California is well known for Hollywood and all the movie stars that stay in the area. However, it is also the state which contributes the most to the gross GDP of the country, making it one of the best places to start a Limited Liability Company (LLC).
An LLC is a type of business structure that protects its members (owners) from being held personally liable for any business debts. Before starting the formation process the following needs to be in place:
- LLC name: Registering a name can be done online via the State Department website. California has certain naming regulations which must be adhered to in order to register a valid business name.
- Registered Agent: By law, every California LLC must have a registered agent appointed. This can be a business entity or individual that receives legal documents on behalf of the LLC.
- Website: Register a domain name and create a website for the LLC. It is also a great idea to start setting up some social media business accounts.
With the above tasks completed, the California LLC formation process can begin. The below 5 steps will guide you through all you need to know to set up an LLC in California.
Step 1: File Articles of Organization
Articles of Organization (Form LLC-1) can be filed with the California Secretary of State. The process can be done online, in hand, or through the post and costs $70. The following information must be on hand in order to fill out the Articles of Organization:
- The registered name of the LLC and the DBA (Doing Business As) name if applicable.
- The name and address of the appointed registered agent.
- The purpose of the LLC.
- If the LLC is member-managed or manager-managed.
- The signature of the person forming the LLC.
The state will review the articles and if approved the LLC will be legally registered. The state will issue a certificate stating the successful formation of the LLC.
Step 2: Create an Operating Agreement
An operating agreement is not required by law in California, however, it is a critical document for any business. The operating agreement outlines how the LLC will be managed as well as put processes in place to help run the business.
The agreement does not have to follow a set template, but should at least address the following:
- General information on the LLC such as the name, address, and registered agent details.
- The management of the LLC.
- Each of the members’ shares in the business and how profits or losses will be dealt with.
- Procedures for dissolving the LLC.
- Liability and indemnity clauses.
Step 3: File a Statement of Information (Form LLC-12)
Every California LLC must file a Statement of Information within 90 days of filing the Articles of Organization. After the initial filing, it needs to be done every two years explaining the business operations and activities over the past year.
This is a requirement by the state even if the LLC has not done any business during the time and carries a filing fee of $20. An additional $5 is charged for disclosure purposes.
Step 4: Obtain an EIN
An Employer Identification Number is similar to a social security number, but for businesses. Single-owned LLCs do not require an EIN, however, it is free to obtain from the IRS and will enable the LLC to hire additional staff if needed.
It is also important to note that most banks require an EIN to open a business bank account which is key to keeping tabs on the company’s finances.
Step 5: Pay Required Taxes
All LLCs’ have a tax obligation to the California Franchise Tax Board to pay an annual franchise tax of $800. This is mandatory whether the LLC is conducting business or not. The California Franchise Tax Board provides a Limited Liability Tax Booklet with all necessary forms included on their website.
California is not one of the cheapest states when it comes to taxes, but the large population and economy make it one of the top states to start an LLC. After forming an LLC, it is always advisable to protect the business by ensuring you apply for a business license if needed, apply for business insurance, and secure business credit.