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 learn 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.
Steps to Form a California LLC
Total Time: 10 minutes
Step 1: Choose a LLC Name
The first step in forming an 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 to do a business name search 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 likely to mislead the public or include words that may imply the LLC being 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’s 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 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 become 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 to be the Registered Agent will reduce the number of unwanted phone calls and mailings.
Learn more about the requirements for a Registered Agent in California
Step 3: File Articles of Organization
The paperwork to officially create an LLC in California is called Articles of Organization.
If mailing, send the form and a check for the $70 state fee 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.
Estimated Cost: 70 USD
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 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).
You don't have to form your LLC by yourself or pay an attorney!Forming an LLC is a little intimidating, especially when it’s your first time. Professional entity formation services help guide you to make sure it’s done right. Check out our reviews of popular LLC formation services to learn more.
You have a California LLC, now what??
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 member’s liability protection and reduce misunderstandings of the member’s roles and responsibilities.
Obtain an EIN
The EIN or Employer Identification Number (also called a Federal Employer Identification Number or FEIN) 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 in order to hire employees, open a bank account, register for business licenses and permits, file tax returns, 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 register by phone, fax, or mailing IRS Form SS-4.
Related: How to Apply for an EIN
Elect the LLC’s Form of Federal Income Taxation
One of the major benefits of the Limited Liability Company is the tax flexibility it provides. When applying for the Employer Identification Number, you will choose how the entity will be taxed for federal income tax purposes. While there are some limitations, an LLC may be classified for federal income tax purposes as a:
- Sole proprietorship
While this may sound confusing, this refers to how the LLC is taxed, not the legal structure.
Related: How can an LLC be taxed?
By default, LLCs are pass-through taxation entities. Instead of the LLC paying taxes on profits, the profits or losses flow through to the members.
Single-member LLCs will, by default, be taxed as a sole proprietorship. The members can elect to be taxed as a C-corporation or an S-corporation.
Multi-member LLCs will, by default, be taxed as a partnership. The members can elect to be taxed as a C-corporation or an S-corporation.
In general, the difference between being taxed as a corporation and being taxed as a sole proprietorship or partnership the profits and losses are passed to the member’s federal income tax returns based on their percentage of ownership. As a result, the owner will pay income tax and self-employment taxes on all business profits. As an alternative, electing to be taxed as a corporation allows the members to take a reasonable salary and then pay payroll taxes. Any remaining profits are distributed and aren’t subject to payroll taxes, resulting in potential tax savings.
Before electing how your Limited Liability Company will be taxed, be sure to talk with an accountant to assess which one will be best for you.
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.
Common Questions To Starting an LLC in California
How much does it cost to start an LLC in California?
There is a filing fee of $70 to start an LLC in California.
Is there a yearly fee for an LLC in California?
A $20 Statement of Information fee and $800 Franchise Tax will be due each year.
How long does it take to start an LLC in California?
It normally takes 3-4 weeks for the state to approve the LLC paperwork, however, expedited processing is available for an additional fee.
Do I have to pay to hire a registered agent?
Anyone 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.
If I have an LLC, is a business license required?
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 an approval from a government entity to legally operate.
What is a Foreign Limited Liability Company?
An LLC that is physically operating in states outside of where it was formed. Physically operating means having a presence such as having an office or employee. The LLC will need to register as a foreign LLC in each state that it plans to operate.
What is a 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 the LLC.