I run a small surfboard rental and lesson thing in Mission Beach, only active May through September. Formed an LLC in 2022 because a friend said I'd get sued into oblivion otherwise. Now I'm looking at the $800 California franchise tax plus the $20 annual report and wondering if I should just dissolve and operate as a sole prop. The business nets maybe $18-25k in a good season. Am I overcomplicating this?
LLC
Is a San Diego LLC worth maintaining for a seasonal business?
The $800 is brutal but it's not just about lawsuits. If you dissolve and something goes sideways with a customer, your personal assets are exposed. For a surf rental business where people can get hurt, that's a real concern. Have you looked into whether your insurance would cover you as a sole prop?
lol 'sued into oblivion' by a guy who can't even paddle out past the break. But seriously, the franchise tax alone is a lot for a seasonal gig.
You're probably overcomplicating it. If you have godo liability insurance, the LLC isn't doing much for a business that small and seasonal. I'd talk to a CPA though, this is not legal advice, etc etc.
Wait, do you actually owe the $800 if you're only operating part of the year? I thought it was prorated or something.
Nope, California doesn't prorate the franchise tax. First year is free, then it's $800/yr minimum regardless of revenue or season length. That's the part that stings.
You could keep the LLC but switch to a different structure? Or file as an S-corp? I'm not sure that helps with the $800 though.
S-corp won't help with the franchise tax.It might help with self-employment tax if you're paying yourself a reasonable salary, but for $18-25k net it's probably not worth the extra accounting costs.
I had a seasonal LLC in Pacific Beach for years. Kept it for the liability shield. The $800 stung but I looked at it as insurance. That said, my net was higher than yours.
Thanks for the replies. @doughnut_derby I do have liability insurance through a specialty carrier, $1M per occurrence. So the shield is somewhat redundant? @pixel_pusher_99 yeah the $800 isn't prorated, which is why I'm asking.
If you have solid insurance, the LLC is mostly about peace of mind. But peace of mind is worth something. How much is yours worth?
Fair enough. That said, the annual report fee is only $20 if you file on time. It's the $800 that's the real cost.
Also consider: dissolving the LLC has its own costs and paperwork. And if you ever want to bring on a partner or sell the business, having the LLC in place Makes that cleaner. Probably not a factor for a surf rental gig, but worth mentioning.
What about converting to a different different state? I've heard of people forming in Wyoming or Nevada. Is that a thing?
Not really for a local business. If you're operating in San Diego, you'll likely still need to register as a foreign entity in California and pay the $800 anyway. Plus you lose the benefit of a local attorney knowing your setup. Not worth the hassle.
Agree with doughnut_derby. Out-of-state LLCs still get hit with the franchise tax if they're doing business in CA. The 'Nevada LLC' trick is mostly a myth for small local operations.
So basically: keep it or don't, but don't expect a magic loophole. Got it.