Running a Sole Proprietorship in LA

No state filing creates it. You start working, you earn money, you report it on Schedule C. If you want a business name other than your own, you file a Fictitious Business Name Statement with the LA County Registrar-Recorder — about $26 for the filing plus publication costs (typically $40 to $80 in a local adjudicated newspaper).

You’ll also need a City of Los Angeles Business Tax Registration Certificate (the old “business license”). The city charges a gross receipts tax that varies by business classification. Creative professionals, consultants, and service providers typically pay between 0.101% and 0.496% of gross receipts, with a minimum tax of around $100 to $200 per year.

Total startup cost for a sole proprietorship in LA: under $200. Ongoing annual cost: the city business tax plus your time filing Schedule C. It’s about as lean as it gets.

Forming a California LLC: The Annual $800 Problem

Filing Articles of Organization with the California Secretary of State costs $70. Cheap, right? Then the franchise tax hits.

Every LLC doing business in California owes an $800 minimum franchise tax per year. It’s due by the 15th day of the 4th month of your tax year (April 15 for most people). First-year LLCs are currently exempt from the $800 in their initial tax year, but starting year two, the bill arrives whether you made money or not.

On top of the $800, California imposes a gross receipts fee on LLCs with total revenue over $250,000:

• $250,000 to $499,999 in revenue: $900
• $500,000 to $999,999: $2,500
• $1,000,000 to $4,999,999: $6,000
• $5,000,000 and above: $11,790

That fee is based on gross revenue, not profit. A business grossing $600,000 but netting $40,000 still owes $2,500 on top of the $800 franchise tax. It’s one of the most complained-about features of California’s LLC tax structure, and for good reason — it penalizes revenue without regard to profitability.

Tax Treatment: Same Return, Different Entity

A single-member California LLC files the same federal Schedule C as a sole proprietor. No difference. Self-employment tax is identical. Federal income tax is identical.

At the state level, California requires single-member LLCs to file Form 568 (LLC Return of Income) even though the income also appears on your personal California return (Form 540). That’s an extra form and, if you hire a CPA, an extra preparation fee. Sole proprietors don’t have this extra filing — their business income goes straight to Schedule CA on their personal return.

The LA city business tax applies to both structures. Switching from sole prop to LLC doesn’t change your local tax bill.

When the LLC Justifies the $800

Liability protection is the reason. If your work carries any real risk — client contracts, physical products, employees, professional services where errors could cause financial harm — the LLC creates a barrier between business liabilities and your personal assets. One contract dispute or one slip-and-fall at your office could cost more than a lifetime of $800 annual payments.

The LLC also looks more professional to certain clients. Some companies won’t sign contracts with sole proprietors. Banks sometimes require an LLC to open a business line of credit. If you’re bidding on work where the client’s legal team vets your entity structure, the LLC matters.

The flip side: if you’re a part-time freelancer earning $20,000 a year from your laptop, the $800 tax is 4% of your revenue before you’ve paid any other tax or expense. That’s hard to justify for liability protection alone, especially if the work is low-risk.

The S Corp Option on Top of the LLC

Here’s where it gets interesting. Once your LLC is earning enough, you can elect S corp status by filing Form 2553 with the IRS. The LLC stays an LLC legally, but for tax purposes it’s treated as an S corporation. That means you pay yourself a salary (subject to SE tax) and take the remaining profit as distributions (not subject to SE tax).

In California, the S corp election trades the $800 LLC franchise tax for an $800 S corp franchise tax plus 1.5% of net income. So the floor is the same, but you add a percentage on top. The SE tax savings usually outweigh the 1.5% at income levels above $70,000 to $80,000 per year. Below that, the extra compliance costs and entity-level tax eat the savings.