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Entrepreneur’s Guide to Setting Up a California LLC

Entrepreneur’s Guide to Setting Up a California LLC

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Entrepreneur’s Guide to Setting Up a California LLC

Are you thinking of starting your own business? If so, one of the first things you’ll need to decide is what business structure to use. The Limited Liability Company (LLC) is a popular choice for small businesses in California, but it’s not uncommon to get overwhelmed by all the paperwork and legal mumbo-jumbo to get one started.

If that sounds like you, don’t worry; this guide to starting a California LLC will walk you through the process step by step.

Related: Guide to starting a business in California

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Steps To Form A California LLC

Step 1: Choose an LLC Name

The first step in forming a California Limited Liability Company is to make sure the name you want is available. There can’t be another LLC in California with the same name as the one you want, so before deciding on a name, you will want to do a  California LLC name search through the California Secretary of State’s entity database.

In addition, there are a few LLC naming guidelines to follow.

1. Under California law, the legal name of the LLC must include one of the following words or abbreviations at the end of the business name:

  • Limited Liability Company
  • Limited Liability Co.
  • Ltd. Liability Company
  • Ltd. Liability Co.
  • L.L.C.
  • LLC

2. The name of the LLC also has to not be likely to mislead the public or include words that may imply the LLC is a government agency.

3. The name shall not include the words “bank,” “trust,” “trustee,” “incorporated,” “inc.,” “corporation,” or “corp.” and shall not include the words “insurer” or “insurance company” or any other words suggesting that it is in the business of issuing policies of insurance and assuming insurance risks.

Before selecting an LLC name, you may also want to see if a domain name is also available.

If you aren’t ready to form your LLC but want to reserve a name, an available name may be reserved for up to 60 days by filing a Name Reservation Request form with the California Secretary of State.

Step 2: Assign a California Registered Agent

To have a Limited Liability Company in California, a registered agent must be identified.  The registered agent is either a California resident (Individual) or a registered agent service (California Registered Corporate Agent). The agent must have a physical address in the state and generally be available during normal business hours. This person will act as a central point of contact to receive legal documents, tax notices, summons, subpoenas, etc., on behalf of the LLC.  To see a list of approved California registered agents, visit https://businessfilings.sos.ca.gov/frmlist1505s.asp.

You, as the business owner, can act as your own registered agent in California, and you are not required to pay for a registered agent. While it’s common for many LLC owners to fulfill this role themselves, some choose to hire registered agent services like Northwest Registered Agent. Utilizing a registered agent service ensures that your LLC adheres to state requirements while offering an added layer of convenience and confidentiality since the owner’s personal address isn’t disclosed in public records.

Related: What is a California registered agent in California?

Step 3: File the California Articles of Organization

The paperwork to officially create an LLC in California is called Articles of Organization.

To file the Articles of Organization, you can either file online or download and mail the Articles of Organization (Form LLC-1) to the California Secretary of State.

If mailing, send the form and pay state fees to:
Secretary of State, Business Entity Filings
P.O. Box 944228
Sacramento, CA 94244-2280

If you have questions, contact the California Secretary of State.
916-653-3794
http://www.sos.ca.gov/

The turnaround time for the state to approve the Articles of Organization normally takes 3-4 weeks, however, expedited processing is available for an additional fee.

Related: How to fill out the California Articles of Organization

Tips for Filling Out the California LLC Articles of Organization

When filing the Articles of Organization, there may be a few sections that you aren’t sure how to answer. I’ll explain some of these.

Purpose statement: No action is necessary necessary on this one. Simply keep the statement, “The purpose of the limited liability company is to engage in any lawful act or business activity for which a limited liability company may be organized under the California Revised Uniform Limited Liability Company Act.”

Management section: This section asks if the LLC is managed by one manager, more than one manager, or all Limited Liability Company member(s).  Every LLC will have at least one member.

There are three choices:

  • One manager: This is when the LLC members hire somebody to run the company,  similar to the position of CEO for a corporation.  This is commonly referred to as a Manager-Managed LLC.
  • More than one manager: Also a Manager-Managed LLC, but with multiple managers.
  • All LLC members: The members themselves are the “managers” and have active involvement in the business’s day-to-day operations.  This is commonly referred to as a Member-Managed LLC.

Most LLCs are member-managed and if so, would select all Liability Company Member(s).

If you are worried about making a mistake when forming your LLC, or just don't want to deal with filling out state paperwork, an LLC formation service will help guide you through the process. My top recommended services include:

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What To Do After Setting Up Your California LLC

Once the Limited Liability Company has been formed, there are a few additional steps to take care of. Below is a list of the most common tasks.

File the Initial Statement of Information

Within 90 days of filing the Articles of Organization, the Initial Statement of Information (Form LLC-12) will need to be submitted to the California Secretary of State. The filing fee is $20.

Prepare an LLC Operating Agreement

The operating agreement is a document that governs the framework of an LLC.  This document covers items like ownership rights, member responsibilities, how profits and losses are distributed, and more.

Most states do not require an LLC to have an operating agreement; however, it is required in California.  While it isn’t required in many states, the operating agreement is useful as it helps to improve the LLC member’s liability protection and reduce misunderstandings of the member’s roles and responsibilities.

Related: California LLC operating agreement template

Obtain an EIN

If the LLC will hire employees or is owned by more than one member, an EIN is required. 

The EIN or Employer Identification Number (also referred to as a Federal Employer Identification Number, FEIN, or Federal Tax ID Number) is a unique 9-digit tax identification number assigned to a business by the Internal Revenue Service (IRS). Similar to a social security number for an individual, the EIN identifies business entities for tax purposes.

Related: How to apply for an EIN

Open an LLC Bank Account

Opening a bank account for your LLC is important for liability protection as the account separates the business’s funds from the member’s personal funds.

Several documents will be needed to open a business checking account, such as:

  • A banking resolution is a document that authorizes the members to open a business bank account on behalf of the LLC.
  • Copies of the original formation paperwork from the state showing the creation of the LLC.
  • Government ID of the member(s).
  • Depending on the LLC’s age, a California Certificate of Good Standing may be needed to prove the LLC is active and in good standing with the state.

Apply for Business Licenses and Permits

Depending on what your business does and where it is located, there will likely be various business licenses and permits to register for. Some common registrations include:

  • Business license: There isn’t a general statewide business license, but many cities in California require businesses to obtain licensing before they can start.
  • Professional license: In California, certain types of professional services, such as barbers, accountants, and others, must be licensed by the state.
  • Seller’s permit: In order to sell products and provide services in California, a seller’s permit from the California Department of Tax & Fee Administration will be necessary to collect sales tax.

Related: What business licenses are needed in California?

Pay the Annual Franchise Tax

Every year a California Limited Liability Company will need to pay a minimum franchise tax fee of $800 to the California Franchise Tax Board.  The franchise tax is based on the gross receipts (total income) of the LLC.

In addition to the franchise tax, businesses in California also have gross receipts tax. The gross receipts tax varies based on the annual net revenue of the LLC.  This second California tax is only assessed on LLCs and not corporations. Once gross revenue exceeds $250,000, there will be an additional franchise tax due.

File the Limited Liability Company Return of Income Form

LLCs that elect to be taxed as disregarded entities or partnerships will need to file the Limited Liability Company Return of Income form (Form 568). This form reflects the financial activity in your LLC and is a sort of master form to ensure that all of the taxes for your business were paid.

File the Annual Statement of Information

LLCs are required to file a Statement of Information (Form SI-550) every two years with the California Secretary of State. The first statement is due within 90 days of the LLC’s approval. The statement updates ownership information and other details.

Related: How to File the California Statement of Information

File the Beneficial Owner Information Report

Beginning in 2024, any individual who owns at least 25% or has “substantial control” of an LLC or corporation in California or any other state must file the Beneficial Ownership Information (BOI) form with the Financial Crimes Enforcement Network (FinCEN). BOI reports are filed electronically through FinCEN’s website.

This material is property of StartingYourBusiness.com

California LLC FAQs

How much does a California LLC cost?

The state filing fee to start a California LLC is $70.

Is there a yearly LLC fee in California?

Yes – To renew a California LLC, every year, there is a $20 LLC Statement of Information fee and $800 franchise tax due.

How long does it take to form an LLC in California?

The time it takes to form a California LLC normally takes 2-3 weeks for the state to approve the LLC paperwork when filed by mail or 3-5 days if submitted online.

Is an LLC the best business structure?

Choosing the right business structure in California depends on several factors, such as your goals, risk tolerance, taxation, and administrative requirements.

A Limited Liability Company (LLC) offers flexibility and protection against personal liability, making it appealing to many. Unlike a sole proprietorship or general partnership, where personal assets are at risk if the business faces legal issues, an LLC safeguards your personal property by separating it from the business’s debts and obligations.

On the flip side, corporations, while offering similar liability protection, are subject to more formalities like board meetings and annual meetings. They tend to be better for businesses planning to raise significant investment from multiple investors.

Sole proprietorships and general partnerships offer simplicity and direct control but lack the personal asset protection that an LLC provides. If keeping business operations straightforward without the need for formal structures is your goal, and you’re comfortable with the risk, these might suit you. But, if you value flexibility with a layer of protection for your personal assets, an LLC in California could be your best bet.

How much is an EIN number in California?

There is no cost for an Employer Identification Number (EIN) in California.

What is a California Foreign Limited Liability Company?

A California foreign Limited Liability Company refers to an LLC that was formed in another state but wants to physically operate in California. Physically operating means having a presence, such as having an office or hiring an employee.

Related: What is a foreign LLC?

What is a California Professional Limited Liability Company?

Businesses that require state licensing, such as accountants, attorneys, podiatrists, physical therapists, acupuncturists, etc., often must file as a Professional Limited Liability Company (sometimes referred to as a Professional LLC or PLLC) instead of an LLC. Filing for a PLLC is very similar to that of an LLC.

Related: What is a Professional Limited Liability Company?

What is the difference between LLC, Ltd, and Co?

LLC, Ltd., and Co. refer to entity designators that can be used at the end of a Limited Liability Name in California.

Related: What Do LLC, Inc., Co., and Ltd. Mean?

Entrepreneur’s Guide to Setting Up a California LLC

Entrepreneur’s Guide to Setting Up a California LLC

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