A Limited Liability Company (LLC) is a way to protect your personal assets in case your business is sued. Conventionally, someone would set up an LLC to run their business. However, there are other uses for the California LLC as well. For example, you could form an LLC to hold your assets.
If you’d like to know how to form an LLC in California, this quick guide should set you on the right path. Setting up an LLC is simple enough and a lot of related work can be done online, especially if you live in the state itself.
Those living out of California in the USA and non-US citizens might have to go through some extra steps. Though overall, the process remains simple enough. So let’s get to creating an LLC in California!
1. Before Starting An LLC In California, Decide On Its Name
When starting an LLC in California, the first thing you’ll need is the name of the LLC. The name is a key part, especially if you’re starting a business. That’s true not only for registering an LLC but also from the perspective of running your business.
You can do a business name search on the California Secretary of State website to check for availability. Having an attractive and unique name for your California LLC will go a long way in simplifying things. The LLC to be registered must have a unique name amongst the previously existing businesses in California.
It’s also a good idea to do a domain name search to register a website for your California LLC. This isn’t a part of creating an LLC in California but is helpful for businesses.
Name Reservation Request (Optional)
Thought of a good name for your LLC, but not ready to get started yet? You can file a name reservation request with the Secretary of State, California. Filing this request will reserve the name of your LLC for 60 days.
However, it does not amount to forming a California LLC – this is just a temporary reservation of the name.
You can use this time to get things in order and form your CA LLC. It’s also a good way to quickly get hold of a unique or trendy name before someone else snaps it.
Each name reservation request costs $10 and can be submitted via mail or in-person (drop off).
Check That The Name Isn’t Infringing Trademarks
Your company’s name should be available for use in California. Additionally, it’s a good idea to check that it doesn’t infringe on any existing Trademarks. Use the USPTO website and do a search to check for any possible trademark infringements.
Designators And Mandatory Elements Of Naming Your LLC
The name of an LLC must end with an appropriate designator. Usually, this identifies it as an LLC, though the following options are available for use too.
- Limited Liability Company
- Ltd. Liability Co.
- Limited Liability Co.
- Ltd. Liability Company
An LLC name shouldn’t be anything that’s “likely to mislead” the public. As such, some words and terms are off-limits. Some of the words an LLC name cannot contain are insurer, insurance, bank, trust, trustee, incorporated, inc., corporation, etc. The name can’t be similar to a government agency or department.
2. A Registered Agent For Your California LLC
A registered agent is a requirement to register an LLC in California. This person will be called the Agent for Service of Process in California.
As the name implies, this person is responsible for receiving any legal mail (service of process) directed at your LLC. This can include receiving comments, complaints, summons, and subpoenas on behalf of the LLC. If your company is sued, the service of process is sent to the registered agent.
The registered agent must have a street address in the State of California. Using a PO Box as an address is not allowed. The address of the registered agent must be included in the Articles of Organization for the LLC.
Who Can Be A Registered Agent When Forming An LLC In California?
Generally speaking, an adult with a street address in California can function as a registered agent.
- You can function as the registered agent of your LLC
- Any member of the LLC can be the registered agent
- Your friends or family members living in California
- A professional service offering a commercial registered agent
Keep in mind, all information related to an LLC can be part of the public record in California. Thus, the address and contact information of the registered agent will form a part of the public record.
That’s one reason people worried about privacy prefer to use a commercial registered agent. That way, your personal information like home address isn’t freely available to anyone.
3. Forming And Filing The Articles Of Organization
Articles of Organization is the most important form you’ll fill when forming your LLC. The moment the state accepts your Articles of Organization is when your LLC is created.
The official form for Articles of Organization (LLC-1) is available online at the California Secretary of State’s website. There are three ways to fill and submit this form.
- By mail
- Walk-in (Counter drop off)
If you live in California, the best way to go about this process is to file the application online. You can file the LLC online using Bizfile on the California SOS site. The $70 Application fee and the $5 certified copy fee can also be paid online.
For mail filing, you can complete the form and send it to the Secretary of State, Business Entities. The application fee involved can be included as a check or money order. The office will not accept any direct cash payment in this format.
Drop off options are only available at the Sacramento office
Counter drop off and walk-in handling of the form is acceptable too. In this case, you’ll need to pay an additional $15 as a counter drop off fee. Interestingly, this fee also provides expedited service over documents submitted by mail.
Guaranteed Expedite Drop Off is available for urgent submissions. In this scenario, the documents are processed within a guaranteed timeframe. An additional, non-refundable fee is involved. The amount of this fee varies, depending on the service needed.
Generally, it takes about five business days for the documents to be processed. Peak filing period (December-January) may require additional time. Other situations might also play a role, like slowed processing due to Covid-related problems.
4. LLC Operating Agreement And Management Structure
When forming an LLC in California, you’ll have to decide how it will be managed. It could be managed by a single manager or by multiple managers. Additionally, you can have the LLC managed by members or hire a manager for the job.
An LLC Operating Agreement is a necessity for the company. You can create this agreement or document when you form an LLC. However, this agreement doesn’t need to be filed. It’s an internal document to be kept with your business records.
The Operating Agreement lists all the member(s)/owner(s) of the company. It also includes the distribution of profits and losses between the members. Taxation information and how to pay taxes is also a part of this document.
While it is most relevant for LLCs with multiple members, a single-person LLC must maintain an operating agreement as well.
5. Getting An EIN (Federal Tax ID)
The taxman never misses his due. Any company is liable to pay taxes and therefore must have a Federal Tax ID Number, also called EIN. In many ways, the EIN for an LLC is equivalent to an SSN for an individual.
While the number is for taxation purposes, the business will need it for additional services as well. Banking services will need an EIN.
Note, you should apply for an EIN only after your California LLC is approved.
Getting your EIN is free. There is no fee involved. It is possible to submit an application for EIN online. The number is generated as soon as the verification is complete.
In cases where an online application is not convenient or possible, you can fill the form SS-4. This form can be submitted via mail or fax. It is also the best option for people who don’t reside in the USA and thus don’t have an SSN.
Finally, in case the owner of the LLC that needs an EIN is another LLC or company, the application can’t be filed online. You’ll have to use form SS-4 in these circumstances.
Get A Bank Account
Your California LLC should have its own bank account to maintain liability protection. The EIN is necessary for opening a bank account. It’s a good idea to shop around for banks that offer the best services you need.
Most banks issue debit cards, often immediately, on opening an account. Getting a credit card is useful too, as it can help build credit for your business.
A phone number is another useful tool. You can get a new connection for your LLC. Or, choose a virtual phone number that forwards calls to your original phone number. Either way, getting a business phone number is important. It’s also useful so that your personal phone number doesn’t become an item of public record.
6. Statement Of Information
All California LLCs must file a Statement of Information regularly. The initial statement of information must be filed within 90 days of the LLC being approved. After this, the document can be filed biennially (every two years).
The form required here is LLC-12 and it involves a fee of $20.
There are three ways of filing this form:
- Online through Bizfile
- Through mail
As with the other forms, if you’re not filing online, you’ll need a check or money order of the said amount. Cash is not accepted.
Failure to file the Statement of Information on time will result in a penalty of $250. Not complying with this requirement will eventually lead to the shutting down of the LLC.
7. Local Laws, Licenses, And Permits
Approval of the LLC means you’re ready to start your business. However, you might still need to apply for more licenses or permits, depending on the business you want to conduct. This depends on the location and industry of engagement of the LLC.
Since this is a specific and niche requirement, you might want to contact your city of business or relevant government department for more information.
8. California’s $800 Annual Franchise Tax And Other Federal And State Taxes
All limited liability companies in California must pay the state $800 annually in franchise tax. The tax is imposed irrespective of the revenues or income of the money. If the LLC exists, it must pay this tax every year – there’s no way around it.
This tax is paid with the California Franchise Tax Board, using Form 3522 (LLC tax voucher).
Any newly formed LLC will have to pay this amount within three months and fifteen days of being formed. Instructions on the voucher say “15th day of the 4th month”, which might erroneously be interpreted as four months.
After the first payment, the tax has to be filed by April 15 for every financial year.
This often created an awkward situation for LLCs being set up later in the year. They’d find themselves liable for $1600 in taxes rather quickly! For example, an LLC formed in October would have to pay the $800 by January 15. Then it turns out, you have to shell out another $800 before April 15!
Carefully choosing the date of setting up your LLC could save you big money. However, things are different at the moment.
California is currently providing temporary relief for newly registered businesses. Any LLC formed in the state during 2021, 2022, and 2023, will not be liable for the $800 franchise tax for their first year.
California Sales Tax
If the revenue of the company exceeds $250,000 in a financial year, it may be liable to pay sales tax. You’ll have to file Form 3536 with the California Franchise Tax Board. Note that this is in addition to the $800 Franchise Tax.
Employer tax might also be applicable if your LLC has hired employees.
Limited Liability Company Return of Income
All LLCs in California must file Limited Liability Company Return of Income annually. This form too is filed with the California Franchise Tax Board and might need additional schedules and forms.
Tax compliance for your city, town, county, etc. This depends on how the local authority is managing these things.
Your EIN should come in handy for filing those federal taxes. California LLCs have “pass through” taxation. For federal taxation, you can add income or losses from your LLC as part of Schedule C, to be filed with your personal tax return.