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How to Start an LLC in California
By Alison Tobin MONEY RESEARCH COLLECTIVE
When starting a business in California, one of the business structures entrepreneurs can choose is an LLC. If you’ve decided that an LLC is the best option for your business, the good news is that they’re relatively easy to set up in the state.
This guide will cover everything you need to know about starting an LLC in California, including the steps to take and any additional state requirements.
Table of contents
- 6 steps to starting an LLC in California
- Next steps after your LLC is formed
- Summary of our guide to starting an LLC in California
6 steps to starting an LLC in California
An LLC business structure establishes a company as a separate business entity from its owners. This structure offers LLC owners (called members) limited liability. LLC owners are typically not held personally liable for company debts or if the company is sued.
LLCs have flexibility in management structures and taxes. They can be member-managed or manager-managed. In terms of taxes, they have pass-through taxation by default. The company’s tax liabilities “pass-through” to the LLC members’ personal tax returns. However, LLC members can also choose to have their company taxed as an S corporation.
LLCs are easier to set up than traditional corporations, but they still have to meet specific requirements. You can create an LLC on your own or hire an LLC service to help you. These services also typically offer additional business resources, such as tax or legal services.
Whether you do it on your own or use an LLC service, below is a step-by-step guide to turning your new business idea into a reality.
1. Choose your California LLC name
The state of California has specific requirements for LLC names, including:
- Distinction: The name must identify that your company is an LLC. Limited liability company, L.L.C. or LLC are acceptable phrasings. You may also abbreviate the words limited to “Ltd.” and company to “Co.”
- Originality: Your California business cannot have the same name as another registered LLC in the state. Do a name search using the California Secretary of State business search to make sure it’s available. Submitting LLC formation documents with a name that’s already registered could lead to denial.
- Clarity: Under California law, your business name can’t be misleading. Make sure the name doesn’t imply that your LLC is an insurer, government organization or professional corporation.
Another important step is to secure a domain (URL) for your business. You’ll need a website for your business soon, so you’ll want to secure the URL before someone else does.
California business name reservation
You can reserve your LLC name with the Secretary of State for 60 days. The fastest way to do so is online at bizfileOnline.sos.ca.gov. You can renew your name reservation request, but only after it expires. There must be at least one day between reservation periods.
2. Choose a registered agent
California requires LLCs to have a registered agent — also called an agent for service of process — which is a person or company that receives legal correspondence on behalf of your LLC. You can be the registered agent for your business or choose an employee or partner to fill the role.
If you choose an individual, they must be:
- Over the age of 18
- A California resident (with a verifiable physical address, not a P.O. box)
- Willing to be publicly registered
- Available at the registered agent address during business hours
Alternatively, you can hire a registered agent service. Working with an external company is a good option if you run your LLC out of your home and don’t want your personal address publicly available. Another reason is if you won’t be available at the address during all business hours.
3. Fill out the proper documentation and pay state fees
The next step is to file your paperwork with the California Secretary of State. The quickest way to do this is online, but you can also file it by mail or in person at the Secretary of State’s office in Sacramento.
You have to fill out the California Articles of Organization form (Form LLC-1) with the following information:
- Business name and address
- Registered agent name and address
- How the LLC will be managed (either by one or more managers or the LLC members)
- Your signature
Pricing is reasonable in California. The application costs $70, and there’s an additional fee of $5 to get a certified copy of your registration. If you file your documents in person, there’s an additional $15 handling fee.
Within 90 days of California LLC formation, all business owners must submit an initial Statement of Information form (Form LLC-12) with a $20 filing fee. You must re-submit this form every two years as you continue to run your business.
If your LLC has more than one manager or member, you have to file an Attachment to Statement of Information form (Form LLC-12A).
Foreign LLCs (i.e., those from out of state or a foreign country that want to expand their business to California) have slightly different forms to fill out. You can find all the forms on the California Secretary of State website.
4. Create an operating agreement for your business
Once your LLC is registered, you still have a few more steps, the most crucial being to create an operating agreement.
An LLC operating agreement defines your business structure and operating rules. It’s essentially a blueprint for your business, outlining how the company will solve problems and who will be responsible for each issue.
In California, LLCs are required to have an operating agreement. You don’t need to submit your agreement to the Secretary of State, but you should keep it with your official business records.
The details of your operating agreement will vary depending on the type of business you’re starting and how many members are involved. Consider consulting a business lawyer for guidance.
5. Obtain an employer identification number (EIN)
An employer identification number (EIN) allows you to hire employees, open a business bank account, and apply for business credit cards.
EINs are not automatically granted when you register your LLC in California. You can apply online for free through the IRS.
6. Fulfill other California LLC requirements
Remember to keep up with your LLC requirements after registration. That includes submitting form LLC-12 every two years and paying your annual taxes.
The annual franchise tax for LLCs in California is $800. Your first-year tax payment is due on the fifteenth day of the fourth month after your business starts. Subsequently, it will be due on the fifteenth day of the fourth month of your taxable year.
Next steps after your LLC is formed
Once you’ve officially formed your LLC, there are some additional steps to take to help set your business up for success.
Obtain necessary business permits
Required permits can vary based on your industry and business activities. You can visit the CalGOLD website to find out what you need.
Some examples include:
- Business license: In California, a business operating license or general license allows you to file taxes as a business, not an individual. You can apply for your business license through your city or local government.
- Seller’s permit: All businesses that sell tangible goods must obtain a seller’s permit.
- Building and construction permits: If your LLC has a physical location, you may need a permit for renovations.
If you’re unsure what licenses and permits your business requires, speak to a representative at your local city hall.
Open a business bank account
Even if you are the only employee of your LLC, separating your business and personal finances is necessary to protect your limited liability.
A business account helps organize your budget and makes filing your taxes easier. On top of that, business accounts often come with unique features like invoice tools, accounting software and free upgrades as your business grows. Take your time and shop around to find the best bank for your LLC.
Create budgets
Establishing a business budget is vital in setting your business up for success.
Here are a few tips to get started:
- Make a note of your necessary expenses: Make a list of essential payments to keep your business running. That includes your annual taxes, permit fees, loan payments and more.
- Create a daily, weekly and monthly budget: Setting up budgets for various time periods will help you stay on top of your finances.
- Work with a professional: Hiring an accountant can help you stay organized regarding your business taxes.
- Consider insurance policies: The best business insurance can help protect you financially against liabilities and save you from expensive legal costs.
Summary of our guide to starting an LLC in California
An LLC may be a strong business structure choice for those who want flexibility and personal asset protection.
Forming an LLC in California is relatively easy. You can follow these six general steps:
- Choose a name for your LLC that complies with California naming requirements.
- Choose a registered agent to accept legal documents on behalf of your company.
- Fill out the proper business formation documents and file them with the Texas Secretary of State.
- Create an operating agreement for your company.
- Obtain an EIN.
- Fulfill all other requirements, such as getting appropriate permits and paying the franchise tax.