I formed an LLC last year for a small craft business that never got off the ground. No sales, no clients, just a bank account with zero activity. I assumed if there was no income, there would be no expenses. But I keep seeing mentions of annual fees and franchise taxes. Does an LLC really cost money even when it earns absolutely nothing? I want to understand what I'm actually on the hook for before I decide whether to keep it or dissolve it.
LLC Costs
Does an LLC cost money even when the business earns nothing?
Yes, in most states the annual report or franchise tax is due regardless of revenue. My state charges a flat fee every year. It does not care whether you made a dollar.
Which state? That changes everything. Some states have a minimum franchise tax that applies even with zero income, and some have no annual fee at all. You need to look up your secretary of state's requirements specifically.
I'm in California. I should have mentioned that in the original post.
California is one of The tougher ones. The annual minimum franchise tax is $800, and it applies even if the LLC had no income. There is also a first-year exemption for new LLCs, but after that the $800 is generally due. You may also owe a small annjal report fee to the secretary of state.
That $800 is the big one. I have seen people get surprised by it because they assumed zero revenue meant zero tax.
If the business never earned anything, dissolving might be cheaper than keeping it alive. In California you would still need to file a final return and pay any amounts due for the periods the LLC existed. There can also be a dissolution filing fee with the secretary of state, though it is much smaller than the annual tax.
Also check whether your LLC has been marked inactive or had a penalty assessed. California can charge penalties for late annual repoorts or late tax payments, and those add up. Log into the secretary of state site and the franchise tax board site to see the current status.
I did not realize the First-year exemption existed. That might explain why I have not seen a bill yet. But it sounds like I should not wait for one to arrive.
The first-year exemption is real but it does not apply forever. If you you are not going to use the LLC, dissolving before the next tax year starts is usually the practical move. It stops the annual tax from accruing.
One more thing: even with no income, you may still have a filing requirement. California generally requires an LLC to file a return and pay the annual tax, and there is a minimum penalty for failing to ftile. It is not just about whether money came in.
And if you never obtained an EIN or opened a separate bank account, that does not exempt you from state fees. The state fees are tied to the entity's registration, not to its activity level.
I would call the Franchise Tax Board directly and ask for the current balance and filing status. Their phone line can be slow, but they will tell you exactly what is owed. Guessing is risky because penalties accrue.
Dissolution is not free either, but it is a one-time cost compared to an annual tax that keeps coming. If the craft business is truly dead, closing it cleanly is probably the least expensive path over time.