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 with this step-by-step guide.
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Step 1: Choose a business type
There are a number of different business structures you can choose from when launching your California LLC business. 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 for business owners:
- 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 protection. 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 California business is organized but also for how you are taxed and protected legally.
What do I need to do?
- If you haven’t decided on a type of business yet, consider the pros and cons of each business entity listed above.
Anything tricky I should be aware of?
- Keep in mind that while an LLC is taxed as either a sole proprietorship (for single-member LLCs) or partnership (for multi-member LLCs), it may choose to be taxed as an S corporation or C corporation. (Want more details? Check out this video on having an LLC taxed as a Sole Proprietorship versus as an S Corp.) Whether your LLC should elect special tax treatment is a complex question best decided with the advice of an attorney or tax professional.
Step 2: Register your LLC with the Secretary of State
Next, you need to file Articles of Organization for your LLC formation 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 LLC, which means you would have to pay two sets of state fees.
Why is this important?
- Your California Articles of Organization will establish your entity as a legal business venture. Deciding on and reserving an LLC 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?
- First, you’re going to need to do a name search for your new venture. So, do the necessary research—via Google, the California Secretary of State website, and if you like, with the United States Patent and Trademark Office—to find a distinct name for your business.
- Then, get a copy of the Secretary of State’s Name Reservation Request Form. Fill it out per the instructions and return it by mail or in person along with the $10 fee. Here’s what the form looks like:
- The name reservation lasts for 60 days. Before your reservation expires, naming requirements include that you have to claim the name 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:
- 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. 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 mailing 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 LLC Articles of Organization, you’ll need to file an initial Statement of Information (also known as an annual report) with the California Secretary of State. This keeps the state 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, serving as a biennial report, in order to keep your business’s public record in good standing.
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:
Anything tricky I should be aware of?
- If you don’t submit your Statement of Information before the required deadlines for state filing, 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 Internal Revenue Service (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?
- Complete IRS Form SS-4 to request your EIN. You can also do this online. In return, the IRS will send you a Form CP-575 to confirm new your EIN.
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 LLC Operating Agreement is a crucial step in the formation process of starting your business. This internal document lays out the details about topics such as the management structure for LLC owners, including but not limited to:
- How your LLC is managed …
- Member-managed if you’re starting a single-member LLC, or if all of the business’s owners—or “members”—will be directly involved in operations
- Manager-managed if you plan to hire an external manager, or if some of the business’s owners don’t want to be involved in management
- 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 LLC Operating Agreement. Here’s are sample templates 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?
- A business bank account separates your business assets from personal assets, which is a huge help in case you’re ever sued. It also makes it easier for your accountant to know precisely which expenses belong to your business.
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?
- LLCs in California are required to pay an annual tax of $800 to the California Franchise Tax Board—plus additional fees if your LLC’s total income exceeds $250,000.
- Within the first year, your initial annual tax is due by the 15th of the fourth month after your LLC is formed. (Note: Until January 1, 2024, there isn’t this initial tax fee.) Every year after, the annual 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.)
- These payments are due with LLC Tax Voucher (FTB 3522).
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 1-800-852-5711 (or 1-916-845-6500 from outside the United States) during business hours 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, and these fees are due by the 15th day of the sixth month of the current tax year:
- $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 register online to get a seller’s permit at no cost from the California Department of Tax and Fee Administration.
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 entrepreneur. 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 business formation of 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—or hire a formation service or registered agent service to set up a LLC—you will have cleared the basic hurdles and legal documents necessary to getting your business off the ground.
Small business attorney Sam Mollaei contributed his expertise and advice to this article.