Are you looking to form a limited liability company (LLC) in California, but you’re not sure how the process works? There are several important steps to create a compliant California LLC that can do business in the state.
To get started, please reference our five-step guide below or hire an affordable online LLC formation service.
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What Is a California LLC?
The California LLC is one of the most popular business structures in the state. It’s a more casual and flexible type of business than a corporation but includes the personal asset protection that’s lacking in sole proprietorships and general partnerships.
LLCs in California have simple formation and maintenance requirements, several options for how they can be taxed, and flexible management. From one-person businesses to multi-member LLCs with several owners, the LLC is a popular choice for a reason.
Setting Up a Brand-New California LLC in 5 Steps
For the first part of this guide, we’ll cover the five essential steps to setting up a California business that doesn’t have employees yet. These steps also apply to businesses with employees, but we’re keeping things streamlined to start. If you do have employees, make sure you complete these steps and the steps for employers (which we’ll cover later in the guide).
Step One: Choose a Business Name
Your LLC’s name is often the first impression you get to make on potential customers, and therefore it goes without saying that this is an important step. There are a few different aspects to consider when naming your business.
Legalities
In the state of California, you’re required by law to meet several requirements for your business name. Here’s a quick glimpse at the rules for LLCs:
- Your name must include the words “limited liability company,” the abbreviations “LLC” or “L.L.C.,” or a similar variation of these
- Your name cannot mislead the public regarding your business purpose
- Your name cannot include words like “trust,” “bank,” or “insurer,” unless your business is a bank or insurance branch
- Your name cannot include tags like “Co.” or “Inc.” since they belong to other entity types
- Your name must be “distinguishable on the record” or distinct from the names of other state businesses
For more information on naming rules in California, please consult the California Revised Limited Liability Company Act.
Explanatory Naming
Another aspect to consider is including language that explains what your business does ― for example, if you’re starting a coffee shop, put the word “coffee” or “brew” in your LLC name. Additionally, if your business has strong values like being environmentally friendly, you can indicate that by including the word “green.” This helps potential customers know exactly what to expect from your business.
Once you’ve picked the perfect name for your business, you don’t want to lose it to another aspiring entrepreneur. Thankfully, California allows you to reserve your business name if you’re not quite ready to register your business. To do that, you’ll need to file the Name Reservation Request form along with the $10 filing fee.
Filing this reservation protects your chosen name for your exclusive use for 60 days. You can renew this reservation if you need to. For more information about name reservations, look here.
Step Two: Appoint a Registered Agent
Every LLC in California is required to designate a registered agent (sometimes referred to as an “agent for service of process in California), which is the individual or registered agent service that receives government correspondence on behalf of your business, then forwards those documents to you.
When you appoint a California registered agent, here are the state requirements to be mindful of:
- Every entity that files with the Secretary of State (both domestic and foreign) must appoint a registered agent
- The agent must be a resident of California or a corporation that has not terminated its capacity to act as a registered agent
- An agent must be continuously maintained
You can find a full rundown of the state laws here.
Without a registered agent, you could lose your good standing with the state of California, and the state also has the right to dissolve your LLC if they decide to. In a worst-case scenario, you could miss the alert regarding a lawsuit against your company, which could even lead to a judgment against your business because you didn’t defend yourself.
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Step Three: File Formation Documents
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Once you are ready to form your California limited liability company, you will fill out the Articles of Organization. You can either do this on your own or hire a California LLC service. Some services, like ZenBusiness, even offer free LLC formation service.
This is the document that will register your LLC with the state. You’ll want to ensure all of the following information is correct on the form:
- Your proposed LLC name
- Street address and mailing address
- Your registered agent’s name and address
- How your LLC will be managed
- The stated purpose for your business
- Name and signature of each organizer
The form is free to file, and you can file by mail or online. But that’s not the only step you’ll have to complete. Within 90 days of filing your Articles, you’ll need to submit a Statement of Information. This document is pretty simple, and it keeps the state informed about your business information. It costs $20 to submit.
- Total cost: $20 (for the Statement of Information)
- Processing speed: 4 business days for online submissions, 6 business days for paper filings
Step Four: Draft an Operating Agreement
After you register an LLC in California, create a detailed outline that explains how you will run and manage your new business. Even though it doesn’t need to be filed with the state, put one together and keep it for your records.
When you open a bank account, you may be asked for this document in order to open an account. You’ll also want to keep in mind that any future business partners or managing members may also be interested in seeing your operating agreement before joining your company. After all, this document essentially serves as your overall plan for success.
An attorney can help you outline your operating agreement or create one from a free template online. You can read more about operating agreements, but some of the basic information you’ll want to have includes:
- Individual members’ ownership percentages
- Rights and responsibilities
- Voting powers and meeting guidelines
- Allocation of profits and losses
- Management rules for the LLC
- Provisions for buying out a member-owner or transferring their shares in the case of illness or death
Step Five: Get Licenses & Permits
California law requires an LLC to obtain all necessary licenses and permits before starting operations. The type and cost of the permits that your business may require vary depending on the nature of the services your LLC offers. In California, there is no state general business license.
And for the most part, California does not allow individuals that perform “professional services” to form an LLC. For more information on these regulated trades, we recommend consulting the CalGold website and the Department of Consumer Affairs. If your business is not included in one of these licensed groups, you should be set to go. But if it is, you might need to form a California professional corporation instead.
Last but not least, you should check with your city or county to see if they maintain any licensure requirements.
Next Steps for Newly Formed LLCs
1. Obtain a Business Bank Account
One of the most important aspects of running an LLC is ensuring that your business funds remain separate from your personal finances. And to do that, you’ll need a separate bank account for your business.
Obtaining a business bank account is pretty simple, and you can choose the financial institution you like best. Some banks will ask to review your LLC’s operating agreement, and it’s a near-certainty that they’ll ask to see your EIN (Employer Identification Number). This is a free registration with the IRS, and the number acts a lot like a Social Security number for a business.
Once you have your account, you’ll be able to get checks, make payments using your business card, and so on.
If you failed to get a business bank account, you would technically be blurring the line between your personal accounts and your business accounts. That compromises your personal asset protection.
2. Prepare for Tax Time
Regardless of how far away April 15th is, it’s never too soon to prepare for tax time and set up accounting software. As an LLC owner, the exact tax rates you’ll pay depend on the taxation structure you choose for your business. If you choose to be taxed as a corporation, the LLC itself will pay taxes from its own funds. Meanwhile, LLCs taxed as pass-through entities don’t technically pay taxes; their members do. The profits are distributed to the LLC’s members, and each member reports that income on Schedule C of their personal taxes.
If you choose to be taxed as a corporation, you’ll pay the following rates:
- Federal: 21%
- State: 8.84%
Meanwhile, LLCs taxed as pass-through entities pay these rates:
- Federal: 10-37%
- State: 1-13.3%
In order to compliantly file and pay your taxes, you’ll fill out a complete copy of federal Form 1065 including all federal K-1s, statements, and attachments. For a full listing of the forms required for LLCs, we recommend consulting the Limited Liability Company Overview page from the California Franchise Tax Board. It fully details the tax requirements for LLCs (California has the highest tax burden in the country). Not only will you have to pay the income taxes from your business’s net income (as high as 13.3%), but you’ll also have to pay the Annual Franchise Tax.
The Franchise Tax is levied every year of business (even your first, with a few exceptions), and the minimum fee is $800. This tax is due April 15th or the fifteenth day of the fourth month of your fiscal year.
Of course, there are sales taxes to consider (at least 7.25%). Last but not least, your business may be subject to industry-specific taxes, such as those for cannabis, lumber, and more. For more information on these miscellaneous taxes, we recommend checking out the California Department of Tax and Fee Administration.
Because taxes can be incredibly complicated, we highly recommend consulting with a business attorney or accountant to ensure that you cover all requirements on the state and federal levels.
3. Be Ready to File Your Statement of Information
Remember that Statement of Information you filed back in the start-up step? That is an ongoing biennial filing in California. All LLCs are required to file another Statement of Information every other year.
The form itself is pretty simple, and it keeps the state up-to-date about information such as your registered agent, contact information for your business, and more. Thankfully, the filing fee is a very manageable $20.
4. Consider Business Insurance
The big advantage of the LLC is that it offers you personal asset protection. But that doesn’t mean that mishaps won’t happen along the way. We highly recommend obtaining a general liability policy with the right coverage for your business.
In the event of a mishap or natural disaster, an insurance policy can help you navigate unexpected expenses. Be sure to compare your different options to get the best coverage for your particular type of business.
Extra Steps for Businesses with Employees
When you’re operating as a one- or two-person show, operating a business is relatively streamlined. Things get more complicated when you bring employees into the picture, but employees also help raise your business to new heights. But to reach those heights, you need to comply with employee-related legal requirements.
Step One: Address Employee-Related Taxes
Obtaining an EIN does more than allow you to get a business bank account. It also lays the groundwork for other taxes, such as Social Security and withholding taxes. For example, you’re required to withhold income taxes from employee paychecks, make Social Security and Medicare tax payments, and pay unemployment fund taxes. For more information on employer taxes at the federal level, look here.
There are similar taxes on the state level. For example, California requires businesses to take withholding taxes from their employees’ income and make contributions to the unemployment insurance tax fund. We recommend consulting with the Franchise Tax Board and the Employment Development Department.
Step Two: Obtain Additional Insurance
Every California business with employees is strictly required to get workers’ compensation insurance, even if they only have one employee. For more information on this policy, check out the Employer Information page of the California Department of Industrial Relations.
If you haven’t already obtained a general liability policy, we highly recommend that you do so when you bring employees into the business. The more people you have involved in a business, the higher your risk of needing general liability insurance.
Of course, proper care and discretion will eliminate most problems, but incidents happen — from faulty products to an employee slipping and falling. And in some cases, insurance can be the difference between a minor hiccup and a budget-breaker.
Step Three: Enlist Help
For some entrepreneurs, part of the fun of running a business is the opportunity to wear lots of different hats: accountant, manager, marketer, quality control expert — it’s a near-endless list. And if your business is still pretty small, you might be able to handle many of these tasks yourself, especially if you’re prepared with a business administration degree.
But if you aren’t (and it certainly isn’t a prerequisite), some of these tasks may leave you feeling overburdened or out of your depth. For instance, navigating employer-related taxes might steal valuable time that you’d rather spend promoting your business or developing a new product. An accountant or tax attorney, however, knows those tasks like the back of their hand. You may decide it’s worth the added expense to enlist their help.
Ultimately, it’s your decision whether to bring in professionals or DIY. But in our opinion, it’s often worth it to get help from specialized pros.