Selling your engineering through an LLC

What you are selling

Most readers of this manual are selling services: design, implementation, review, staffing a gap on a product team. A smaller set also sell a product: a SaaS, a plugin, a downloadable tool, a training course. Tax and contract treatment split along that line.

• Time and custom work — billed hourly, weekly, or fixed-price against a SOW. This is a consultancy. Sales tax generally does not apply. IP must be assigned in writing or it stays with you under copyright’s default (you wrote it).
• A product many customers use — canned software, licenses, hosted apps. Different tax, different TOS, different insurance, and often a different entity conversation (sometimes a C corp if you raise). Do not mix both into one sloppy MSA.

NAICS codes you will be asked for: 541511 (custom computer programming), 541512 (systems design), 541519 (other computer-related). Pick the one that matches the majority of revenue. City tax forms and banks care more than SOS does.

Sales and use tax

California taxes the retail sale of tangible personal property. It generally does not tax professional services. Software sits on the fault line. The statute and regulation:

• Revenue & Taxation Code § 6010.9 — “sale” does not include the design, development, writing, or transfer of a custom computer program (other than a basic operational program), in any form.
• CDTFA Regulation 1502 — computers, programs, and data processing. Custom vs prewritten, load-and-leave, remote access, maintenance, training.

Usually not taxable

• Custom programs prepared to the special order of one customer, even if you reuse libraries and snippets. Transfer by git, tarball, or a USB stick does not make it taxable if it is custom.
• Separately stated charges for custom modifications to a prewritten program.
• True consulting, architecture, code review, and training not tied to a mandatory software sale.

Often taxable

• Prewritten / canned software held for general sale — including something you originally built custom and then productized.
• Software delivered on tangible media (USB, disc) when it is prewritten.
• Bundled deals where the customer cannot buy the hardware or canned software without buying your “services,” and you did not separately state custom work. CDTFA has annotations on this exact fact pattern for computer consultants.
• Optional maintenance that includes updates to prewritten software can be taxable; optional unbundled consulting often is not. The invoices have to match the story.

You generally do not need a seller’s permit to only provide nontaxable custom programming. If you sell any taxable TPP (laptops you mark up, books, canned software, branded merch), you need a permit even if it is 2% of revenue. Register with CDTFA, do not with FTB.

You still pay use tax when you buy equipment, SaaS, or tools from out-of-state sellers who did not collect California tax. That is on you as the buyer, reported on your California return or a CDTFA use-tax account.

Intellectual property

Copyright in code you write vests in you (or the LLC, if the LLC is the author via work you make for the company) until you assign it. Clients often drop a one-page “all work product is our work made for hire.” California and federal work-for-hire rules are narrower than that sentence. If they want ownership, sign an assignment. If you want to keep your libraries, say so.

• Background IP — your snippets, templates, internal CLI, prior blog posts. License them; do not assign.
• Foreground IP — what you build under the SOW. Usually assigned on payment, not on kickoff.
• Open source — you cannot assign what you do not own. List third-party licenses. Do not drop a GPL component into a client’s proprietary product unless they agree.
• Trained models and prompts — say who owns outputs, whether client data may be used to train, and what happens to logs.

Put the LLC on the copyright line and the GitHub org. Personal repos with client code are how NDAs get broken.

Contracts that matter

Do not start a repo on a handshake. The stack:

1. Master services agreement — status (independent contractor), payment, IP, confidentiality, non-solicit (be careful; some California non-solicits are unenforceable), limitation of liability, insurance, termination.
2. Statement of work — deliverables, dates, fees, assumptions, what “done” means. Change orders exist so scope creep has a price.
3. W-9 — LLC legal name, tax classification (disregarded / individual, or S corp once elected), EIN.

Engineer-specific clauses worth fighting for:

• Liability cap at fees paid in the prior 12 months. Unlimited liability for a solo LLC is how you lose the house the LLC was meant to protect.
• No uncapped indemnity for IP unless you wrote it from scratch and were paid. Exclude open source and client-furnished material.
• Payment in 15 days, not “Net 90 because procurement.” Late interest is allowed; collections are cheaper than pride.
• You are not their employee. You use your own equipment. You may serve other clients. (This also feeds the AB 5 business-to-business exception.)

AB 5 and clients

Covered on Should you? because people form LLCs thinking it solves classification. It does not. The ABC test still applies. The business-to-business exception (Labor Code § 2776) is the usual path for a genuine consultancy: separate location or home office, business license, other clients or the ability to have them, your own tools, a contract in the business name.

Some large companies will only engage you through a staffing firm (W-2) because their counsel will not sign up for ABC risk. That is a business decision, not a moral failing. You can still have an LLC for everyone else.

Insurance

Enterprise MSAs will demand a certificate of insurance. Typical ask:

• Professional liability / errors & omissions — the one that matters when your code ships a bug. Often $1M per occurrence. A few hundred to a couple thousand a year for a solo with clean work.
• General liability — slip-and-fall, not segfaults. Cheap. Often bundled. Clients still want it.
• Cyber / tech E&O — if you touch production data, PII, or HIPAA-adjacent systems. Sometimes folded into E&O.
• Workers’ compensation — required if you have employees. Some clients demand it even for a single-member LLC; you may need a policy or a legally valid exemption letter. See DIR.

Name the client as additional insured when they ask and your policy allows it. Send the cert from the broker, not a Photoshop.

Day-to-day operations

• Invoice from the LLC. Accept ACH/wire to the LLC. Avoid payment apps tied only to your SSN.
• Track time or milestones well enough to defend a collections action and a tax audit.
• Deduct ordinary expenses: laptop depreciation or § 179, home office if it qualifies, software subscriptions, conference travel, a portion of health insurance if you are eligible for the self-employed deduction, retirement (SEP IRA or solo 401(k) — the latter needs a plan document, preferably before December).
• 1099-NEC: if the LLC is disregarded, clients may 1099 you as an individual with the EIN or SSN depending on how they read the W-9. If you are an S corp, they generally should not 1099 you for services, but many still will. Keep the W-9 consistent.
• Do not hire employees “off the books.” California is not the state for that experiment.

Stay in good standing: calendar and checklist.