,000 and $499,999 per year will pay LLC fee of $900.
Earned income between $500,000 and $999,999 per year will pay an LLC fee of $2,500.
Earned income between $1,000,000 and $4,999,999 per year will pay an LLC fee of $6,800.
Earned income above $5,000,000 per year will pay an LLC fee of $12,590.

California Alternative Minimum Tax

What is the California Alternative Minimum Tax (AMT)?
The AMT is a 6.65% tax on corporations that earned a positive net income. Corporations that did not earn a positive net income are not subject to the AMT, they are only subject to the franchise tax.

How is the California Alternative Minimum Tax calculated?
The AMT recalculates income tax after adding specific tax preference items back into the adjusted gross income, and is based on the federal AMT rules.

Do California corporations pay a corporate income tax?
No. Corporations instead pay the franchise tax. The one exception is corporations that don’t engage in business activity in the state are subject to a state corporate income tax instead of the franchise tax. This state corporate tax rate and forms are the same, but there is no minimum tax requirement.

What tax forms do California LLCs and California corporations need to file?
LLCs will file using Form 568, which includes Schedule IW that is required of LLCs taxed as single-member LLCs, and Schedule K-1 that is required of LLCs taxed as multi-member LLCs.
C corporations will file using Form 100.
S corporations will file using Form 100S.

What’s the personal income tax rate in California?
Below are the personal income tax brackets in California for single filers:

$0 – $8,544: 1%
$8,544 – $20,255: 2%
$20,255 – $31,969: 4%
$31,969 – $44,377: 6%
$44,377 – $56,085: 8%
$56,085 – $286,492: 9.3%
$286,492 – $343,788: 10.3%
$43,788 – $572,980: 11.3%
$572,980+: 12.3%

When are my California business tax returns and fees due?
LLCs classified as partnerships need to file their taxes by the 15th day of the 3rd month after the close of their tax year, or March 15th for calendar year filers. This does not apply to the franchise tax, which is due the 15th day of the 4th month after the close of their tax year (or April 15th).

Single-member LLCs need to file their taxes by the 15th day of the 4th month after the close of the tax year, or April 15th for calendar year filers.

S corporations need to file their taxes by the 15th day of the 3rd month after the close of their tax year, or March 15th for calendar year filers.

C corporations need to file their taxes by the 15th day of the 4th month after the close of the tax year, or April 15th for calendar year filers.

Please note the LLC fee payment is due by the 15th day of the 6th month of the current taxable year.