Entrepreneurs from all over the world look to the United States to establish their companies and enjoy the perks of the American economic environment. Tech and e-commerce giants often headquarter in California regions such as Silicon Valley, for which the state has gained popularity amongst up-and-coming entrepreneurs as well. Now, let’s see how to start an LLC in California and the pros and cons the state offers to global business founders.
But first, should I open a business in California?
The tech world sees California as the Mecca to establish software companies because of the popularity of Silicon Valley within the industry. The tricky part is that tech giants such as Google, Tesla, Amazon, and Apple have re-incorporated in other states while maintaining their offices in California. But why does this happen? The truth is that California has some disadvantages that may discourage entrepreneurs from registering their LLCs or Corps in the state. It’s important to mention that Globalfy doesn’t register companies in California. Keep reading to understand why.
Disadvantages of opening an LLC in California
- High state income tax rate: California has the second highest state income tax rate for Corps in the entire country (behind New Jersey) with an 8.8% on all profits. This means that, if eventually, you want to change your structure from LLC to Corp, you’d be subject to one of the highest tax rates in America.
- Highest franchise tax in the US: California has the highest franchise tax rate in the United States. All businesses, including LLCs, must pay the state of California US$800 every year to renew their registration.
- No privacy: all registration documents are public so if you start an LLC in California everybody can look up your personal information anytime they want.
- Not everybody can start an LLC in California: license-requiring practices such as medicine, law, engineering, bookkeeping, etc, cannot open a business in California as an LLC, only as a corporation.
Now, let’s see the more appealing aspects when considering how to start an LLC in California.
Advantages of opening an LLC in California
- Unique name for the business: in some other states, businesses are allowed to have a DBA (“doing business as”), also known as an alias or pseudonym, even when another company has been registered first using the same trade name. In California DBA names are allowed only when they’re unique, which means no other company can use your name to do business.
- Pass-through taxation for LLCs: just like in any other US state, LLCs registered in California don’t have to pay income tax, only members (owners) have to do so on an individual basis once the organization has distributed its profits.
Requirements to open an LLC in California
To set up an LLC in California you don’t need much paperwork. US residents and foreigners can go to the California Secretary of State’s office website and register their companies. Filling out the Articles of Organization for LLCs online is free and the only personal info you need to input is your ID. Though, to submit this documentation for state approval and get your LLC registered you’d have to pay US$70, plus fees to reserve your company’s name, get a business license, etc. All in all, the process to register your LLC in California costs a minimum of US$105.
Now, let’s see what’s the follow-through and the process to set up your LLC.
How to start an LLC in California online
Even after registering your LLC in California, you’ll still need to file for an Employer Identification Number (EIN) with the IRS to do business legally in the US. And in case you are to perform physical activities in a California city or town, you’ll need to get a business license. Depending on the municipality, a California business license can go from US$50 up to US$100.
In case you want to establish an LLC for an e-commerce or retail business, you can get a statewide license called Seller’s Permit with the California Department of Taxes and Fee Administration (CDTFA). This permit is mandatory for all California retail or online commerce companies. No fees may apply for this permit although the CDTFA might request a security deposit depending on your situation.
The last documentation you’ll need to do business in California is a Statement of Information, which includes data on the LLC’s members (owners). The fee to file this document on the California Secretary of State’s Business Programs website is US$20.
How long does it take for an LLC to be approved by the state of California?
If you submit all of your documentation online, it takes up to 5 days, whilst if you do so by mail it can go up to 3 weeks. Meanwhile, states such as Wyoming take less than 24 hours to approve either LLCs or Corps.
Alternative states to start an LLC
States such as Wyoming, Delaware, New Mexico, Texas, and Florida offer more benefits and lower tax rates than California. The pros of registering in these states even increase when it comes to foreign entrepreneurs who want to start an LLC in the United States.
An important part of the process to see how to start an LLC in California is comparing the rates, benefits, and fees of other states.
|LLC formation fee||US$125||US$90||US$300||US$50||US$100||USD105|
|Individual State Income Tax||None||None if you don’t reside in the state||None||Between 1.7% and 5.9%. Higher rates apply at USD210,000 in income||None||From 1% up to 6%, depending on the income bracket|
|Annual Report or Franchise Tax for LLCs||Between USD138.75 and USD150||Minimum of USD225||None, however, you must file No Tax Due and Public Information reports annually||None||Minimum of USD62. Additional fees if you have +USD250,000 in assets||USD800 from the second taxable year on|
|Privacy||No anonymity. All commercial records are public||Total privacy for LLC and partial for Corps (public may access information through annual reports)||No anonymity. All commercial records are public||Total privacy for LLC and partial for Corps (public may access information through annual reports)||Total privacy for LLC and partial for Corps (public may access information through annual reports)||No anonymity. All commercial records are public|
As you can see in the table above, there are better options than California. Tech companies are inclined to register their companies in Delaware or Wyoming. E-commerce businesses open their LLCs where they will have their physical inventory. For example: if your fulfillment center is located in Florida, why will you register your company in California?
It’s important to mention that Globalfy doesn’t start companies in California. The latest changes in the state and the low interest from international entrepreneurs made us focus only on better options. We’ve worked with more than 5,000 satisfied entrepreneurs from 53 different countries who trust our content and services.
In case you want to start your LLC in any of the alternative states cited above, you can check Globalfy’s all-in-one plan. Open your LLC in the United States from abroad, 100% online, plus get 1 year of Virtual Address, 1 year of Registered Agent, and a US bank account for your business. All of that for only US$599. Do not miss this opportunity and expand your business horizons.