This article provides step-by-step instructions specific to forming a California limited liability company (LLC).
LLCs are similar to corporations but may enjoy some of the tax and operational benefits that partnerships do, such as:
- pass-through taxation (i.e., profits and losses “pass-through” the business directly to LLC owners)
- fewer formalities are required for operation (such as holding meetings and keeping minutes).
How to Form an LLC in California
STEP 1: Name Your California LLC
The name of your LLC must contain the words “Limited Liability Company,” “Limited Company,” or abbreviations: L.L.C., L.C., Ltd. Co., Ltd., or LC (abbreviation is not required if it’s the only business entity with that abbreviation in the state).
To make sure no one else has already reserved your desired business name, you can conduct business name search online at http://www.boe.ca.gov/ to see if it’s available for use by another company in your county or any adjacent counties, which are included in its search radius by default under the current system (it may be necessary to expand this range depending on demand).
If someone else has already reserved the name you want, you will have to choose a different one.
STEP 2: Choose a Registered Agent in California
Once your LLC is officially formed, you need to choose an agent for service of process (i.e., someone authorized to accept legal documents on the LLC’s behalf) who will act as the company’s only representative for receiving lawsuits, summonses, and notices sent through the mail.
“Registered Agent” is a generic term used to refer to whoever you designate as your representative; some states use other terminology such as “registered representative” or “resident agent.”
This person must be:
- 18 years or older
- a California resident or business entity
- someone with good standing in the state of California (meaning no outstanding tax liens or criminal charges).
FAQ: Nominating a California Registered Agent
Q. Must I choose a Registered Agent service when filing the LLC formation documents?
A. No. The Certificate of Formation (the official state form to register your LLC with) also contains a section for you to submit the name and address of your agent.
You can fill this in later, but it must be filed before you open for business, or else your company won’t be legally recognized by the state of California.
Q. Can I serve as my own registered agent?
A. Yes, but that is not recommended because agents are private individuals who may get mixed up with notices accidentally sent out in the company’s name.
By appointing an authorized representative outside of yourself, you avoid risking personal liability if someone complains about something they received in error from your company.
Q. If I appoint a Registered Agent, is that person required to serve as my agent forever?
A. No, you can change your registered agent, and can even have multiple representatives at one time so long as each has the authority to receive legal documents on behalf of the LLC.
The person or company you choose will need to file a Certificate of Change document with the State of California if:
- you switch Registered Agents,
- change your business address for service of process, or
- dissolve your company and appoint a different agent for its winding-up process (i.e., the final stage in an LLC’s life cycle before it is delisted from state records and dissolved).
STEP 3: File Your California LLC Articles of Organization with the Secretary of State
File your Articles of Organization (also known as a certificate or form 200) with the California Secretary of State (SOS).
You can download this document for free at http://www.sos.ca.gov/business/corp/forms/.
The filing fee in most counties is $70; some counties charge up to $142, which you must pay when you submit the form.
FAQ: Filing California LLC Documents
Q. How long does it take to form an LLC in California?
A. It takes 4-6 weeks to form an LLC, but you can complete your formation process online by filing the Articles of Organization at http://www.sos.ca.gov/business/corp/onlinefiling/.
If you want to reserve a business name before forming your company, this service should be used instead so that no other company in the state has the right to use your desired name.
Q. Can I file my documents online?
A. Yes, if you have a valid California driver’s license or ID card issued by a government agency and agree to pay electronically via credit card or debit card (which will incur a convenience fee ranging from 1.5% to 2.9%).
Otherwise, you can submit your Articles of Organization by mail with the SOS and pay by check or money order
Q.How long is my LLC valid in California?
A. You must file a Statement of Information (also known as form SI-200) each year after incorporating your business in California; this document simply confirms that the company still exists and that all contact information remains accurate for it.
If you fail to do so on time, your company will be dissolved and fall out of good standing; then you’ll have to re-register it once you’ve filed the necessary paperwork.
STEP 4: File the Initial Statement of Information
After forming your LLC, you must file a Statement of Information (Form SI-100 or form SI-200) each year following your company’s formation.
The California SOS website has more information on this document, as well as updated filing fees which can be viewed by visiting http://www.sos.ca.gov/business/corp/filingfees/.
What is a Statement of Information?
A Statement of Information simply proves that your business still exists and all contact information is updated with the state; it should be filed every single year after incorporating to keep your business active in California records and prevent you from losing its status as an active entity.
If you fail to complete this step despite having an activity in the state, your business will be dissolved and fall into a delinquent status.
STEP 5: Create a California LLC Operating Agreement
LLC members should create an operating agreement to document their arrangement with regard to how the business will be run, as well as what policies are in place for making decisions.
This written agreement also clarifies your roles and responsibilities within the LLC.
FAQ: California LLC Operating Agreement
Q. How should I choose a name for my California LLC?
A. Your business name should not be identical or misleadingly similar to that of other companies in the state, or even names reserved by other companies (which can be checked online at http://www.sos.ca.gov/business/corp/trademarksearch/).
You can reserve a name before incorporating your company; you simply need to indicate this on your Articles of Organization.
Q. How long does it take to prepare an LLC operating agreement?
A. It takes 2-4 hours, depending on its length and complexity, so you should work closely with your business partners when creating this document.
STEP 6: Get a California LLC EIN
After forming your company, you will get an Employer Identification Number (EIN) that identifies your business at the federal level.
You must also get a California LLC EIN if you plan to hire employees or open a bank account for your business in the state.
FAQ: Getting an EIN
Q. How do I apply for an EIN?
A. You can apply by mail or fax, but the e-approval process is recommended as it’s faster and easier.
Q. What are eligible business types?
A. Only businesses with sole ownership are eligible for this tax ID number; LLCs must use their own EINs to open bank accounts in California instead of your individual social security number.
Pros and cons forming an LLC in California
- A Limited Liability Company offers the limited liability features of a corporation, but it is taxed like a sole-proprietorship or partnership
- You can easily transfer ownership in your California LLC if you decide to sell your business, dissolve it, etc.
- The state also protects you from personal liability when operating your business
- When forming an LLC in California, one must take into account the fact that the process is more expensive than for other types of businesses
- You’ll have to complete an additional Statement of Information form each year after incorporating, pay $800 annually and get a federal EIN just for this type of company (although it’s possible to be exempt from these fees if you meet certain criteria).
How much does it cost to form an LLC in California?
The total cost of creating a California LLC, including filing fees and operating costs, can be estimated at around $1,000. The official state fee for creating your company is $70 plus an additional $800 fee if you opt for expedited service.
In addition to the government registration process, you have to file California Articles of Organization with the Secretary of State.
You will also have to set up a bank account and get an EIN from the Internal Revenue Service (IRS) (for tax purposes).
Considering Using an LLC Formation Service?
Although the process of forming an LLC in California may seem intimidating, there are companies that can help you out for a price. A professional formation service will not only do all the paperwork on your behalf, but it will also prepare and file your Statement of Information once a year (at no extra charge) if you live in this state.
Separate Your Business and Personal Assets
Although you won’t be personally liable for the company’s liabilities, your California LLC must observe all local and federal laws. For example, if you don’t keep separate records and fail to pay taxes on time, the IRS could seize assets from both your business and personal accounts.
1. Opening a business checking account:
If you plan to hire employees, open a business bank account in California using your name and EIN for this purpose.
If you don’t, then the IRS may confiscate all funds from your personal checking or savings accounts.
2. Getting a business credit card:
You might also consider applying for a business credit card in order to pay for company expenses.
If your LLC is audited, this could prove beneficial to you as the account will be under the name of your business and not your social security number.
3. Hiring a business accountant:
You’re required to file a Statement of Information each year, but you can avoid this cost by hiring an accountant to do it for you.
This way, your company’s finances will be in professional hands and up-to-date at all times.
Get Business Insurance for Your LLC in California
As with any other business, you must have appropriate types of insurance for your LLC. Liability, property damage, and vehicle insurance are the three most common types of coverage necessary for small businesses in California.
If you want to protect yourself from lawsuits filed by clients or third parties, then liability insurance is mandatory. If someone gets injured on your premises or if you damage their property, they can sue you to recover medical costs and the like.
Property damage protects against things like fires and floods; while automobile coverage provides liability protection for accidents involving employees’ cars on the job.
California Business Permits & Licenses
You might need certain permits and business licenses if you plan to start an LLC in California. Depending on the nature of your business, you may be required to obtain special state or local licenses (for instance, if you’re selling goods, then you will need a Sales Permit).
If you sell food, alcoholic beverages, or tobacco products through your California LLC, then you’ll have to file additional paperwork with the Department of Alcoholic Beverage Control (ABC). You can register online by paying $30 for each location where these items are sold.
California LLC Tax Filing Requirements
All LLCs in this state are required to file Form 568 with the Franchise Tax Board. The filing fee for this form is $70, so you’ll have to pay an additional $800 if you request expedited service.
You can contact FTB at 916-845-3000 or 888-829-5500 if you require further assistance with your California business taxes.
California is a Streamlined Sales Tax State. The state uses the destination method with regard to sales tax so you will collect and report taxes based on your customer’s state of residence.
You may file Form ST-145, Certificate of Registration for Transient Merchants, for out-of-state sellers. This form can be obtained from the Board of Equalization at 800-400-7115 or 916-324-3533.
Once your LLC closes, you will have to file Form 568-W with the Franchise Tax Board. You must pay estimated quarterly taxes for one quarter at a time.
The due dates are the last day of the month following each quarter (i.e., 31 March, 30 June, 30 September, and 31 December).
For example, if you close your LLC on 15 July, then you’ll need to send your first payment by 29 August.
You can pay online or by phone using EFTPS; otherwise, you may make payments by check or money order (if filing in person) or mail (if paying by mail).
Federal LLC Tax Filing Requirements
If your LLC is active, then you must file Form 8832 to obtain the business classification (e.g., corporation, partnership) that will be used when calculating taxes.
You’ll also need to complete Form 2553 in order to elect single-member treatment if your LLC has only one owner. The latter can be done any time up until 60 days after the end of your fiscal year.
It’s important that you keep all employment tax records for at least four years; otherwise, they may not be accepted by the IRS or state authorities in case of an audit.
When doing payroll, make sure that you withhold federal income tax and social security/Medicare tax from each paycheck; if applicable, you should also deduct unemployment taxes & non-resident state tax withholding.
California Biennial Report & Franchise Tax Fee
After completing your first two years of operation, you will need to file Form 568. This form is due on March 15th of odd-numbered years. Your LLC must pay an $800 annual franchise tax fee by the same date; otherwise, it will be suspended automatically.
If you choose to dissolve your California LLC before that date, then you should contact the California Franchise Tax Board and request written confirmation that this has been done in compliance with state law.
In order to meet state business entities’ filings requirements for your Biennial Report in addition to paying taxes, make sure that servers aren’t overwhelmed when it’s time to submit both forms simultaneously!
You might consider hiring a professional tax preparation service since they know what paperwork is necessary and how best to complete all necessary forms.
Hiring Employees in California
When hiring employees, you must adhere to the following state laws
- All new hires must apply for a Work Opportunity Tax Credit certificate through the state before completing I-9 forms. To do this, contact CalEITC4Me at 866-306-6272 or visit them online. You’ll then need to complete either Form DE 23 or 24 and submit it along with form WOTC to your local employment development department office within 28 days of hire. Employees are exempt from any state unemployment insurance withholding if they are covered by a collective bargaining agreement that establishes their wages, hours of work, and working conditions in lieu of California law. If an employee worked during any day of the previous four quarters, then they are ineligible for exempt status until the fourth quarter following their date of hire.
- You must withhold California income tax from paychecks as well as FICA taxes (social security and Medicare). Your employees may be eligible to contribute towards a Roth IRA if they meet certain requirements; you can deduct these contributions from your company’s taxable income. Some employers also offer a state disability insurance plan and life insurance benefits to full-time employees. The latter can be offered regardless of age, but coverage has to begin within 90 days of employment or before the employee’s 31st birthday – whichever comes first. The amount that can be excluded from an employee’s taxable wages is capped at $75,000 per year.
- If unemployment insurance taxes weren’t withheld during an employee’s last period of employment, then you must pay it back before they can start working for you. You’ll be assessed interest on any delinquent unemployment insurance payments at the rate of 10% per year; this starts accruing on the date that the original payment was due.
How to Build Business Credit?
Building business credit is an excellent way to help your company get favorable loan terms. Credit scores are based on the amount of debt you currently owe, how many accounts you have open, and their payment history.
If you’re just starting out in California, then banks will likely look at two numbers when determining whether or not to approve your business for a line of credit: your personal FICO score and your company’s credit score.
How to Make a Website?
There are plenty of ways to create a website, either through your hosting service or an external web design company.
If you do it yourself, then you’ll need two key components: web hosting and a domain name. Hosting is necessary to ensure that internet browsers can access your server and display information sent from the site.
A domain name serves as the address for your website so that site visitors can easily find you on the internet.
How to Obtain a Certificate of Good Standing in California?
A certificate of good standing confirms that a business is a registered and inactive status with the Secretary of State.
Companies that have been established for at least one year can request a Certificate of Status, which verifies the date they were incorporated or qualified to transact business in California.
Newer companies will need to request what’s known as an “Initial or Amended Formal Notice,” which shows their formation date. To receive this document, submit your company’s name and official mailing address through your online account on the state’s website.
Do you need a lawyer to form an LLC?
You can always hire a lawyer to help you with the paperwork, but it isn’t a legal requirement. However, if this is your first foray into business ownership and you don’t feel like taking on any risk, then hiring an attorney is probably your best bet.
They’ll complete all of the necessary formalities and make sure that everything’s in order; additionally, they can offer valuable advice throughout the process of starting and operating a new LLC.
What is a foreign California LLC?
If your company is located outside of California but will be doing business within the state, then you need to register it as a foreign LLC. This form must be filed with the SOS; it can either be completed on paper or online (which costs $50).
After the registration has been processed, you’ll receive a certificate of good standing that needs to be submitted along with any other paperwork needed for your new company’s taxes.
How can I get a California phone number for my LLC?
As far as phone numbers go, you can get either a dedicated or shared line. The latter is the cheapest option, but your company will share its number with other organizations; this could result in some awkward conversations if it’s not professional enough for your tastes.
If that doesn’t sound like something you’d be comfortable with, then select a separate number that’s exclusive to your business. You’ll need an LLC attorney to help you set up your free 1-800 number so that each call goes through correctly.
Starting an LLC in the state of California is a relatively easy process, but it can become more complicated if you decide to hire employees and/or pay federal taxes.
Make sure that you’re aware of all applicable state and federal laws and use online resources (including this article) to help guide your business decisions; doing so will save you time and money in the long run.