Forming an LLC in California will help protect your personal assets from lawsuits and judgments against your business. An LLC is a legal structure that separates your business and personal assets. By not having your business in a separate legal structure, you can be held personally liable for certain debts and lawsuits incurred by the company. Forming an California Limited Liability Company does not require an attorney and you can save a lot of money if you do it yourself with the five simple steps below.
Before getting into the five steps here are a few things to know about California LLCs.
An LLC has fewer formalities after formation than a corporation–meaning you can focus on your business and not on paperwork. One caveat: California does tax LLCs more heavily than most other states do, with a minimum franchise tax of $800 per year. As your company’s revenue increases, the franchise tax increases. Note: don’t let the term “franchise” confuse you–even if your business is not a franchise (e.g. McDonald’s, Subway, etc.), you are still liable for the tax. Protecting your assets and projecting a professional image for your business might be worth it, but understand that having an LLC in California is more expensive than in other states.
If you plan to form your LLC in October, November, or December, but will not start generating any revenue, you may want to consider waiting until the following year in January so you don’t have to pay the $800 Annual Tax twice in a few months. The first tax is due by the 15th of the 4th month after the LLC is filed and then by April 15th every year thereafter. If you file on December 1st, the tax would be due April 1st and then again on April 15th.
If you neglect to incorporate your business, you could be held personally liable for business debts and lawsuits. Find out about forming a legal California Limited Liability Company and start your business off on the right track.
Additionally, California does not permit foreign or domestic LLCs to perform professional services.
How Much Does It Cost to Get an LLC In California?
The fee to file the LLC Articles of Organization in California is $70.00, which goes to the Secretary of State. There is an additional fee if you send a paper form of $15.
California places an additional tax on domestic LLCs based on the LLC’s worldwide income. If the majority of your income is outside the state of California, you might want to reconsider whether you should incorporate or form your limited liability company in California or in another state where the bulk of your business takes place.
California LLC Annual Fees
April 15th of every year, $800 is due for the California LLC Tax.
- Minimum Number – one or more
- Members/Managers- at least one is required to be listed in the Articles of Organization
- Residence Requirements – none specified
- Age Requirements – none specified
Steps to Forming an California LLC
Step 1. Name Requirements
Your corporate name must end with the words Limited Liability Company or an abbreviation of these words (“LLC,” “L.L.C.,” “Limited,” “LTD.,” “LTD”.). Check out our article on naming your LLC for all of the requirements that you must follow when naming an LLC.
Now that you have the perfect name, you want to be sure nobody else is using it as each state requires a unique name per LLC or Corporation. To check if your name is being used, visit our page to do a free California LLC name search.
Step 2. Choose a Registered Agent
The registered agent must have a physical presence in California but may be an individual resident, domestic or foreign corporation authorized to transact business in California. The registered agent must also have a physical address in California and a Post Office Box is not acceptable. If the registered office includes a suite number, it must be included in the registered office address. The person named as agent must be a resident of California or a corporation that has filed a certificate pursuant to Section 1505.
Provided you as the business owner have a physical presence in California, you can be the registered agent however, there are some privacy benefits to having a third-party registered agent.
Check out our article on LLC Registered Agents for more details.
Step 3. File the Articles of Organization
This is the most important step and many people believe that you need an attorney to file. While we don’t discourage having an attorney, filing a California LLC can be done by most people, but you can save considerable money over an attorney and make sure everything is filed correctly by using a formation service such as LegalZoom.
Step 4. Create an Operating Agreement
An operating agreement is not required in California but is typically a good idea, especially for an LLC owned by multiple people. The primary function of the operating agreement is to govern the relationship between the owners of the business, but also outlines who makes what decisions, how profits or losses are distributed and the operating procedures of the LLC.
Step 5. Get an EIN
What is an EIN? The Employer Identification Number (EIN), or Federal Tax Identification Number (FEIN), is used to identify a business entity. It is essentially a social security number for the company.
In addition to the EIN being an identifying number for the LLC it serves a few other purposes such as:
- Opening a business bank account
- Federal and State tax purposes
- Conduit to pass payroll taxes for employees paid by the company
This link will take you to the IRS website to get an EIN for your LLC. Less than five minutes and you will have your number free of charge. Wait until your LLC is approved and filed before applying for your EIN.
Something to consider with a new LLC is that it has no credit history associated with it and as such may make it a more difficult to acquire business funding or vendor credit. Depending on the industry, you may want to look into building your LLC’s business credit soon after filing to begin generating a credit history. Dun & Bradstreet offers a lot of information about improving business credit.
Don't want to go it alone but don't want the expense of an attorney? Another alternative is to use an LLC formation service that will do the formation at a low cost. Take a look at our comparison page of popular LLC formation services.
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