Today, limited liability companies are one of the most popular business structures around the world. And it’s no surprise! Due to volatile economic conditions, the opportunity to secure personal assets attracts many entrepreneurs. However, LLC formation is quite a non-trivial process that implies thorough preparation and understanding of legislation and regulations needed to register an LLC in California.
Let’s take a closer look at the scheme of forming a limited liability company in California, highlighting a few key steps.
Step 1. Name Your California LLC
- Step 1. Name Your California LLC
- Step 2. Hire a California Registered Agent
- Step 3. File the California LLC Articles of Organization
- Step 4. Create an Operating Agreement
- Step 5. Get a California Federal Tax ID Number (EIN)
- Step 6. Open a Business Bank Account
- Step 7. Taxes, Licensing, and Reports
If you are going to start your LLC, you might have already come up with a name. California has fairly liberal laws when it comes to registering LLCs, however, there are still a number of conditions to be met as follows:
- Uniqueness. It is prohibited to use names that are already assigned to another company operating in the state;
- Identifier. The name must unambiguously include the words “Limited Liability Company” or “Limited Company” (or their abbreviations “LLC,” “L.L.C.,” “LC,” or “L.C.”).
- The name of the company must not mislead the public as to its nature and business purpose. For example, if you are engaged in the relevant activities, you may not use such terms as “bank,” “insurer,” “attorney,” etc. Also, words that allude to any connection of the company with the government are not allowed.
Apart from complying with mandatory requirements before starting an LLC, you might also want to check whether a suitable logo and URL is available.
The problem of matching company names can be solved by choosing a similar name, close in the meaning. The distinction, however, must be significant since you cannot open an LLC company with a name that is “deceptively similar” to someone else’s name.
Step 2. Hire a California Registered Agent
A registered agent is a person that is responsible for receiving official legal and tax paperwork from the state government, e.g. tax forms, deadline notices for annual report filings, or lawsuit notices, and then forwarding them to the company.
Company owners often spend a lot of time out of the office, thus, hiring a professional registered agent will guarantee that all the important correspondence is received on time. Otherwise, the penalty for missing important notifications from the state may result in a serious fee or even automatic dismissal.
According to the law, a CA registered agent can be either a legal entity or a person. A friend, relative, lawyer, or even the owner himself – anyone willing to take on the responsibility can become a registered agent. However, this has to be a CA resident of at least 18 years old that has a legal physical address.
If your registered is an individual, you must include the full name and mailing address in the paperwork. This information will become part of the public record. Therefore, if you do not want personal information to be publicly available, it is wise to address dedicated service providers. ZenBusiness, Northwest Registered Agent, IncFile – any of these companies will not only take on the role of your registered agent but will also help you avoid unexpected costs and consider all nuances related to starting an LLC in California.
Step 3. File the California LLC Articles of Organization
This step is one of the most important in the California LLC registration process. The day of registration is the day when the company is officially born. The Charter is defined by law as a legal document and should contain the following main points:
- LLC name;
- Registered agent data;
- Products/services you plan to distribute;
- Management method;
- Legal address (i.e. a physical address in the state, not a post office box).
There are three ways to file your Articles of Incorporation in California: online, by mail, or in person.
Simply go to Bizfile (an online filing portal) and follow the instructions by filling out the proposed form.
Filing by Mail
To send the documents by mail, fill out and print the application for registration. Pay the fee and mail the filing materials and payment check to the Secretary of State:
California Secretary of State
1500 11th Street
Sacramento, CA 95814
This method is suitable for Sacramento residents or city guests. In-person submission ensures priority over documents sent by mail but you will have to pay a $15 fee.
In addition, those who apply this way may request expedited processing for an additional fee.
Unlike New York, California does not require you to have your Articles of Organization published in a city newspaper to legally start a new LLC.
Step 4. Create an Operating Agreement
A California LLC operating agreement is an internal legal document that sets out your company’s structure and operating procedures. The agreement does not have to be registered anywhere but it is mandatory for all new LLCs, even if there’s only one member. And here are the reasons for that:
- An operating agreement allows to clearly define the roles and responsibilities of each of the participants, preventing the emergence of possible conflicts;
- An operating agreement helps limited liability companies to guarantee their status and receive support in court;
- An operating agreement is required by the state.
Generally, a California LLC operating agreement contains the following points:
- Basic company information (incl. LLC name, formation date, names of members/owners and percentage of their ownage, principal office address, a number of capital contributions, etc.);
- Name and address of the registered agent;
- Methods of company management;
- Voting procedure details;
- Meeting information and voting rights;
- Distribution of profits and compensations;
- Procedures for adding or removing a member;
- Process of dissolving the LLC;
- Amendment process for the operating agreement, etc.
Thus, the content of a CA LLC operating agreement is virtually unlimited. Only the legal capacity of the LLC or the authority of the court may not be changed.
Depending on your desire and budget, you can draft the agreement by yourself – simply download a free California LLC operating agreement template and have it reviewed by an attorney or hire a reputable LLC formation service to help reduce California LLC formation cost and minimize risks.
Step 5. Get a California Federal Tax ID Number (EIN)
A California Federal Tax ID Number is a nine-digit code provided by state law. It is an identification number assigned to each company and is used to quickly identify it to the Internal Revenue Service (IRS). In other words, it’s a social security number of your LLC needed to operate your business.
According to the law, your California LLC will need to obtain a California EIN to be able to do the following activities:
- Hire employees;
- Open a business bank account and do banking in the U.S.;
- Submit applications for permits;
- File California LLC taxes with the IRS, etc.
Applying for a California EIN takes place after your company has been officially formed and the articles of incorporation have been approved.
You can purchase a CA EIN by choosing one of the following options:
- Online. If you file online on weekdays, you can print your EIN confirmation notice right after you fill out the digital form;
- By fax. Download, fill out, and fax Form SS-4 to (855) 641-6935. After that, you will receive your EIN within four business days;
- By mail. Once you print and mail your completed Form SS-4, you will need to wait about four weeks to get your California EIN.
Mail or fax Form SS-4 to:
Internal Revenue Service
Attn: EIN Operation
Cincinnati, OH 45999
Step 6. Open a Business Bank Account
Every LLC in California is required to have a separate bank account. Why? Because the principle of limited liability is based on asset segregation. The owner’s’ personal assets are secure as long as they are not mixed with the company’s capital. Otherwise, your status as an LLC can be ignored in the event of a lawsuit. This is exactly why a bank account for your California LLC is vital.
Securing your company is quite simple. All you need is to open a bank account in California by choosing any suitable establishment.
Apart from maintaining your LLC status, having an independent bank account for your company has a number of benefits as follows:
- Accountancy simplification;
- Separation of business and personal expenses;
- Facilitation of tax reports;
- An opportunity to create your own credit history and improve your company’s reputation and its rating in the eyes of potential partners.
Step 7. Taxes, Licensing, and Reports
Generally, California LLCs are classified as “pass-through” tax units. By avoiding double taxation, they do not have to pay income tax directly but pass it on to the owners, who must report their income and expenses on their personal tax return.
However, at the request of the owners, such a taxation scheme can be changed to another.
State and local taxes
Before starting an LLC in California, keep in mind that CA has one of the highest rates of personal income tax. Also, each LLC in California must pay an annual franchise tax. Plus, if your LLC’s total income exceeds $250,000, you will also have to pay a fee that can reach several thousand. The fee has to be paid by the 15th day of the 6th month, of the current tax year.
However, even taking all of the above into account, forming an LLC in California still costs less than, for example, it would take to set up a corporation in this state.
Some cities, municipalities, and counties impose their own taxes on companies operating on their territory. Plus, under certain conditions, an LLC must also pay the following additional taxes:
- Sales tax (if you are into retails or rentals);
- Unemployment and disability insurance tax (if the LLC hires employees).
Even though your company is already considered fully legal after incorporation, you may still need a special license to get down to business. This depends on the area in which you plan to operate and the requirements stipulated by the state, city, or municipality.
In order to find out if your LLC needs any licenses, you can visit the CalGOLD website, namely the Governor’s Office of Business and Economic Development.
Once your company is up and running, you will search for new development ways to grow your business, have deals and business meetings, etc. – all this requires a lot of energy and time. However, even in the daily bustle, you should not forget that every California LLC needs to comply with the law, namely, regular tax returns and income reports.
California sets quite clear requirements for LLCs in the state. The first Statement of Information has to be filed within 90 days after registration with the California Secretary of State. For this, you should use Form SI-550.
All LLCs must mile the Statement every two years until the end of your company’s anniversary month. The total filing fee is $20. You can read these tips for more detailed information.
A Statement of Information can be submitted for filing directly by mail to the Secretary of State by using the following address:
Statement of Information Unit,
P.O. Box 944230,
Sacramento, California 94244– 2300
You can also drop the form off in person at
1500 11th St., Sacramento, CA 95814.
The purpose is to let the state know if your company’s address has changed, who is managing your business, contact information, etc.