It’s a pretty safe guess that anyone who is reading this article has decided to form a Limited Liability Company (LLC) in California.
It’s always an exciting time when you’ve decided to start a new business or expand your business to a different state. Congratulations!
In this article, I’ll give you a comprehensive guide that will tell you everything you need to know about forming an LLC in California including tips and advice that will make the process seem less scary. But before we jump into the crazy process of forming an LLC in California, I’m going to give you an overview of a California LLC and what benefits you get from an LLC instead of any other business structure.
(If you want to skip to the ‘how to form an LLC’ section, click here)
Table of Contents
What Is A California LLC?
A California LLC is a Limited Liability Company formed in the state of California that is governed by the laws, regulations and statutes of the state of California.
Why choose An LLC?
There are a few advantages to LLCs that make them a more attractive business type for many people than S corporations, C corporations, partnerships or sole traders.
1. Limited Liability And Asset Protection
The first benefit that owners of LLCs enjoy is that they cannot be held personally responsible for the liabilities and debts of the LLC.
If your California LLC happens to be sued or suddenly goes bankrupt, your LLC’s creditors can’t come after your personal assets like your house, your car and your personal bank account. Their only financial recourse is limited to the assets of the California LLC itself.
We’ve all been made very aware that unexpected events (like a global, viral pandemic) can put even the most successful and well-prepared LLCs out of business. So this level of personal asset protection is much appreciated by business owners who value the hard work they’ve put into creating and developing their LLCs.
The second benefit you receive when you form an LLC in California is the protection of your personal information.
Scam artists and hackers have become even more skilled at what they do. With the smallest bit of seemingly insignificant information they can steal your identity and rack up thousands of dollars of debt in your name.
If you choose to use a partnership or sole trader business type, your personal information is put on the California Secretary of State’s business name search page, which is public record. This makes the personal information of business owners of these business types vulnerable to everyone, especially people with nefarious intent who can easily obtain your information to do with it what they will.
However, when you choose to form an LLC in California you have the option to keep your personal information off the public record.
In order to get this information protection, all you need to do is hire an LLC formation service. An LLC formation service will put their information on the formation documents, instead of your information. You’ll still retain ownership of your Limited Liability Company (LLC), but your information won’t be listed on the website of the California Secretary of State for everyone to see.
Finally, LLCs enjoy taxation benefits that many business owners consider to be the biggest benefit to creating a California LLC.
If you choose a corporation as your business type instead of a California LLC, then you’ll experience what is known as “double taxation”.
Here’s how this phenomenon works. First any profits made from the corporation are taxed at corporate tax rates, then divided and distributed to the business owners as dividends which are then subject to personal income taxes. Thus the term “double taxation” because you have to pay taxes twice.
As an LLC, you won’t have to worry about “double taxation” issues. The profits of LLCs are taxed at company tax rates instead of corporate tax rates which are then divided up amongst the LLC owners and taxed as personal income tax. This way, the profits of an LLC are only taxed once.
Additionally, LLCs receive more tax benefits due to the 2017 Tax Cuts and Jobs Act. Under the Tax Cuts and Jobs Act, a new tax benefit for LLCs was introduced called Qualified Business Income Deduction (QBID). Because of this, LLCs enjoy a 20% tax benefit that no other business structure benefits from.
How To Start An LLC In California
Now that you’ve read about what a Limited Liability Company (LLC) is and what sort of benefits LLCs can provide your company, you can make the decision whether to form a LLC. If you’re still confident that a Limited Liability Company is the right structure for your business in California, here are the five steps to form an LLC in California.
IMPORTANT: If you feel like you need a bit of guidance to help you through all of the red tape and legal jargon that you have to go through and learn to get through the LLC formation process, there are companies that will guide you through it all. They’re called LLC formation services and they’ll help you to file all of the necessary formation documents and keep your personal information safe.
LLC formation services typically cost as little as $0 plus the state filing fees. (However, my go-to LLC formation serviceis ZenBusiness which charges $49 plus the state fee.)
If you think you’d benefit from some guidance and help filing formation documents as well as protecting your information, check out my guide on the best LLC formation service here: Best LLC service
1. Obtain Articles Of Organization Form
The first step on your journey to form an LLC in California is to get yourself a copy of the Articles of Organization form from the California Secretary of State.
You can get what the California Secretary of State calls “Form LLC1” on their website and either submit it online or download a PDF and submit it by mail. Either way, you’ll have to pay the filing fee. If you transmit the form online you can make a credit or debit card payment and if mail it, you can make a payment using a check or a money order.
Because this is the main document required to form an LLC, these steps below will refer back to this document.
2. Choose Your Business Name
One of the first things you’ll need to do once you’ve obtained your Articles of Organization form is to decide on your LLC name.
Unfortunately, you can’t just enter any name that pops into your head for your Limited Liability Company. One of the requirements for LLCs enforced by the California Secretary of State is that each business in the state of California must have a unique name, so that no two businesses have the same name.
It’s easy to find out if the LLC name you want is available. You can just run a simple search on the California Secretary of State business name database.
There are rules about LLC names in California that all LLCs must follow. For instance, every Limited Liability Company (LLC) in California must have a name that ends with “Limited Liability Company”, “L.L.C.”, “LLC”, or abbreviations like “Ltd.” or “Co.” You can read more about the rules for your LLC name here.
3. Choose A California Registered Agent
Another of the requirements for LLCs set by the California Secretary of State is that every California LLC needs to have what is known as a “registered agent”.
A registered agent is a statutory or legal agent that is the designated point of contact for your business in California and is available to accept mail, legal documents and service of process from any government agency on behalf of your LLC during normal business hours.
You can, of course, choose to act as the registered agent for your LLC yourself or acquire a registered agent service. This is an important decision which could mean the difference between whether your business entity remains in good standing with the California Secretary of State or …..
If you decide to take on the registered agent duties of your LLC yourself, you’ll have to deal with your personal information being made public and will therefore be vulnerable to hackers and scam artists. You’ll also have to consider how to make yourself available during business hours if you’re also running your LLC during normal business hours. You can’t be in two places at once and if you miss an important piece of mail, document or service of process, you risk not only your company’s good standing but also being sued and not being able to defend yourself.
Tackling the role of registered agent for your LLC will cost you a lot of time and energy. The only real bright side to it is that you won’t be charged any fees because you’re doing the work yourself.
If you choose to appoint a registered agent service rather than to take on the difficult task yourself they will keep your personal information safe by registering their information instead of yours on the public record, make sure that you receive mail and legal notifications and forward your mail to you. The only real downside of using a registered agent service is they cost between $99-$299 per year.
However, given the fact that you could be sued and not afforded the chance to defend yourself or even lose your business if you aren’t available to receive every document or piece of mail, it’s worth the $99-$299 fee for the peace of mind that a registered agent service provides.
If you’d like to ensure that your personal information is protected and you’d like the peace of mind that comes from appointing a registered agent service, check out my guide on the best California registered agent service
4. Choose Your LLC Address
Your LLC name isn’t the only piece of information that must be included on the Articles of Organization. You’ll also have to register an address for your LLC to be listed on the public record through the Secretary of State’s website in accordance with California state law.
If you’ve chosen not to use a registered agent service, you’ll have to use the street address of your business in California. But if your business doesn’t have an actual physical street address, you’re forced to use your personal home or office address.
If you’ve decided to use a registered agent service, they provide your business with both a name and address to register on the public record that can’t be traced back to you or your home address.
5. Sign And File Your Articles Of Organization
Once you’ve ensured that all of the information on the form is correct (and checked it for accuracy several times), it’s time to sign and file the Articles of Organization for your LLC.
Of course, you can sign and file the document yourself, but this leaves your personal information on the public record and vulnerable to attacks by cyber criminals with criminal intentions. But if you’ve decided to use an LLC formation service, they sign and file the Articles of Organization on behalf of your business in California.
You can either submit your form online and pay the state fee with a credit or debit card, or send the form along with the state fee payment by mail to:
Secretary of State Business Programs Division
1500 11th Street
Sacramento, CA, 95814
The Secretary of State will notify you by email or mail once they’ve filed your Articles of Organization which typically takes between 4-6 weeks. If you want to speed up the process , several LLC formation services in California offer expedited filing services that can get results in just a few days.
Other LLC Activities
There are a few other activities that you’ll have to take part in so that your Limited Liability Company (LLC) can remain in good standing so while they’re not part of the LLC formation process, they’re just as important.
One of these activities is filing your Biennial Report or Statement of Information every two years. The initial statement of information for your business must be filed within 90 days of the date your LLC was approved. The Statement of Information is due on the anniversary of your business being approved for LLC status.
Every LLC in Florida has to pay taxes to the California Franchise Tax Board to comply with Florida state law. So, you’ll have to pay a yearly franchise tax to the California Franchise Tax Board for your business. The annual minimum franchise tax is $800 and the Franchise Tax Board will tack on additional fees to the annual franchise tax for LLCs with a net income of over $250,000.
On top of the filing a biennial Statement of Information and making the annual franchise tax payment for your business, you’ll also need to obtain a Certificate of Good Standing, pay state taxes and take part in other activities in order to meet the requirements and obey the law so that you can continue to run a business in the state of Florida.
It’s pretty likely that you’ll need to obtain a business license for your LLC so that you can legally conduct business in California. You may also need to register with one of California’s many tax authorities. If your business collects sales tax, you’ll need to register your business with the California Board of Equalization (BOE). And for employer tax purposes you’ll need to register with the California Employment Development Department.
This is a lot to keep up with in your business and it can make your head swim. But if you’d like to relieve yourself of some of the paperwork and filing burdens associated with business ownership in California, you should consider hiring a California PEO company as well as an online legal service to help you with any tax or legal questions you may have.
California LLC Fee Summary
Whether you decide to form your Limited Liability Company on your own or you choose to hire an LLC formation service to help with the process, you’re going to have to pay some fees. Here are a few of the most common fees you’ll encounter when forming an LLC in California:
Articles of Organization filing fee: $70
Name Reservation filing fee: $10
Registered Agent filing fee: $99-$299
Biennial Report or Statement of Information filing fee: $20
State Personal Income Tax Rate: 1%-12.3%
State Corporate Income Tax Rate: 8.84%
After Starting Your California LLC
You’ve formed your LLC which is a major step. Take time to celebrate this victory by drinking a beer or a glass or two of wine, going out to dinner or taking a weekend trip. But don’t relax for oo long because there are still several steps you need to complete to make sure that your Limited Liability Company (LLC) has the foundations it needs to run properly as a business!
Step 1. Create An Operating Agreement
If you were to compare your business to a living creature, the LLC would be compared to the skin or the exoskeleton of the creature and the LLC Operating Agreement would be likened to the nervous system which tells the creature how to respond and what to do.
California state law doesn’t require that your Limited Liability Company (LLC) has an Operating Agreement, but it’s highly recommended that you create one.
Basically, the LLC Operating Agreement is an agreement between LLC members that provides a detailed explanation of how the business should run. The agreement should identify each of the LLC members and all of the members on your Board of Directors (if you choose to have one) and then continue to describe the managerial, operational, structural and financial details of your Limited Liability Company (LLC).
A good Operating Agreement should specify which members make the high-level decisions as well as specifying the ownership percentages belonging to each member and the shares of profits and losses that each member receives. The agreement should define the roles of each member and members’ relationships with each other so that the office environment can be defined and established.
Additionally, the agreement should provide a thorough explanation of what happens when a member leaves or joins your Limited Liability Company (LLC). If you design your agreement this way, you’re providing not only business operation instructions, but also explicit instructions to follow in the event that the members have a disagreement.
The Operating Agreement is one of the most important documents for your business entity because it describes the office environment and how members interact with each other and defines how the business should be conducted. From these definitions it should be easy to guess that your business is pretty much required to operate under the instructions laid out in the operating agreement, so if it’s poorly designed it could stunt your business growth and halt business progress because of the agreement’s faulty instructions which didn’t leave room for things like innovation and change. If your Operating Agreement is well-designed, your business will flourish without the restraints of flawed instructions for business operation.
You can download a free and editable operating agreement template on Northwest Registered Agent’s Website here: Free Operating Agreement Template
Step 2. Apply For An Employer Identification Number
If you plan to either open a bank account specifically for your LLC or you plan to hire employees, you’ll need to acquire an Employer Identification Number (EIN). With an EIN, your company can qualify for certain licenses and permits and you’ll be able to perform payroll operations. Of course, you aren’t required to hire employees to receive an EIN – it’s just an identification number for businesses.
EINs are numbers that help to identify LLCs in much the same way that Social Security Numbers identify individual people. It’s not hard to apply for an Employer Identification number and you can do it on the Internal Revenue Service (IRS) website.
A lot of LLC formation services will apply for an EIN on your behalf, which is convenient.
However, it’s simple enough to apply for it yourself. You just have to go to the website Monday-Friday between 7am-10pm to apply.
Step 3. Open A Business Bank Account
You’re nearly through all of the steps to complete the business foundation for your LLC! The last step is to create a bank account specifically for your business operations.
A lot of people overlook this step but it’s quite an important one.
Many people attempt to use their personal bank account for both their personal transactions and their business transactions and then have to try to figure out which transactions were which later for tax purposes. This may seem easier than having two different bank accounts, but there are two important reasons you shouldn’t do business this way.
The first reason you should open an LLC bank account is it will be immediately obvious that every transaction made on your LLC bank account is a business transaction and not a personal transaction. While you may think that you can remember which transactions were which, it gets a lot harder to remember which were which when tax season rolls around because that’s often several months after the transaction was made. Doing business from your personal account makes tax season more complicated than it needs to be, and it’s not like doing business this way provides you with a better tax return so it’s not worth the headache.
The next reason is pretty important. If you make business transactions through your personal account, you risk being vulnerable to personal lawsuits – regardless of the personal asset protection you get from forming an LLC.
So you can make your life a lot easier and protect yourself by just creating an LLC bank account that is separate from your personal bank account.
You’re typically going to need what’s known as a “bank kit” in order to open an LLC bank account. These kits usually include a copy of documents like your Articles of Organization, Operating Agreement, your initial resolution and your EIN.
As is the case with many things discussed in this article, an LLC formation service can help you with this task. They usually include bank kit creation as part of their formation services.
Starting an LLC in California is a massive first step and a huge accomplishment.
If you choose to use an LLC formation service to help you navigate through the red tape and paperwork associated with the formation process, they can cost as little as $0 plus the state filing fees. If you’ve chosen to forego the LLC formation services, here are the five steps you’ll need to complete to form your California LLC:
- Obtain the Articles of Organization form
- Name your LLC
- Choose your Registered Agent
- Choose your LLC address
- Sign and file your Articles of Organization
It’s a lot of hard work to swim through the ocean of red tape, legal jargon and paperwork associated with forming an LLC. But if you get through it on your own without using an LLC formation service, you’ll be rewarded with an immense sense of accomplishment. This is the first step along your business journey, and the first step is always the biggest one.
Congratulations on this momentous occasion, and good luck on your business journey!