Entity choice

Should you even form an LLC?

An LLC is a liability wrapper and a filing with the Secretary of State. It is not a tax shelter, a contractor-status badge, or a way to skip California. Your options for entity are: sole proprietor, California LLC, or California LLC that later elects S corporation.

This is a practical briefing compiled from California SOS, FTB, CDTFA, IRS, and SSA publications as of August 2026. It is not legal, tax, or insurance advice. Filing fees and tax rules change. Confirm figures on the official sites before you pay or elect anything, and consult a California CPA or business attorney.

What an LLC actually does

A limited liability company is a legal person separate from you. If the company is sued over work it contracted to do, creditors of the company are supposed to stop at the company’s assets — cash, equipment, receivables — and not your house, personal brokerage, or wages from a W-2 job.

It only holds if you treat the company as a company:

Contracts and invoices in the LLC’s legal name.
A dedicated bank account. No mixing rent and Stripe payouts.
A written operating agreement, even as the only member.
Enough insurance that a claim does not immediately empty the box.
You do not personally guarantee everything (some landlords and card issuers will still make you).

An LLC does not protect you from your own malpractice in the way people hope. If you personally commit fraud, or you are negligent as the engineer who wrote the code, plaintiffs often name you anyway. Professional liability insurance is the actual control for that. The LLC still helps with contract disputes, unpaid vendors, and “the company” being the named party on the MSA.

For federal tax, a single-member LLC is a disregarded entity by default. Profit hits Schedule C of your Form 1040, the same as a sole proprietor. You still pay self-employment tax. California follows that classification. The LLC adds the $800 annual tax and, above $250,000 of California total income, a gross-receipts fee. See Taxes.

The real menu

Vehicle	Liability	CA entity tax	When engineers use it
Sole proprietor	None. You are the business.	$0 entity tax. Income tax + SE tax.	Side work, first clients, testing the market.
CA LLC (disregarded)	Yes, if you respect the veil.	$800 + LLC fee over $250k receipts.	Default for a solo consultancy.
CA LLC + S corp election	Same LLC shield.	Greater of $800 or 1.5% of S corp net. No LLC fee. Payroll instead of SE tax on salary.	Sustained profit roughly $80k–$100k+ and a CPA who will run payroll.
C corporation	Yes.	8.84% CA franchise tax on net, min $800. Double tax on dividends.	Venture-backed product companies. Almost never a solo contractor.
DE / WY LLC	Yes, in that state.	Still $800 in CA as a foreign LLC, plus home-state fees.	A California resident should not do this.

When it is worth $800

You have savings, equity in a home, or a spouse’s income you do not want sitting next to client work.
A client’s vendor form asks for an EIN, insurance certificate, and “legal entity name.” Many procurement teams will not pay to a SSN.
You might hire a contractor, take on a partner, or sell a small product later. Starting as an LLC is cheaper than converting later in a hurry.
You want a clean books trail for a mortgage, visa, or future S corp election.

When to wait

You have not landed a paid client. Do not pay $800 to a dormant company. You can still buy a domain and write a one-pager.
This is a three-month moonlighting gig while you have a W-2 with indemnification and no personal assets of note. A sole prop plus a contract is enough for many people.
You are about to leave California. Forming here and then moving does not turn the lights off — you must cancel with SOS and file a final 568 or you will keep getting billed $800.

The Delaware / Wyoming trap

Delaware is designed for venture corporations with out-of-state investors and Delaware Chancery Court. Wyoming markets anonymity. Neither helps a person who lives in Oakland and Slacks with a client in Austin.

California’s “doing business” definition is aggressive. Living here, working here, or having a client who receives the benefit of your services here is enough. A 2025 Office of Tax Appeals decision confirmed you can owe the $800 even when you miss the bright-line sales/property/payroll thresholds, if you are simply transacting for profit in the state.

If you form elsewhere and then work from California you typically:

Pay the other state’s formation and annual report.
Register as a foreign LLC with California SOS (another filing fee).
Pay California’s $800 and file Form 568 anyway.
Maintain two registered agents and two sets of records. Gain nothing on income tax.

Form in California. If you later raise institutional money for a product company, a lawyer will tell you whether to flip into a Delaware C corp. That is a different business.

You are not a PLLC

California restricts LLCs for some licensed professions (law, medicine, accountancy, architecture, and similar). Software engineering is not on that list. You file a regular LLC. Do not put “Professional” or “P.C.” in the name. Do not imply you are a licensed engineer with “P.E.” unless you actually are.

Name rules live in Corporations Code § 17701.08: the words Limited Liability Company, LLC, or L.L.C. must appear; bank, trust, incorporated, and insurance are banned.

AB 5 still applies

Forming an LLC does not make you a lawful independent contractor under California’s ABC test. Your client still has to classify you correctly. Many software consultancies rely on the business-to-business exception (Labor Code § 2776): you are a bona fide business, you have a contract, you have a business license, you can work for others, you provide your own tools, and you actually behave like a vendor.

If one FAANG-shaped client is 95% of your revenue, sets your hours, and hands you a laptop, an LLC letterhead will not save them — or you — in an audit. Diversify clients. Use your own equipment. Invoice per milestones, not via timesheet.

Continue to how to file if you are forming.