I started a website that is software as a service. Currently I am a solo founder, and have not incorporated the company yet. The website is now bringing in some revenue (about $360 in recurring subscription fees), and is growing slowly but surely. Each client pays $40 a month, and the goal is to increase the business to a $1,000/month, with the goal of $4,000/month in 6 months. I live in California and now I want to incorporate this business as an LLC. Any advice as to where?
(Disclaimer: The following is not tax or legal advice, and I am not your attorney or your CPA. Consult with your own professional counsel before making a decision.)
Unfortunately, California has an $800 "minimum franchise tax" fee that every LLC or corporation doing business in California must pay, regardless of where they are incorporated.
As far as the State of California is concerned, if any of an LLC's or corporation's owners live in the state, the company must be registered there and pay the $800 annual fee.
If you plan to move away from CA soon, it's probably worth it to file in someplace like Nevada, New Mexico, or Wyoming where filing fees are lower and out-of-state (or in the case of Nevada, also in-state) companies pay no state tax. My understanding is that companies incorporated in California must pay CA state tax even if the business's operations are elsewhere. If in doubt, ask your accountant or your attorney about this.
If you plan to continue living in California for the foreseeable future, you should probably form your company there instead of paying fees and/or taxes to two states. The one exception is if you are planning to take venture capital funding soon, in which case it may save you some money and hassle to form a Delaware corporation (but you will have to pay both Delaware and California filing fees and a Delaware registered agent).
If you aren't planning to take VC money soon, go ahead and form a California LLC. If you're near Sacramento, you can actually go to the Secretary of State's office and get the paperwork processed while-you-wait.
If I recall correctly, you'll need to file Articles of Incorporation and an initial List of Members. This will cost you several hundred dollars. If you are good with paperwork, just go online to the CA Secretary of State's website and get the necessary forms and file them yourself. If you're not good with paperwork and legal stuff, hire an attorney to do this for you.
Once your LLC paperwork is filed, you can apply online to the IRS for an EIN. With that and your LLC papers, you can get a business checking account.
When your LLC is formed, it defaults to "pass-through" tax treatment. Your LLC will not file a return with the IRS. The business's profit or loss will be reflected on your individual tax return Schedule C.
Talk to your accountant about whether (and when) you should elect S Corporation or C Corporation tax treatment for your LLC. When you're making a lot of money, this can save you thousands of dollars a year in taxes. Or it can cost you hundreds of dollars in unnecessary tax prep fees. So get some good advice and run the numbers.
Be aware that many municipalities have a local business license / tax scheme, and if you're operating your business out of your home you may need to get into compliance with this. Some cities will get tax data from the State for anyone in town who files IRS Schedule C and send them a hefty estimated tax bill if they aren't registered as a business.
Congrats on getting your SaaS business off the ground. I advise SaaS businesses on how to increase their sales and recurring revenue, so get in touch if you'd like any help with that.