California is home to over four million small businesses, making it a world leader in entrepreneurship. In order to set up a business there, you’ll need to navigate a complex set of rules and regulations unique to California. To make this less daunting for you we’ve easily outlined the steps of forming a Limited Liability Company (LLC) in California.
1. Choose a Name For Your Business
Choosing a name for your company is the first step in starting your LLC. Under California law, LLCs can’t choose a name that’s so similar to another business’s name that it would cause confusion for the public.
A useful rule of thumb is to come up with at least three names to choose from, just in case your first choice name is taken.
You can search LLC names that are currently on file with the California Secretary of State on their Business Search tool. If a name appears to be available, you can request a more formal name availability confirmation by mailing a completed name availability inquiry letter to the California Secretary of State’s office in Sacramento. Your inquiry will be processed in approximately two business days.
You can also reserve a business name for up to 60 days while you complete the other steps toward setting up your LLC. To reserve a name, you must mail or drop off in person a name reservation request form, along with a $10 reservation fee and a $10 handling fee. You can request to reserve up to three names.
However, if you want to be able to operate your business under an alternate name, then you have to register that “doing business as” name (DBA) as well.
A DBA is not a legal name, but rather an assumed name under which a business can operate.
2. Select a Registered Agent
If you want to run an LLC then you are required to designate a registered agent for your business entity. You must provide a physical address where the business can receive legal notices, summonses, and subpoenas.
The registered agent must be a California resident or a registered California corporation with a physical address in California. You cannot use PO Boxes for your registered agent address. Also, the registered agent must be available to accept documents during normal business hours.
While the state of California allows you to be your own registered agent (as long as you have a street address located in the state), using a registered agent service offers the following benefits:
- Privacy - Your name and contact information will not become public information posted on the website for everyone to see.
- Flexibility - You do not have to worry about making yourself available during all business hours to receive official documents. This is useful if you travel often to see clients or if you are often on the go.
- Peace of Mind - The registered agent will help you stay on top of legislative changes, due dates for reports, and disparate laws of different states.
3. File Articles of Organization
Articles of Organization must be filed with the office of the California State of Secretary when forming an LLC in the state.
These documents are a formal application to legally establish the existence of your LLC in the state of California and they outline the main details of your new startup. They tell the state of California how your LLC will be managed by its own members or by separate managers.
Articles of Organization in the State of California must include the following:
- Name of the LLC
- Business address of the LLC’s California office
- Registered agent’s information
- Name and signature of the organizer filling out the form. You can use a home address if you don’t have an office address. However, be aware that the address you list here will be made available to the public.
A domestic limited liability company is defined as an LLC that is organized and operated to do business under the laws of California and must fill out Form LLC - 1. A foreign limited liability company is defined as an LLC that is formed under the laws of another state, but want to do business in California. If you are a foreign LLC you must fill out Form LLC - 5.
The filing fee for Articles of Organization is $70. You can file this online, by mail or in person, with the Secretary of State’s office in Sacramento, CA. Once it is approved, the state will send you a stamped copy of your Articles of Organization and a 12-digit identification number that you will use on other state paperwork. Other important facts to know along with your Articles of Organization are the following:
- Operating Agreement - If you file your Articles of Organization with the California Secretary of State, but fail to create an operating agreement your LLC will be vulnerable. If you are ever sued or subject to an IRS audit your personal assets and the assets of your LLC will be exposed to liability. This is because you have not specified who your company’s owners are, how your LLC operates, your preference of tax treatment, and so forth. In order to protect yourself from a lawsuit or IRS audit you should prepare a comprehensive operating agreement for your LLC.
- Keep your Funds Separate (no commingling) - It is important to run your LLC as a separate business entity, otherwise, you may be exposed to personal liability. You should be sure to not commingle your LLC’s funds with your personal funds or the funds of any other businesses.
4. File Statement of Information
Within 90 days of receiving your official LLC from the State of California, you are required to submit a Statement of Information to the Secretary of State. This document ensures that all of the information about the company is accurate and up to date. For example, if your business address or registered agent information has changed, the Statement of Information is where you’d indicate those changes.
You will need to provide the following information when filing the Statement of Information:
- The name of the LLC and the company number issued by the California Secretary of State
- The business address along with the names and addresses of the Members or Managers of the business.
- A short description of the type of business.
- The name and address of the registered agent that will accept service of process in the event that the company is sued.
Make sure to file your Statement of Information on time, because failure to do so will result in a $250 fine. The Statement of Information form can be submitted online, by mail, or in person, with a $20 filing fee. You will need to file an updated Statement of Information every two years.
5. Pay Taxes
LLCs formed in California or that are registered to do business in California are required to pay four main types of taxes.
The first type of tax is an $800 annual franchise tax that all LLCs must pay.
- If you want to pay taxes online, you’ll need to call the Franchise Tax Board at 1-800- 353-9032 or 1-916-845-2829 for those outside of the United States. If you want to file your taxes by mail, fill out Form 568.
- Keep in mind that your first LLC tax is due on the 15th of the fourth month after your LLC is formed. Every year after that, your tax payment is due on the 15th of the fourth month of your taxable year. If you create your LLC with the Secretary of State in December, you'll have to pay $800 by March 15 for your first tax year and then another $800 by April 15. There is one exception to this rule. If you create your LLC on or after December 17, and you don't do any business until January 1, the first year's $800 minimum tax is waived, and you would just owe $800 by April 15.
The second type of tax is a gross receipts tax that varies based on the total revenue of the LLC:
- $0 to $249,999 total revenue = no gross receipts tax
- $250,000 to $499,999 gross revenue = $900
- $500,000 to $999,999 gross revenue = $2,500
- $1 million to $4,999,999 gross revenue = $6,000
- $5 million + gross revenue = $11,790
The third type of tax refers to the obligations that apply to members of the LLC. Each member of the company must pay personal state income taxes on their share of the business's profits unless the LLC elects to be taxed as a corporation.
The final type of tax concerns LLCs with employees. LLCs with employees must withhold payroll taxes from their employees’ wages and pay the employer share of payroll taxes.
Always keep in mind that in addition to state and federal taxes, you must comply with county and/or city tax requirements. To find out if there are additional taxes you need to pay, Google your city name along with “register your business” and see if your city has tax requirements. Repeat this process with your county’s name.
Common Questions About Forming a California LLC
What is Better a California LLC or a California Corporation?
Both offer personal liability protection and keep your personal assets safe from being used to pay your company’s debts. A corporation is complicated (and expensive) to run and manage. It is mainly suited for large and complex businesses that have many shareholders. While a California LLC is more affordable and simple to set up. It is also easier to manage since you don’t have to hold board meetings or keep extensive records. If you have a large business with many shareholders, then form a corporation. If not, then a California LLC might be a better option for you.
What is Better a California LLC or a Partnership?
In a partnership, you and your partner’s personal assets are not safe. They can be used to pay off your company’s debts if your company falls behind on payments or gets sued. In comparison to a California LLC that builds a “wall of protection” between your personal assets and the assets of your business. In case your California LLC gets sued, only the assets the LLC holds can be used to pay off its liabilities. In conclusion, a California LLC is often better than a Partnership.
What is Better a California LLC or a Sole Proprietorship?
In a sole proprietorship, you will be held personally liable for your business’s debts. This because the law views you and your business as one and the same person. In a California LLC, your business is viewed as a “legal person” separate and distinct from you. It can hold and own its own assets. In case your business has to pay debts, only the assets of your business can be used. Your California LLC creditors won’t be able to go after your personal assets. Therefore, a California LLC is preferable to a sole proprietorship for asset protection.
When is the Best Time of Year to Form an California LLC?
Remember, you must pay the Annual LLC Franchise Tax of $800 by the 15th day of the 4th month after you filed your California LLC. However, this pays for the current year only. After that, you’ll have to pay it again by April 15th of every year. For that reason if you form your California LLC in October, November, or December, you’ll end up paying $800 twice within the span of a few months. As a result, it is recommend you form your California LLC before October, November, or December. In the case your business doesn’t need to operate immediately you can wait until January the following year to form your California LLC.
Final Thoughts on Forming an LLC in California
California LLCs provide a combination of operational flexibility and legal protections. In addition, California business owners mainly choose to form an LLC because this structure gives owners the same limitation of liability as a corporation without the added complications.
Do You Need A Registered Agent For Your California LLC?
Before you can form a LLC in California a registered agent is required. You’re required to designate an in-state registered agent when you form your company and in each additional state in which you are doing business. Maintaining a registered agent in the state in which you formed and in each state where your company is conducting business is an ongoing requirement.
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