Setting up an LLC in California will take your entrepreneurial idea to the next level. It will add legitimacy to your business and provide important legal and tax benefits. In general, starting a business can be a difficult, costly task that requires a lot of paperwork. But do not worry, we are here to help and guide you each step of the way.
LLCs are considered one of the easiest, quickest forms of business to set up in California. You just need to know exactly what to do. That is why we will provide you with a complete guide to make the process less confusing for you. First, let’s learn more about LLCs and all the benefits they provide.
What is an LLC?
“Limited Liability Company,” that is what LLC stands for. It is a type of legal entity that can be formed to own and run a business. Unlike other business types, LLCs offer liability protection and tax advantages. That is why LLCs are very popular in California and across the US.
Many business owners in California also prefer LLCs as they combine the best parts of corporations, sole proprietorships, and partnerships. An LLC offers liability protection, management structure flexibility, and some tax advantages. LLCs are also much simpler and cheaper to form and operate. You do not need to have officers, directors, and other administrative burdens that come with forming a corporation.
Why Should You Choose the LLC Business Type?
- Limited Liability: As an LLC owner, you will not be personally liable for any debts incurred by your business. This means creditors or people whole file lawsuits against your LLC will not be allowed to collect against your personal assets. They can only collect their money from your LLC assets or LLC bank account. Your personal car, home, and bank accounts will be safe.
- Pass-Through Taxation: The profits or losses of the LLC will pass through to the owner’s personal tax return. This means your LLC profits will be taxed at your personal tax rates.
- Flexibility: Unlike other business types, an LLC provides huge flexibility. First, there is ownership flexibility. There are no minimum or maximum limits on the number of owners or members when it comes to LLCs. Your LLC can have only one member or hundreds of them. There is also management flexibility.The LLC can be managed by all the members, or you can choose to designate one or more managers to run the business. The designated managers can be members, non-members, or a combination of both.
Who Should Setup an LLC?
Whether you are starting a business or currently running one, you should consider setting up an LLC. It does not matter what type of business you have. LLCs can be used to own and operate almost all kinds of businesses. You can also set up an LLC for a business of any size. That is why LLCs are the most common legal form used to own and run a business in California.
What Are the Steps in Setting Up an LLC in CA?
Starting an LLC in California is relatively easy. It does not require using a lawyer. You can form the LLC yourself. Our step-by-step guide will help you go through the LLC setup process smoothly from start to finish.
Step 1: Name Your CA LLC
The first step of setting up an LLC is to choose a name for it. You need to make sure the name complies with the business name regulations of California. These are some of the most important naming requirements to keep in mind:
- The name of the business must include the phrase “limited liability company,” or one of its abbreviations, like LLC, L.L.C., Limited, Ltd., Company or Co.
- Your business name cannot contain words, such as FBI, State Department, Treasury, etc. These words can make people confuse your LLC with a government agency.
- Some restricted words such as bank, university, attorney, lawyer, etc., may require additional paperwork and a licensed individuals to be part of the LLC.
- Your LLC name must differ from all existing businesses in the state of California. To make sure the name you want is not already taken, you can conduct a search on the Secretary of State’s website.
We recommend also choosing a name that is easily searchable for your potential clients. Even if your business will not currently need a website, it probably will in the future. So, make sure to buy the domain name you want for your LLC from the start. Otherwise, it might be taken by somebody else.
Step 2: Choose Your Registered Agent
“Agent for Service of Process” is the common name for a registered agent in California. Every LLC in California is required to appoint an agent for service of process. This can be a person or a business entity. They will be your LLC’s point of contact with the state. Your agent for service of process will be authorized to receive official legal documents, government correspondence, and notices on behalf of your LLC.
Any agent for service of process must be either a full-time resident of California or authorized to conduct business in the state of California. It can be a person or an entity. You can even choose yourself or an employee of your LLC to be your agent for service of process. In all cases, the agent for service of process must meet the following criteria:
- Entities must provide registered agent services.
- Must have a physical street address in California.
- Must be available on-site to accept documents on behalf of your LLC, during regular business hours.
Step 3: File CA Articles of Incorporation
To officially create an LLC in California, you must file Articles of Organization using Form LLC-1. This form must include your LLC’s name, purpose, management structure, address, and registered agent information. As the person forming the LLC you must also sign the form.
The Articles of Organization can be submitted to the California Secretary of State online or via mail. You can also hand-deliver the form to the office of the California Secretary of State. The online filing fee is $70. Once you file the form, the Secretary of State will review it. If it gets approved, you will receive a certificate that confirms your LLC formally exists. You can use this certificate to obtain an Employer Identification Number (EIN), business licenses, and a business bank account.
Step 4: File a Statement of Information with California
Within 90 days of filing the Articles of Organization, you will be required to file an Initial Statement of Information (Form LLC-12). This ensures you retain the name of your LLC and its status with the state. The Statement of Information is also filed with the Secretary of State. Just like the Articles of Organization, it can be done online, in-person, or by mail. The online filing fee for the Statement of Information is $20
Any Statement of Information should include:
- Name and mailing address of your LLC
- LLC’s California Secretary of State file number
- LLC’s agent name and address
- LLC’s principal business activity
- Name and business or residence address of the LLC manager or chief executive officer
Before filing your LLC Statement of Information, remember that all the information in it will be open for public record.
Step 5: Create an LLC Operating Agreement
This legal document should outline the ownership and operating procedures of your LLC. In California, it is required for an LLC to have an operating agreement, even a single-member LLC. However, it is an internal document. The operating agreement does not have to be filed.
Having a comprehensive operating agreement in place is important for various reasons. It could be used to settle financial or managerial disputes that may arise in the future. An operating agreement should include:
- The LLC name, address and purpose
- Duration of the LLC
- Members of the LLC and their contribution
- Management structure of the LLC
- How the profit/loss will be divided
- Contacts of the registered agent
- Information about the Articles of Organization
- Liability clauses
Step 6: Apply for an Employer Identification Number (EIN)
The EIN is basically the Social Security number for your LLC. It is what the US Internal Revenue Service (IRS) uses to identify and tax any business. Your LLC can apply and obtain the EIN for free by mail or online through the IRS.
Receiving an EIN is a necessary process for any LLC. It allows you to open a business bank account. The EIN is also required to hire employees for your LLC.
Other Resources for Starting a Business in CA
Setting up your LLC in the state of California comes with many benefits. California is not just a place of sunny weather and great beaches. It is also a thriving market filled with exciting businesses. Feel free to use the resources below to learn even more about how to join them.
California Secretary of State – this is the go-to website to start a business in California. It includes all the essential information to get you started.
California Franchise Tax Board – here, you will find all the information you need to handle your personal and business income taxes in California.
You can also learn even more about Setting Up a Business in Orange County, California (including more detail on the differences between the major business types) through our previously published blog post. (Just click the link above.) Or, if you are a visual learner, check out the great video below.
Now that you are a master on LLCs, maybe you should learn about S-Corps next. Click here for our handy introduction to S-Corps. Or, if you would prefer to learn about sole props, click here.
Have a friend or family member who is wondering, “How do you setup an LLC in CA?” – send them here!
To successfully start a new business in California, you need to find all the support you can get. At My OC Bookkeeper, you will find the best bookkeeping, accounting, and business strategy experts in California. Reach out to us now and let’s do great things together.