Forming an LLC in California: Step by Step Guide
13 May, 2020
Deciding to start a Limited Liability Company in California? Well, to form an LLC in California is easy and affordable. But just like every other state, there are many specific requirements that are idiosyncratic. The same goes for starting a business in California. The interested parties have to register their business with the Secretary of State by filing the necessary forms, paying the fees, and meeting all the requirements to form their LLC in California.
However, unlike some of the other states, California does not need the LLCs to publish their Articles of Organization in a newspaper in order to finalize their LLC status. And just like this, there are many other rules that have to be followed. But with the rules come the advantages of owning an LLC in California. One of the advantages is the offering of limited liability as a corporation but with less complexity.
This article will help you understand why the choice to form an LLC in California is a great choice and the steps to form it.
Why form an LLC in California?
As compared to every other business entity available, the LLC has many advantages over all the business structure types. The very first advantage that it has is favorable federal tax treatment. To explain better, an LLC that has only one owner is called a single-member LLC and can easily choose if it would like to be taxed as a sole proprietorship, a C corporation, or an S corporation.
For the LLC that has more than one owner, it is called a multiple-member LLC and has the choice to be taxed as a partnership, a C corporation, and an S corporation. A corporation has two choices: C corporation (double taxation) or S corporation (pay taxes at personal return). But a business operated as a sole proprietorship or a partnership does not have any option as to how they will be taxed. Moreover, unless the LLC elects to be taxed as a C corporation, all California LLC profits are passed through to the members.
The LLC members would have to pay both the California and federal income tax, along with the federal self-employment tax on their share of the profits (even if they do not receive profits). In short, the best choice out of all the available entities is the LLC where it not just has the tax advantages but also fewer complexities.
As compared to a sole proprietorship, or a general partnership, an LLC also has the following advantages:
- Limitation of liability: This is one of the main reasons why people set up an LLC for their business. Basically, the owners of an LLC are called the members and are not personally liable for the business, including the debts resulting from most lawsuits against the company. This is not the same for the sole proprietorship and partnership where the owners would have their personal assets at risk when they need to pay for the debts of their business.
With this clear, let us see what makes an LLC better than a corporation. As compared to a corporation, an LLC has the following advantages:
- Less complexity: The LLC has a very simple structure where the member can manage the company or just appoint someone to run the day-to-day operation based on their desire. But in a corporation, there is a three-tiered management structure. Basically, there are shareholders, a board of directors and officers. Additionally, a corporation is needed to hold annual board meetings, meetings of the shareholders, and to keep minutes of what takes place in these meetings. There are no such requirements for the LLC.
- Flexible membership: The LLC can have unlimited number of members, regardless of if it is taxed as an S corporation, but the S corporation can have no more than 100 shareholders. And even though a C corporation can have an unlimited number of shareholders, it will be subjected to double taxation and have more regulations regarding its operations.
In short, if you plan to form an LLC in California, it is the best choice you can make.
Steps to form an LLC in California
Now that you know your choice to form an LLC in California is a good one, you need to know how to start the process. Here are the steps to start your LLC in California:
Step 1: Choose a Name for Your California LLC
The very first step that you need to take is to choose a proper name for your LLC which is unique and the one that would sound perfect as a brand. Remember that the name cannot be the same as or even similar to any existing name in the California Secretary of State records. Additionally, it cannot be misleading to the public. In fact, you can cross-check if the name is available to use by searching the California Secretary of State's business name database.
If you find that your company name is available, you can reserve it for a maximum of 60 days by filing a Name Reservation Request form. The form must be postal mailed or hand-delivered to the California Secretary of State's office. This would allow you to use the name within these 60 days in opening a company. In case the time limit is crossed, you will have to again search to see if the name is still available.
But that is not all; if you are about to form an LLC in California, you need to end the company name with Limited Liability Company. You can also use the abbreviations such as LLC or L.L.C. Along with this, the words Company and Limited can also be abbreviated to Co. and Ltd. The LLC's name may not contain the words bank, trust, trustee, incorporated, inc., corporation, corp., insurer, insurance company, or any other words suggesting that it is in the insurance business (unless you have the permit for it).
Find out more details on the Secretary of State website about important information regarding business name availability here online and in a downloadable publication (Business Entity: Name Regulations & Additional Statutory Requirements and Restrictions).
Step 2: File Articles of Organization
Once you are ready with the name, the next step is to file the articles of organization. Basically, a California LLC is created by filing Articles of Organization with the Form LLC-1 and submitting it to the California Secretary of State's office. The articles must include the LLC's name, its purpose, its address, information on how it will be managed, and the name and address of its registered agent in California.
The form can be completed online or you can mail or hand-deliver the form to the Secretary of State's office. The fee for filing this form is $70. Additionally, with the hand-delivered filings at the Secretary of State's office, you can request for expedited filing for an additional fee. Check out the website for more details or contact us at Eqvista.
Step 3: Choose Your Registered Agent
When you are about to form an LLC in California, you will need an agent for service of process, who is also called the registered agent. This is a person or a company that agrees to accept the legal papers on behalf of the LLC for any case. And an LLC cannot act as its own registered agent in California. The agent should agree to accept service of process on behalf of the limited liability company prior to designation.
Additionally, the individual agent has to be a resident of California and have a street address (not a PO box). And this address has to be added in the form while filing the articles of organization. Also, the agent may be a member, manager, or officer of the LLC, but doesn't need to be affiliated with the LLC. The same rule is for the company which has to be registered in California to act as the registered agent. IncParadise offers the service of acting as a registered agent. Learn more about it here.
Step 4: Prepare an Operating Agreement
There isn't a special need by the Secretary of State to create the LLC operating agreement. But it is highly advisable to create one as it helps in keeping a proper structure and helps in the smooth operation of the company.
Step 5: File a Statement of Information With the Secretary of State
All California and foreign LLCs registered in California have to file a Statement of Information using the Form LLC-12, with the California Secretary of State within 90 days after filing their articles of organization. And after that, the Statement of Information will have to be filed every two years. The period for filing is within the month when the articles of organization were filed for and five months before it. The statement can be filed online or printed out and mail or hand-delivered to the California Secretary of State with the filing fee of $20.
The Statement of Information has to include:
- the LLC's name;
- the California Secretary of State file number;
- the name and address of the LLC's registered agent in California;
- the street address of the principal executive office of the LLC;
- the LLC's mailing address, if it is not the same as the main address;
- the name and complete business or residence addresses of any manager or managers and chief executive officer, if any; if there isn't any elected manage, it has to have the address and the name of each member;
- a valid email address, if the LLC wants to get renewal and other notifications on their mail from the Secretary of State; and
- the general type of business that is the LLC's principal business activity.
Step 6: Pay Your California State Tax Obligations
It is important for even foreign LLC and local LLCs to pay California taxes to the California Franchise Tax Board (FTB) if:
- They have not elected to be taxed as a corporation, which means that they are taxed as a sole proprietorship or a partnership; and
- They are organized in California, registered in California, and conduct business in California.
If both conditions are true, every LLCs that does business in California has to pay an annual minimum franchise tax of $800. You will have to submit the tax using form 3522, which is also called the Limited Liability Company Tax Voucher. In addition to this, the LLCs that have a net income of over $250,000 have to pay an additional fee based on their total annual income.
Other Filing Procedures: Every LLC has to file California Form 568, which is the Limited Liability Company Return of Income by the 15th day of the 4th month after the close of the taxable year of the LLC (which is the 15th of April for most of the LLCs). Check out the California Franchise Tax Board's website to find the Limited Liability Company Tax Booklet that includes Form 568 and Form 3522.
Step 7: Comply With Other Tax and Regulatory Requirements
Other than the things mentioned above, you will also have to comply with other tax and regulatory requirements that apply to your LLC once you form an LLC in California. These include:
EIN (IRS Employer Identification Number): In case your LLC has more than one member in it, you will have to get an IRS Employer Identification Number (EIN) for it. Just to be clear, more than one member means that even if there are two co-founders and no employees in the company, the LLC still needs an EIN. Additionally, if you form an LLC in California that is a one-member LLC, you will have to get the EIN only if the company gets employees or you have elected to be taxed as a corporation instead of a sole proprietorship. To get this, you will have to complete a form on the IRS website or by filing IRS Form SS-4. There is no filing fee for this.
Business Licenses: Based on the kind of business that your LLC is engaged in and where it is located, you might have to get some additional state and local business licenses. To get more information on this, visit CalGold on the California Office of Business and Economic Development website.
Sales and employer taxes: There are some cases (for example if you will be selling goods and collecting sales tax or if you have employees), you will have to get registered with the appropriate California taxing authority. For instance, if you will be collecting the sales tax, you will have to register with the California State Board of Equalization (BOE), which you can do online or in-person at a BOE field office. For employer taxes, register with the California Employment Development Department (EDD).
Step 8: Special California Rules for Professional Services
As per the California law, LLCs cannot be formed to offer professional services. To be clear, professional services include any service that needs a professional state license. In case you do not know if your service needs a state license, see the California Department of Consumer Affairs website. Professionals are allowed to form limited liability partnerships (LLPs) as an alternative to forming an LLC.
Step 9: Foreign LLCs Doing Business in California
Every LLC that has been organized out of California has to register with the California Secretary of State to do business in California. To register for this, you will have to file Form LLC-5, which is also called the Application to Register a Foreign Limited Liability Company and pay a $70 fee. The form must be filed by postal mail or can also be dropped off in person for an additional fee. The LLC must appoint a registered agent in California and provide a certificate of good standing from the agency where the LLC was originally formed. For details, see the business entities section of the Secretary of State's website.
How does IncParadise help you?
With this clear, you now know how to form an LLC in California. And since California offers a lot of benefits, what are you waiting for? Have your idea ready and connect with IncParadise to help you not just register your business in California, but to also act as your registered agent. Find out more about our other service here or contact us today!
« Go Back to Blogs