Definition

What is an LLC?

An LLC, short for a limited liability company, is a type of business that offers owners limited liability protection while granting them the freedom to run their operations independently. 

An LLC isn’t a corporation or partnership; it’s a unique legal entity with its own specific rules. This separation means that if your LLC faces legal issues, your personal assets are usually safe. This shield against personal liability is a big draw for entrepreneurs who want to run their businesses with more peace of mind. Think of an LLC as a blend between a corporation and a more flexible business structure. 

LLCs come in different types, each with unique benefits based on the owner’s needs. A disregarded entity type of LLC generally applies when there is only one member, while an LLC being taxed as a corporation is usually preferred when the number of members is four or more. 

Other than the ones above, here are some more types of limited liability companies:

• Single-member limited liability companies (SMLLCs)
• Partnerships
• Limited liability partnerships
• Limited liability limited partnerships 
• Series limited liability companies. 

Each option has its own set of rules and regulations, so it’s important to consult legal and financial experts to determine which structure is the best fit for your business needs.

Advantages

What Are The Advantages Of An LLC in California?

Starting a limited liability company in California can be an exciting journey, but it can also be a daunting one. Let’s delve into the four major advantages of establishing an LLC in California: shielding personal liability, reaping tax advantages, enjoying an affordable LLC setup, and accessing funding opportunities.

Starting an LLC in California comes with numerous advantages compared to other corporate structures, given proper planning. These benefits include safeguarding personal assets, enjoying tax benefits, streamlining capital raising through stock issuance, and cost-effective formation compared to partnerships or corporations. For those aiming to start a business in California, making an LLC should be a top choice due to the advantages we talked about above.

Disadvantages

What Are The Disadvantages Of An LLC in California?

Of course, if there are benefits to possessing an LLC in California, there exist corresponding drawbacks. Below are some things to consider:

LLC Formation

How to Create An LLC In California 

As discussed, forming an LLC in California comes with valuable perks like protecting personal assets from creditors and enjoying significant tax benefits. While the process might appear intimidating, things are much easier to manage with the proper preparation and guidance. Here is a quick overview of the steps involved in forming an LLC in California:

• Decide a name for your LLC
• Choose a Registered Agent
• Fire your Articles Of Organization
• Statement of Information
• Create an Operating Agreement
• Obtain an Employer Identification Number
• Get all necessary licenses and permits
• Understand your tax obligations

Decide A Name For Your LLC

Starting a limited liability company is always an exciting opportunity. Yet, before diving in, it’s crucial to grasp the legal aspects of establishing an LLC in California. One initial task is selecting a suitable name for your LLC. While this might initially feel overwhelming, with a little research and assistance, it can be a manageable process. Below, we’ve outlined some helpful tips for picking the right name for your California LLC.

LLC Naming Guidelines In California 

Every state has its own rules and regulations for naming an LLC, and California is no exception. For example, the names must include the words “limited liability company” or an abbreviation thereof (i.e., “LLC”). The name cannot imply that the business is something other than an LLC (for example, if you are not a bank, you cannot use “bank” in your name) or that it is affiliated with any government agency (such as “Department of State”).

Additionally, the name must be distinguishable from any existing businesses listed in the state database. To check whether your proposed name is available for use in California, search the Business Entities Index maintained by the Secretary of State’s office. 

Here are some major factors to consider while choosing the name of your LLC company: 

• When selecting a name for your business, it is essential to ensure that no other California-based businesses have the same moniker. 
• Plus, you will need to suffix “Limited Liability Company,” “LLC,” “L.L.C.,” etc., at the end of your chosen name in order for registration requirements by California State Government to be met successfully and lawfully! 
• Additionally, avoid naming confusion or misrepresentation – steer clear of words such as ‘Treasury,’ ‘State Head Department,’ and acronyms like FBI/NASA, etc., unless additional criteria are also fulfilled. 
• When looking into domains (optional), make sure there is sufficient availability so that one can easily find out more information regarding yourself through internet searches too!

Reserving your business name

If you think someone might try to copy your business name at some point, it might be worth reserving it so that no one else can register it while you wait to form your company. You can reserve a business name with the Secretary of State’s office online via their website or by mail using their downloadable forms. The reservation fee is $10 by mail and $20 in person and will last up to 60 days; after that period, you will need to renew or cancel the reservation. 

Doing Business As (DBA) Or Trade Name 

In addition to registering an official business entity with the state, many businesses also choose to register what is known as a “doing business as” (DBA) or trade name with their local county recorder’s office in order to conduct business under an alternate name. For instance, if you don’t want the “LLC” in your business name to appear in any of your promotional materials, you’ll have to register a DBA of your business name without the “LLC” to legally circulate those.

If this applies to your situation, you should register a DBA or trade name once all paperwork for forming your LLC has been filed with the state and approved. The initial filing fee for this is $26.

Choose A Registered Agent

Once you’ve settled on your LLC’s name, a crucial next step in California LLC formation is selecting a registered agent. This agent serves as the only legal point of contact between your company and the state. As long as you appoint someone who has a physical address in California and makes sure their contact information is updated with any changes, your LLC will be fully formed and legally compliant. 

It is also important to pick a responsible individual or in-state entity that’s willing to officially accept documents for your company. If they have prior knowledge of how your business’s industry works—that’s even better!

Fire your Articles Of Organization

When establishing an LLC in California, a key step is submitting the Articles of Organization to the state. This can be done online or by sending a physical form and payment. When filling out these forms, you’ll need to provide key details like the LLC’s name, the registered agent’s address, and its purpose. Additionally, signed consent from other initial members may need to be provided if it’s a multi-member LLC. This process will cost you around $70. 

Once you’ve submitted your Articles of Organization, California offers a handy three-day expedited processing option for a little extra cost if you’re in a hurry. Otherwise, the regular processing takes about five business days. After this, you’ll receive an official Certificate of Formation.

Statement Of Information

Forming an LLC in California can be a complicated, involved process. After filing the Articles of Organization, the next important move is submitting a Statement of Information. This document captures essential details about your LLC, such as manager names and addresses, additional office addresses, and agent of service names, if applicable. Filing this Statement helps you stay informed about local business regulations and ensures that important information is accurately provided for creditors or potential LLC members.

To stay compliant with California laws, you need to file the Statement within 90 days of submitting the initial LLC formation form, then every two years after that.

Attachment to the Statement Of Information

As mentioned, to maintain accuracy and keep current information with the Secretary of State, businesses usually update their details every two years. However, if any modifications or updates take place within this two-year period for your LLC, you need to file an Attachment to the Statement of Information with the California Secretary of State. This is particularly important when adding or removing a second manager or member. 

By informing state authorities of these changes, you’re safeguarding the accuracy and currency of your LLC’s records, which plays a crucial role in maintaining a seamless business operation and staying compliant. Plus, filing this form takes only a few minutes! It’ll help keep your business’s public record up-to-date so you can steer clear of any unexpected issues in the future. 

Statement of No Change 

If no change has occurred in your LLC’s structure and membership within 90 days of filing your initial Statement of Information, you’ll be required to file a Statement of No Change (SOC) with the California Secretary of State. If it’s been more than 90 days and you still need to file your SOC, don’t worry—it’s not too late. Just ensure that no changes have occurred since your initial Statement of Information submission.

Create an Operating Agreement

An Operating Agreement is an internal document that outlines your California LLC’s ownership and management details. It covers important topics such as how income and losses are distributed among members, voting rights, membership contributions, and rules for admitting new members into the LLC. It’s even a great reference when making business decisions or resolving member disputes.

Your Operating Agreement should cover the following aspects:

• Duration of the LLC
• Purpose of the business
• LLC’s name and address
• Name and residence of the registered agent
• Members and their contribution
• Information about the Certificate of Organization
• Methods of dividing profits and losses
• Procedure for admitting new members, as well as outgoing members
• Management of the LLC
• Indemnification and liability clauses

Although not mandatory in California, having a well-defined Operating Agreement for your California LLC is highly recommended. This agreement provides clear operational guidelines, defines roles, boosts flexibility, and safeguards investors. Beyond tax and legal considerations, it also promotes smoother business operations. Consult a lawyer so you can craft an Operating Agreement that is tailored to your specific needs and preferences, one that safeguards your personal interests.

Obtain an Employer Identification Number

The last step to establishing your California LLC is obtaining an Employer Identification Number (EIN), also called a federal tax ID. The IRS issues this number to businesses. Getting a California LLC EIN enables you to open a bank account, hire employees, file taxes, and build credit. An EIN can be obtained quickly and easily online from the IRS website or over the phone. The process typically includes providing basic information about your business, such as name, type of organization structure, state of formation, and more. 

An EIN is not an LLC requirement, but you do need one if you’re looking to hire employees in the future. Opening a business-affiliated bank account in California will also require an EIN.

Get all necessary licenses and permits

Even if California doesn’t require a general business license, certain licenses might be essential for your LLC, depending on your business’s location and the industry it operates in. For instance, these could include a health permit, an occupational license, or a municipal license for specific jurisdictions. The time it takes to secure these licenses can differ widely depending on the type of permit you need and where your business is located.

Understand your tax obligations

California has some of the highest income tax rates in the country, so make sure you understand how your business will be taxed in order to plan accordingly. A yearly tax of $800 and various other taxes and fees may apply to your business, regardless of whether your business is based in California or simply operating a franchise within the state. 

For instance, if your LLC was formed in May, your yearly LLC tax must be paid by August 15, which is the 15th day of the fourth month. This rule applies regardless of your taxable year’s start and end dates. Make sure to double-check the requirements for your particular industry and consult with a professional if needed.

Short Form Cancellation

If you choose to dissolve your newly formed LLC within the first year, you need to submit a Short Form Cancellation (SOS Form LLC-4/8). This will allow you to skip paying the $800 annual tax for that initial fiscal year. 

California Foreign LLC

If you’re a business from outside California wanting to operate here, forming a California Foreign LLC is the way to go. To do this, you’ll need to submit an Application for Registration of a Foreign Limited Liability Company to the California Secretary of State. Additionally, provide a Certificate of Good Standing from your original jurisdiction and pay any required fees. 

Once registered, your foreign LLC must employ a Registered Agent in California and be registered with the Franchise Tax Board. Meeting these obligations is crucial to steer clear of penalties and to maintain the legitimacy and active status of your LLC in California. Don’t forget to do your independent research on all specific regulations governing out-of-state companies in California to make sure you are meeting them correctly.

Types of LLC

Which type of LLC is ideal for me?

In California, there are mainly two types of Limited Liability Companies (LLCs) that can be formed:

• Domestic LLC: A domestic LLC is an LLC that is formed and operates within the state of California. It is governed by the California Revised Uniform Limited Liability Company Act. To form a domestic LLC in California, you need to file Articles of Organization with the California Secretary of State and comply with other state-specific requirements.
• Foreign LLC: A foreign LLC is an LLC that is formed under the laws of another state or country but wants to conduct business in California. Foreign LLCs must register with the California Secretary of State by filing an Application to Register a Foreign Limited Liability Company, along with the required documents and fees. A foreign LLC must also appoint an agent for the service of process within the state.

Additionally, LLCs can choose their tax classification based on their management structure and the number of members. This can affect how the LLC is taxed at the federal level. The main tax classifications for LLCs are:

• Single-member LLC: A single-member LLC has only one owner or member. By default, it is considered a disregarded entity for federal tax purposes and is taxed as a sole proprietorship. However, a single-member LLC can also elect to be taxed as a corporation.
• Multi-member LLC: A multi-member LLC has two or more owners or members. By default, it is taxed as a partnership for federal tax purposes. However, a multi-member LLC can also elect to be taxed as a corporation.

Always consult with a legal or tax professional to determine the best type of LLC and tax classification for your specific situation.

LLC Taxes

How Are California LLCs Taxed?

California levies taxes on LLCs in the same pattern as most other US states. Below are the tax types you need to be concerned about.

Sales Tax

If your business provides services or physical products, you have the task of collecting sales tax from your customers on behalf of the state. This collected tax must be calculated accurately and submitted to state authorities following the rules. Keeping accurate records and following the state’s sales tax guidelines is essential to prevent any possible problems.

Federal income tax

LLCs enjoy automatic pass-through taxation, which means the LLC itself doesn’t pay federal income taxes. Instead, profits and losses are passed on to individual members, who report them on their personal tax returns. In California, federal income tax rates vary depending on business earnings. 

Alternatively, LLCs can choose corporate tax treatment, making them liable for federal income taxes as a separate entity. In this case, they need to file corporate tax returns and handle taxes accordingly.

Personal income tax

In California, personal income tax is structured progressively. This means there are different rates based on how much you earn. There are nine tax brackets, starting at 1% and going up to 12.3%. In short, as your profits go up, your tax responsibilities also increase. The IRS should have more details about this, but if you’re unsure about how much you should be paying, seek advice from a tax professional or accountant. 

Federal Self-Employment Tax

Each individual who receives profits from an LLC is obligated to pay the self-employment tax. This is overseen by the Federal Insurance Contributions Act (FICA), which manages programs like Social Security and Medicare. In California, this tax is 15.3% (12.4% for Social Security and 2.9% for Medicare).

When you’re working out how much self-employment tax you owe, you can take away some business expenses from your total earnings. This calculation figures out the final amount you need to pay.

Cost

How Much Does A California LLC Cost?

The cost of forming an LLC in California is relatively high compared to other states. On average, the cost ranges from $900 to $11,000. This includes the filing fees associated with creating the company’s Articles of Organization. Additionally, every business operating in California must register with the Secretary of State and cover an annual fee, usually around $800. 

And don’t forget your professional costs! You might need to budget for additional expenses, such as hiring a Registered Agent or consulting with legal experts. The expenses of operating a business in California can differ widely based on your company’s type and scale. Smaller businesses might have lower overall costs, whereas larger enterprises could need more staff and resources to stay in line with regulations.

It is also important to note that the cost of maintaining an LLC in California can be quite costly. This covers things like annual report filings, tax payments, business license fees, and making sure the company follows all laws. 

Here is our breakdown of the estimated expenses associated with forming an LLC in California:

For non-residents

California foreign LLC

If you are a foreign entity looking to do business in California, setting up a California Foreign LLC is the best option for you. Establishing this type of entity requires filing an Application for Registration of Foreign Limited Liability Company with the California Secretary of State, submitting a Certificate of Good Standing from the jurisdiction where your company was formed, and paying any applicable fees.

Once registered, your LLC must maintain a registered agent in California and be registered with the Franchise Tax Board to become eligible to maintain good standing status. Keeping these requirements fulfilled will help you avoid penalties and help ensure that your LLC remains valid and active within California.

It’s important to research all specific regulations governing out-of-state companies in California to make sure you are meeting them correctly; doing so will help ensure that setting up and running your business goes as smoothly as possible.

After Forming An LLC

What To Do After You Start Your California LLC?

Starting an LLC is a great way to protect your personal assets from business liabilities. However, let’s not forget some key steps in order for your protection to stay intact, such as appointing a registered agent, making sure there are sufficient capital reserves, and filing all major documents with the state. Following all these measures can help prevent that dreaded “corporate veil,” which could hold owners personally liable if they are ever faced with court action arising from debts owed by their company. 

Here are some steps to help make sure that your limited liability company is set up properly and ready to start operating:

Separate Your Business And Personal Assets 

One of the most important steps when starting any business is to separate your personal assets from those of your company. This means opening up a separate bank account for your LLC, which will help protect you from potential legal liabilities should something go wrong with the business. Additionally, having separate accounts allows you to track your expenses more easily and accurately. 

Opening a company bank account not only helps separate personal and company assets but also gives you access to certain business-related resources, such as loans and lines of credit, that can be used for expanding or investing in the growth of your business. 

File Your Business Permits

We’ve talked about this a bit above, but we really have to hammer in this reminder. Again, depending on what type of business you run, certain permits or licenses may be required by law to operate legally in California. For example, if you’re running a restaurant or bar, you would need an ABC permit from the respective board. Meanwhile, if you plan on selling any products online or through retail stores, then an appropriate seller’s permit will also be necessary. 

Research what types of permits and licenses are applicable to your specific industry so that everything is compliant with state regulations before launching your new venture. You can operate without a permit, sure, but when the inspectors come knocking for documents, you need to have them. This is why obtaining permits can be done after the LLC has been established.    

Comparisons

Is LLC The Best Entity For Me?

Maybe, LLC isn’t the right entity for you. Maybe it is a C-Corp. Only way to find out is to directly compare them all.

FAQ

Frequently Asked Questions About Starting An LLC In California

Here are the most commonly asked questions about forming an LLC business in the state of California: