How to Form an LLC in California
Hi, everyone.
I'm Priyanka Prakash, a senior staff writer at Fundera, and today I'm going to walk you
through how to form an LLC in California.
This video is both for domestic LLC which are organized under California law, as well
as those that are organized elsewhere but want to do business in California.
Many businesses choose to structure themselves as limited liability companies because LLCs
offer tax advantages, legal protections, and they have fewer compliance requirements compared
to corporations.
The first step for launching your California LLC is to choose a name.
As in most states, under California law, LLCs cannot choose a name that is so similar to
another business’s name that it would mislead the public.
The name of your California LLC not only has to be distinguishable from other LLC names;
it also has to end with “limited liability company” or the abbreviation “LLC.”
Other abbreviations are fine as well.
For example, you can use Ltd. for limited or Co. for company.
Just make sure that you don't use certain words which the California Secretary of State
prohibits, such as bank, trust, corporation, and insurer.
The California Secretary of State actually has a convenient name search tool to help
you with the naming process.
Here's how the name search tool looks.
Let's say I'd like to start a bakery called ABC Bakery LLC.
I can choose “LLC” as entity type, type in “ABC,” and choose “begins with”
to have the widest field of results.
When I click search, you'll see all LLCs in California that start with “ABC.”
Now, as I scroll through, I see that there's no LLC in California called ABC Bakery, so
that probably indicates that the name I want is available.
Just to be sure, you would want to repeat the search with similar search terms, such
as A.B.C. with periods.
Once you find a name that you like, you can actually reserve it for a period of 60 days
by mailing in a Name Reservation Request form.
Note that the California Secretary of State does not check for trademark compliance when
reserving names, so if you're in doubt, it's a good idea to consult a trademark lawyer
or business lawyer.
The second step to forming your California LLC is to choose a registered agent.
A registered agent is an individual or a company that accepts legal and official documents
on your business's behalf.
Now if you choose an individual as your registered agent, they must be 18 years old, a California
resident, and available during normal business hours to accept documents.
Many people actually nominate themselves or a business partner to be the registered agent.
This is fine under the law, but it could end up causing you problems.
For example, if you go on vacation or you call out sick one day, and you aren't available
to accept a business document, it could land you potentially in trouble with the Secretary
of State.
For this reason, a lot of LLCs and other types of businesses opt for a registered agent service.
At Fundera, we recommend IncFile for registered agent services because it's one of the most
affordable options you can find.
On IncFile, you can actually form your California LLC and get registered agent service.
Here’s the IncFile homepage.
Here, I can choose “LLC” as my entity type and “California” as state of formation.
Once I click “Get Started,” you'll see that three different pricing options pop up,
all of which offer a slightly different set of services.
The good news is that each tier comes with one year of free registered agent service.
Step 3 to starting your California LLC is to obtain a business license.
Compared to other states, California regulates businesses pretty heavily, so most LLCs will
need some type of license to operate.
You can get your general business license from your city or county.
Depending on what you're selling, you might also need a seller's permit to collect sales
tax.
And businesses that are using trade names, which is really any name that's different
from your LLC’s legal name, must apply for a fictitious business name/”doing business
as” name.
Professional industries, like doctor’s offices and lawyer’s offices, for example, cannot
organize as LLCs in California.
So, if you belong to a professionally regulated industry, you'll need to pick an alternative
business structure, such as a corporation for example.
Step 4 to form your California LLC is to file your articles of organization with the Secretary
of State.
The filing fee is $70.
Domestic LLCs, which are those organized under the laws of California, should fill out Form
LLC-1.
Businesses that are formed under the laws of other states but are looking to operate
in California should fill out Form LLC-5.
The state takes about one week to process your articles, after which they'll send you
a stamped copy which you can store with your important business records.
The easiest and fastest way to file your articles of organization is online.
As you can see from the form here, you'll just need some basic information to complete
the articles of organization.
You'll need your LLC’s name and address and registered agent information.
That could be either an individual or a corporation, like a registered agent service.
You'll need to designate whether the LLC is member-managed or manager-managed.
And if it is managed-managed, you'll need to say whether it's managed by one manager
or more than one manager.
The purpose statement at the bottom of the form is already prefilled, so just make sure
not to alter this or write over this in any way.
At the bottom, the organizer will sign the form and provide their name.
The organizer could be a member of the LLC, a manager of the LLC, or someone else connected
with the entity.
Once the articles of organization are filed and you receive your stamped copy back, your
company has the authority to operate in California.
However, don't forget this next step—Step 5—which is to draft your LLC operating agreement.
California is actually one of the few states that requires LLCs to have an operating agreement.
You don't file your operating agreement with the state, but you store it with other important
business documents.
The operating agreement is basically like a contract that outlines the governance structure
of the LLC.
It talks about each member’s job title, ownership share rights, responsibilities,
and profit share.
Even if you are a single member LLC (that is, an LLC with just you as the owner), you
should have an LLC operating agreement.
The operating agreement is key to preserving limited liability for members because it shows
that your business is a separate legal entity, and it also helps to prevent conflicts among
owners if you have a multi member LLC.
We suggest getting the help of a business lawyer or using an online legal template to
create your LLC operating agreement.
Step 6 to form your California LLC is to file a statement of information.
LLCs in California must file a statement of information within 90 days of formation and
every two years after that.
There's a $20 filing fee.
The easiest and fastest way to file is online.
This is how the statement of information form looks.
As you can see, it actually contains almost identical information to the articles of organization,
but this is simply to ensure that all of that information is up to date.
You'll need to provide your LLC’s name and address, as well as the secretary of state
entity file number, which the secretary of state will send you after stamping your articles
of organization and certifying your articles of organization.
In the middle of the forum, you'll have to provide manager and member information.
If you have more than one manager member, you can fill out their information on the
supplemental form LLC-12A.
In the service of process box, you'll need to provide registered agent information, which
could either be for an individual or a registered agent service.
Toward the bottom here, you'll need to provide a short statement about your company's product
or service.
And if you have a CEO, you'll need to provide their information.
At the very bottom, don't forget to date the form as well as provide the name, title, and
signature of the person completing the form.
Step 7 to forming your California LLC is, of course, to pay your taxes.
LLCs in California have four main tax obligations.
First, all California LLCs have to pay an annual franchise tax.
Second, there's a gross receipts tax for LLCs which varies based on your business's total
revenue.
Third, there's a California income tax.
Unless you elect for your LLC to be taxed as a corporation, the business’s income
and losses will pass through to the owners’ personal income tax returns, and each owner
will be taxed at their personal income tax rate on their share of the business’s profits.
The last type of tax that you have to worry about is payroll taxes.
LLCs with employees have to pay California payroll taxes.
The last and final step to forming your California LLC is—don't forget about federal requirements.
Along with state requirements, California LLCs also have to comply with federal obligations.
For example, you'll have to pay federal income taxes and federal payroll taxes.
Now, the exact tax forms you'll use depend on how you elect for your LLC to be taxed.
If you have employees or you elect for your LLC to be taxed as a corporation, then you'll
need a federal Employer Identification Number (EIN).
And that’s it.
Once you follow these eight steps, you have a registered California LLC.
LLCs have a lot of advantages, for example, limited liability protections for members
and fewer reporting requirements than corporations and tax flexibility.
However, LLCs in California also tend to pay a sizable amount of taxes, so just make sure
you carefully evaluate your options and consult a business lawyer if you need help choosing
a business structure.
Fundera is here to help you with this and other business decisions.
For more small business information, visit https://fundera.com/blog, and subscribe to
our YouTube channel for more videos.
Thanks for watching, everyone.