Q: How Do I Form an LLC in California?

Starting a business in California is no small task. It’s a multi-step process that requires lots of attention to detail and plenty of patience. To keep things as straightforward as possible, we’re going to focus on one of the most common types of small business in California: the limited liability company, also known as an LLC. Let’s get started on forming an LLC in California.

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Step 1: Choose a business type

There are a number of different business types you can choose from when launching your venture. These include:

  • Limited liability company
  • Sole proprietorship
  • Partnership
  • C corporation
  • S corporation

We’ll be diving into what you need to do to start an LLC in California. Compared to corporations and partnerships, an LLC has two major advantages:

  • Streamlined taxation. Unlike a corporation, an LLC is not taxed at the entity level. At tax time, the LLC’s profits and losses “pass through” to the members of the LLC, each of whom includes their share of the profits and losses on their individual tax returns.
  • Limited personal liability. Unlike in a general partnership, you are not personally liable for the debts and liabilities of your company and your personal assets are protected in the event of a lawsuit.

Why is this important?

  • The type of entity you choose not only lays the groundwork for how your business is organized but also how you are taxed and protected legally.

What do I need to do?

Anything tricky I should be aware of?

Step 2: Register your LLC with the Secretary of State

Next, you need to file Articles of Organization for your business with the California Secretary of State. You can also choose to form your business elsewhere, say Delaware, Nevada, or another state with business-friendly laws and tax benefits.

However, if you’re doing business in California, you will likely have to register in California as a “foreign” entity, which means you would have to pay fees in two states.

Why is this important?

  • Organizing your business with the Secretary of State will establish your entity as a legal business venture. Deciding on and reserving a name, which is part of the process, will also help ensure that you have a unique, legal identity to use when working with customers as well as state and federal agencies.

What do I need to do?

California Business Name Reservation Request Form
  • The name reservation lasts for 60 days. Before your reservation expires, you have to claim it by formally registering your business. To do so, you need to file your Articles of Organization via Form LLC-1. Here’s what that form looks like:
articles of organization form llc 1 california
  • Fill out Form LLC-1 per the instructions included and return it by mail or in person to the Secretary of State’s office in Sacramento. You’ll also need to include the $70 filing fee. After they receive your form, the Secretary of State’s office will return one copy of your filed document for free. And if you request it, they will certify that copy for a $5 fee.

Anything tricky I should be aware of?

  • You can use your home address if you don’t have an office address. Just be aware this info will be public.
  • You’ll be asked to name either an individual agent or a registered corporate agent for your business. This person must provide an address where they can receive legal notices, summons, and subpoenas. You can be your LLC’s agent.
  • If you want to be able to operate your business under another name, then you have to register that name as a “doing business as” name (DBA), which is also known as a fictitious business name. For example, Gusto is a DBA. Our legal name is ZenPayroll, Inc. You can register a DBA with the county clerk or county recorder where your business is located.
  • You may also have to register your LLC with other states where you conduct business. If you have a physical presence or an employee in a state, or if you have frequent in-person meetings with clients or generate a large part of your revenue from a state, you’ll likely be considered as doing business in that state. This usually means you’ll need to pay taxes to that state as well.

Step 3: File a Statement of Information

After you file your Articles of Organization, you’ll need to file a Statement of Information with the California Secretary of State. This form helps the state stay updated on changes in your LLC such as the business address or the names of the LLC’s members.

Why is this important?

  • California law requires that you file a Form LLC-12 within 90 days of registering with the Secretary of State and then every two years in order to keep your business’s public record active.

What do I need to do?

  • You can electronically file Form LLC-12 using a credit card. The filing fee is $20, and you will receive a PDF copy via the email if you request it. You can also mail or drop off the form at the Secretary of State’s office in Sacramento. If you choose to file offline and want a physical copy of your filing, you’ll need to include additional payment. You can also access a digital copy online at any time.
  • Here’s what Form LLC-12 looks like:
statement of information california llc-12

Anything tricky I should be aware of?

  • If you don’t file your Statement of Information before the required deadlines, your LLC may be suspended, and you effectively lose the right to run your business legally. If this occurs, you will have to contact the Secretary of State to find out what you need to do to legally revive your LLC.

Step 4: Apply for an EIN

To pay Uncle Sam taxes on your LLC, you’ll most likely need an Employer Identification Number (EIN). Also known as a federal tax ID, the EIN is a 9-digit number assigned by the IRS to identify your business.

Why is this important?

  • An EIN makes it possible for you to open a bank account for your business, apply for various business permits, set up payroll, and pay federal payroll taxes.

What do I need to do?

Anything tricky I should be aware of?

  • You won’t need an EIN if you answer “no” to all of these questions.
  • You can also establish your tax year on Form SS-4 by specifying the closing month of your accounting year in line 12.

Step 5: Create an Operating Agreement

Drafting an Operating Agreement is a crucial step in the process of starting your business. This internal document lays out the details about topics such as:

  • How your LLC is managed
  • Who owns how much of the company
  • How money is raised
  • How profits and losses are shared among members
  • How membership changes occur
  • How to dissolve the LLC

Why is this important?

  • The State of California requires LLCs to have either a verbal or written Operating Agreement, though they advise having a formal, written one. You don’t have to file it with the Secretary of State, however. Just keep it in your records.
  • Having an Operating Agreement will help establish your limited liability status. Without an Operating Agreement, a court is more likely to disregard the LLC and hold its members liable for judgments against the LLC.

What do I need to do?

  • Put together your Operating Agreement. Here’s one sample template to consider, though there are many different formats. Each member of the LLC may also want to hire an attorney to review the Operating Agreement.

Anything tricky I should be aware of?

  • An Operating Agreement is not set in stone and can be updated. To make sure updates can be made smoothly, make sure to include the process for making amendments in your Operating Agreement.

Step 6: Open a bank account for your LLC

It takes money to make money, so the next thing you’ll want to do is open a bank account for your new LLC.

Why is this important?

What do I need to do?

  • Contact the bank of your choice to find out what you’ll need to open a business bank account for your LLC. Most banks ask for information such as your EIN, Articles of Organization, and Operating Agreement.

Anything tricky I should be aware of?

  • Be sure to ask upfront if you can get a free account for your business. Many banks offer this.

Step 7: Register with the Franchise Tax Board

In addition to federal taxes, you’ll also have to pay taxes to the state of California. To do so, you’ll need to register with the Franchise Tax Board.

Why is this important?

  • Each year, LLCs in California are required to pay an $800 tax to the state’s Franchise Tax Board—plus additional fees if your LLC’s total income exceeds $250,000.
  • Your first LLC tax is due by the 15th of the fourth month after your LLC is formed. Every year after, the tax payment is due on the 15th of the fourth month of your taxable year. (If you adopt the calendar year as your taxable year, this would be April 15.)  

What do I need to do?

  • If you want to pay your California taxes online, you’ll need to call the Franchise Tax Board at 1-800-353-9032 (or 1-916-845-2829 from outside the United States) before you start the online registration process.  
  • You can also file your taxes by mail using Form 568.

Anything tricky I should be aware of?

  • The FTB defines “total income” as the sum of gross receipts and cost of goods sold that are attributable to California.
  • Below is the fee schedule for California LLCs with total incomes of $250,000 or more. This is in addition to the annual $800 LLC tax.
    • $900 if total income is $250,000 – $499,999
    • $2,500 if total income is $500,000 – $999,999
    • $6,000 if total income is $1,000,000 – $4,999,999
    • $11,790 if total income is  $5,000,000 or more

Step 8: Hiring employees? Register with the EDD

If you want to hire employees as your business grows, you’ll need to get a payroll tax account number from the Employment Development Department (EDD).

Why is this important?

  • To legally hire employees in California, you must have a payroll tax account number. Having this number will also allow you to work with payroll providers like Gusto.

What do I need to do?

  • Requesting a payroll tax account number is easy. Simply go to the EDD’s e-Services for Business page and click “Enroll” to create a username and password. Then log in, click on “New Employer,” select the “Click here to register for Employer Payroll Tax Account Number” link, and follow the instructions.

Anything tricky I should be aware of?

  • If you fail to verify your email address within 24 hours, you’ll have to start the enrollment process all over again.

Step 9: Apply for a seller’s permit

If your LLC is involved in selling or leasing any goods, products, or tangible property that would usually be subject to sales tax, California requires you to have a seller’s permit and pay sales tax on those items.

Why is this important?

  • If you make sales without a seller’s permit, you could be fined or otherwise penalized.

What do I need to do?

  • You can get a seller’s permit at no cost from the California Department of Tax and Fee Administration. Register for your seller’s permit online by clicking on “Register a New Business Activity.”

Anything tricky I should be aware of?

  • If you have more than one location for your business, you’ll need to get either individual permits for each business location or one consolidated permit. Just register for the permit and the CDTFA will decide which type of permit you receive.

Step 10: Comply with any county and/or city tax requirements

We’ve already discussed federal and state taxes. On top of that, some counties and cities may require you to pay local taxes.

Why is this important?

  • The taxman waits for no man. You have to pay your taxes.

What do I need to do?

  • Google your city name along with “register your business” to see if your city has tax requirements. Then do the same with your county name.

Anything tricky I should be aware of?

  • Whatever you do, don’t skip this step. Failing to pay taxes can land you in big trouble with the government.

Congratulations—you’ve made it to the end of this tutorial! By now it should be pretty clear that forming an LLC in California is not something you can knock out in a single afternoon and maybe even a single week. But if you carefully follow the steps above, you will have cleared the basic hurdles necessary to getting your business off the ground. For additional related tasks, such as registering a trademark or setting up payroll, refer to our Ask Gusto library.

Small business attorney Sam Mollaei contributed his expertise and advice to this article.

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