How to form an LLC in California
You’re in the process of starting a business in California, and you have a critical question to answer — what business structure should you choose?
You have options, including a corporation or partnership, but a limited liability company (LLC) structure is often a great choice for new business owners. This article explains why that is and how to set up an LLC in California.
- LLCs have several key benefits for new business owners, including pass-through taxation, limited liability protection, and flexibility when creating management structures.
- To start an LLC in California, you must submit Articles of Organization and a Statement of Information.
- If you want to save time and hassle, Block Advisors’ Business Formation Incorporation Services can help with every stage of the California LLC filing process.
What is an LLC?
An LLC, or limited liability company, is a business structure. The California Secretary of State describes an LLC as a business that’s similar to a corporation but with more flexible tax and management benefits.
LLC formation grants business owners, also known as members, certain liability protection. The members generally can’t face personal legal action, such as lawsuits, related to business activities. Because of this, you get some separation between your company and your personal life.
However, that separation isn’t absolute. In certain cases, such as if you break the law, a judge may order action against your personal assets.
Tax treatment of a California LLC
An LLC in California pays an annual tax and an LLC fee.
The annual tax is simple — you pay the California Secretary of State $800 annually to keep your LLC in good standing. Think of it as an annual franchise tax for your company. You can make that payment online or via mail to the following address:
Franchise Tax Board
P.O. Box 942857
Sacramento CA 94257-0631
The LLC fee is a little more complicated because it’s based on how much the business earns. When you start an LLC in California, you commit to submitting an estimate of earnings by June 15 every year, along with paying the LLC fee associated with those earnings on the same date.
The LLC fees are as follows:
- $0 fee for earnings up to $249,999
- $900 fee for earnings of $250,000 to $499,999
- $2,500 fee for earnings of $500,000 to $999,999
- $6,000 fee for earnings of $1 million to $4,999,999
- $11,790 fee for earnings of $5 million or above
Benefits of forming an LLC in California
Before you rush to send your formation documents to the California Secretary of State and start your LLC, it’s a good idea to understand precisely why this entity type is a good choice.
1. Personal liability protection
Imagine you have a sole proprietorship – which means the business is in your name alone and you have not created a formal entity yet – and there’s no separation between your company and yourself. If your business gets sued, that’s equivalent to you getting sued, which places your personal assets at risk.
An LLC offers your California business protection against this form of personal liability. If the business gets sued or falls into debt, you usually don’t have to worry about those issues passing over into your personal life.
2. Simplicity and flexibility
Given that both LLCs and corporations offer liability protection, you may wonder why you shouldn’t just form a corporation instead. The answer is two-fold — simplicity and flexibility.
Corporate structures are rigid because you have to maintain a board of directors and declare ownership stakes based on shares. It can get complicated. LLCs have more flexibility in how you choose to structure your business and its ownership.
Corporations also require a lot of paperwork, like conducting annual board of director’s meetings and maintaining minutes; LLCs require less formal reporting. You can form an LLC by completing and filing Articles of Organization correctly. LLCs require some paperwork to maintain, such as filing an annual report every year, but they’re generally lower compared to a corporation.
3. Pass-through taxation
An LLC is a pass-through tax entity for federal tax purposes, meaning all of the income, losses, distributions, and profits your LLC generates pass directly through to the LLC members. In other words, the business doesn’t pay separate federal taxes on its earnings.
That doesn’t mean you pay no taxes at all. Instead, you pay taxes on the LLC’s income on your personal income tax return at your personal tax rate. Nevertheless, the pass-through taxation model is advantageous because it helps you avoid the issue of double taxation, which is when tax is paid twice on a company’s earnings – once by the company on its income and again on profits paid to owners.
4. Increase your credibility
Many business owners feel a sense of accomplishment and credibility once they take the plunge and form an LLC. It’s tough enough to form business partnerships without having to worry about what a potential partner might assume about your company based on its structure. But that’s a problem you’ll face if you maintain a sole proprietorship. Your credibility may diminish in the eyes of partners and even clients because you don’t have a formal business structure.
Forming an LLC solves that credibility problem. Better yet, sole proprietors can form a single-member LLC, giving them the control they want while offering the credibility and liability protection they don’t get from the sole proprietor structure.
Downsides to the LLC structure
Though LLCs offer plenty of benefits in terms of simplicity and business structuring, there are some downsides to consider before you move ahead:
- Personal liability protection isn’t absolute in an LLC because a judge can order the removal of this protection in some cases.
- If you want to leave the business you will have to follow the rules laid out in the operating agreement. If there is no ownership transfer clause in the operating agreement, a majority of the existing members must agree to the transfer of your interest.
- California’s annual tax and LLC fees make an LLC more expensive than a sole proprietorship or partnership.
How to start a California LLC
If you believe LLC formation offers what you need from a business structure, this step-by-step guide will take you through forming an LLC in California. Keep in mind, many business owners choose to outsource this process to save time and gain peace of mind knowing that the process is being completed correctly.
1. Choose your California LLC name
Every new LLC needs a name, but choosing that name isn’t as simple as putting some words down on paper and running with what you have. There are rules in place, starting with these basic naming conventions:
- Must use characters from the English alphabet and Arabic numerals
- Must be unique and distinguishable from any other business registered with the California Secretary of State
- Must include an identifier such as LLC or Limited Liability Company
- Can’t mislead the public regarding what your business does (i.e., “John’s Hot Dog Stand, LLC” for a real estate company)
Assuming you’ve found a suitable name for your California business, you may reserve that name so no other company can snatch it from under you. The state offers a name reservation process that allows you to safeguard your desired name for up to 60 days, giving you time to handle your formation documents.
Complete the Name Reservation Request form and submit it along with a check for $10 made out to the California Secretary of State to the following address:
Secretary of State
Name Availability Unit
1500 11th Street, 3rd Floor
Sacramento, CA 95814
If you choose to form your business with Block Advisors, we will work with you to ensure your business name meets all California requirements and reserve that name on your behalf.
2. File your LLC Articles of Organization
You’ve settled on an LLC as the right type of business structure, and you have a name ready to go. Next, you must file California Articles of Organization with the California Secretary of State to formally request permission to start an LLC.
Your Articles of Organization inform the state of key information about your business, including:
- Your LLC name and address
- The names and addresses of all LLC members
- The name of your registered agent or the registered agent service your LLC will use
You must pay state fees of $70 plus an optional $5 certification fee to submit this form. (California has temporarily suspended the state fee through June 30, 2023.)
You can submit these to the California Secretary of State online or mail the form and fee to the following address:
Secretary of State
Business Programs Division
1500 11th Street
Sacramento, CA 95814
If you choose to form your business with Block Advisors, we will create the Articles of Organization based on information you provide and submit it to the California Secretary of State on your behalf.
3. Choose a registered agent service
Your California LLC needs a registered agent to keep your business in good standing with the state. A registered agent is a designated individual or business entity that handles the following responsibilities:
- Processing legal documents, such as service of process, on your California business’s behalf
- Maintaining a physical street address to serve as a mailing address for receiving legal documents and communication from the Secretary of State (mailing services and P.O. Boxes don’t count)
- Operating under regular business hours to ensure availability
You must appoint your registered agent in your Articles of Organization.
Though you or an employee can serve as your registered agent in California, doing so comes with administrative and compliance burdens. It’s also often not a possibility for business owners who maintain irregular business hours or are rarely on premises at the business address on file with the state.
Because of this, many choose to hire a professional third-party service. These agents handle your business’s compliance and legal document processing needs so you always have a registered presence on the public record in California.
If you choose to form your business with Block Advisors, you can appoint a third-party registered agent during the ordering process.
4. File your LLC Statement of Information
Every domestic or foreign LLC in California must submit a Statement of Information, also known as an Initial Report, as part of the LLC formation.
The form is due within 90 days of submitting your Articles of Organization and carries a $20 filing fee. You must also resubmit your Statement of Information every two years to stay in good standing with the state.
Your Statement of Information goes to the California Secretary of State, and you can file it either online or by mail along with payment for the state fees. If you choose to submit by mail, use the following address:
Secretary of State
Statement of Information Unit
P.O. Box 944230
Sacramento, CA 94244-2300
If you choose to form your business with Block Advisors, we will create the Initial Report (Statement of Information) based on information you provide and submit it to the California Secretary of State on your behalf.
Unlike many other states, California legally requires your California LLC to have an LLC operating agreement. This agreement is a legal document that allows you to draft specific criteria relating to your LLC for its members. It should contain the following information:
- Information about internal governance and the processes you’ll follow to make business decisions
- Statements regarding ownership stakes for each member and the management structure the LLC adopts
- Process to follow should a member retire, leave the business, or pass away
You don’t have to submit this document to the California Secretary of State. Instead, you simply have to keep the agreement with your LLC records. If you choose to form your business with Block Advisors, we will create the Operating Agreement based on information you provide and store it in your online account.
An Employer Identification Number (EIN) identifies your business to the government, much like a Social Security number identifies an individual. It’s a unique code that the Internal Revenue Service (IRS) assigns to your business to help it to process employer taxes related to your business.
Technically, if you are a single member LLC you generally don’t need an EIN if you have no employees, though it’s still a good idea to get one for the following reasons:
- You operate a business that is required to pay excise taxes or special taxes or fees
- Can be helpful when opening a business bank account in many financial institutions
- Adds credibility and shows potential clients and business partners that you take your responsibilities seriously
- Prepares your business to scale up and hire people whenever you need to do so
Handle your business formation needs
Prospective LLC owners have some work on their hands if they want to form a California LLC. The state has more stringent requirements than many others, mainly due to the need to submit a Statement of Information every two years and to keep up with the Annual Tax and LLC Fees.
If an LLC business still sounds right for you, Block Advisors Business Formation can help with every stage of the California LLC filing process. With prices starting from $149 plus state fees, you can get started in just 10 minutes.
Navigating your options
Whatever route you choose, to create an LLC or select another entity type, to form in California or another state, it’s important to consider the needs of your business and your personal situation. Laws vary from state to state. This article is intended to be informative, but it is not legal advice or a substitute for legal advice. A business attorney can review your specific circumstances and guide your decisions to confirm that you are doing what’s right for you. Likewise, the California Secretary of State’s office offers resources for small business owners, including online information that may help you decide the best options – and possible requirements – for your specific circumstances.
We, at H&R Block and Block Advisors, look forward to continuing to support you throughout your business journey. We are committed to helping your business thrive and our Small Business Certified Tax Advisors are available year-round, virtually and in person, to help you keep more money in your pocket.
This article is for informational purposes only and should not be construed as legal advice. You may want to seek the advice of an attorney to evaluate all relevant considerations.
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