How to Form an LLC in California: The Affordable Way

Author: Mathew Abraham

Is it time for your fledgling business to take the next leap forward, or for you to crash into the market with your new and novel business idea? Forming a company for your business would be the very first step.

The state of California has exempted LLCs formed in 2021 from paying their annual franchise tax. California has its own set of regulations regarding formations of companies, as well as other mandates you will have to meet. Missing out, or having any errors in the process could mean that you would have to start all over again.

There are a few steps you will have to follow to form an LLC in California.

Name Your California LLC 

The first step to forming your LLC is choosing its name. This will make it easy to create an identity around your LLC in the eyes of the law, and in the market.

You will need your LLC’s name to be unique, different from your competitors. Your LLC’s name will also appear in all the documents you file for it, and will be available in the public domain.

Naming Guidelines

Your LLC’s name should not be substantially similar to any other company’s name. The underlying rationale is that no company shall benefit from the goodwill and reputation of another company. You will have to conduct a name search, and meet certain guidelines in order to name your LLC.

Other than your LLC’s name being unique, it must include ‘limited liability company’, or abbreviated versions of it, like ‘LLC’, ‘L.C.’, etc.  

You cannot use a name that confuses your LLC with a government agency. If you want to name your LLC ‘Finding Biscuits Insights’, it’s abbreviation would be ‘FBI’. California does not allow you to name your LLC like this.

You may need to submit additional paperwork, or obtain permissions, in order to include words such as ‘Bank’, ‘Academy’, ‘Attorney’, etc. in your LLC’s name. 

Does Your Business Require a DBA?

A DBA is also called a ‘fictitious name’ in California. A Doing Business As Certificate, or DBA, is what you would obtain for your LLC if you want your LLC to operate its business under a different name. 

As your LLC’s business grows, it could enter a new market, or completely change its marketing strategy. Your LLC’s registered name may no longer be suitable, which is when you would obtain a DBA.

You will also have to publish a notice in the local papers regarding your LLC’s fictitious name.

HOW TO OBTAIN A FICTITIOUS NAME

Access Your LLC’s County Clerk and Apply

Obtain Fictitious Name

Fee: Usually $10, check with your LLC’s County

Name Search and Name Reservation

To ensure that your company’s name is not already under use, carry out a name search on California’s website. 

If you still need time before you form your LLC, but would like to finalize its name, you can reserve it.

Your name remains reserved till the end of the year, and you can request to extend the reservation between October 1 and December 31. You cannot extend the name’s reservation multiple times consecutively. If you’re unable to form your LLC and the reservation expires, you can always apply for a fresh name reservation. 

RESERVE AN LLC NAME IN CALIFORNIA

Name Reservation through Mail, or In-Person

Download form

Mail to:
Secretary of State
3rd Floor
1500 11th Street
Sacramento, California 95814

In-Person: Same as mailing address

Fee: $10

Registering Your Business Domain Name

In an increasingly digital world where most services are now offered online, it is recommended that you ensure that an apt domain name is available, and register it as a URL. This will help you grow your LLC online.

Choose a Resident Agent in California

Your LLC’s registered agent serves as the first point of contact between you and the state of California for all communications between your LLC and the state, including subpoenas, tax notices, etc. 

Who Can Be a Registered Agent?

The state of California has certain requirements for a person, or legal entity, to become your LLC’s registered agent:

  • Has to be over the age of 18
  • Has to have a street address in California
  • If the registered agent is a legal entity, then it must be permitted to do business in California
  • Must be available to receive communications during regular business hours

You can appoint any individual, including yourself, friends, family, or other members of your LLC, as the registered agent. Provided they meet the requirements mentioned above.

Individual Registered Agent v. Commercial Registered Agent 

Hiring a commercial registered agent has its own benefits. A commercial registered agent is dedicated to being available during office hours every day. They would not only be available year-round, but they will also make sure that your company does not miss any filing deadlines and is in compliance with legal requirements.

Hiring a service would ensure that your address is not on public records. They can also help you expand to other states if your business grows, and create an online repository of your essential documents.

File the Articles of Organization

The Articles of Organization is a legal document that the state of California needs to be able to register your LLC. After being registered, the LLC is authorized to conduct business in California. Some of the information that is to be filled into the Article of Organization:

  • The LLC’s name
  • The type of LLC 
  • The registered agent’s name, address and contact details
  • Details on your LLC’s Organizer, the person who will file the Certificate of Formation with the state
  • Details on your LLC’s members
  • Your LLC’s planned date of formation

HOW TO FILE ARTICLES OF ORGANIZATION WITH CALIFORNIA

Option 1: File the Articles of Organization Online

Apply online – OR –

Option 2: File Articles of Organization through Mail or Fax

Download form

Mail to:
Secretary of State
Business Entities
1500 11th Street
Sacramento, California 95814

Fee: $70

Expedited Formation

Filing your Articles of Organization in-person at the Secretary of State’s office would cost an extra $15, over the $70. You can opt for expedited processing (faster approval) for an additional fee. If you want to get your approval within 24 hours, you would have to shell out an extra $350. For approval within 4 hours, the fee is $500, and for approval within an hour, $750.

Public Notice of Formation

The state of California does not mandate a public notice of formation.

Create an Operating Agreement for Your California LLC

An operating agreement is an internal document and is not mandated by the state of California. An operating agreement will help define roles and responsibilities of members and employees, how your LLC will operate in the day-to-day as well as in the future (in case it needs to close, a member wants to leave, or enter). 

Your LLC’s operating agreement is not restricted to any strict format, but it would cover the following essential points:

  • Date of formation of the LLC.
  • Name of the LLC.
  • Name, address and contact details of the members.
  • Purpose of the LLC.
  • Capital contribution by each member.
  • Responsibilities and other liabilities of each member.
  • The profit-sharing ratio between the members.
  • Terms for Dissolution of the LLC.

Writing the Operating Agreement Yourself v. Hiring a Service

Depending on how complex your LLC’s operations will be, a detailed operating agreement would serve the purpose better. You can engage a commercial service to draft an operating agreement for you, most commercial registered agents offer drafting services as well.

Limits of the Operating Agreement

Your LLC’s operating agreement will not be able to exempt you, your LLC’s members, or its employees from the scope of California’s laws. The operating agreement cannot be used to excuse yourself from paying taxes due, responding to subpoenas, etc.

Obtain an EIN

An Employer Identification Number, or EIN, is a 9 digit number used by the IRS to identify your LLC for taxation purposes. Your LLC will need an EIN if it has more than one member, or if it will be employing other people. An EIN is also needed if your LLC wants to open a business bank account. The IRS levies no charge for issuing your LLC an EIN.

GET AN EIN

Option 1: Request an EIN from the IRS

Apply online – OR –

Option 2: Apply for an EIN by Mail or Fax

Download form

Mail to:
Internal Revenue Service
Attn: EIN Operation
Cincinnati, OH 45999

Fax: (855) 641-6935

Fee: Free

File Annual Reports

An annual report is called a Statement of Information in California, and provides information about the agent, agent’s address, and LLC’s relevant business. Your first Statement of Information is to be submitted within 90 days of your LLC’s formation. 

California mandates that your LLC file this once every two years, due on even-numbered years if your LLC is formed in an even-numbered year, odd-numbered years for LLCs formed in an odd-numbered year. Your LLC will have a six month window from the month of its formation to file its Statement of Information, i.e. if your LLC was formed in January, you will have till August to file its Statement of Information. 

The filing process is the same as that of the Articles of Organization. Missing the deadline for this filing costs a penalty of $250.

Tax Liability for Your California LLC

Depending on how you present your LLC to the IRS, and on what laws the state of California has in place specifically for your LLC and its business, how your LLC is taxed will differ greatly.

It is important to stay up to date with your LLC’s tax filings, as failing to do so would create unnecessary complications with the state and the IRS.

Federal Tax Liability

How your LLC pays federal taxes depends on what tax structure you choose. 

By default, a multi-member LLC and a single-member LLC are treated as a partnership and sole-proprietorship, respectively. Individual members are taxed on the profits/loss they acquire from the LLC.

You can file your LLC’s taxes as an S-corporation, where the LLC is not taxed on its income, but the individual members are taxed on their allocated share of income. You can do so by filing your LLC’s taxes under Form 2553. If you would like your LLC to be taxed as a C-corporation, where the LLC and its members are taxed separately, you would file your LLC’s taxes under Form 8832

State Tax Liability

Your LLC is liable to pay an annual franchise tax to the state of California.

If your LLC earns an income of less than $250,000 a year, you will have to fill out Form 3522 and pay an annual franchise tax of $800. 

If your LLC earns more than $250,000 a year, then your LLC would pay additional taxes over the annual franchise tax of $800. However, the deadline for filing taxes is the 15th date of the 6th month from the date you file with the Secretary of State. The process for filing is the same as above.

The annual franchise tax is to be paid by the 15th day of the 4th month from the date you formed your LLC. So let us assume that you filed with the Secretary of State on the 1st of January. Then you would have to pay on the 15th of April. 

LLCs formed in 2021 are exempted from paying the franchise tax for one year.

HOW TO PAY CALIFORNIA FRANCHISE TAX

Option 1: Pay Franchise Tax due to California

Pay online – OR –

Option 2: Pay Your Franchise Tax through Mail

Download form

Mail to:
Franchise Tax Board
PO Box 942857
Sacramento, CA 94257-0631

Fax: Not available in California

Tax Due: As calculated depending on yearly income

Miscellaneous Taxes

Your LLC may also be liable for other taxes such as merchandise sales tax if it is engaged in merchandise business. You may also be liable to pay Unemployment Insurance Taxes if you employ other people in your LLC. Moreover, depending on the district and the city you are based in, you may accrue some additional taxes. Consult the municipality or the local government website to find out more.

Permits & Licenses in California

Depending on the kind of business your LLC is engaged in, you may require additional permits to operate in the state of California. 

Industries such as healthcare, food and beverages, construction, would require additional permits and licenses. 

You can find the licenses that your LLC may require by visiting the Office of Business and Economic Development website.

Business Bank Account & Phone Number

Having a separate bank account for the LLC is vital. It ensures that the members and the LLC are separate financial entities. It can be pretty helpful for taxation purposes as well. The bank would require your LLC’s EIN, and other documents relating to your LLC.

In the present day and age, privacy has become crucial. It is prudent to have a separate phone number for your LLC. A business phone number also helps provide customer support. You can obtain a phone number by availing of services of any network carrier

Final Thoughts

The state of California mandates LLCs file a Statement of Information every two years, make sure you meet this deadline. Do not miss out on tax deadlines, or any other filings the state, or county, may require. Note that the first year’s franchise tax is exempted if your LLC is formed in 2021. The Statement of Information filing due dates can be confusing, make sure you keep a close track or ask your registered agent to do so. Keep the state happy, so that your LLC can continue to grow and do business unhindered.

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