Setting Up an LLC

Note: This is not legal advice, and I am not an attorney. Just the notes of someone trying to figure out how to navigate bureaucracy and set up a company.

Technical Definitions

  • An LLC blends partnership and corporate structures. You form an LLC to run a business or hold assets. LLCs protect its members against personal liabilities.
  • An LLC will be either:
    • A disregarded entity (for federal purposes) - if only has one member
      • Single member limited liability company (SMLLC)
    • A partnership - if has more than one owner
      • Limited liability partnership (LLP) - must be licensed as Lawyer, Architect, Accountant
      • Limited liability limited partnership (LLLP)
        • Cannot be formed in California, but an LLLP formed in another state must register with the California Secretary of State (SOS) before they start doing business in California.
        • Consists of one or more:
          • General partners - manages business operations
            • Limited partners - maintains a financial interest
        • An LLC classified as a partnership generally determines and reports California income, deductions, and credits separately under personal income tax law. These items pass through to their owners for purposes of taxation.
      • Series limited liability company (SLLC) - also cannot be formed in California
        • Group of LLCs owned in a tiered-down structure. Top tier LLC owns the lower-tiered LLC.
    • An LLC being taxed as a corporation - must file an election with IRS using Form 8832
      • Can elect:
        • C Corporation
        • S Corporation
          • Every S Corp that has CA sourced income is taxed 1.5%

Annual Fees for LLCs

  • Every LLC business that is “doing business or organized in California” must pay an annual tax of $800
    • Doing business in California” if:
      • Engage in any transaction for the purpose of financial gain within California
      • Are organized or commercially domiciled in California
      • Your California sales, property or payroll exceed the amounts linked here
    • Due annually until LLC is canceled, even if not doing business
    • Due until the 15th day of the 4th month from date when LLC is filed
      • Ex: Register a new LLC with Secretary of State on 6/18/20. Annual LLC tax due 9/15/20.
    • Pay annual tax using a Bank Account or Credit Card
  • Additional fees are required if the California income is more than $250,000. Reference table here

What’s so special about Delaware?

Delaware Advantages

  • Delaware has 14th lowest filing fee of 50 states
  • Primary purpose of forming an LLC is to shield owners against being personally liable for debts and liabilities of the business
    • Owners of Delaware LLCs and corporations are given the strongest legal protection available by any state. Piercing the corporate veil, or making individuals personally liable for claims against their business, is very unlikely in Delaware.
  • No need to have a bank account in Delaware or a business address within the state - duty of a Delaware Registered Agent is to forward annual notices and court notices to the business wherever it may operate.
  • Delaware Division of Corporations’ office provides outstanding customer service. This includes options for expedited document approval and filing in as little as 30 minutes.
  • Delaware does not keep record of the shareholders of the business, you only need to provide your incorporator a minimal set of information, including (1) the name of the corporation; (2) a contact person and their contact information; (3) names of initial directors and officers; and (4) the number of shares of authorized stock. Criteria

Some people starting a business to keep things simple by incorporating or forming an LLC in their home state. Others opt for more “business friendly” states and incorporate in Delaware, Nevada or Wyoming. Considerations for choosing a state to incorporate per Entrepreneur Magazine:

  1. Formation Fee (One-Time)
    • Lowest (Arkansas, Colorado, etc): $50
    • Highest (Connecticut): $455
    • Delaware: $90
  2. Annual Fees and Filings (Annual Filing Fee)
    • Wyoming: $52
    • California: $21
  3. Franchise Taxes (Annual tax, but not necessarily based on revenue)
    • California $800 + more if income exceeds $250K
    • Delaware: $300
    • Nevada/Wyoming: None
  4. Legal and Court System
    • Delaware: cases resolved more quickly than other states, separate court to resolve business disputes that uses Chancellors (judges) instead of juries
    • 64% of Fortune 500 companies are incorporated in Delaware (Facebook, Google, Twitter, etc)
    • Over half of publicly-traded companies in US incorporate in Delaware
  5. Investors
    • Many investors are familiar with Delaware corporate law
  6. State Corporate Income Tax
    • Does not matter for businesses incorporated in one state and doing business in another
    • For example, if your business is located and oeprates in California, you can’t avoid paying California state income taxes by incorporating in Delaware

Specific Annual Costs of Incorporating in Delaware, Doing Business in California

  1. One-Time Costs ($349 expedited total through
  • Certificate of Formation: $90 state fee
  • Certified copy of Delaware LLC filing: $99 through IncNow (may be required by banks to open business account)
  • Certificate of Good Standing: $99 for short form certificate (may be required by banks to open business account)
  1. Annual Costs ($1199 total)
  • Franchise Tax, on or before June 1 annually, to maintain good standing status: $300
  • Registered Agent Fee: $90 first year (up to 18 months), $99 thereafter
  • California Annual Tax: $800

Registering as a Foreign LLC in California

  • Do I have to qualify or register a foreign (out–of–state or out–of–country) business entity?
    • Before transacting intrastate business in California the business must first qualify/register with the California Secretary of State.
    • “Transacting Intrastate” defined as “as entering into repeated and successive transactions of its business in this state, other than interstate or foreign commerce.”
  • How do I qualify or register a foreign (out–of–state or out–of–country) business entity in California?
    • A foreign business entity can qualify/register to transact business in California by filing the applicable form (as described below) with the California Secretary of State.
      • Limited Liability Company: File an Application to Register (Form LLC–5) and attach to the completed form a valid certificate of good standing by an authorized public official of the foreign jurisdiction under which the foreign limited liability company is organized.
  • File Statement of Information - All LLCs in California must file a Statement of Information within 90 days of registration, every two days thereafter.
  • LLC’s appear to be exempt from the $800 annual franchise tax in their first taxable year:
    • “The 2020 Budget Act extends the first year exemption from California’s $800 minimum franchise tax to limited liability companies (LLCs), limited partnerships (LPs), and limited liability partnerships (LLPs). Under the new rules, for the period starting January 1, 2021 and ending December 31, 2023, any LLC, LP, or LLP that files, registers, or organizes to do business in California is exempt from the state’s $800 minimum annual franchise tax for its first taxable year.” Source