San Luis Obispo has a vibrant startup community, fueled by the presence of Cal Poly and its entrepreneurial ecosystem. Many founders look for ways to minimize costs when forming a business, and online services promise cheap LLC and corporation formations. However, if you operate in California, those out-of-state savings won’t matter.
California has some of the strictest tax and fee requirements for LLCs and S-Corps, and if you operate in the state, you must comply with them—no loopholes.
California LLCs: Expensive and Inescapable Fees
If your business has any presence in California, such as an office, employees, or even just customers in the state, the California Franchise Tax Board (FTB) requires you to register and pay California taxes and fees, even if your LLC is formed elsewhere.
1. The Mandatory $800 Franchise Tax
Every LLC doing business in California must pay a minimum annual franchise tax of $800 to the California Franchise Tax Board (FTB). This applies even if your business makes zero revenue. The first payment is due by the 15th day of the 4th month after formation (usually April 15 for calendar-year LLCs).
2. Additional Fees Based on Revenue
If your LLC makes more than $250,000 in annual gross revenue (not profit), you must also pay the following additional LLC fees:
- $900 for revenue between $250,000 and $499,999
- $2,500 for revenue between $500,000 and $999,999
- $6,000 for revenue between $1,000,000 and $4,999,999
- $11,790 for revenue over $5,000,000
This fee is stacked on top of the $800 annual franchise tax.
3. Other LLC Costs
- $70 Formation Fee – To file Articles of Organization with the California Secretary of State.
- $20 Biennial Statement of Information Fee – Required every two years.
- Registered Agent Fees – If you use a service, expect to pay $50–$300 per year.
S-Corporation vs. LLC: A More Cost-Effective Alternative?
Some business owners consider an S-Corporation (S-Corp) election to avoid the gross revenue-based LLC fees. Here’s how the costs compare:
| Cost Item | LLC | S-Corp |
|---|---|---|
| Formation Fee | $70 (Articles of Organization) | $100 (Articles of Incorporation) |
| Annual Franchise Tax | $800 minimum | $800 minimum |
| Additional Taxes | Gross revenue-based fees if revenue > $250K | 1.5% state income tax on net income (no cap) |
| Statement of Information | $20 every 2 years | $25 annually |
| Payroll Costs | Optional | Must pay “reasonable salary” to owners |
When is an S-Corp More Cost-Effective?
If your net income is over $80,000, an S-Corp may save money on self-employment taxes. If your LLC earns more than $250K in revenue, avoiding gross revenue-based LLC fees can make an S-Corp more cost-effective.
However, an S-Corp requires payroll processing and more tax filings, which can add administrative costs. Source: IRS S-Corporation Guide.
The Hidden Dangers of Using Free LLC Operating Agreements
If you do go the LLC route, do not just download a free operating agreement from the internet. Many of these generic templates have serious flaws that can leave your business and personal assets at risk. Here’s what could go wrong:
1. Not Compliant with California Law
Many free templates don’t account for California’s unique LLC laws, such as fiduciary duties, tax regulations, and required filings. Courts can invalidate improper agreements, leaving you vulnerable. Source: California Revised Uniform Limited Liability Company Act.
2. No Customization for Ownership & Profits
Many agreements assume equal ownership and profit distribution, but real businesses need:
- Unequal ownership percentages
- Custom profit-sharing rules
- Voting rights tailored to capital contributions
3. No Exit, Buyout, or Dissolution Provisions
Without clear rules for what happens if a member wants to leave, dies, or divorces, you could be forced into costly legal disputes or be stuck with an unworkable business structure.
4. Weak Liability Protection
A poorly written operating agreement might fail to separate business and personal assets, allowing courts to pierce the corporate veil and hold members personally liable for business debts.
5. No Clear Decision-Making Rules
Generic agreements don’t clarify:
- Whether the LLC is member-managed or manager-managed
- Who has authority to sign contracts or take on debt
- Voting procedures (majority vs. unanimous decisions)
6. Missing Dispute Resolution & Deadlock Provisions
A 50/50 ownership split with no deadlock resolution clause can leave a business paralyzed if members disagree on major decisions.
7. No Tax Election & Financial Provisions
Most templates fail to specify:
- Tax treatment (default LLC taxation vs. S-Corp election)
- Profit and loss allocations for tax purposes
- Financial reporting and accounting rules
8. May Not Be Legally Enforceable
If an agreement contains outdated or conflicting terms, it may not hold up in court, leaving members with no legal protection.
The Bottom Line: Do It Right the First Time
While you can technically form an LLC in another state for cheap, if you operate in California, you must register here and pay California’s fees—there’s no escaping it.
If you decide on an LLC, don’t cut corners with a free operating agreement. Instead:
- Hire a business attorney for a custom agreement that follows California law.
- Customize your agreement to reflect ownership, taxes, and business structure properly.
Setting up your business the right way from the start will save you thousands in legal and tax headaches down the road.
