Are you considering starting a business in the Golden State? Forming a California LLC might be the perfect choice for you. This complete guide will walk you through the process of forming an LLC in California, providing you with valuable insights and practical tips on everything from business licenses to federal taxes.
Quick facts about California LLCs
Let's look at some quick facts about California LLCs:
- As of 2023, 4.15 million small businesses were registered in California, representing 99.8% of all California businesses.
- Forming an LLC in California offers numerous benefits, including protection of personal assets, with responsibilities including taxes and business permits.
- In California, you can form a domestic LLC, foreign LLC, single member LLC, or multi-member LLC.
Many California entrepreneurs prefer to register their small businesses as LLCs rather than corporations because LLCs offer more flexibility and have fewer record keeping requirements than corporations.
Why is 2024 the year to start an LLC in California?
This is the year to form your new business in California! After all, California offers numerous benefits to those who start a California limited liability company (LLC), including limited liability protection, flexible taxation, and enhanced credibility. With the economy bouncing back from the pandemic years, now is the perfect time to get your business going.
The LLC formation process in California involves selecting an LLC name, submitting the articles of organization, appointing a registered agent, acquiring an employer identification number (EIN), and complying with California licenses, permits, and tax regulations.
When starting a domestic or foreign LLC, it's important to carefully consider how to pay taxes and fees. In California, you may be subject to the following:
- An annual tax of $800
- A fee based on annual revenue
- Federal income taxes
- LLC taxes
- Sales tax
- The California franchise tax
Don't let these obligations intimidate you, though. With proper LLC paperwork, planning, and organization, you can efficiently manage your LLC's finances and fulfill your tax responsibilities.
As an LLC owner in California, you'll have access to a variety of resources, including:
- Online tools
- Detailed instructions and sample forms
- Business bank accounts
- The "How to Start an LLC in California" guide
It's important to note that a business owner who offers professional services, such as an accountant, cannot form an LLC in the Golden State. Those kinds of businesses are referred to as professional corporations in California.
How to start an LLC in California in 7 steps
While there is a lot to keep track of when forming your own California limited liability company, it's just a matter of familiarizing yourself with all the requirements. So, if you're wondering how to get an LLC in California, follow these seven simple steps to get started:
Step 1: Choose a business name for your California LLC
The first step in establishing your California LLC is selecting a unique and fitting name. Your LLC name must be unique, comply with state regulations, and not be vulgar or misleading.
Before finalizing your choice, it's essential to check the California trademark database and the California Secretary of State's business search portal to ensure the desired name is not already registered. Thorough due diligence in the name selection process helps avoid potential legal issues and establishes a strong brand identity for your business.
With a unique and compliant name, you'll be one step closer to launching your LLC.
Step 2: Appoint a registered agent for your California LLC
California Corporation Code Section § 1700-1702 requires all California business entities to acquire a registered agent.
A registered agent is the individual or business entity authorized to receive tax and legal documents on behalf of your company. This means the agent must keep regular business hours. (Normal business hours are 9 a.m. to 5 p.m.) In California, this person may be a member, manager, or officer of the LLC or an unrelated individual or entity. The agent must be at least 18 years old and have a physical address in California to conduct business.
Appointing a registered agent not only fulfills a legal requirement but also ensures that important documents are received promptly. Many businesses choose to use registered agent services, which offer added convenience and compliance support for an annual fee. Engaging a reliable person allows you to concentrate on growing your business, confident that important documents will be handled properly.
Step 3: File the articles of organization
Filing the articles of organization with the California Secretary of State marks the next official step toward forming your LLC. The articles of organization are the documents that establish your business entity and allow you to conduct business in the state.
When filing this LLC paperwork, you must include the following in the document:
- Your LLC's name
- Purpose of your business
- Management structure
- Physical address of your business
- The name and address of its registered agent
The filing fee to file California LLC articles of organization is $70.
Typically, the processing time for an LLC filing submitted online in California is approximately 8 business days. If you need expedited processing, the Secretary of State's office in Sacramento offers next-day approval services for hand-delivered filings. Prompt and accurate submission of the articles of organization establishes your LLC's legal foundation, bringing you one step closer to launching your business.
Remember that filing the articles has a one-time filing fee to establish your LLC. However, you'll also need to budget for ongoing fees such as the annual franchise tax and other state and federal taxes.
Step 4: Draft a California LLC operating agreement
Though it's not a requirement in every state, California requires you to create an operating agreement as part of the LLC registration process.
An operating agreement outlining the ownership structure, management rules, and other vital company information is a key document for your LLC. Creating a comprehensive plan can help prevent future disputes and maintain smooth operations within your LLC. The document must adhere to the California Revised Uniform Limited Liability Company Act's requirements, ensuring that the rights and responsibilities of LLC owners are clearly defined.
To draft your LLC operating agreement, consider using a template as a starting point. Customizing the template to suit your business's specific needs will ensure that your agreement accurately reflects your LLC's structure and goals. With a well-crafted operating agreement in place, your LLC will have a solid foundation for growth and success.
Step 5: Get an employer identification number (EIN)
Any California LLC fundamentally requires an employer identification number (EIN), also known as a Federal Tax Identification Number. It is an essential tool to validate your LLC and start working on business operations. This unique number, issued by the Internal Revenue Service (IRS), allows you to handle tax filings, open a business bank account and business credit card, and hire employees. Applying for an EIN is a straightforward process, with the IRS offering a free online application.
Even if your California LLC is a single-member entity with no employees, obtaining an EIN can still be beneficial. Using an EIN instead of your personal Social Security number for business purposes can help protect against identity theft. With an EIN in hand, you'll be prepared to manage your LLC's finances and comply with tax requirements.
Step 6: Comply with California licenses and permits
The next step in figuring out how to form an LLC in California involves obtaining the appropriate business licenses and permits.
To operate your California LLC legally, you must fulfill federal, state, and local government regulations. This includes obtaining necessary health permits, building permits, and signage permits, among other requirements. Adherence to these regulations ensures the smooth operation of your LLC and helps to avoid potential legal issues.
Information about business licenses can be found at your local county clerk's office or the Governor's Office of Business and Economic Development's website, CalGold.
Step 7: Maintain good standing with the California Secretary of State
For the continued success of your LLC, it's important to maintain good standing with the California Secretary of State and the California Franchise Tax Board. This involves filing required documents, such as the Statement of Information, and paying annual franchise taxes and other fees to the California Franchise Tax Board.
The Statement of Information contains supplemental contact information and details regarding your company's finances and must be filed within 90 days of formation. You must submit an updated Statement of Information with the California Secretary of State every two years and pay the $20 filing fee.
Prompt submission of necessary documents and payment of fees ensures that your California LLC continues to maintain good standing with the Secretary of State. This will help you avoid potential penalties and maintain a positive reputation for your business.
How much does it cost to start an LLC in California?
Now, how much does it cost to form an LLC in California? It depends on a number of factors, such as whether you file on your own or hire a service like LegalZoom to help guide you through the process.
At the very least, it costs $70 to file your articles of organization and $20 for your Statement of Information, bringing your initial cost to $90.
Remember, California LLCs must have registered agents, so if you're hiring one, you'll need to budget for that cost, too. LegalZoom offers registered agent services for $249/year.
LegalZoom can also help you file your business formation documents and ensure your LLC is compliant with California law. We offer a basic free service for the cost of state filing fees, and more advanced services with advice and guidance from our trusted attorneys.
How to file taxes for a California LLC
It's important to note that California LLCs are taxed as pass-through entities, meaning LLC owners pay personal income tax on the LLC's revenue instead of paying corporate income tax on the LLC. How your LLC is taxed will depend on your LLC's tax classifications—it can be taxed as a sole proprietorship, general partnership, S-corp, or C-corp.
Every LLC in California must pay an $800 annual franchise tax to the California Franchise Tax Board. Some cities and counties also impose their own local taxes. Furthermore, the California Department of Tax and Fee Administration charges industry taxes on certain sectors, and if your LLC sells taxable products or services, you must collect sales tax on your transactions.
Be aware that your tax obligations will be a little different depending on whether you work alone or if you employ personnel. Contacting the appropriate California taxing authority can provide you with the information needed to fulfill these obligations. However, at LegalZoom, we also provide business accounting solutions and personal tax advice to help you learn the ins and outs of California LLC taxes.
How to expand your LLC: Hiring employees and growing your business
As you grow your business, you can consider expanding your workforce, broadening your range of services, and engaging with the local business community. This can help drum up more business and define your brand identity.
Hiring employees involves obtaining a California employer identification number (EIN), defining job roles and responsibilities, advertising positions, conducting interviews, and providing training and orientation. Registered employers must report any change in business status to California's Employment Development Department.
In addition to expanding your California LLC, you can consider offering employee benefits:
- Health insurance
- Retirement plans
- Disability insurance
- Flexible working hours
- Optional leave
Each of these comes with different implications, concerns, and benefits. Seek advice from a business lawyer if you’d like to pursue any of these, as they can be complicated to do correctly on your own.
Important California laws for LLC owners
In addition to following the above steps for forming an LLC in California, be sure to familiarize yourself with California business laws to ensure you stay compliant.
Beneficial Ownership Information Reports
As of Jan. 1, 2024, certain types of corporations, limited liability companies, and other similar entities created in or registered to do business in the U.S. must report information about their beneficial owners—the persons who ultimately own or control the company—to the U.S. Dept. of the Treasury’s Financial Crimes Enforcement Network (FinCEN). This document is called a Beneficial Ownership Information Report, BOI report, or BOIR.
These BOI reports are part of an initiative to help crack down on criminals who form fake business structures to carry out illegal activities, such as money laundering and trafficking. The report identifies who controls and owns your company, providing the government with a more transparent look into the legality of your operations.
When submitting your BOI report, you'll include information about your LLC and its beneficial owners, such as their names, current addresses, and copies of their IDs or passports. You can file this report for free on the FinCEN website.
Insurance requirements
According to California Labor Code Section 3700, all California businesses must purchase workers’ compensation insurance for their employees. While this is the only insurance required by California law, we highly recommend investing in other forms of coverage, such as general liability protection and professional liability insurance.
How to create a California LLC with LegalZoom
From figuring out how to submit your articles of organization to determining how much you owe the California Franchise Tax Board, a lot goes into forming an LLC in California.
At LegalZoom, we understand all the moving parts, and we're here to help streamline the business formation process for you. We'll guide you through all the steps, such as choosing an appropriate business name, selecting a registered agent, and determining your management structure. Then, we'll help you draft and file all the appropriate documents, like your articles of organization and operating agreement, register your EIN, and navigate business license, insurance, and tax requirements.
FAQs
Check out some answers to your frequently asked questions about California LLCs.
Is an LLC worth it in California?
Yes, forming an LLC in California is worth it for many kinds of businesses. Some benefits of forming this kind of business entity include tax advantages, protection of personal assets, and management flexibility.
Is it free to set up an LLC in California?
No. You must pay a $70 fee to file your articles of organization with the California Secretary of State to establish your business entity with the state plus a $20 fee for your Statement of Information.
How can I check if my desired business name is available?
Use the California Business Entities Search tool. This database has access to all the registered business names within the state.
Can a personal bank account be used for business?
No. The law requires you to open a separate business bank account for your limited liability company. Enjoying limited liability protection is one of the advantages of forming an LLC, so it's essential to keep your business and personal assets separate.
What's the difference between a California LLC and an S-corp?
There are some major differences between a California LLC and S-corp. For example, there are fewer requirements when it comes to forming an LLC than an S-corp, and LLCs are less regulated than S-corps. Also, LLCs must pay an annual franchise tax of $800, while S-corps must pay either the minimum franchise tax ($800) or 1.5% of their net income, whichever total is greater.
Where does a business owner file for an LLC?
Business owners file for LLCs through their Secretary of State. For example, in California, they can submit their articles of organization via the California Secretary of State's website.
What is the most common type of new business in the state of California?
According to the California Tax Franchise Board, sole proprietorships are the most common type of new business in California.
How do I dissolve a California LLC?
Should you decide to dissolve your California LLC, you must file a Certificate of Cancellation and a Certificate of Dissolution with the Secretary of State.
In addition to filing the necessary paperwork, you'll need to notify creditors and settle any outstanding tax obligations. Consulting with an attorney and accountant can be helpful in ensuring you meet all legal and financial requirements during the dissolution process.
Anne Brennan contributed to this article.
