Looking to introduce your novel business idea into the market? The first step would be for you to decide your business structure. An LLC can be an excellent choice for the business you are trying to form. It protects your personal assets from legal liability and, at the same time, gives you great operational flexibility.
California has regulations regarding the formation of companies and other mandates you must meet. Missing out or having any errors in the process could mean that you would have to start all over again. We are here to break it down and guide you through each step involved in the process.
Name Your California LLC
The first step to forming your LLC is choosing its name. You must select a name that is appropriate for your business. A good name will help your LLC to have brand value in the market.
You will need your LLC’s name to be unique and 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. While naming your LLC, you must follow all the naming guidelines the State of California has laid down.
Your LLC’s name should not be substantially similar to any other entity’s. The underlying rationale is that no company shall benefit from the goodwill and reputation of another company.
The name of your business should have the words “limited liability company” or one of its abbreviations (LLC or L.L.C.)
You cannot use a name that confuses your LLC with a government agency. For instance, you cannot name your business “State Health Department.”
Similarly, usage of certain words, like “Bank” or “University,” is restricted and involves obtaining the written consent of concerned authorities and additional paperwork and compliance requirements.
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. It is best used for branding purposes.
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.
Access Your LLC’s County Clerk and ApplyContact your county clerk
Fee: Check with your LLC’s County
Name Search and Name Reservation
Before finalizing a name for your LLC, you must ensure that the name you selected is not similar to an existing business. Conduct a business name search on California’s website to ensure that your company’s name is not already used.
If you still need time before you form your LLC but would like to finalize its name, you can reserve it. You can apply with the Secretary of the State in California for this purpose.
Once the Secretary of State has reviewed the application, the name shall be reserved, for 60 days, in the name of and for the applicant’s exclusive use. This can be renewed for a further period of 60 days, provided that there is at least a day’s gap between the reservation periods. To know more, you may visit the Secretary of State’s website and read the Revised Business Entity Name Statutes.
Option 1: Reserve Your Name OnlineApply Online – OR –
Option 2: Reserve Your Name by Mail, or In-PersonDownload form
Secretary of State
1500 11th Street
Sacramento, California 95814
In-Person: Same as mailing address
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.
Before you select a name for your LLC, it is recommended that you ensure that the domain name you need is also available.
You can check currently available domain names.
Choose a Registered 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 addressed to your LLC by the authorities, including subpoenas, tax notices, etc.
You must select a registered agent before your company can start functioning.
Who Can Be a Registered Agent?
The State of California has specific requirements for a person, or legal entity, to become your LLC’s registered agent:
- Has to be over the age of 18 (in case the registered agent is an individual)
- Has to have a street address in California
- Has permission to do business in California (in case the registered agent is another entity)
- 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. Alternatively, you can also hire a professional service.
Individual v. Registered Agent Service
Hiring a registered agent service has its benefits. A professional service 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.
A professional registered agent service ensures that you don’t fail to duly respond to any notice or other communication that may be sent to your LLC. They remind you when your returns and other filings are due and help ensure you don’t miss any deadlines.
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 with California
The Articles of Organization is a legal document needed to officially form and legally incorporate your LLC. Once you file this document, the LLC is authorized to conduct business in California. Some of the information that is to be filled into the Article of Organization include:
- 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
You have to file your Articles of Organization with the office of California’s Secretary of State. You can do the same either online or by submitting a copy of the duly filled form by mail.
Option 1: File the Articles of Organization OnlineApply online – OR –
Option 2: File Articles of Organization through Mail or FaxDownload form
Secretary of State
1500 11th Street
Sacramento, California 95814
Fee: Free (The processing fee is waived for submissions submitted July 1, 2022 – June 30, 2023) | In person submissions (excluding Statements of Information): $15 handling fee
You may also choose to submit the duly filled form in-person to the following address: 1500 11th St. Sacramento, CA 95814. Filing your Articles of Organization in person at the Secretary of State’s office would cost $15 in handling fee.
You can opt for expedited processing (faster approval) for an additional fee. For more information in this regard, you may visit the Service Option page of the California Secretary of State’s website.
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 a legal document. It lays down the rules of your LLC’s internal operation and functioning. It also provides a framework concerning the duties of members of the LLC and its managers. An operating agreement acts as a guiding force in matters of the day-to-day functioning of the LLC.
Even though California’s law does not mandate having an operating agreement, you should have one for your LLC. It offers credibility to your enterprise. You will need an operating agreement for opening an account with the bank.
There are no prescribed templates for an operating agreement in North Dakota, and you may draft one according to the needs of your business. However, irrespective of the nature of your business, it shall be advisable for your operating agreement to cover the following matters:
- 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
You can create your operating agreement, or you can purchase templates that you can customize to draft the operating agreement of your LLC. It is, however, recommended that you seek the help of an attorney or a professional in preparing your operating agreement. Most registered agent services also offer to draft operating agreements.
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. In short, the terms are limited to the law. You cannot include something in your operating agreement that is prohibited by the laws of California.
Obtaining an EIN for your California LLC
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 required if your LLC wants to open a business bank account. The IRS levies no charge for issuing your LLC an EIN.
Option 1: Request an EIN from the IRSApply online – OR –
Option 2: Apply for an EIN by Mail or FaxDownload form
Internal Revenue Service
Attn: EIN Operation
Cincinnati, OH 45999
Fax: (855) 641-6935
File the Initial Statement of Information with California
LLCs in California must file a document called the Initial Statement of Information. It is to be filed with the Secretary of State within 90 days from the LLC’s formation and, after that, every two years. The filing fee is $20.
In this document, you will have to provide details such as the name of the LLC, the business address, members/managers, registered agents’ details, etc. You may file this document online or download the form and submit a duly-filled copy by mail to the Secretary of State, Statement of Information Unit P.O. Box 944230 Sacramento, CA 94244. There is also an option to submit it in person, which will involve an additional $15 as a handling fee.
Subsequent filings of Statement of Information are to be done in form LLC-12NC, where there are no changes in the information of your LLC, and in form LLC-12 if some of your business information has changed.
If you miss the deadline for filing this document, your LLC will be charged $250 as a penalty.
Tax Liability for Your California LLC
Depending on how you choose to treat your LLC for taxation, your tax liability will differ. There are four ways in which LLC will be taxed:
- Sole proprietorship: a business owned by a single person
- Partnership: a business owned by multiple people
- C – Corporation: income is split or segregated for taxation
- S – Corporation: tax liability is split between the business and its owners
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
If you’re a single-member LLC, your default taxation type will be that of a sole proprietor. The LLC has to report its activities under Schedule C, Schedule E and/or Schedule F of Form 1040.
If, on the other hand, you are a multi-membered LLC, you will be seen as a partnership for taxation purposes by default. It means the LLC does not pay tax as an entity; instead, the members who take a share of the profits will need to pay tax on their income through the LLC. You must also pay Federal self-employment tax (presently 15.3%) on the profits you take from your LLC. You are eligible for certain deductions like business expenses. In this case, apart from filing Form 1040, you’ll have to file your partnership return in Form 1065 and provide information in the K-1 of each partner.
If you would like your LLC to be taxed like a C-Corp or S-Corp, you can do so by filing Form 8832 and Form 2553, respectively.
State Tax Liability
Your LLC is liable to pay an annual franchise tax to the State of California. If the income earned by the LLC is 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. 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 must 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.
Option 1: Pay Franchise Tax due to CaliforniaPay online – OR –
Option 2: Pay Your Franchise Tax through MailDownload form
Franchise Tax Board
PO Box 942857
Sacramento, CA 94257-0631
Fax: Not available in California
Tax Due: As calculated depending on yearly income
If your LLC is engaged in selling certain physical products or specific services, you will be required to pay Sales Tax in California. To impose sales tax on your product or service, you must first register your LLC with the State and obtain a Seller’s Permit.
Additionally, if your LLC hires employees, you must sign up for Employee Withholding Tax, Unemployment Insurance Tax, and Disability Insurance. You may do so by visiting the California Payroll website.
Moreover, depending on the district and the city you are based in, you may accrue additional taxes. Consult the municipality or the local government website to find out more.
Permits and Licenses
Depending on the nature of business of your LLC, you may be subject to three licensing jurisdictions: Federal, State and Local.
Federal Licensing requirements will depend on the business activity carried on by your LLC. If your company is engaged in any area of business regulated by the Federal Government, you will be required to obtain relevant Federal Licenses and Permits.
Some business activities requiring Federal Licenses and Permits are Agriculture, Alcoholic beverages, Aviation, Firearms, ammunition and explosives, Fish and Wildlife, Commercial fisheries, Maritime transportation, Mining and drilling, Nuclear energy, Radio and television broadcasting, and Transportation and logistics.
At the State level, you are required to obtain a Seller’s permit if your LLC sells specific products or services subject to sales tax. Depending on the nature of your LLC’s business, you may also require particular licenses and permits. To understand the licensing requirements of your LLC, you may visit the California Business Portal and the CalGold website.
Depending on where you operate your business, you may also be required to get the local government’s license and permit. To know more about local licensing requirements, get in touch with your local government’s office.
For more information regarding;
- Federal Permits and License
- Office of Business and Economic Development website
- California Business Portal
Business Bank Account & Phone Number
Having a separate bank account for the LLC is vital. It ensures that the members and the LLC are independent 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.
Setting up your business in California has a lot of benefits. The State has a strong and growing economy and is home to some of the biggest companies in the country. The State offers some flexibility in terms of regulation and taxation to benefit new and small businesses.
The State of California mandates LLCs file a Statement of Information every two years. Make sure your LLC complies with all filing requirements at the State and County level.
On completing the above steps, your LLC is legally incorporated and ready to do business. We wish you and your new business the very best!