Many people are deciding to start their businesses in California, and one of the first things they must do is learn how to form an LLC.
The good news is that this process can be accomplished easily as long as you know where to look for some helpful information.
Forming the LLC yourself is easy if you have the correct information, including information about what you must include and other important details when creating this type of business structure.
Each state has its regulations regarding forming an LLC, so getting familiar with these regulations is essential.
This article will tell you what to look for to form an LLC in California.
STEP 1: Name Your California LLC
There are some basic naming requirements when creating your California LLC.
- Your name cannot be the same or too similar to an existing business within California, and your name also must be unique.
- You can check with the Secretary of State to ensure that your name meets these requirements; however, it is often a good idea to check with the Secretary of State before selecting a name for your LLC.
- The name of the LLC must also be distinguishable from the names of other businesses or entities within California and have to be no longer than 80 characters.
- You also must file Articles of Formation with the Secretary of State to check your LLC business name availability. To do this, you will need to fill out FORM LLC-1 and include the information on a form called Schedule A, FORM LLC-2 if you are filing an application for initial franchise tax exemption, and Form LLC-3 if you are applying for initial exemption from personal income tax.
STEP 2: Choose a Registered Agent in California
One of the most important things you need to know when forming an LLC in California is choosing a Registered Agent for your LLC with the Secretary of State.
Registered Agent Requirements:
- The Registered Agent is responsible for receiving documents filed with the Secretary of State and sending these documents to the members.
2. A Registered Agent needs to be a CA Corporation or LLC, and the registered agent must have their own business address to properly receive all documents sent through the mail or in person.
3. Other than the Registered Agent service, you also need to choose a mailing address for your LLC. You can find this information by going to the CA Secretary of State website and clicking on “Forms” from the main menu.
There you will be able to search for an existing business or pick a new business name, and then click on “Electronic File Submission” from the resulting menu.
On this screen, you will then be able to choose between sending your documents through Certified Mail, Regular Mail, or Online Electronic Service.
STEP 3: File Your California LLC Articles of Organization
Once you have your California Registered Agent and mailing address, you can file your files with the California Secretary of State’s office.
Remember that there is a filing fee for doing this, and this fee is added to the amount you have to pay for filing fees for other business types.
After you have filed your Articles of Organization with the Secretary of State, you can now start forming your California LLC.
You will need to complete and file some additional forms before starting doing business in California under this name.
To form an LLC in California, you will need to fill out and file the following forms:
- The Articles of Organization for your California LLC
- The Certificate of Good Standing for your LLC
- Authorization for an Agent to Accept Service of Process for the LLC
- Authorization to Appoint Additional Agents or Sales Agents for this Corporation or Limited Liability Company (If the Agents are not acting as regular agents)
STEP 4: File the Initial Statement of Information
In addition to the forms above, you also need to file another record with the CA Secretary of State called the Initial Statement of Information.
This form was created to give information about key people within the LLC and is filed within 90 days after filing your Articles of Organization.
STEP 5: Create a California LLC Operating Agreement
Having filed your initial statement of information with the Secretary of State, you will now need to create an operating agreement for your LLC.
You will have to file this form with the Secretary of State as well. In order to create the operating agreement, you will need to complete FORM LLC-10 and file it with the Secretary of State.
Note: to file FORM LLC-10, you must have your Articles of Organization filed with the CA Secretary of State.
STEP 6: Get a California LLC EIN
The final thing you will need to do in order to start your California LLC is to request a Federal Tax ID number for your LLC.
To do this, you will need to fill out FORM CA-1 and send it with the other paper filings described above.
The filing fee for doing this is $78, and this state fee is added on top of any fees you may have paid when forming the LLC.
STEP 7: Start Doing Business Under Your LLC’s Name
You now officially have a functioning California LLC. You can now start doing business in CA under your LLC’s name, and you will need to register your California business with the CA Secretary of State.
To do this, you will fill out FORM SB-120 and send it to the Department of Corporations.
The form must be signed by a member or manager of the LLC, and the signatures are subject to verification by an authorized representative of the Secretary of State.
Choose a business type.
As mentioned above, you can register a business as an S-Corp or an LLC. When choosing between these business types, it is essential to consider the tax implications of each type of business.
Limited Liability Company (LLC)
“Also called a “disregarded entity,” a limited liability company has characteristics of partnerships and corporations.
LLCs, like partnerships, pass profits and losses through to business owners, who report them on their income tax returns.
By contrast, corporations are separate taxable entities that pay corporate income taxes. LLCs are taxed like partnerships but are treated as corporations for tax purposes.
The owner of an LLC is the ” Member,” and a group of members may form a multi-member LLC branch. “
An S corporation is taxed as a corporation, paying corporate income taxes on earnings and losses.
Instead of being taxed at the entity level, owners choose to have their compensation earned in shares that are treated like stock with capital gains. Still, dividends paid to them are deductible from their personal income taxes.
Limited liability protection is provided under state law for the benefit of the owners, who are treated like shareholders in a corporation. “
S-corporations must be established within a specific geographic area, namely one state.
Corporations with their headquarters outside of California are not required to be registered to do business in CA.
Benefits and Drawbacks of Forming an LLC in California
There are certain benefits and drawbacks to forming your LLC in California.
- A single-member LLC in California does not have to pay fees for annual reports or members’ meetings. In addition to this, there is no requirement for your CA LLC to conduct a yearly meeting or keep minutes of that meeting, and these items also do not need to be filed with the state.
- California LLCs and corporations are not required to file their initial and biennial statements until April 15 of the second year after filing their California Articles of Organization. If you form your Limited Liability Company in California, the Secretary of State will mail your LLC a postcard that you can use to file your initial statement on or before April 15. If you do not receive this postcard, you should contact the California Secretary of State.
- There is no requirement for LLCs in California to file a copy of their governing documents. For further information about this, you can look at the Secretary of State’s website.
- If you live in another state but want to incorporate in California, you do not have to meet CA legal residency requirements. This means that you do not need to live in California for a certain length of time before forming a CA LLC.
- You can form an LLC and start selling your products or services online immediately. Considering that the internet is an important part of our economy, this benefit is very useful for any entrepreneur.
- You must have a minimum of three members in your LLC if you are going to be selling products or providing services. If there are only two members in the LLC, it is recommended that the two members be equal. Some states require this rule as well, but California does not.
- If you start an LLC that provides any type of service, it is required to keep a record book for calendar years.
- You must have a written operating agreement in your LLC in order to be able to operate. This agreement can be amended as needed, but it is still required.
- You pay more taxes as an LLC than you do as a sole proprietor or partnership. If you are making less than $100,000, the difference is not that much. If you are making more than $100,000, it can be a lot more.
- You must report and pay taxes in the state where you do business as well as in California. If your LLC is set up to do business in multiple states, you need to have an additional tax ID for each state where your business operates. This is called a “DBA.
- You have to have an operating agreement and a buy-sell agreement if more than one owner is involved.
Bottom Line on Forming an LLC in California
I personally like the LLC structure, and I think it has a lot more flexibility than a corporation or S-Corp.
It is important to note that we have an LLC for our main business, but we have chosen to do business as a corporation for some of our smaller businesses.
I would suggest doing a lot of research before making any decisions as to the structure of your business. The member of the CA LLC can be one person or many people.
The members can be equal to each other or unequal to each other. The number of shareholders can also be 2, 3, or more. In order for an LLC to function as a single owner entity, you must have one principal member.
If you want to form a multi-member LLC in the state of California, you must file Articles of Organization with the Secretary of State and pay the annual fees before you can start operating in California and do business there.
How much does it Cost to Form an LLC in California?
If you are creating your own LLC and doing all of the work yourself, then the cost of forming an LLC in CA is $35.00 as of this writing.
If you use a CA LLC Formation service, they will charge you between $200 – 350 for their services.
If you choose to pay extra for a registered agent for service, they will generally charge more than $100 for their services as well.
If you are doing business as an LLC in California and you want to hire a registered agent, your cost will range from $40 – $100.
- $800 Corporate Franchise Tax: $800 (personal service corporations)
- $350 (non-resident) Sales and Use Tax: 0.0%
- State Income Tax Deduction: None Corporate Income Tax: 8.84%
- State Minimum Capital: $300
California is a community property state, so it is important that you and your spouse understand the risks involved in forming an illiquid LLC in California.
Qualified By-Laws: $700 – $900
As of January 1, 2011, California has changed minimum capital requirements. The new minimum capital for an LLC is now $2,500.
This tax does not apply to LLCs operating solely within California.
Illiquidity Requirements of an LLC in California
An illiquid company is defined as a company that has difficulty selling assets.
It is important to note that this tax does not apply if an LLC only operates within California. The tax also does not apply to sole proprietorships, general partnerships, or limited partnerships.
With all the modifications and laws that California has passed over the years, creating your own business entity in CA can be quite confusing and complex.
Tips on filing the Initial Statement of Information
- Make sure that your statement of information is completely up to date. You should not just mail in the form and file the annual statement every year without checking to see if any of your information has changed.
- Be careful when filling out and filing your LLC Statement of Information. You will be held responsible for all errors on it, and you can be fined for improperly filing this legal document.
- If you are operating as a corporation and you hire an additional employee, it is important to make sure that you file the correct forms for that person.
- You must use the appropriate format for your filing. For example, if you are filing in California with an annual filing fee of $350, then you must use the Annual Statement of Information Form CA 9024.07. If you are filing for free, you can use any of the other Forms CA 9024.07-1 through -49.
- Be careful when filling out the form and following the filing instructions as to where you cannot file. For example, if your mailing address is not correct on the form, then it will be rejected. If an officer’s home address is not listed, then you will get an error message when you try to file this form.
- The size of your company should not matter when filling out the form. You should be able to file the form regardless of the type of business you are in.
Remember to follow the state rules that apply to your situation.
Forms for forming an LLC in California
- CA 9024.07 Annual Statement of Information – Annual filing fee $350
- CA 9024.07-1 Declaration as To Filing Status – Free version
- CA 9024.07-2 Application for Annual Statement of Information
- CA 9024,07-3 Statement as To State Residency
- CA 9024.07-4 Statement as To State Residency – Nonresident
- CA 9024.07-5 Statement as To Filing Status
- CA 9024.07-6 Declaration as to Information – Not Required
- CA 9024.07-7 Certificate of Dissolution and Reinstatement
- CA 9024.07-8 Certificate of No Longer Existing Incorporators
- CA 9024.07-9 Procurement of Agent or Registered Agent
- CA 9024.07-10 Application and Appointment of Agent or Registered Agent – Free version
- CA 9024.07-11 Certificate of Designation as to Tax Status of All Members – Not Required
- CA 9024.07-12 Initial Statement of Information – Free version
- CA 9024.07-13 Annual Statement of Information
- CA 9024.07-14 Change in Ownership Report, LLC
- CA 9024.07-15 Certificate of Termination of Foreign Limited Liability Company
Tips on creating California LLC Operating Agreement
- You must have a Federal Employer Identification Number (FEIN) to form an LLC. This is also required for the formation of a limited partnership.
- You need to include the names of all the people who will be in the LLC.
- The people who are going to run your business should be included in your operating agreement.
- You can add these people as members, or you can give them voting rights and/or share any profits.
- As mentioned previously, it is important to sign your business entity formation document in front of a Notary Public.
- If you are planning on forming a non-professional LLC, then there is no need to include in the operating agreement the information on whether your business will be active or passive. You will not have to worry about how much money you make from your company, and it does not matter if you are selling services or products in California because you are not required to register as any type of business entity.
Tips on Getting a California LLC EIN
- You will need an Employer Identification Number (EIN) to do business in California. When you form your LLC, you will be assigned an EIN number, and this will be the number that you put on your company’s W2 form.
- This number is different from the FEIN number required for non-professional limited liability companies (LLC).
- You can apply for a Taxpayer Identification Number (TIN), or SSN, which does not require an EIN.
- If you live outside California and are not sure what your TIN is, then you can request an EIN from the IRS.
- You must have a Federal Employer Identification Number (FEIN) to form an LLC. This is also required for the formation of a limited partnership.
- Any business that falls into the category of non-professional income tax does not require an EIN from the IRS.
- The IRS will start sending you tax forms, even if you are not making any income.
You must include your EIN on every tax form that you file with the IRS.
How do I open a California business bank account?
If you want to open a business bank account, then you will need to open a business account at your local bank.
- You can open a business account at the bank if all the members of your LLC are signing a legal document and agree to operate as a California limited liability company.
- The members of the LLC must pay income taxes on their profits in California. To do this, it is necessary for them to receive money from their business for services or products that they sell in California.
- If your new LLC is not doing any business in California, then you should not open a bank account.
- You can apply for a California business bank account if you are opening a professional LLC.
- You will need the following: Limited Liability Company Business Banking Application, Articles of Incorporation, Certificate of Registration with the State Secretary of Corporations (form 5134), and Articles of Amendment (Form 5134A).
Getting a business credit card
You can apply to open a business credit card with your bank. You will have to show proof that you are using the money for your business and pay all of the charges on time.
- You can apply for a California business credit card if you are opening a professional LLC.
- You will need Articles of Incorporation, Certificate of Registration with the State Secretary of Corporations (form 5134), and Articles of Amendment (Form 5134A).
- The cardholder must be the owner of the LLC or an employee that is working for your company.
- You can get a California business credit card if you are opening a non-professional LLC.
- If you are not making any income from your LLC, then you will not have to pay any taxes in California because it does not matter whether you are in the business of selling services or products to customers.
How to Build Business Credit
When you start a new business, business partners or co-founders will need to have a certain amount of personal credit in order to ensure that payments are made on time, and payroll deposits are accurate.
- You can create a business credit profile that will help you get access to more business services and products, such as affordable lines of credit and working capital financing.
- You can get business credit by being involved with suppliers and vendors, but you will need to ensure that you are showing the business as a borrower.
- Most businesses never apply for business credit because they have problems figuring out how to go about getting it.
- You will need to prove that your business exists for a certain period of time, and you must show a pattern of paying your bills on time.
California Business Permits & Licenses
If you are opening a business, then you will need to make sure that you know the different permits and business licenses that are relevant.
- You must receive a Certificate of Occupancy (form CA 1510) if you have an office or space in California that is used for your business.
- If you are looking to open a new restaurant in California, then you will need to apply for a California Restaurant Permit (form CPB 150).
- If you are planning to open a daycare, then you will need to obtain a California Daycare Permit (form CPB 150).
- If you are opening a new home daycare or childcare facility, then you should obtain the appropriate California license for child care centers. You can obtain this business license by making sure that the licensing requirements of the city and/or county where your business will operate are met.
- If you are opening a school, then you will need to do the following: the California Department of Education will need all of the correct formation documents in order to issue a Permit for School (form CA 150).
- If you are opening any kind of school that does not fall under these categories, then you will need to obtain a Charter School Facility Permit (form FPB 150).
- You must register your business with a county business tax office in accordance with their requirements.
California LLC Tax Filing Requirements
If you are opening a non-professional limited liability company or NPL, then you will need to file your taxes with the Internal Revenue Service using an EIN number.
- You will also have to pay taxes if you sell services or products in California.
- If you are selling products to other businesses, or clients outside of California, then they do not have to pay sales tax in California.
- You will need to file and pay taxes on a form known as the Sales and Use Tax Return (Form 3516).
- If you are managing a business that has employees, then you will need to pay payroll taxes.
- You will need to pay California unemployment taxes if your business pays benefits to any of its employees.
- If you are opening an LLC and you want to create more than one LLC within the state, then the California Business Entity Naming Requirements apply.
If you are opening a business, then you will need to know how to file and pay sales taxes in California.
- You will be required to collect the state sales tax if you sell merchandise or products that will leave your place of business.
- If your products or merchandise are delivered to the customer’s location, then you do not have to collect taxes.
- If you are selling an item online in California, then it is a good idea to make sure that your business has a warehouse where all of your merchandise is located.
- If you are staying in California, then you will need to pay the following:
- You will need to collect a Business Use Tax from anyone who comes into California on business.
- If your business employs at least one person, then you will need to pay a Personal Income Tax (form 540).
- If your business has employees, then each of them will have their own personal income tax return that they must file and pay as well. There are three different types of personal income taxes: federal, state, and municipal.
If you are opening a new business, then you might need to know the different types of employer taxes that apply in California.
- The federal and state unemployment insurance programs and social security tax apply for employers who have employees.
- The Fair Labor Standards Act and California’s minimum wage requirements also apply for employers that employ workers.
- Each employer will need to collect a Form W-4 from each employee that they will be paying wages.
- California does not have a corporate income tax.
There are six different employer taxes in California:
- Social Security Tax (a.k.a. FICA Employer Tax)
The social security tax is made up of the following:
- Six percent for employers with employees who make $100,000 or more a year (employers who employ married couples both making $50,000 or more are exempt from this part). Employees pay half, and the employer pays half of this tax.
- 12.4 percent for employers with employees who make $110,000 or more a year (employers who employ married couples both making $60,000 or more are exempt from this part). Employees pay half, and the employer pays half of this tax.
- 2.9 percent for employers with employees who make $110,000 or more a year (employers who employ married couples both making $50,000 or more are exempt from this part). Employees pay half, and the employer pays half of this tax.
- 6.2 percent for employers with employees who make $110,000 or more a year (employers who employ married couples both making $60,000 or more are exempt from this part). Employees pay half, and the employer pays half of this tax.
- Medicare Tax (a.k.a. Hospital Insurance Employer Tax)
The Medicare tax is made up of the following:
- 1.45 percent for employers with employees who make $110,000 or more a year (employers who employ married couples both making $50,000 or more are exempt from this part). Employees pay half, and the employer pays half of this tax.
- 2.35 percent for employers with employees who make $110,000 or more a year (employers who employ married couples both making $60,000 or more are exempt from this part). Employees pay half, and the employer pays half of this tax.
- 6.2 percent for employers with employees who make $110,000 or more a year (employers who employ married couples both making $50,000 or more are exempt from this part). Employees pay half, and the employer pays half of this tax.
- Corporation Tax
The corporation tax is made up of the following:
- 5.75 percent for all corporations with $50,000 or more a year of total gross receipts for the previous 12 months.
- 9.50 percent for all corporations with $100,000 or more a year of total gross receipts for the previous 12 months.
- 6.25 percent on any excess over $1 million in taxable income.
- Estate Tax
The estate tax is made up of the following:
- Two percent for all estates with $1 million or more of total assets.
- Three percent for all estates with more than $4.5 million of total assets.
- Eight percent for all estates with more than $10 million of total assets.
- Corporate Income Tax
The corporate income tax is made up of the following:
- 1.25 percent on gross business receipts exceeding $50,000 a year.
- 1.8 percent on all business gross receipts exceeding $250,000 a year.
- 2.34 percent for all business gross receipts exceeding $500,000 a year.
- Utility User Tax
The utility user tax is made up of the following:
- 3% of utility users pay this tax if they are using more than 25,000 cubic feet of gas or 500 therms of gas per month from any customer that is not exempt from the tax.
- 5% of utility users pay this tax if they are using more than 100,000 cubic feet of gas or 1,000 therms of gas per month from any customer that is not exempt from the tax.
- 10% of utility users pay this tax if they are using more than 250,000 cubic feet of gas or 2,500 therms of gas per month from any customer that is not exempt from the tax.
– As a result of Proposition 22, California has adopted what is commonly referred to as the use tax.
California is a very large and diverse state. It has enough variety to make it different from any other state in the entire country.
However, this is not only a good thing, but it also helps make California’s economy powerful for many different reasons. California’s economy is fueled by many different industries, but most of the industries that are in California are high-end industries.
By knowing how to form an LLC in California, you will be able to create a successful business entity for yourself. You can start this process with confidence if you have the right information and know what steps to take.