Are you thinking of starting your own business? If so, you’ll need to decide what legal structure to use. The Limited Liability Company (LLC) is a popular choice for small businesses in California because it offers some advantages over other types of business structures. In this article, I’ll provide a guide to starting an LLC in California, with the steps you need to take and the requirements you must meet.
What is an LLC?
The Limited Liability Company (LLC) is a popular business structure for many businesses starting in California. The LLC is created under state law and provides personal liability protection, and has the potential to save money on taxes. With a little research, you can earn how to form an LLC in California without an attorney.
Unlike a sole proprietorship or partnership, where the small business owner can be held personally liable for lawsuits against the business, the LLC is a separate legal structure, which provides asset protection because the entity separates the business assets from the business owner’s personal assets.
Besides having liability protection, the Limited Liability Company provides several other benefits over the sole proprietorship, partnership, and corporation because of the multiple tax options, ease of administration, and management flexibility.
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Steps to Form a California LLC
Are you thinking of starting your own business but feeling overwhelmed about all the paperwork and legal mumbo-jumbo? Don’t worry; this guide to starting an LLC in California will take you through the process step by step and show you the way.
Step 1: Choose an LLC Name
The first step in forming a California Limited Liability Company is to make sure the name you want is available. There can’t be another LLC in California with the same name as the one you want.
Before deciding on a name, you will want to do a name availability search, as each LLC must have a unique name in California. Check on available LLC names in California through the California Secretary of State’s entity database and make sure the name you want is available.
In addition, there are a few LLC naming guidelines to follow.
1. Under California law, the legal name of the LLC must include one of the following words or abbreviations at the end of the business name:
– Limited Liability Company
– Limited Liability Co.
– Ltd. Liability Company
– Ltd. Liability Co.
2. The name of the LLC also has to not be likely to mislead the public or include words that may imply the LLC is a government agency.
3. The name shall not include the words “bank,” “trust,” “trustee,” “incorporated,” “inc.,” “corporation,” or “corp.” and shall not include the words “insurer” or “insurance company” or any other words suggesting that it is in the business of issuing policies of insurance and assuming insurance risks.
Before selecting an LLC name, you may also want to see if a domain name is also available.
If you aren’t ready to form your LLC but want to reserve a name, an available name may be reserved for up to 60 days by filing a Name Reservation Request form. The cost to reserve is $10.
Step 2: Assign a California Registered Agent
To have a Limited Liability Company in LLC in California, a registered agent must be identified. The registered agent is either a California resident (Individual) or a registered agent service (California Registered Corporate Agent). The agent must have a physical address in the state and be available during normal business hours. This person will act as a central point of contact to receive legal documents, tax notices, summons, subpoenas, etc., on behalf of the LLC. To see a list of approved California registered agents, visit https://businessfilings.sos.ca.gov/frmlist1505s.asp.
You, as the business owner, can act as your own registered agent in California, and you are not required to pay for a registered agent.
Any individual meeting the above requirements can be the agent, however, the agent’s name and address becomes public record, and with that comes a loss of privacy. This is more important for some entrepreneurs, especially when they are doing business from home or still employed. Hiring a commercial registered agent service like Northwest Registered Agent will help keep the owner’s names from being publicly listed.
Step 3: File the California Articles of Organization
The paperwork to officially create an LLC in California is called Articles of Organization.
If mailing, send the form and pay state fees to:
Secretary of State, Business Entity Filings
P.O. Box 944228
Sacramento, CA 94244-2280
If you have questions, contact the California Secretary of State.
The turnaround time for the state to approve the Articles of Organization normally takes 3-4 weeks, however, expedited processing is available for an additional fee.
When filing the Articles of Organization, there are a few sections that may be unfamiliar. Let’s go over a few of those sections.
Purpose Statement – No action is necessary. Keep the statement “The purpose of the limited liability company is to engage in any lawful act or business activity for which a limited liability company may be organized under the California Revised Uniform Limited Liability Company Act.”
Management Section – This section asks if the LLC is managed by one manager, more than one manager, or all limited liability company member(s). Every LLC will have at least one member.
There are three choices:
- One Manager – This is when the LLC members hire somebody to run the company, similar to the position of CEO for a corporation. This is commonly referred to as a Manager-Managed LLC.
- More than One Manager – Also a Manager-Managed LLC, but with multiple managers.
- All LLC Members – The members themselves are the “managers” and have active involvement in the business’s day-to-day operations. This is commonly referred to as a Member-Managed LLC.
Most LLCs are member-managed and if so, would select all liability company member(s).
What To Do After Setting Up Your California LLC
Once the Limited Liability Company has been formed, there are a few additional steps to take care of. Below is a list of the most common tasks.
File the Initial Statement of Information
Within 90 days of filing the Articles of Organization, the Initial Statement of Information (Form LLC-12) will need to be submitted to the California Secretary of State. The filing fee is $20, and if not filed within 90 days, a $250 penalty will be assessed.
Prepare an LLC Operating Agreement
The operating agreement is a document that governs the framework of an LLC. This document covers items like ownership rights, member responsibilities, how profits and losses are distributed, and more.
Most states do not require an LLC to have an operating agreement; however, it is required in California. In addition to it being required, the operating agreement is useful as it helps to improve the LLC member’s liability protection and reduce misunderstandings of the member’s roles and responsibilities.
Obtain an EIN
If the LLC will hire employees or is owned by more than one member, an EIN is required.
The EIN or Employer Identification Number (also referred to as a Federal Employer Identification Number, FEIN, or Federal Tax ID Number) is a unique 9-digit tax identification number assigned to a business by the Internal Revenue Service (IRS). Similar to a social security number for an individual, the EIN identifies business entities for tax purposes. The EIN will be needed to hire employees, open a bank account, build business credit, register for business licenses and permits, file federal and state taxes, and more.
There is no cost for the EIN when registering through the IRS. The number is available immediately when applying through the IRS website; however, you can also register by phone, fax, or mailing IRS Form SS-4.
If an Employer Identification Number isn’t required, the LLC can either use the owner’s social security number or register for an EIN.
Related: How to Apply for an EIN
Open an LLC Bank Account
Opening a bank account for your LLC is important for liability protection as the account separates the business’s funds from the member’s personal funds.
Several documents will be needed to open a business checking account, such as:
- A banking resolution is a document that authorizes the members to open a business bank account on behalf of the LLC.
- Copies of the original formation paperwork from the state showing the creation of the LLC.
- Driver’s licenses of the members.
- Depending on the LLC age, a California Certificate of Good Standing may be needed to prove the LLC is active and in good standing with the state.
Apply for Business Licenses and Permits
Depending on what your business does and where it is located, there will likely be various business licenses and permits to register for. Some common registrations include:
- Business License – Some cities in California require businesses to obtain licensing before they can start.
- Professional License – Certain professional services such as barbershops, accountants, salons, and others must be licensed.
- Seller’s Permit – In order to sell products and provide services, registration with the California Department of Tax & Fee Administration will be necessary to collect sales tax.
Pay the Annual Franchise Tax
Every year a California Limited Liability Company will need to pay a minimum franchise tax fee of $800 to the California Franchise Tax Board. The franchise tax is based on the gross receipts (total income) of the LLC.
In addition to the franchise tax, there is also a gross receipts tax for businesses in California. The gross receipts tax varies based on the annual net revenue of the LLC. This second California tax is only assessed on LLCs and not corporations. Once gross revenue exceeds $250,000, there will be an additional LLC tax of $900.
File the Limited Liability Company Return of Income Form
LLCs that elect to be taxed as a disregarded entity or partnership will need to file the Limited Liability Company Return of Income form (Form 568). This form reflects the financial activity in your LLC and is a sort of master form to make sure all of the taxes for your business were paid.
File the Annual Statement of Information
LLCs are required to file a Statement of Information (Form SI-550) every 2 years with the California Secretary of State. The first statement is due within 90 days of the LLC being approved. The statement of information updates ownership information and other details.
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California LLC FAQs
How much does it cost to start an LLC in California?
The state filing fee to starn a California LLC is $70
Is there a yearly fee for an LLC in California?
To renew a California LLC, every year, there is a $20 LLC Statement of Information fee and $800 Franchise Tax due.
How long does it take to form an LLC in California?
It normally takes 3-4 weeks for the state of California to approve the LLC paperwork, however, expedited processing is available for an additional fee.
Where do you check if your California LLC name is available?
To search for available LLC names in California, visit the California Secretary of States entity name database.
Do you need a registered agent for your California LLC?
Every LLC in California is required to have a registered agent.
In California, anyone (even the owner) can act as a registered agent, provided they are at least 18 years old, reside in the state, and are generally available during normal business hours.
Does an LLC need a business license in California?
It’s sometimes thought that the LLC and business license are the same, but they aren’t. An LLC is referred to as the business entity, which is how the business is organized to conduct business. A business license is approval from a government entity to legally operate.
How much is an EIN number in California?
There is no cost for an Employer Identification Number (EIN) in California.
What is a California Foreign Limited Liability Company?
A California foreign Limited Liability Company refers to an LLC that was formed in another state but wants to physically operate in California. Physically operating means having a presence such as having an office or hiring an employee.
Related: What is a foreign LLC?
What is a California Professional Limited Liability Company?
Businesses that require state licensing, such as accountants, attorneys, podiatrists, physical therapists, acupuncturists, etc., often must file as a Professional Limited Liability Company (sometimes referred to as a Professional LLC or PLLC) instead of an LLC. Filing for a PLLC is very similar to that of an LLC.
What is the difference between LLC, Ltd, and Co?
LLC, Ltd., and Co. refer to entity designators that can be used at the end of a Limited Liability Name in California.