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For new companies, forming as an LLC is often the best option as it is an uncomplicated business structure that affords business owners legal protection by separating personal assets from business debts. Additionally, LLCs often enjoy a lower tax rate than corporations. However, forming an LLC can be a little complicated, and each U.S. state has a unique checklist for starting an LLC with minor procedural variations.
The process of forming an LLC in California does not deviate from the norm nor does it require LLC members to fulfill unusual obligations or pay excessive fees. As in most states, an LLC is created in California through the filing of Articles of Organization with the Secretary of State. The only major exception is that LLCs formed in California must pay higher-than-average franchise taxes relative to those formed in other states.
To avoid a misstep in the filing process, follow these steps to start an LLC in California, and refer to the checklist at the bottom of the post to familiarize yourself with the legal and financial requirements for LLCs in the state.
Starting an LLC in California step-by-step
1. Select a name for your California LLC
Follow naming requirements
There are 3 major guidelines to follow when naming your LLC in the state of California:
- Your LLC’s name must be distinguishable from the names of existing business entities on file with the California Secretary of State.
- Your LLC’s name must end with the words “Limited Liability Company” or the abbreviations “LLC”, or “L.C.C.” The words “Limited” and Company” may be substituted with “Ltd.” and “Co.”, respectively.
- Your LLC’s name must not include the words trust, trustee, bank, incorporated, inc., corporation, corp., insurance company, insurer, or other words that relate to the insurance industry.
Reserve your LLC name with the Secretary of State
After selecting a name for your LLC, you can reserve it with the California Secretary of State.
First, check the availability of the name using the California Secretary of State business name database. If the name is available for use, you can file a Name Reservation Request form by mail or hand delivery to the California Secretary of State to reserve the name for up to 60 days. The fee is $10 for postal filing or $20 for in-person filing.
2. Designate a registered agent
As in every U.S. state, forming an LLC in California requires the appointment of a registered agent to handle state and federal legal documents and service of process on the business’s behalf. The registered agent must either be a state resident or business entity with a street address in California.
Check this list of private California-based registered agents supplied by the California Secretary of State for help in the selection process.
3. File Articles of Organization
Once your LLC name is reserved and you have appointed a registered agent, you can form your LLC by filing Articles of Organization with the California Secretary of State. Your Articles of Organization can be filed online, through the mail, or via hand delivery to the Secretary of State’s office. The state’s filing fee is $70.
Your LLC’s Articles of Organization must include the following details:
- LLC’s name
- LLC’s principal address
- LLC’s purpose
- Registered agent’s name and address
- Whether the LLC will be member-managed or managed by a specially designated manager
LLCs formed outside of California that intend to do business in the state must also register with the California Secretary of State.
Follow these steps to register your foreign LLC in California:
- Comply with California LLC naming guidelines and confirm that your LLC name is available for use in the state by checking the California Secretary of State business name database.
- Appoint a California registered agent to handle service of process.
- File an Application to Register a Foreign Limited Liability Company by postal mail or in-person. The filing fee is $70.
4. Draft an operating agreement
Although not a legally mandated step for forming an LLC in California, drafting a comprehensive LLC operating agreement is strongly recommended for all nascent limited liability companies.
The operating agreement should do the following:
- Describe the LLC’s business structure
- Establish the individual responsibilities and obligations of LLC members
- Detail how the LLC will be run
Without an operating agreement clarifying the specific duties of its members, an LLC may face significant legal and operational difficulties.
5. Obtain an IRS Employer Identification Number (EIN)
All newly formed LLCs in the United States must acquire an Employer Identification Number (EIN) from the Internal Revenue Service (with the exception of single-member LLCs).
The nine-digit EIN is like a social security number for a business and is necessary to pay income tax, file tax returns, open business bank accounts, and to perform many other important functions.
You can apply for an EIN online on the IRS website without paying a filing fee.
6. Fulfill your California LLC’s additional legal obligations
Once an LLC is registered, its members must devote attention to fulfilling legal requirements that apply for the duration of the company’s existence.
Pay annual taxes
The California Franchise Tax Board requires all LLCs doing business in the state, including those formed in California and foreign LLCs, to pay a minimum franchise tax of $800 every year. However, LLCs that opt to be taxed as corporations should obey different tax rules.
California franchise taxes are due on the 15th day of the 4th month after the end of an LLC’s taxable year. The tax is paid by filing Form 568, which can be found on the California Franchise Tax Board website. LLC’s that report a net income over $250K are required to pay additional taxes based on their total income from that year.
File biennial reports
All California and foreign LLCs are required to file a Statement of Information (Form LLC-12) with the California Secretary of State in the 90 days following the submission of their Articles of Organization.
After the initial Statement of Information is filed, LLCs must file additional statements every two years during the calendar month when their original Articles of Organization were filed, or within the five preceding months. The Statement of Information can be filed online, by postal mail, or hand delivered to the California Secretary of State’s office. The filing fee is $20.
Register with California taxing authorities
Certain California LLCs are required to register with California taxing authorities in order to pay state taxes related to their business. Here are two of the principal California taxing authorities along with the types of businesses that must register with them.
- California State Board of Equalization – Businesses that collect sales tax.
- California Employment Development Department – Businesses with employees.
Obtain business licenses
Many LLCs will need to obtain additional licenses, permits, or other certifications to operate legally in the state. These may be issued at the state, county, or local level.
Check out Calgold, a handy tool provided by the California Office of Business and Economic Development that produces a list of permits and licenses a business needs based on its location and type of business.
California LLC checklist
A California LLC’s name must obey the following guidelines:
- Be distinguishable from the names of existing businesses registered with the California Secretary of State
- Must end with the words “Limited Liability Company” or the abbreviations “LLC” or “L.C.C.”
- Must not include the words that relate to the insurance industry, such as trust, trustee, bank, incorporated, inc., corporation, corp., insurance company, or insurer
Required formation documents and filing fees:
- Name Reservation Request form – Postal filing fee: $10, In-person filing fee: $20
- Articles of Organization – Filing fee: $70
- An LLC is created in California through the filing of Articles of Organization with the California Secretary of State.
Additional legal obligations:
- Biennial reports – Must be filed within 90 days of the Articles of Organization, and then once every two years.
- Annual franchise taxes – All California and foreign LLCs are required to pay a minimum of $800 a year, while LLCs with an income of $250K must pay an additional fee based on their income.
- Register with California taxing authorities – Necessary for certain California LLCs depending on the nature of their business.
- Obtain business licenses – Required for certain LLCs depending on their business type.