An LLC or a Limited Liability Company is a business structure standard in the US and is almost a hybrid structure which means you benefit from the features of a corporation and a partnership.
LLCs mean they have limited liability if the business fails and you have all the best parts of corporate structure, sole proprietorship, and partnerships in one.
You benefit not only from the liability but flexible management practices and tax advantages depending on the state you are setting up in.
But what about setting up an LLC in California? To form an LLC in California, you need to name your LLC, choose your registered agent, file any articles of incorporation, create an operating agreement, get an EIN and choose if you need a BIN.
The articles of organization you need to file will cost you $70 online and you can apply either online, in person, or by mail or fax. These are the official documents you need to create your California LLC.
In this article, we look at how you create an LLC in California in much closer detail and tell you everything you need to know from tax requirements to your operating agreement and more. Let’s jump straight in.
Name Your California LLC
To start an LLC almost anywhere, you need to start by choosing its name, just as you would do with any other business.
This is an important step and you need to make sure you are choosing a name that complies with the California naming requirements. It also needs to be easy to find for clients and follow the guidelines below:
Naming Guidelines For A California LLC
- The name for your LLC needs to include ‘Limited Liability Company’ or abbreviations such as LLC.
- The name is not allowed to include words that might confuse the LLC with an official government agency such as the FBI.
- Any registered words in the names such as Bank, University, or Attorney might need additional paperwork and an authorized individual with a license such as a lawyer or a doctor to be part of your LLC.
You also need to make sure the name is available in the state, so you will need to ensure it is available in California. You can do this by doing a name search on the State of California website.
You could also use an LLC Name Generator online to come up with a name for your LLC if you are stuck. However, this will not provide you with a URL. You will also need to generate a logo but again, you can use a Logo Generator online.
You will also need to make sure the URL is available. You can check online for this to see if your business name is available as a web domain. You will need a domain name so people can recognize your business at a site when searching for your website.
It will make sure you have maximum engagement with visitors and clients. Even if making a business website is far down on the list of things to do, making sure you have a URL ready is key to stopping any other business from acquiring it.
Once you have acquired your business name, you might want to transfer the LLC formation over to a professional service.
Two of our favorites are ZenBusiness, Inc | Start, Run, and Grow Your Business Today which gives you the fastest formation online and offers services of only $39, and Company Formations, Conveyancing, and Make a Will | LegalZoom UK which offers clear, simple and affordable services, helping over 4 million people.
Most LLCs do not need a DBA either and the name of the LLC can accept checks and payments. However, if you want to do business transactions under another name, you might want to register a DBA.
Choose A Registered Agent
You will now need to choose a registered agent. In California, you are required to appoint a California Agent for Service of Process for your LLC. This is more commonly known as simply a registered agent in other states across the US.
An Agent of Service of Process is a single person or a business entity and they are responsible for receiving and dealing with tax forms, a notice of lawsuits, legal documents, and any official government correspondence on the business’s behalf.
Your registered agent is essentially your point of contact between the business and the state.
An Agent of Service of Process can be anyone who is a full-time resident of California or a corporation of any kind that is authorized to conduct business in the state.
You can select an individual to be a registered agent and this includes yourself. People often register agents for their own business if it is a single-member LLC.
It can be a member of your business or a friend but they need to be over 18 years old, have an address in the state, and are available to be contacted during normal business hours. If you cannot find someone, you can hire a professional registered service agent.
Zenbusiness, the professional service we have suggested above, helps you come up with a registered agent and provides you with the first year of registered agent service free when you pay for an LLC formation with them.
File The Articles Of Incorporation
The next step is to file your forms. To register an LLC in California, you will need to fill out Articles of Organization (Form LLC-1) (ca.gov) and this is filed through the California Secretary of State. You can either apply online, through the mail, or in person.
At this stage, you also need to work out if your LLC will be member-managed or manager-managed. When your LLC is member-managed, the members are involved in the operations of the company and every member has a say in daily operations and affairs.
Sometimes, there is a vote needed for a big business decision.
If your LLC is manager-managed, the members know that there is an administrative power of managers and these handle all the affairs of the company so the company remains efficient if the number of members in the LLC is relatively large.
When you file your articles of organization, you will need to pay a nonrefundable fee of $70 and this will need to be paid when you file either online or by mail.
If you are filing in person, the articles need to be filed in person at the Secretary of State’s Office. This is in Sacramento on the 3rd floor of the office, and if you choose this method, you will need to pay $15 extra at the counter.
This means you will have priority processing over applications that are submitted by mail.
If you are expanding your LLC to California, you will need to form a Foreign LLC which can be found here: Application to Register a Foreign LLC (Form LLC-5). You can only file this by mail.
It will take 5 days online or by mail to process your LLC in California but it can be expedited in 4 hours for $500, the same day for $750, and in 24 hours for $350.
File The Initial Statement Of Information
LLCs in California need to file an Initial Statement of Information, also known as Form LLC-12 with the California Secretary of State. This needs to be done within 90 days of the formation of the LLC and can be done either online, in-person, or by mail. It will cost you $20 to file this form.
Create An Operating Agreement
Now it is time to form an operating agreement. An operating agreement is needed when you form an LLC in California and many other states. This is an agreement and legal documents which outline the ownership and operating procedures of an LLC.
They are important to the formation of an LLC because they ensure that all the business owners know where the business is at and this will reduce the risk of conflict with owners later down the line.
An operating agreement protects the operations of the LLC and it is legally required by the state. It will set out clear rules and expectations within your LLC and establish credibility to others as a legal entity.
An operating agreement should address topics such as the organization, management, and voting, capital contributions, distributions, changes to the membership structure, and dissolution.
You can download a free operating agreement online to make things easier for you and once formed, it should be kept on file as an internal document for future reference. Many states, including California, require this law to form an LLC.
Get An EIN Number
The next step is to form your EIN. EIN stands for Employer Identification Number and it is made up of 9 digits. They are assigned by the IRS and help to identify businesses for tax purposes. Essentially, it is a Social Security number for any business.
The number will identify you as a business with the IRS and will allow them to track the monetary flow of the business.
An EIN is also referred to as a Federal Tax Identification Number (FTIN) or a Federal Employer Identification Number (FEIN).
You will need an EIN to deal with everyday business affairs including opening a business bank account, filing and managing federal and state taxes, and hiring any future employees.
If an EIN has already been established for your sole proprietorship, the IRS still requires you to get a new EIN when you are converting this to an LLC. You can get your EIN straight from the IRS directly and it is a simple process of either applying online or by mail.
If you are an international EIN applicant, you don’t need an SSN but you will need to fill out Form SS-4, Application for Employer Identification Number (EIN) | Internal Revenue Service (irs.gov).
When you get your EIN, you will be informed of all the different tax structures available to choose from. Most LLCs when considering tax classification options will choose the default tax status, yet some LLCs can reduce their federal tax by choosing an S corporation.
Every LLC formed will need an EIN if you have employees or have more than one member. It is required by the IRS.
Frequently Asked Questions
Do I Need A Business License?
To operate an LLC in California, you need to comply with regulations such as state, federal, and local government regulations. The details of each permit will vary by state but you need to ensure you read carefully what California licenses you will need.
You can get a business license for California online or apply with the licensing or regulatory agency for your LLC. They will depend on the location and zoning requirements of the business, as well as the business’s activity. The three main licensing jurisdictions are state, local, and federal.
In California, the main state-level license you will need is a seller’s permit.
You will need to obtain one of these permits if you are engaged in any type of business in the state or if you intend to lease or sell tangible personal property that would be under sales tax if you sold it at retail.
To obtain a seller’s permit in California you need to visit Obtaining a Seller’s Permit (ca.gov). You might also need specific licenses or permits depending on your profession and you can find out which ones your business needs on CalGold Home Page.
In California, most businesses will also need a county or city-level license for tax purposes. The only exception is some unincorporated areas of counties in the state. You might also need a license from your local government depending on the type of business.
If your business has locations in lots of different cities, you might need a business license in the primary location and a business tax certificate in any other counties where the business is concerned.
What Are The Tax Requirements?
Depending on the business, you might also need to register forms of tax.
If you are selling a physical product, you will need to register and get a seller’s permit. You can do this on the state of California’s website and this will allow a business to collect sales tax on taxable sales.
Sales tax, which is also known as ‘Sales and Use Tax’ is a tax that is levied by counties, states, and municipalities on transactions of the business which involve the exchange of goods and services.
For your employees, you should register for California Employer Taxes, including Employee Withholding Tax, Disability Insurance, and Unemployment Insurance Tax. This is done through the California Payroll website.
California Franchise Tax
There is also Franchise Tax to consider in California and this is for every LLC formed in the state but differs according to your LLC income. LLCs in California also need to file a biennial report (Statement of Information) with the Secretary of State.
Federal LLC Tax
Most LLCs need to report their income to the LLC using a Form 1065, U.S. Return of Partnership Income | Internal Revenue Service (irs.gov) or a Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship) | Internal Revenue Service (irs.gov), depending on whether you are a multi-member or single-member LLC.