How to Start an LLC in California? (11 Easy Steps Guide)

Establishing a new LLC may seem confusing and complicated, particularly for those unacquainted with the procedure.

After seeking guidance from our team of legal experts and conducting thorough research on the subject, I've gathered crucial information to assist you in successfully forming your LLC.

This walkthrough article will help you navigate the process of creating an LLC in California effortlessly. We’ll also discuss the pros and cons of an LLC to give you a better decision-making position.

Additionally, these California professional LLC services are available to help you create an LLC.

Quick Summary

• Starting an LLC in California involves steps like choosing a business name, selecting a registered agent, and filing Articles of Organization.
• Key steps include creating an LLC operating agreement and obtaining an Employer Identification Number (EIN).
• Approximately 44% of new businesses in California choose the LLC structure for its liability protection and tax benefits.
• From my perspective, the benefits of forming an LLC in California far outweigh the challenges, offering a flexible and protective structure for businesses.

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How to Form an LLC in California?

To form an LLC in California, you must comply with California state law requirements. Here are the steps you can follow.

1. Choose the Type of Your LLC (Mandatory)

When choosing the type of your LLC in California, you generally have a few options to consider, each with its own advantages and disadvantages:

• Single-Member LLC:
  • Advantages: Simple structure, ideal for solo entrepreneurs. It offers personal liability protection and easier tax filing as it's disregarded for tax purposes, similar to a sole proprietorship.
  • Disadvantages: May be seen as less credible by lenders and investors compared to a multi-member LLC or corporation.
• Multi-Member LLC:
  • Advantages: Suitable for businesses with multiple owners. Provides liability protection for all members and allows for more complex profit-sharing arrangements.
  • Disadvantages: More complex management structure and operating agreement requirements. Tax filing can be more complicated, as it's treated like a partnership.
• Series LLC:
  • Advantages: Allows for the creation of separate "series" within a single LLC, each with its own liability protection. Ideal for companies with multiple, distinct asset groups or projects.
  • Disadvantages: Relatively new and complex structure, not widely understood. May face varying legal treatment in other states.
• Professional LLC (PLLC):
  • Advantages: Designed for licensed professionals (like doctors, lawyers). Offers liability protection while complying with state professional regulations.
  • Disadvantages: Only available to certain licensed professions. May have additional compliance requirements.

Each type serves different business needs, so it's important to consider the specific requirements and goals of your business when choosing. Consulting with a legal or financial advisor is also advisable to make the best decision for your situation.

2. Choose a Name for Your California LLC (Mandatory)

Picking a business name for your LLC is the next step in establishing your business.

Your California LLC's name must be unique and distinguishable from other names on the California Secretary of State records. So, avoid using certain words or phrases that would otherwise be allowed for personal use.

You cannot use any restricted word/term as part of your business name without the consent of the California Secretary of State. This includes any term associated with any government agency (Treasury, State Department, etc.).

Check California's Code of Regulations section for a detailed list of restricted LLC terms [1].

Your LLC must include the following abbreviations or terms: LLC, LLC, Ltd., Limited, Company, or Co.

You may also utilize the Secretary of State's website to look up a California LLC and check if your desired name is already taken.

3. Select a Registered Agent (Mandatory)

A limited liability company requires an LLC registered agent to conduct business.

As a business consultant, I've guided many clients through the process of setting up an LLC, and a key piece of advice I always emphasize is the importance of choosing the right registered agent.

In one instance, a client selected a highly reputable and responsive agent, which made a significant difference in the smooth running of their business.

This agent was responsible for receiving crucial legal and tax documents, including the LLC's operating agreement. Their efficiency in managing these documents ensured that my client stayed on top of legal deadlines and compliance requirements.

Search the internet and check with your personal network to find a high-quality registered agent in California.

Many reputable companies will offer their services for free or at a very affordable rate. A registered agent fee usually ranges from $25 to $100 annually.

Once you find a reputable California registered agent company, they will provide you with a unique account number associated with your new business.

You’ll need this information to log into the registered agent service company's website and complete any necessary forms required by your LLC in California.

4. File Articles of Organization (Mandatory)

Registering an LLC is usually as simple as filing Articles of Organization. The state business entities filing fee is $70, and it takes a few business days to process the Articles of Organization once submitted by mail or in person at your local Secretary of State's office.

You can file the LLC Articles of Organization through the California Secretary of State.

You’ll download and fill out an application, sign it before a notary public, include payment by check or cashier's check made payable to "Secretary of State," and mail them all together to the California Secretary of State.

You can also opt for expedited registration by mail or online, but remember that you’ll be charged an additional filing fee. You can opt for 24-hour registration, same-day registration, or 4-hour registration.

Additionally, you can ask for help from ZenBusiness, a specialized company that offers superior LLC formation services in the state of California.

Steps to Take After Forming an LLC in California

After successfully forming your LLC in California, it's important to take specific steps to ensure your business operates smoothly and remains compliant.

5. Create an LLC Operating Agreement (Optional, but Recommended)

This document serves as the foundation for your business's internal operations and structures, outlining the rights, responsibilities, and relationships among the members.

It provides clarity on profit distribution, management duties, and procedures for addressing disputes or changes in membership.

As a business consultant, I found that an operating agreement is invaluable in preventing misunderstandings and conflicts among members. It gives your LLC a customized structure that goes beyond the basic laws governing LLCs in California.

Moreover, having this agreement in place enhances your business's credibility with banks, lenders, and potential investors. It's a key tool for ensuring smooth operations and long-term stability of your LLC, making it a wise investment in your business's future.

6. Apply for an Employer Identification Number (EIN) (Optional, but Recommended)

Every LLC in California is required to obtain an EIN (Employer Identification Number). You can obtain one online in under five minutes.

To register the LLC, you must provide a Federal Tax ID number and another name for your EIN.

If you do not already have one from a previous business, apply immediately because time is of the essence.

There are two ways to obtain a Federal Employer Identification Number: through the IRS or your state government (in this case, California) [2].

It’s much quicker and easier to go online and apply for it on the official website of the Internal Revenue Service. You’ll be issued one immediately upon completing a simple application form.

EINs are required if you plan to hire employees, open a bank account for your LLC or pay state and federal taxes on behalf of the LLC.

An EIN is not an official document but merely proof that you comply with all federal tax regulations and have applied to become part of their system as employers or taxpayers.

7. Open an LLC Bank Account (Optional, but Recommended)

8. File Your California LLC Biennial Statement of Information (Mandatory)

This report must be filed with the California Secretary of State every two years. The due date is based on your LLC's registration date, falling on the last day of the month in which your LLC was originally formed.

For instance, if your LLC was formed on June 15th, your report will be due by June 30th every two years.

The filing fee for this report is currently $20.

This report serves to update or confirm the records of your LLC, including information about addresses, management, and any changes in membership.

Failure to file this report can result in late fees and potentially jeopardize the good standing of your LLC with the state. It's advisable to mark this deadline in your business calendar to ensure timely compliance.

9. Obtain Business Licenses and Permits

California licensing requirements vary depending on the business type and location.

If you plan to conduct business in Los Angeles County, be aware that some counties require additional permits or licenses for your LLC. Most California business owners can apply online at the state's website.

The Secretary of State does not grant California licenses or permits. The best way to check the type of business licenses you need is to visit the CalGold website.

This online database links and contact information for government offices that issue licenses, permissions, and registration requirements at all governmental levels.

Check the U.S. Small Business Administration (SBA) guide for federal business licenses.

Related Articles:

• How Long Does it Take to Form an LLC in California
• Dissolve LLC California

10. Initial Statement of Information (Mandatory)

The California Secretary of State requires that all LLCs submit an Initial Statement of Information (also known as Form LLC-12) within 90 days after formation. You can complete it online, in person, or by mail.

You will have to pay a $20 non-refundable filing fee.

11. Choosing Your Tax Structure

The right tax structure for your LLC in California is crucial for optimizing your tax benefits and meeting your business needs.

The most common structures include:

• Disregarded Entity/Partnership:
  • Pros: Simplicity in filing; profits and losses pass through to personal tax returns.
  • Cons: Self-employment taxes on all profits.
• S-Corp:
  • Pros: Potential savings on self-employment taxes; profits and losses pass through to personal tax returns.
  • Cons: More complex filing; salary requirements for owners.
• C-Corp:
  • Pros: Lower corporate tax rate; ability to retain profits in the company.
  • Cons: Double taxation on dividends; complex tax filing and regulations.

Based on my experience, many small to medium-sized LLCs benefit from the S-Corp structure due to self-employment tax savings. However, the best choice depends on your specific business circumstances.

Regarding timeline, you can change your tax structure at the beginning of a tax year, and it must be done within 75 days of the start of the tax year or the creation of the LLC.

This ensures that the new structure is in effect for the entire fiscal period. Making informed decisions with the help of a tax professional is always advisable.

Related Articles:

• Remove a Member From an LLC in California
• Minimum Cost to Start an LLC in California
• Converting an LLC to a Corporation in California

Benefits and Drawbacks of an LLC in California

Benefits:

• Limited Liability Protection: LLC members are typically not personally liable for business debts and lawsuits, offering a significant safeguard for personal assets. This protection is particularly relevant in California, where the vast majority of businesses—99.8% (4.1 million) of which are micro-enterprises as per the 2023 US Small Business statistics—can benefit from the reduced risk to personal assets [3].
• Flexibility in Taxation: California LLCs can choose how they want to be taxed - as a disregarded entity, partnership, or corporation (S-Corp or C-Corp), providing flexibility to optimize tax obligations.
• Less Formality and Paperwork: Compared to corporations, LLCs face fewer state-imposed annual requirements and ongoing formalities.
• Access to California Markets: Being an LLC in California offers access to one of the largest economies in the world, with diverse sectors and opportunities for business growth.

Drawbacks:

• High State Taxes and Fees: California imposes an annual LLC tax of $800, regardless of income, which is high compared to many other states. Additionally, there are gross receipts fees for higher-earning LLCs.
• Rigid Franchise Tax Board (FTB) Regulations: The FTB in California is known for its stringent compliance and reporting requirements, which can be a challenge for small businesses.
• Limited Duration: In California, unless stated otherwise in the Articles of Organization, an LLC has a default existence of 40 years.
• No Statutory Indemnification: Unlike corporations, California LLCs are not provided with statutory indemnification for their members or officers, which might necessitate additional insurance or internal agreements.

DIY vs. Professional LLC Formation

DIY Formation:

Pros:

• Cost-Effective: Generally cheaper, as you avoid professional service fees.
• Direct Control: Complete control over the formation process.
• Educational: You gain a deeper understanding of your business's legal framework.

Cons:

• Time-Consuming: Requires more time and effort to research and complete necessary steps.
• Risk of Errors: Without legal expertise, there’s a higher risk of making mistakes in forms or missing key legal requirements.
• Lack of Legal Guidance: No professional advice on structuring the LLC, which could lead to issues later.

Professional LLC Formation Services:

Pros:

• Expertise and Accuracy: Professionals are adept at navigating legal intricacies, ensuring accurate and compliant filings.
• Time-Saving: Outsourcing this task saves time, allowing you to focus on other business aspects.
• Additional Services: Many services offer ongoing compliance support, legal advice, and customized solutions.

Cons:

• Cost: More expensive due to service fees.
• Less Hands-On: Some business owners may feel detached from the process.

The choice between DIY and professional LLC formation depends on individual preferences, expertise, and business needs. Consider your specific situation, including the complexity of your business structure and your legal acumen, before deciding.

FAQs

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References:

1. https://oal.ca.gov/publications/ccr/
2. https://www.irs.gov/businesses/small-businesses-self-employed/employer-id-numbers
3. https://advocacy.sba.gov/wp-content/uploads/2023/11/2023-Small-Business-Economic-Profile-CA.pdf