Fact checked for accuracy by Billie Anne Grigg, a bookkeeper and Mastery Level Certified Profit First Professional.
It is the dream of many people to establish a successful business. However, building a business from scratch can be a nerve-wracking experience due to the complexity involved in planning the entire process. Fortunately, with determination and hard work, a business can be rewarding.
If you are an entrepreneur who wants to establish a business in California, choosing the right business entity is imperative. This is because you can minimize liability exposure, reduce taxes, and ensure that the business can be financed and operated successfully. It also offers entrepreneurs a technique for ensuring that the business operations will proceed rather than being impulsively discontinued upon the death of an owner.
Limited Liability Company(LLC) is among the most prevalent business structures for numerous startups in California. It incorporates the aspects of a corporation with those of partnership or sole proprietorship.
LLC is formed under state law and offers individual liability protection, and can save money on taxes. Therefore, having an LLC means you will not be held responsible for the business debts or liabilities.
Forming an LLC is more comprehensive than creating a sole proprietorship or general partnership. You should contemplate seeking the advice of an experienced attorney or hire an LLC formation service.
Step 1: Choose a Name for Your Company
Picking a name is the fundamental step in creating a California Limited Liability Company.
Before choosing a name, it is imperative to conduct in-depth research to ensure that the name is distinguishable from other LLCs in California. You can consult a lawyer to run a search to ensure that the name you have chosen is unique. The state of California requires the following:
The legitimate name of the LLC needs to have the following words or abbreviations at the end of the business name:
- Limited Liability Company
- Limited Liability Co.
- Ltd. Liability Co.
The name of the LLC should not delude the public or contain words that may insinuate the LLC is a government agency.
The name should not use or include “bank,” “incorporated,” “trust,” “corporation,” “trustee,” “inc,” or “corp.” It should also not include “insurer,” “insurance company,” or any other word that may imply that the LLC is in the business of selling policies of insurance and assuming insurance perils.
Step 2: Identify a Registered Agent
The registered agent can either be a California native or a registered agent service (California Registered Corporate Agent). This is the individual or entity who will collect tax forms and notice of lawsuits in place of the LLC. The agent must possess the following standards:
- A physical address in California and be reachable during typical business hours
- Since the agent acts as a central point of contact to collect the legal documents, they should always be on-site during business hours.
- Be above 18 years
However, the California Secretary of State’s office can give you a list of registered commercial agents to select from if you don’t have anyone in mind.
Step 3: Prepare and File Articles of Organization
Filing the articles of the organization entails the entire paperwork of creating your LLC by setting out preliminary information about it. The document can be filed with Form LLC-1 in California. Although the process may sound daunting, it is usually a straightforward process. The process can be filed online or sent via mail to the California Secretary of State. To expedite the process, the best way is to file them online. Some of the requirements while preparing your articles include:
- Your name and address
- The goal of the LLC
- The name of your registered agent and information
- Comprehensive details of the management structure: who will manage the LLC. Is it the members or the managers?
- Signature of the person establishing the articles
Step 4: Obtain a Certificate from the State
After successfully preparing and approving the LLC’s formation documents, the state will give you a certificate that verifies the official existence of the LLC.
This certificate will permit the LLC to acquire an Employer Identification Number (EIN), Business License, and business bank account.
Step 5: Creating an Operating Agreement
An operating agreement is a document that indicates how your LLC will run the business. It is a state’s requirement for every LLC to possess an operating agreement. However, it is not a requirement for it to be filed. A well-drafted operating agreement is essential as it helps to resolve disputes that may emanate over financial agreements and other arguable litigation.
Failure to have a well-prepared operating agreement makes the courts decide based on state law, which might not be the best option for the LLC and its members. Some of the details of the operating agreement include:
- LLC’s principal address and information
- Period of the LLC
- Key information of the registered agent
- Comprehensive details of the article of an organization
- Purpose of the business
- List of members and their stipulated roles
- Profit and loss sharing
- The procedure of receiving new members on board
- Management of the LLC
- Compensation and liability clauses
Step 6: File Statement of Information
All California LLCs must file a statement of information with the state’s Secretary of State within three months of creating the LLC. The file must be filed after every two years either online or printed out and sent via mail or hand-delivered to the secretary of state’s office. The details of the statement of information can include, but are not limited to, the following:
- LLC’s name and California Secretary of State file number
- LLC’s agent information
- The office address of the LLC’s key executive
- LLC’s mailing address
- The manager’s and chief executive officer’s names and entire business or residence addresses. However, if the LLC has not yet chosen the managers, every member’s name and business or residence address should be submitted instead.
- An exact email address if the LLC prefers to get renewal notices and any other notification from the secretary of state by electronic mail instead of US mail.
Step 7: Comply with California State Taxes
If you’re filing an LLC in California, it is vital to ensure your business acts according to California’s tax rules. It is a statutory obligation for all LLCs and foreign LLC to pay their taxes to the California Franchise Tax Board if they fit the following standard:
- They are formulated, registered, or run businesses in California
- They have not ruled out tax liability as a corporation. A corporation taxed as an LLC should instead adhere to California’s corporate tax rules.
Cost to Start an LLC in California
The cost of starting an LLC differs by state. However, the average cost is between $40 and $500. A few various costs are incurred in the beginning stages of establishing an LLC in California. Below are some of the mandatory charges in the initial formation of an LLC. The costs exclude the startup costs such as promotion, lawyer fees, and others:
- Costs related to the secretary of state
- Name reservation fee
- Business privilege tax
- Annual report fee
What to Do After Forming Your LLC in California
After successfully forming an LLC, you can undertake the following critical steps:
Employ an Accountant
In the initial stages of running a business, many business owners tend to conduct all the business operations to avoid paying for a professional service. However, it is critical to get an accountant who can relieve you of the stress and save you money and potential ultimate troubles.
The accountant protects the business from being overcharged on taxes and assists it in avoiding penalties, fines, and other expensive tax errors. Also, they simplify bookkeeping and payroll, giving you adequate time to concentrate on business growth.
Design a Business Plan
A business plan is a detailed written document that summarizes business operations and states the business objectives and the duration needed to achieve them. Formulating a business plan is vital as it assists you in putting that on paper.
Get Business Insurance
Business insurance assists you in managing your company’s risks. Applying for business insurance will help keep your business assets covered against any peril.
State Business Licensing
Based on the kind of business your LLC conducts, you may be required to acquire local and state business licenses. You are expected to get different licenses if your business is situated in more than one physical location.
Register for Taxes
Tax requirements differ by state and by an LLC’s tax status. It is important to obtain profound insight from your state’s tax office to decide which taxes you are required to register for and apply. Below are some common types of taxes an LLC might need to pay:
If your LLC is involved in the sale of products and collecting taxes, you’ll be required to pay an extra tax. You need to sign up with the California State Board of Equalization.
The state requires you to file employer tax if your business has employees. You can sign up with the California Employee Development Department.
Apply for Employee Identification Number (EIN)
You are expected to apply for a federal EIN, commonly known as a tax ID number – to create a bank account for your LLC and recruitment. An EIN recognizes your business to the IRS and permits you to distinguish your business and personal affairs by possessing a separate bank account for your LLC.
Open a Business Bank Account
Opening a business bank account is vital as you cannot use your individual bank account for company expenses because of liability reasons.
Develop Your Web Presence
Today, digital marketing is king. Therefore, it is essential to establish an internet presence. This entails having:
- A website
- Social media accounts
- A YouTube channel
How to Keep Your LLC Compliant in California
Compliance is very critical in ensuring the constant running of the business. Always ensure that your business has all the necessary licenses. In California, you should have an EIN and monitor your tax responsibilities. You must also keep some records as a California LLC is subject to assessment.
- A revised list of the names and present addresses of every member and manager
- A copy of the files articles of organization
- Financial statement the LLC has undertaken the most present three years
- Evidence of most recent federal, state, and local income tax compliance
Tax Filing Requirements for LLCs in California
In California, LLCs are expected to file business privilege taxes and statements of information with the department of revenue. The two types of taxes should be filed after the commencement of the LLC’s taxable year but before three and a half months after the start of the tax year.
Every LLC is required to pay a yearly minimum tax of $800. The deadline for paying your first-year annual tax is usually the 15th day of the 4th month from your filing date. It is mandatory to pay this fee irrespective of whether the business makes any income and is due each year. If your LLC’s yearly gross revenue surpasses $250 000, an extra annual fee is needed.
However, there is an exception for the yearly LLC tax, which includes:
- Your LLC was not functional in the tax year
- Your tax year was two weeks or fewer
- California is giving a one-year exemption for the yearly tax for any LLC created in 2121, 2022 00r 2023. Beginning in the second year, all LLCs are expected to pay the annual $800 minimum franchise tax.
Frequently Asked Questions
How long does it take to register an LLC in California?
In California, you can expect the LLC mail filing to take approximately two to three weeks. This includes 3 to 5 business day processing time and when your documents are in the mail.
What tax structure should I choose for an LLC in California?
As a straightforward and successful tax structure, numerous multi-member LLCs will find Partnership tax status to be a perfect choice. However, if you intend to source your finances from external investors or other inactive owners, you may want to contemplate being taxed as a corporation.
Should you hire an LLC formation service in California?
The simple answer is Yes. Formation companies can minimize startup costs for your California business when establishing an LLC online. Formation service also offers you adequate time to concentrate on operating and growing your California Enterprise. Check out our top picks for the best LLC services for some good options.
Filed under: California Business Guides