How to Form an LLC in California
Setting up a limited liability company (LLC) in California is a great way to start your new business and provide liability protection for your personal assets. This article is a step-by-step guide to forming an LLC in California and includes information regarding relevant laws for California LLC formation.
Steps for Forming a California LLC
Name Your LLC
A California limited liability company should have a unique LLC business name. The name must be distinguishable from an existing registered entity of the same type. Meaning it must be different from other registered LLC names. To determine if your proposed business name is registered, go to the California Secretary of State Business Search website and search for name availability. If the name you want is not on the website, it is available for use.
Creating Your Business Name
In California, an LLC's name must meet the following California business name regulations:
- The name must include the words "Limited Liability Company" or contain an abbreviation such as LLC or L.L.C. You can abbreviate the words "Limited" or "Company" to "Ltd." and "Co."
- The name can't include the words "bank," "trust," "corporation," "corp.," "incorporated," or inc."
- The name cannot be misleading to the public. For example, naming your LLC to suggest it is a bank, insurance company, or government-run entity.
Protecting Your Business Name
- Reserving Your Name: If you aren't ready to file your California articles of organization, you can still reserve your business name for 60 days with the California Secretary of State business entity name reservation form.
- Trademarking Your Name: Another way to protect your company name is to file a California trademark or service mark application with the Secretary of State. If you have the trademark for your company, you are protected from other businesses using your name or logo.
- Registering Your Domain Name: Almost all business today is conducted online, so a unique website is essential for any business. First, perform a name search for your business online to see if it is available. If not, register your domain name so another entity can't use it.
Choose a Registered Agent
A registered agent is a person or company designated to accept legal papers for your business, including service of process, the California annual reports, and certificates of good standing. In California, the registered agent must be:
- Located in California
- Available during regular business hours
- Able to accept mail, legal documents, and service of process
Your registered agent's name and address appear on the articles of organization, which is a public record. You can ask a registered agent service company to serve your registered agent with their office address. The advantage is that they keep your personal information private and your LLC in good standing.
File Articles of Organization
Articles of organization outline your business structure. You draft and file the LLC articles of organization with the California Secretary of State and include the following:
- Name of the LLC
- Purpose of the LLC
- The management structure of the LLC
- The business address of the LLC (physical address, not a P.O. Box)
- Name and address of the registered agent
You can complete form LLC-1 with the California Secretary of State online. Or mail or hand-deliver the form to the California Secretary of State's office. The filing fee is $70 (or $75 if requesting a certified copy of your articles of organization). Or you can use an online business formation service company to handle your formation documents and filing.
Draft an Operating Agreement
An LLC operating agreement for an LLC describes how the company governs and makes decisions, similar to corporate bylaws. California requires an LLC to have an operating agreement, but you don't have to file it with the Secretary of State. Your operating agreement defines your business structure and the organization of members and managers. Banks, lenders, and investors may request a copy of your operating agreement.
Get an EIN
Apply for an Employer Identification Number (EIN). An EIN is like a Social Security Number for your business. An EIN will allow your LLC to file taxes and open a small business bank account. It also establishes your business as an independent entity. You can apply for an EIN online with the Internal Revenue Service (IRS) or file IRS form SS-4 by mail or fax. The response time depends on how you apply. If you apply online, you will receive an immediate reply from the IRS. An application by fax will receive an answer in 3-4 business days. An application sent to the IRS through the mail will typically receive a response from the IRS after 4-5 weeks.
Set Up Business and Tax Accounts
Once your California LLC is up and running, you need to keep your LLC compliant with California law. Compliance includes annual reporting and paying state fees and taxes.
File Statement of Information
California requires that every LLC files a Form LLC-12 with the secretary of state. A Statement of Information must be filed within 90 days of filing the LLC's articles of organization. A statement of information contains general information about the LLC and is also known as a Biennial Report because you file the statement every two years. The filing fee is $20. A statement of information must include the following:
- Name of the LLC
- LLC's street address
- LLC's mailing address
- Name and address of the registered agent
- Name of the manager(s) and their business addresses and residential addresses
- Email address to receive electronic communication from the California Secretary of State
- LLC's California Secretary of State file number
- Statement of the LLC's purpose
When starting a new business, you must register for business and tax accounts. You may need permits to operate your business. If you have employees, you must also set up employer accounts in California.
State Business Tax
If you elect to treat your LLC as a corporation for tax purposes, you pay a flat corporate income tax of 8.84%. However, most entrepreneurs form LLCs for pass-through taxation, so they avoid corporate income tax.
State Employment Tax
If your LLC hires employees, you must pay payroll taxes to the California Employment Development Department (EDD). Payroll taxes include employee withholding, unemployment insurance, and disability insurance.
Sales and Use Tax
If you sell products in California, you must register for a California seller's permit and collect a sales or use tax. You charge that sales tax to your customer and collect it for the state.
Business Licenses and Permits
California requires business owners to have a proper business license to operate within the state. Depending on your type of business, you may also need special permits, for example, if you serve food or provide services to the public. Having appropriate permits and licensure is crucial because failing to get them may result in expensive fines. California has a professional licensure guide to determine if your industry needs a license.
Registration in Other States
If you plan for your LLC to do business in other states, contact the secretary of state in that jurisdiction to register as a foreign LLC. That state may ask for a certificate of good standing (California calls it a certificate of status), which you can get from the Secretary of State. The certificate shows your LLC is current and compliant with state law.
To keep your California LLC in good standing, you must file:
Annual Franchise Tax Reports
The California Franchise Tax Board requires filing a California LLC franchise tax report and paying a franchise tax of $800 per year. Franchise taxes are also called privilege taxes for the 'privilege' of operating within the state. The franchise tax does not replace federal and state taxes.
In response to the COVID-19 pandemic, there is a one-year tax exemption for franchise taxes for new LLCs formed in 2021, 2022, and 2023. That means new LLCs will have their first year's franchise tax waived and begin paying the $800 franchise tax the following calendar year. The franchise taxes increase if your annual LLC income is $250,000 or more. For example, LLC's earning between $250,000 - $499,000 pay $900 annually.
Biennial reports update your LLC information with the Secretary of State. You file your first report no later than 90 days after your LLC's formation date. You can complete the Statement of Information (Form LLC-12) or file it online. There is a $20 fee for the report. Then you must file the statement of information every two years. The filing period is during the 6-month window before the last day of the month of your LLC formation date.