Are you about starting a business in California and want to form an LLC? If YES, here is the requirement to start an LLC in California and how much it cost.
In California, there are a lot of business entities that entrepreneurs can start their businesses on, and it is well known that the type of entity you choose not only lays the groundwork for how your business is organized but also how you are taxed and protected legally. This makes the LLC the most popular business entity form in the state.
A California Limited Liability Company (LLC) is a legal business structure used to protect an entrepreneur’s personal assets (home, car, bank account) in case the company is sued for whatever reason. A California LLC can be used to operate a business, or it can be used to hold assets of a business such as real estate, vehicles, boats, and aircraft.
You should have it in mind that while an LLC is taxed as either a sole proprietorship (for single-member LLCs) or partnership (for multiple-member LLCs), it can also choose to be taxed as an S corporation or C corporation, thus giving you the freedom of choice (something other business entity forms would not afford you).
Unlike a corporation, an LLC is not taxed at the entity level. At tax time, the LLC’s profits and losses “pass through” to the members of the LLC, each of whom includes their share of the profits and losses on their individual tax returns.
Unlike in a general partnership, you are not personally liable for the debts and liabilities of your company and your personal assets are protected in the event of a lawsuit. If you’d like to form an LLC in California yourself, we have provided for you a detailed guide which you can follow.
A Detailed Guide to Starting a LLC in California and the Cost
- Name Your California LLC
Choosing a company name is the first and most important step a business has to take when thinking of forming an LLC in California. When picking a name, be sure to choose a name that complies with California’s naming requirements and is easily searchable by potential clients.
Your name must include the phrase “limited liability company”. California law allows for the following designators:
- LLC (most common)
- Liability Co.
- Limited Liability Co.
- Liability Company
- Limited Liability Company
You must make sure that your name does not include words that can confuse your LLC with a government agency, such as FBI, Treasury, State Department, etc. Restricted words (e.g. Bank, Attorney, University) may require additional paperwork and a licensed individual, such as a doctor or lawyer, to be part of your LLC. So, you have to take note of this.
For a complete list of naming rules in California, you can read California’s Code of Regulations. You can find this online, and you have to make sure the name you want isn’t already taken by doing a name search.
Another thing you need to look out for is to make sure that you check to see if your business name is available as a web domain. Even if you don’t plan to make a business website today, you can decide to buy the URL in order to prevent others from acquiring it, and making things difficult when you need it.
When picking a name, you have to do the necessary search as was stated above, via Google on the California Secretary of State site, and, if you like, with the United States Patent and Trademark Office.
If you have settled with a name, you can then get a copy of the Secretary of State’s Name Reservation Request Form. Fill it out per the instructions and return it by mail or in person along with the $10 fee to the Secretary of State’s office in Sacramento.
You’ll also need to include the $70 filing fee. After they receive your form, the Secretary of State’s office will return one copy of your filed document for free. And if you request it, they will certify that copy for a $5 fee. You can use your home address if you don’t have an office address. Just be aware this info will be public.
If you want to be able to operate your business under another name, then you have to register that name as a “doing business as” name (DBA), which is also known as a fictitious business name. You can register a DBA with the county clerk or county recorder where your business is located.
2. Choose An Agent Of Service Of Process
When you are done with picking and registering your business name, you now need to focus on getting yourself an agent of service of process for your California LLC. You are required to nominate by yourself an Agent for Service of Process for your California LLC. A registered agent is commonly known as an agent for Service of Process in California, but they perform the same roles.
An Agent Of Service Of Process is a person or business that agrees to send and receive legal papers on behalf of your LLC. Such papers include service of process of legal action (if you are sued) and state filings. Who can be your Registered Agent in California?
- You can be your LLC’s Registered Agent
- A friend or relative can be your LLC’s Registered Agent
- You can hire a Commercial Registered Agent
An Agent Of Service Of Process must be a resident of California or a corporation authorized to transact business in California. This person must provide an address where they can receive legal notices, summons, and subpoenas. You may elect an individual within the company including yourself. This role is left within your discretion, but you have to make sure that you find someone that can stand in for your business.
3. Register your LLC with the Secretary of State
Your next port of call when forming a California LLC is for you to file Articles of Organization for your business with the California Secretary of State. You can also choose to form your business elsewhere, say Delaware, Nevada, or another state with business-friendly laws and tax benefits.
However, if you’re doing business in California, you will likely have to register in California as a “foreign” entity, which means you would have to pay fees in two states. So it would end up costing you more.
Note that organizing your business with the Secretary of State will establish your entity as a legal business venture. Deciding on and reserving a name, which is part of the process, will also help ensure that you have a unique, legal identity to use when working with customers as well as state and federal agencies.
You can file the Articles of Organization for your business with the California Secretary of State by mail or in-person. When filing, you will need to state whether your LLC will be member-managed or manager-managed.
4. File a Statement of Information
After you file your Articles of Organization, you’ll need to file a Statement of Information with the California Secretary of State. This form helps the state stay updated on changes in your LLC such as the business address or the names of the LLC’s members. All LLCs in California must file an Initial Statement of Information within 90 days of the LLC being formed.
California law requires that you file a Form LLC-12 within 90 days of registering with the Secretary of State and then every two years in order to keep your business’s public record active.
You can electronically file Form LLC-12 using a credit card. The filing fee is $20, and you will receive a PDF copy via the email if you request it. You can also mail in or drop off the form at the Secretary of State’s office in Sacramento. If you choose to file offline and want a physical copy of your filing, you’ll need to include an additional payment. You can also access a digital copy online at any time.
You need to file a Statement of Information every 2 years. They are due by the anniversary date of your LLC’s approval. If you don’t file your Statement of Information before the required deadlines, your LLC may be suspended, and you effectively lose the right to run your business legally. If this occurs, you will have to contact the Secretary of State to find out what you need to do to legally revive your LLC.
5. Apply for an EIN
To pay taxes on your LLC, you’ll most likely need an Employer Identification Number (EIN). Also known as a federal tax ID, the EIN is a 9-digit number assigned by the IRS to identify your business. The following names are all the same thing: Federal Tax Number, Federal Employer Number, FEIN, Federal Tax ID Number, EIN, Employer Identification Number.
An EIN is required for the following:
- To open a business bank account for the company
- For Federal and State tax purposes
- To hire employees for the company
An EIN is obtained from the IRS (free of charge) by the business owner after forming the company. This can be done online or by mail. To get your EIN, complete IRS Form SS-4 to make a request. You can also do this online. In return, the IRS will send you a Form CP-575 to confirm new your EIN.
You can also establish your tax year on Form SS-4 by specifying the closing month of your accounting year in line 12. Please note that you can only apply for your EIN only after your California LLC is approved.
If you are a non-US resident or don’t have a social security number: You can’t get an EIN online. You can get an EIN without a social security number though if you apply by mail or fax (fax has a faster approval time). Complete Form SS-4 and write “Foreign” on line 7b.
Once the state receives your filing, they’ll approve your LLC in 3 to 5 business days. If you’re forming your LLC during a peak filing period (December through January), approval can take 6 to 7 business days. You’ll receive back an approved Articles of Organization and a Welcome Letter.
If your LLC goes into existence late in the year (October through December), you’ll owe $1,600 within a few months. If you don’t need your LLC open right away, it is recommended that you use a future file date.
6. Create an Operating Agreement
An operating agreement is required when forming an LLC in California. An operating agreement is a legal document outlining the ownership and operating procedures of an LLC. Your LLC Operating Agreement is an internal document, meaning, you’ll just keep a copy with your business records.
It does not get sent to the California Secretary of State, or to any other agency. A comprehensive operating agreement ensures that all business owners are on the same page and it reduces the risk of future conflict. This internal document lays out the details about topics such as:
- How your LLC is managed
- Who owns how much of the company
- How money is raised
- How profits and losses are shared among members
- How membership changes occur
- How to dissolve the LLC
The State of California requires LLCs to have either a verbal or written Operating Agreement, though they advise having a formal, written one. You don’t have to file it with the Secretary of State, however. Just keep it in your records.
Having an Operating Agreement will help establish your limited liability status. Without an Operating Agreement, a court is more likely to disregard the LLC and hold its members liable for judgments against the LLC. An Operating Agreement is not set in stone and can be updated. To make sure updates can be made smoothly, make sure to include the process for making amendments in your Operating Agreement.
7. Open a bank account for your LLC
It takes money to make money, so the next thing you’ll want to do is open a bank account for your new LLC. A business bank account separates your business assets from personal assets, which is a huge help in case you’re ever sued. It also makes it easier for your accountant to know precisely which expenses belong to your business.
To start, you have to contact the bank of your choice to find out what you’ll need to open a business bank account for your LLC. Most banks ask for information such as your EIN, Articles of Organization, and Operating Agreement. Be sure to ask upfront if you can get a free account for your business. Many banks offer this.
8. Register with the Franchise Tax Board
To complete your California LLC formation, you need to register with the franchise tax board. All California LLCs – regardless of gross receipts (total revenue) or activity – must pay an $800 Franchise Tax fee every year. So, in addition to federal taxes, your business will also have to pay taxes to the state of California. To do so, you’ll need to register with the Franchise Tax Board. You are also required to pay additional fees if your LLC’s total income exceeds $250,000.
Your first LLC tax is usually due by the 15th of the fourth month after your LLC is formed. Every year after, the tax payment is due on the 15th of the fourth month of your taxable year. (If you adopt the calendar year as your taxable year, this would be April 15.)
The $800 Annual Franchise Tax is paid using Form 3522. This voucher changes each year, so in order to download Form 3522, please visit the Forms page on the Franchise Tax Board’s website. Select the appropriate Tax Year, select “Limited Liability Companies” for Taxpayer Type, and select “Income Tax Forms” for Form Type. Then look for 3522 Form, “Limited Liability Company Tax Voucher“.
If you want to pay your California taxes online, you’ll need to call the Franchise Tax Board at 1-800-353-9032 (or 1-916-845-2829 from outside the United States) before you start the online registration process. You can also file your taxes by mail using Form 568.
If you want to hire employees as your business grows, you’ll need to get a payroll tax account number from the Employment Development Department (EDD).
Requesting a payroll tax account number is easy. Simply go to the EDD’s e-Services for Business page and click “Enroll” to create a username and password. Then log in, click on “New Employer,” select the “Click here to register for Employer Payroll Tax Account Number” link, and follow the instructions.
If you fail to verify your email address within 24 hours, you’ll have to start the enrollment process all over again.