How To Start An LLC In California (Step-By-Step)

Choosing the correct business structure is a vital step in forming any new business. Among the various types of business structures that exist, LLCs are one of the most commonly used due to the flexibility, personal liability protection, and tax benefits it provides to the owner(s). LLCs are also easy to form, and easy to manage.

The major benefit to forming an LLC in California is that the costs associated with the formation process are tax-deductible up to $5,000.

The deductions include: 

  • Articles of Organization costs
  • LLC filing fees
  • Fictitious business name fees
  • Attorney fees
  • Paperwork costs
  • Registered agent costs
  • Any other costs that come with setting up your LLC

Follow along with our comprehensive guide on How to Form an LLC in California to get started today, or check out our video on How to Start a California LLC in 7 Steps (2022).

What is an LLC?

A Limited Liability Company (LLC) is a pass-through business entity that protects its owners from personal responsibility in the case of lawsuits or fraud against the company. It is a hybrid business structure that provides the features of a partnership, sole proprietorship, and corporation.

Unlike S Corps, LLCs allow for an unlimited number of owners, and any entity or individual can be a member of an LLC except banks and insurance companies.

In addition, LLCs don’t pay taxes on their profits directly. Instead, profits and losses are passed through to members who report them on their personal tax returns. 

Note: Formation laws vary from state to state. For that reason, it’s best to check with the state of California to find out all of the steps that are required in forming your specific business.

The Formation Process

The creation of an LLC involves the following steps:

  • Choose a business name
  • File articles of organization with the state
  • Pay state fees. For example, you must pay an additional fee in California to obtain an Employer Identification Number (EIN).
  • Submit paperwork 

Who Should Form an LLC?

LLCs are becoming more popular compared to other forms of business.

This particular structure is ideal for companies that:

  • Want to limit the personal liability of themselves and their partners or investors
  • Need a formal agreement between two or more members
  • Want to separate business assets from personal assets of the owners

Limited Liability

Limited liability means the owners and shareholders aren’t individually liable for debts and damages against the company. Instead, the LLC itself is responsible. Therefore, lenders or creditors can’t come after you for your personal assets.

Pros of an LLC

Below are some advantages of an LLC:

  • Limited liability: Owners aren’t held legally accountable for business liabilities such as debts. In that case, any private assets under your name are protected from potential lawsuits.
  • Tax advantages: LLCs can choose to be taxed as a corporation, sole proprietorship, or partnership. This way, they’re not required to pay separate federal taxes, which allows them to avoid double taxation that C corps are subject to. Also, LLCs can elect to be taxed as LLCs and save on self-employment taxes.
  • Easy to set up: LLCs are easier to set up than a corporation as it involves light paperwork and fewer formalities.
  • Flexible: Your LLC can be member-managed, meaning the owners oversee the day-to-day business functions, or manager-managed, meaning members appoint an outside person for the management role.

Cons of an LLC

Like any other form of business, an LLC also has its drawbacks.

They include:

  • Costs: It generally costs more to form and maintain than a sole proprietorship. Some expenses you’ll incur include the formation fees, annual report fees, and franchise taxes.
  • Fewer investors: Investors are usually more likely to put their money into a corporation than an LLC, especially those taxed as a partnership. That’s because the pass-through form of taxation complicates their personal tax situation. For tax purposes, they’ll have to pay taxes on the LLC’s profits even if there’s no cash distributed.

California LLC Formation Steps

Here is a detailed step-by-step guide on how to set up an LLC in California:

1. Choose a Business Name

You should select an original and distinct name for your business. The state of California requires that your LLC’s name must:

  • Include the phrase “limited liability company” or the abbreviations “LLC” or “L.L.C.”
  • You can abbreviate Limited to “Ltd.” and Company to “Co.”
  • Must be distinguishable from current LLCs in California. (Conduct a search on the Secretary of State’s business name database to determine if your desired name is available.)
    • Note: You may use a Name Reservation Request form to reserve the name if you’re not ready to proceed with documentation. However, it only holds the name for a maximum of 60 days.
  • You should not include words like “Treasury,” “FBI,” “Federal,” “Bureau,” “Municipal,” “Division,” or other state department names that suggest it’s a government agency. This is to avoid confusion among the public.

For more information on choosing a business name, you’d want to check the other rules available on the official California Secretary of State’s website.

2. Select a Registered Agent

California requires all LLCs to have an appointed registered agent to receive important legal documents on behalf of the business. This can be yourself, an individual, or a business entity registered with the Secretary of State as an agent for the service of process. For an individual, the agent must be over 18 and should have a physical address in California. A third-party service such as Incfile will provide free registered agent service for your first year if you form your LLC through their website.

3. File Articles of Organization

To register your LLC with the state of California, you need to file Form LLC-1. You can apply online, by mail, or in person, which costs $70 (non-refundable). They charge a $15 additional counter-drop-off fee for articles filed in person.

The essential contents of the article include:

  • The business name and principal address.
  • LLC’s management structure. (If member-managed or manager-managed.)
    • LLC is usually member-managed when there are a small number of members and they are willing to be involved in the day-to-day business operations.
    • LLC is usually manager-managed when there are a large number of members and they do not wish to be involved in the day-to-day operations.
  • The business purpose. 
  • Name and address of your registered agent.

4.  Prepare an Operating Agreement

LLCs are not required to form an Operating Agreement in the state of California.

Though it’s not required in California, it’s still a highly recommended document for LLCs with multiple owners or employees. It allows you to outline vital areas of your business, such as ownership and operational rules.

Other details you can elaborate on include:

  • Powers and duties of members and managers
  • How profits and losses will be distributed
  • Buyout rules

By failing to prepare an Operating Agreement, default California LLC laws will apply and may not provide your business with the optimal protection it needs.

5. Pay California State Tax and Fees

All LLCs conducting business operations in California must pay taxes through form 3522.

That includes:

  • An annual minimum tax of $800 with exceptions
  • Additional taxes to businesses earning over $250,000. Therefore, if your LLC will make more than this, you will be taxed based on your net annual income. You should estimate and pay the respective amounts by the 6th month of the current tax year.

Use Estimated Fee for LLCs (FTB 3536) to remit the estimated fee payment:

If the total LLC income rounded to the nearest whole dollar is:

The fee amount is:
$250,000 – $499,999 $900
$500,000 – $999,999 $2,500
$1000,000 – $4,999,999  $6,000
$5,000,000 or more  $11,750

 

Note: You have until the 15th day of the 4th month from your filing date to pay your first-year annual tax. The good thing is that if your LLC is registered in 2022 or 2023, you’re exempt from taxation for the first year. This is to allow you to establish yourself first after formation.

6. Acquire State and Local Business Licenses

This depends on what type of business your LLC is involved in. For instance, if you’re a contractor, you might be required to acquire a building permit.

The fees charged for licensing also vary for different permits. You should visit the Governor’s Office of Business for statewide licensing requirements.

7. File a Statement of Information

Every California LLC is required to file a statement of information every two years. The first Statement of Information is due within 90 days of your LLCs formation date.

The document should include:

  • The LLC name, address, and file number 
  • Name, email, and address of the registered agent  
  • General business activity

The Best Method to Forming an LLC

Here are three ways for your consideration:

  • Incfile: Comes with very affordable plans with tons of features like online storage of documents and a personalized dashboard.
  • ZenBusiness: Super easy and affordable for small business owners. Also, it has flexible pricing plans for specific needs.
  • Solo: You can save more money but sacrifice more time and mental power.

Conclusion

Starting an LLC in California involves simple administrative procedures. You’re required to choose a name, get a Northwest registered agent, pay your state taxes and fees, get your state and local business licenses, and file a statement of information. For a seamless initiation process, you may want to use a business formation service like Zenbusiness or Incfile. Altogether, remember to consult the professionals if you have any doubts. You’d want to get all the details right the first time to prevent any future inconveniences.

Check out our video on How to Start a California LLC in 7 Steps!

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