How to Form Your LLC in California?
The state of California is considered a heaven for new businesses and you can choose any type of business structure. Although, you can choose any structure, a limited liability company is one of the popular business structures opted for in California. There are several benefits that prompt entrepreneurs and first time business owners to form a California LLC. This guide will help you to understand a limited liability company and its benefits in California and provide an insight into the process of registering an LLC.
LLC in California
California nicknamed the “Golden State” is home to some of the big companies of the world including JBL, Mozilla Corporation, Netflix, Warner Bros., Wells Fargo, Universal Pictures, Tesla, Inc., Seagate Technology, and San Jose Sharks LLC among others. You can also start an LLC in California and leverage the dynamic capabilities and innovation platforms in a rapidly evolving California business environment. Due to the fact that a limited liability company is a pass-through entity, they are the most popular legal entity in the state of California. Once you form an LLC in California, you will need to keep it active by filing California LLC statements of information and annual tax.
What is California LLC?
You can form a domestic or a foreign limited liability in California. You can also form a California LLC in any other state and move your business to California. The process for the registration of a domestic LLC is different from that of a foreign LLC. There are several different types of LLC that can be formed in the US and they are:
- Single-Member LLC/Sole Proprietorship
- General Partnership
- Family Limited Partnerships
- Series LLC
- Restricted LLCs
- L3C Company
- Anonymous LLC
- Member-Managed LLC or Manager-Managed LLC
Of the above, California allows the formation of Single-Member LLC or Sole Proprietorship and General Partnership (LLC will with multiple members). The regulations pertaining to limited liability companies will vary from one state to another. For example, it is mandatory to hire and maintain a California LLC registered agent. If you register a California LLC, then you will be the owner and in the context of the LLC, be known as a member. It is not just an individual who can form a limited liability company but members can include corporations, foreign entities, non-US residents and even other LLC’s.
What are the benefits of forming an LLC in California?
Boasting a $3.2 trillion gross state product (GSP), California is the 5th largest economy in the world. This growing economy can be attributed to the 4 million small businesses along with the big names in the IT sector. You can also form a California LLC in such a thriving economy but that is not the only benefit the state offers. There are several other benefits of starting an LLC in California like the following:
- Pass-Through Taxation: One of the primary reasons entrepreneurs start an LLC in California as opposed to other business structures is pass through taxation. Pass-through is a type of tax treatment where-in taxes of the LLC literally “flows through or passes through” to the tax returns of the LLC owner or members. Hence, when you register a California LLC, it will not be subjected to any double taxation like some other business structures may be subjected to. It is also important to note that when a limited liability company elects to be taxed as a corporation then pass through taxation will not be applicable.
- Limited Liability Protection: California LLC incorporation will provide you with limited liability protection. This simply means that as the owner you will not be held responsible if the company suffers a loss. This also means that all your personal assets like home, car, and bank accounts will have necessary protection from lawsuits and business debts.
- Credibility: If you register a California LLC then the company will help increase credibility in the market. In fact, a limited liability company is recognized as a formal business structure as compared to partnership or sole proprietorship.
There are several other benefits that a California limited liability company can enjoy including a wide variety of incentive programs like the New Employment Credit (NEC), California Research & Development Tax Credit, and California Small Business Loan Guarantee Program (SBLGP) among others.
Forming an LLC in California
California provides strong business infrastructure and a robust platform for startups and hence is considered a favorite location for starting a new business. You can form a limited liability with the help of a top California LLC registered agent like IncParadise although there is a process that you will be required to follow. The process has several steps right from the conception of a company name to actually filing the articles with the office of the California Secretary of State.
1. Choose California LLC name
Every business is known and defined by its name and hence choosing an appropriate name is crucial towards business operations. The business name is provided in most of the official documents including application for EIN tax ID, California LLC statement of information, and Articles of Organization. When you are ideating a name, it is important to follow the name regulations mentioned in the 2021 Revised Business Entity Name Statutes and the California Revised Uniform Limited Liability Company Act.
According to the name statutes and Act, you need to ensure your business name is distinguishable from the name of any other limited liability company on record with the California Secretary of State. The name should be such that it doesn’t mislead the public. This can be made possible by conducting a California LLC name search on the SOS website. You can reserve your LLC name for a period of 60 days by filing the “Name Reservation Request Form” with the Business Programs Division.
2. Choose California LLC registered agent
One of the important steps towards California LLC incorporation is finding, hiring, and maintaining a registered agent. Most first time business owners would ask if hiring a registered agent is necessary or not. Apart from the fact that having a California LLC registered agent can be quite beneficial, it is also mandatory for all corporations, LLCs and other business entities to appoint and maintain a registered agent pursuant to the California Corporation Code Section § 1700-1702.
A California LLC registered agent also known as a Statutory Agent or an Agent for Service of Process needs to have a physical address in the state, which should be operational during regular business hours. IncParadise, is one of the most respectable agents for service of process in California. We can be your California registered agents as we are compliant with all regulations and requirements of the state. We can also assist with California LLC incorporation as well as other annual business requirements you may have in the state.
If your business is already operational in California or if you are planning expansion within the state, we as a reputed California LLC registered agent can assist you with several business related state based requirements. Any or all existing and currently operational businesses in California can change registered agent services in California to IncParadise.
IncParadise offers a wide variety of registered agent services in California!
3. File Articles of Organization with CA SOS
In order to form a California LLC, you will be required to file the “Articles of Organization” with the California Secretary of State pursuant to CA Corp Code § 17702.01 (2017). You will have to provide specific information in the articles pertaining to the business including LLC name in compliance with Section 17701.08, office street address, and name and street address of your California LLC registered agent among others. The filing fee for Articles of Organization is $70. If you submit in person then there is a counter drop-off fee of $15.
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4. Prepare LLC operating agreement
An LLC Operating Agreement is an integral aspect of forming a limited liability company in California. It is a legal document, which outlines the duties of members and owners of the company. It is not possible to start an LLC in California without the operating document although you are not required to submit it with the office of the Secretary of State. The importance of the agreement lies in the fact that it helps in setting down the working and financial relationship among members or business owners as well as between managers and members. The content of an LLC operating agreement will vary from one entity to another but the six key areas included in this are:
- Management and Voting
- Capital Contributions
- Membership Changes
5. Obtain EIN
EIN is an Employer Identification Number and it is also known as the Federal Employer Identification Number. This is a unique 9 digit tax ID number that is assigned to businesses by the Internal Revenue Service (IRS). It is used for reporting employment taxes and most businesses in California would require this number bar a few exceptions. If you register a California LLC with one member (single member LLC) and are considered a disregarded entity without any employees then you will not be required to apply for an EIN. If your company is a multi-member LLC then you will be required to apply for and obtain an EIN.
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6. File initial statement of information
Once you have filed the Articles of Organization for California LLC incorporation, there is another filing required by every LLC in the state. It is known as the Statement of Information (Form-LLC_12) and has to be filed with the California Secretary of State, within 90 days from the date of registration of the limited liability company. After the initial filing, the statement of information has to be filed once every two years. If your LLC has more than one member or manager then you will be required to also file an “Attachment to Statement of Information” during the initial statement filing. The initial statement filing fee is $20. As one of the top California LLC registered agents, IncParadise can assist you with the filing of the statement of information.
7. Pay California annual franchise tax
If you register a California LLC then there are certain annual requirements you will be required to fulfill including filing annual franchise tax. A limited liability company organized in California or conducting business in the state has to file an annual tax of $800. The tax is due on the 15th day of the 4th month from the day of registration of the LLC e.g., if you formed LLC on June 22, 2021 then your tax will be due on September 15, 2021.
8. Obtain necessary business licenses and permits
Once you register a California LLC, it will become operational only after you apply for and obtain necessary business licenses and permits. You can start your business in a variety of industries but the type of business license and permit will depend entirely on the business activity. In California, business licenses or permits can be classified under two categories, which are:
- General business license
- Business licenses or permits for specific industries
It is important to note that business licenses and permits also known as a business tax certificate are issued by cities and counties where an entity is located or conducting business from. A top California LLC registered agent like IncParadise can provide guidance on business licenses and permits and you can also avail of our Business License Research Report service for detailed information on licenses and permits in California.
9. Open a bank account
One of the important requirements pre or post California LLC incorporation is that of a bank account. Whether it is a single member LLC operating as a sole proprietorship or a multi-member LLC, having a business bank account always reduces any problems that may arise due to the mixing of your personal and business finances. Having a separate business account will also help in tracking your business cash flow while helping manage business specific budgets along with income and expenditure.
10. Comply with taxes and other regulations
Most businesses established in California will have to pay some form of tax. If you register a California LLC then depending on the business activity and the type of LLC, you may be required to file one or more forms of state tax. According to the California Franchise Tax Board (FTB), an LLC classified as a partnership for tax purposes will have to file Form-568 for Limited Liability Company Return of Income. Some of the different forms of taxes that a California LLC may have to file include:
- If you start an LLC in California as a retailer or are in the retail business where selling of goods and merchandise takes place then you will be required to file sales tax. You will have to first register with the California Department of Tax and Fee Administration (CDTFA) to pay this tax.
- If your company is a single-member LLC then you will be required to file self-employment tax on your business profits
- Owners of a California LLC will be required to pay federal income tax on profits earned less federal deductions or allowances
- As an employer, you will be required to file payroll tax on any salaries paid to an employee
Ready to form a California LLC?
If you are planning to form a California LLC or you have an innovative startup idea then the state provides just the right balance of opportunity and growth. We at IncParadise are one of the most reputed California LLC registered agents and have helped thousands of startups and new businesses to register and operate in the state. We can assist you with the entire process of LLC formation as well as annual maintenance of your company.
We understand that each business has its unique requirements and hence are offering additional services that can be leveraged according to your specific business requirement. Some of our top services include foreign qualification, EIN assistance, S Corporation status election, and Statement of Information among others.