If you’re thinking of going into business, forming an LLC could be in your best interests. Not only does it offer protection from liability, but it also provides tax advantages you otherwise would not find in partnerships, sole proprietorships, and corporations. Before we get into how to start an LLC in California , let’s cover some basics:
First off, what is an LLC? People often throw this term around without fully acknowledging its weight. LLC stands for a limited liability company. This type of legal entity allows you to own and operate your business while enjoying limited liability. While the term may have you thinking that the setup would be costly, it turns out that this entity is easier to form and run compared to a corporation. That’s one win right there.
Creating an LLC in California
Who is this for?
LLCs are not limited to huge companies, but rather, they work for everyone. Whether you are new in business or already run a sole proprietorship, this legal entity can help you limit your personal legal liability. Such an entity works for almost all businesses. Benefits of this setup include personal asset protection, simplicity, tax advantages, and flexibility.
Business in California
So, why should you create an LLC in California? As it is popularly known, California, or the Golden State, is an ideal region for setting up a business. For one, it has a bustling economy that ranks 5th worldwide, thus boosting the chances of your business succeeding. This state alone contributes to 13% of the US’s agricultural revenues, alongside its contributions to tech and entertainment. Secondly, you get to work with successful people who have carved out a niche in their industries. These people become part of your network, and you meet more of them in the various workshops organized in your choice of industry. There is no stagnation in this state where everyone seems to be in constant momentum.
It gets even better. California is home to so many tourists who flock here year in and year out. Imagine all that disposable money and how easy it would be to make a killing from the tourism industry if you position yourself well. Add the fact that there are so many entrepreneurial classes and incentives, and you will have what it takes to grab the many opportunities you come across.
The icing on the cake is the sheer number of investors willing to take on new ideas. If capital is the problem, searching for an investor can be the way out. And in the Golden State, this might be easier than it seems!
Filing Registration Documents
When forming an LLC, you need to file your Articles of Organization with the California Secretary of State (SOS) to establish your business. You have three options in this case. The first is online, which is the fastest and most accessible. The second option is the submission of PDF files through e-forms. This process involves downloading and signing the necessary forms and submitting them in unlocked PDF forms. The last option involves showing up in person or sending the forms by mail.
Step 1: Choose a business type and Unique Business Name
Now that you are starting your venture, you have different business types from which you can choose. By this, we do not mean the kind of business operations such as the provision of services or goods. Instead, this refers to your liability regarding business transactions. Business types fall under Limited Liability Company, sole proprietorship, partnership, and corporation. Your choice will affect ownership, taxation, legal protection and federal obligations. Make sure that you consider the pros and cons of all available options before making a choice. It would be wise to engage an attorney or tax advisor to help with this decision.
Company Types in California
· Corporation – this type is separate from its owners, thus limiting their personal liability. Taxes are, however, applicable to the the entity and people who hold shares in it .
· Limited Liability Company – the liability in this case is similar to that of a corporation. However, it allows for streamlined taxation.
· Limited Partnership- this business type provides limited liability for some partners, while general partners are subject to unlimited personal liability.
· General Partnership – all partners in this business enjoy joint liability, and their personal income is subject to taxation.
· Limited Liability Partnership – this entity applies to people engaged in professional services such as law and accountancy. Partners should have insurance as per the law.
· Sole Proprietorship – this setup allows an individual to run a business while being subject to all taxes and liabilities accruing from the business operations.
Benefits of an LLC
LLCs have several advantages over partnerships, corporations, and sole proprietorships. However, we will focus on the two main reasons people go for these entities.
For one, they feature streamlined taxation such that you can include your profits and losses when filing your individual tax returns. You do not get taxed on the entity, as would be the case when running a corporation.
Secondly, you enjoy a great deal of limited personal liability . What does this mean? It means that you enjoy protection from the law regarding debts and liabilities accruing from the company. If things go south, you can rest assured that your personal assets will not get taken from you to cover the debts or lawsuits . That is unlike in other business types where personal and company assets are used to pay off debts.
Naming your LLC
Choosing a name for your LLC is the subsequent stage. The naming has to comply with the naming regulations.
- The name must indicate that your company is an LLC, which you can achieve by using suffixes such as LLC, L.L.C, Ltd, Co, Company, or Limited.
- The name should not have similarities with government agencies that can create a false sense of confidence in your company, with the public thinking that your business is government-related.
- Additionally, when using restricted words such as university, you will require more paperwork and professionals to join your LLC. It is advisable to avoid such words.
- The name should be available, and you can confirm this by doing a name search. You should also check if a URL of your preferred name is available. You might not plan on having a website at this point, but if you eventually do, you will require it to be available by registering it today.
Want to learn more? Read our full Choose a business type and Unique Business Name For LLC
Step 2: Assign an Agent for Service of Process
The next step lies in finding and appointing a California Agent for Service of Process to form your LLC. In other states, this agent goes by Registered Agent.
Roles of the Agent
Your agent can be a person or business entity tasked with the following duties:
- Receiving fundamental tax forms
- Receiving legal documents
- Receiving notice of lawsuits
- Receiving official government correspondence
Benefits of an Agent
Here are some reasons to use a good agent :
- The agent receives correspondence on your behalf and is your point of contact with the state, allowing you to focus on the business instead. This allows privacy such that law enforcement officers do not show up to your workplace in front of your clients.
- The agent handles compliance issues, reducing the risk of non-compliance
- You can keep your address hidden from the public eye if you run your business from home. The agent can sort through the mail and reduce the pressure on your junk folder.
- An agent also comes in handy if you run your business outside the normal operating hours. All correspondence will get to the agent, ensuring you do not miss out on any communication. This method also works when you are incorporating your business in California, yet you do not run your business from the state. It also works for you if you do not have a permanent worksite such that you do not have a physical address.
Choosing an Agent
The agent can be a corporation or a full-time resident in the state with a permit to conduct agency-related business. You are thus free to represent your company as an agent or to nominate one of the people in your LLC. However, it is always better to have a registered agent receiving documents on your behalf. Not all agents will do a good job, and it is always best to work with those with good reputations for excellent services. When looking for a registered agent, the below examples can help:
- ZenBusiness – for the first year, clients pay $49. Subsequent years cost $119 per year, enabling clients to access their dashboards, which contain relevant business correspondence.
- Incfile – clients do not pay for the first year of service. For subsequent years, the charges start at $119, enabling you to access an agent, a digital dashboard, and automatic mail forwarding services.
- Northwest Agent Registration – like with incfile, the first year is free. Clients pay $100 for the subsequent years, enabling them to access online accounts that comprise reminders, tips, annual reports, and important documents.
- LegalZoom – clients benefit from identity theft coverage in the tunes of $1 million as well as business data protection. Charges start at $299 a year.
- CT Corporation- fees for this service are quite hefty, starting at $329 a year, with new clients benefitting from a 10% discount. Clients access their online portal 24/7.
Want to learn more? Read our full Assign a the Registered Agent
Step 3: File the LLC Articles of Organization
You need to file your Articles of Organization, which is a legal document that officially establishes your business. It also goes by names such asCertificate of Formation or Certificate of Organization in other states. You can think of this filing as the first step into the future.
Components of the Articles of Organization
- The proposed name of your LLC – once you make your submission, the SOS can either approve or reject the name. It is thus advisable that you follow the guidelines we covered under step 1.
- Business Address – this includes the physical and mailing address of your company. If the mailing address is different from the physical one, ensure that you indicate this. Indicate the address which should receive your governing documents and other records, even if it is outside the state.
- Your Registered Agent – you need to have a registered agent who will serve as your point of contact regarding correspondence. For example, if you get sued, the communication should go to this agent.
- Management – you need to indicate how the LLC will be managed. The options are one manager, more than one manager, and all limited liability company managers.
- Purpose- this part will be filled-in by default, and you cannot change it. However, if you want to expound on it, you can do so in your operating agreement.
- The Organizer Signature – this part is for the individual in charge of preparing and filing your Articles of Organization. It can be you, a member of the company, or a third party.
Submission can be online, by mail, or in person after filling the Form LLC-1. In all cases, you are subject to a filing fee of $70.
You can complete Form LLC-1 online in website California Secretary of State
The mailing address is as follows:
Secretary of State
Business Entities Filings
P.O. Box 944228
Sacramento, CA 94244
You can drop off the application as follows:
1500 11th St.
Sacramento, CA 95814
Mon-Fri. 8 a.m. to 5 p.m.
All applications must accompany a $70 filing fee, which is non-refundable. If you make errors in your filing, the loss falls on you. A good example would be where you submit a name that already belongs to another company.
Please note that you will pay an additional $15 at the Sacramento counter to allow for priority processing over mail applications for in-person delivery.
Mail filing should have a check or money order accompaniment. Cash is not acceptable.
Processing timelines depend on the number of applications at any given time. Generally, online and mail applications take 5 business days. You can expedite the processing for an additional fee as follows:
- 4 hours- $500
- 24 hours- $350
Statement of Information (SOI)
California law requires that you file your SOI Form LLC-12 within 90 days of forming your LLC. This statement enables the state to be up to date on any changes in your LLC, such as business address changes. You should do this every two years after the first filing to ensure your public record remains active.
The filing can be online, by mail, or in person at a fee of $20, using the same addresses as discussed under the Articles of Organization.
Components of the SOI
It is advisable to type in the answers for legibility. You need to note the following:
- The exact name of your LLC
- The LLC file number issued by the SOS
- If the LLC was formed outside California, where it originally was
- The business addresses- actual address, mailing address, and address in California if the first two are not. Only the mailing address should be a P.O. Box.
- Registered Agent
- Type of business, e.g., music
- Name and address of the CEO
- Date, name, and title of the person filling the form
Updates to the SOI
Where any changes occur to the LLC, even in less than 2 years of filing, you need to update the business records. For this, you should include the following in the LLC-12 Form.
- The name of the LLC
- Street address of the LLC’s main office
- Name and address of the registered agent
- Type of business changes
- Name and address of CEO/ member/ manager changes
If no changes are present, you should fill the LLC-12NC Form. Failure to update the statement on time results in a late fee of $250. You can also risk losing your right to operate in California.
Want to learn more? Read our full File LLC Articles of Organization
Step 4: Get an Employer Identification Number (EIN)
EIN stands for Employer Identification Number (EIN) or federal tax ID. The EIN is a 9-digit number issued by the Internal Revenue System (IRS). It identifies a business entity and tracks its tax reports. You can think of it as the social Security Number equivalent for a business entity. An EIN applies to all LLCs with more than one member, even if no employees are present in the organization.
Importance of an EIN
- It enables you to open a bank account for your business
- It allows you to apply and get business permits
- It makes it easier to set up a payroll for outgoing monies
- It aids in the payment of federal payroll taxes
How to get an EIN
You can get this identification from the IRS at no charge. Once you form a company, you can make the application online or by mail as follows:
It works where you have an SSN or ITIN and is the fastest method. To apply online go to the website
Use Form SS-4 – you can use this if you have an SSN or ITIN but get an error message. In this case, you need to fill the SS-4 form and send it to the IRS. You can also use it where you do not have SSN or ITIN.
Internal Revenue Service
Attn: EIN Operation
Cincinnati, OH 45999
This method works for people who have SSN or ITIN but get error messages. It also works for those who do not have SSN or ITIN.
Send the form to fax number to 855-641-6935.
The IRS will issue an approval if you fill the form correctly, reverting with a CP 575.
- Online applications have no waiting time. You get approval at the end of the application. The IRS sends a copy in about 4 weeks.
- Fax – you get a fax confirmation letter within 4-7 business days.
- Mail – this takes the longest time; about 4-8 weeks.
If you apply for an EIN before forming your LLC, you run the risk of having an EIN for a company that does not exist. However, you can cancel the EIN by mailing a cancellation letter to the IRS.
Want to learn more? Read our full Get an Employer Identification Number For LLC
Step 5: Create an Operating Agreement
Every LLC should have an operating agreement, which establishes the business. This legal document stipulates the rules to which your LLC is bound as well as your expectations. Mainly, it shows who owns the business based on shares and who has the power.
Why you need it
- Legal Requirement- the state requires that you have this agreement as per CA Corporations Code Section 17701.02(s) . Thus, if not for any other reason, you need it to ensure you abide by the laws.
- Conflict Resolution- members can refer to the agreement for future dealings. Everything is often okay in the beginning. However, as the money starts trickling in and responsibilities start adding up, it is easy to have misunderstandings. The agreement thus creates a baseline for these future interactions. Also, people are well aware of their duties and roles in the company.
- Limited Liability- the agreement makes the business look more professional and credible , further allowing you to enjoy limited liability.
Components of the Operating Agreement
- Organizational Structure: it shows who the members are and their ownership of the company.
- Management: this shows who will be in charge of the business operations. Management can be by member or manager.
- Voting: the agreement should show how many votes members have and if anyone has more voting power than others.
- Invested Capital- the document also shows how much members have put into the business and rules on raising additional capital in the future.
- Sharing: how will profits and losses be divided among the members? It can be equal or follow a structure.
- Structural Changes: this shows how members will handle roles and ownership transfers owing to replacements, transfers, and other changes. It shows the process for making amendments.
- Dissolution: if members agree to undergo business dissolution , how will this take place?
The agreement is thus an outlook of business operations in the present and the future for the continuity of the business.
Once the operating agreement is ready, you should keep it in the records and share it with other LLC members. Note that when major company events occur, such as the loss of a member, you will need to amend the agreement. These updates depend on the rules, e.g., how many people it takes to make changes.
Here is a sample operating agreement ( link )
Want to learn more? Read our full Create an LLC Operating Agreement
Step 6: Open a business bank account
The next step is to open a bank account for LLC. Keep in mind that the LLC is a legal business entity, and there is thus a need to understand which expenses belong to your business for ease of taxation. Also, the business bank account allows you to separate what belongs to the business and what belongs to you. This separation is what you need to continue enjoying limited liability protection. Without it, in the event that you get sued, you would stand the chance to lose items that are not attached to the business.
Benefits of an account
- It allows for the separation of assets, thus providing limited liability protection
- It enables you to account for taxes
- It exudes professionalism. When you pay or get paid using a business account, you appear to be professional in your dealings.
- It allows you to build a relationship with the bank for future business loans
It helps to look into the fee structure and service options at different banks before settling for one. Once you find a reputable bank, you will need the following information as relates to your business:
- A copy of your Articles of Organization
- Your operating agreement
- Your EIN
Banks often differ in requirements, but the above three are the most requested. You should contact your bank of choice to see if there are additional requirements.
Want to learn more? Read our full Open a bank account for your LLC
Step 7: Register with the Franchise Tax Board
Profits on an LLC are not taxed at the business level, as would be the case with a C corporation. Your tax requirements will be as follows:
- Self-employment tax on business profits
- State tax on any profits, minus state allowances and deductions
- Federal income tax on any profits, minus federal allowances and deductions
- Sales tax on products for some LLCs
- Payroll tax on salaries to employees
Your employees will also be subject to federal, state, and payroll taxes on their earnings. For self-employment, state and federal income taxes, these fall under pass-through incomes. You need to report these profits on your federal and personal tax returns to pay these taxes.
You will pay state tax on monies you pay to yourself through the personal tax returns. This taxation falls under the state income tax. Here are the taxes you should expect:
These apply to people who sell physical products and some services. These taxes vary per region and you should get familiar with what would apply in your case.
Federal taxes include self-employment and federal income taxes.
Self-employment taxes apply to members of the business who take profits from the company. The amount you owe depends on your income and business expenses.
Federal income taxes depend on your earnings, tax bracket, deductions, and the mode of filing.
Employee & Employer Taxes
Tax implications for a business with employees differ, and you should talk to an accountant about this. The taxes include employer payroll tax, federal income, and state taxes.
What is the franchise tax board?
Generally, you should pay estimated taxes four times annually. In addition to federal taxes, you need to pay taxes to the state of California through the Franchise tax board. This tax is due each year as long as your business registration is active. Even if you do not conduct business during your tax year, you will need to part with the tax.
This tax is payable on the 15th day of the 4th month from the date you filed with the SOS to pay your annual tax.
All companies have to pay $800 per year. However, if your income exceeds $250,000, you will be liable to pay more money. Payments can be made via:
- Online- before making an online payment, you need to call the Board before you can start your registration.
- By Mail- you can fill the Form 568 and send it to the board.
If your tax year was 15 days or fewer, and you did not conduct any business during this time, you would not be subject to the annual tax. Where you cancel your registration within a year of formation, you can file a short form cancellation to allow you not to pay the annual tax for the first year.
Want to learn more? Read our full Taxes and License Fees in Texas
Frequently Asked Questions
Forming an LLC in California takes 3-5 business days. However, during peak times, it can take 6-7 business days. The time taken also depends on the mode of application. In-person applications can be expedited at a fee to have the formation done in 4 hours.
If you want to register LLC in California, you will pay $70 when submitting your Articles of Organization. You will also pay $20 when submitting your Statement of Information. Expedition costs vary.
It is a requirement that you register with the California Franchise Tax Board. However, you might not be liable to pay if your tax year is 15 days or fewer and you have not operated during this period. If you cancel your LLC within its first year since formation, you may be liable for exclusion.
When you form an LLC in California, you are subject to the following taxes:
– State tax
– Federal income tax
– Self-employment tax
– Payroll tax
When you want to open LLC in California, you will realize that the formation processes are not costly. With $90, you can have your LLC set up and ready to run. However, the minimum annual franchise tax adds to the running costs, given that you have to part with $800 each year.
Generally, the process should set you back $90, including the costs relating to Articles of Organization and Statement of Information. However, once you include hiring a registered agent California and other costs, the fees may go up.