How to Start an LLC in California

Creating an LLC in California can be a good idea. But how do you start one? Read on to learn more about California's LLC formation process.

Starting an LLC in California can offer many benefits to your business. But the process tends to differ from state to state. That's why knowing where and how to begin can be challenging.

So how do you start an LLC in California?

Keep reading to discover how starting an LLC works in the Golden State.

Guide to Starting an LLC in California

Whether you do it yourself or hire someone else, follow these 6 steps to start an LLC in California:

1. Name Your LLC

You need to register a business name when starting an LLC. Your chosen name must follow the state's guidelines.

In California, the guidelines you have to follow for LLC business names are as follows:

• Unique to your business - No other company in the state should've registered the same business name as yours. You can check if the one you want is available by searching California's business name database before filing the paperwork.

• Cannot be confused with another business - It shouldn't be similar to another business' name in any way. You also can't use suffixes, definite articles, or symbols to differentiate your business name from another company's.

• Must indicate it's an LLC - Your chosen business name should include terms like "LLC" or "Limited Liability Company."

• Shouldn't be similar to a government agency or organization's name - Implying an association with any government agency is also prohibited.

• Must not promote illegal acts or crimes - Using obscene words/profanity in your business name is also forbidden. It also shouldn't mislead the public, whether intentionally or not.

• Cannot contain words like "bank," "trust," or "insurance" - These are reserved for specific institutions.

DBA Names in California
You can get a DBA if you want to use a different name for your business than what's registered. You can explore what else DBAs offer in this article.

In California, you need to register your DBA name within 40 days of starting your business.^[2]

DBA registration is valid for 5 years in California. The filing fees vary from area to area. Make sure you double-check with the county office to learn how much you have to pay.

Aside from that, California requires all LLCs operating under a DBA to announce it in a local publication within 30 days of their DBA registration's approval. Your advertisement should run once a week for 4 weeks or 1 month.

2. Assign a Registered Agent

Like in other states, all California LLCs must have a registered agent on file when they submit their formation documents. Otherwise, your application will be rejected.

California doesn't have special requirements to become a registered agent. Anyone can be a registered agent as long as they meet the following criteria:

• Should be 18 years old or above
  
• Must be a California resident with a physical street address in the state (no P.O. Boxes or virtual addresses allowed)
  
• Should be an individual or a qualified agency (your LLC can't serve as its own agent)
  
• Must always be available during regular business hours (8AM to 5PM, Mondays to Fridays) to receive legal documents

You generally have 2 options: be your own registered agent or assign/hire someone else. Most advise against being your own agent. You can learn more about the pros and cons of being your own registered agent here.

Hiring a third-party registered agent service can cost $100 to $300 per year, depending on the company's specific rates. Some companies offer their registered agent services for free (usually just the first year) when you use them to start your LLC.

3. File Your Articles of Organization

To start an LLC in California, you need to file your Articles of Organization with the Secretary of State's office. You need to use Form LLC-1 for domestic LLCs and Form LLC-5 for foreign LLCs.

You'll need to include your:

• Name and address
  
• LLC's name and address
  
• Registered agent's name and address
  
• Management structure

These forms already contain the necessary details; you just have to fill them up. But you can include additional information if you want and send it as an attachment.

You can submit the Articles of Organization in 3 ways: online, via mail, or in person. Filing online is typically the easiest and fastest way of the three.

As for the fees, California has a state filing fee of $70. But if you need a certified copy of your formation documents, you have to pay an additional $5.^[3]

You also need to pay an extra $15 as a handling fee if you drop off the paperwork in person.^[4] In-person drop-offs should be done during regular business hours (Monday to Friday, 8 AM to 5 PM).

Once you submit your Articles of Organization, you just have to wait until your application is approved.

4. Apply for an EIN

After your LLC is approved, you need to apply for an employer identification number (EIN). You'll need an EIN when paying business taxes since LLCs are considered separate legal entities.

The only exception is single-member LLCs. Owners can still use their Social Security number (SSN) as their business' EIN. But it's still generally better to apply for a separate EIN for your company.

You can apply for an EIN directly with the IRS. And you can do so in 4 ways: online, by fax, via mail, or through phone calls (international applicants only). Online applications are the fastest because you'll get your EIN immediately after the session if you're eligible.

Applying for an EIN through the IRS is completely free. Going for a third-party service can cost you extra.

5. Create an Operating Agreement

California is one of the few states where an operating agreement is necessary for LLCs. You don't need to file it with the state, but you should have one.

Operating agreements typically contain the following information:

• Management structure (member or manager managed)
  
• Members' information (total number, rights, duties, etc.)
  
• Registered agent's information
  
• How profits and losses are distributed
  
• How handling new and outgoing members will work
  
• Clauses regarding indemnification and liabilities

An operating agreement serves as a company's guidelines. It determines how your LLC will be run and operate. It can come in handy when handling conflicts within the business.

6. File the Statement of Information

California requires all LLCs formed in the state to file a Statement of Information (using Form LLC-12) with the Secretary of State's office within 90 days of their approval date.

This information includes:

• Your name and address
  
• California Secretary of State entity number
  
• Your LLC's name and address
  
• Managers' or members' name and address
  
• Your registered agent's name and address
  
• Type of business
  
• Chief Executive Officer (if elected or appointed)

After the initial filing, you'll need to file it every two years on your LLC's registration anniversary to comply with the state's requirements.

You can file your Statement of Information online, via mail, or in person. It costs $20 per filing, with an additional $15 handling fee for in-person submissions. You can also request a certified copy for your company's records, which costs an extra $5.

California offers a 60-day grace period to businesses that can't file on or before the deadline. After this, you'll be charged a $250 penalty fee if you still fail to file before the grace period ends.

What to Do After Creating a California LLC

You have to do a few other things after the state approves your LLC's creation, namely:

Get the necessary business licenses and permits.
Like most states, you don't need a license or permit to start an LLC in California. But you may need one to actually conduct business within the state.

The specific licenses and permits you need will depend on your business type, the industry it's in, and its location.

If you're unsure what licenses or permits you need, you can check using California's handy online tool. Here, you can search for the specific licenses/permits you need and where to get them.

Open a business bank account.
LLCs are separate entities from their owners. So you need a separate business bank account. That way, you maintain a clear line between your personal and business finances.

A dedicated business account makes it easier to keep track of your company expenses. It makes tax season more manageable and allows you to establish a separate credit score for your business.

You can check this article to learn more about the best business bank accounts for LLCs.

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Pay state business taxes.
As an LLC, your company pays its income taxes as part of the members' individual tax returns. But if you choose a C-corporation tax classification, you'll need to pay income taxes twice - on individual and corporate levels.

Aside from income taxes, California LLCs also have to pay two different taxes:

• Annual franchise tax
  
• Estimated LLC income fees (for companies making more than $250k/yr)

The annual franchise tax costs $800 annually in California. Meanwhile, the estimated LLC income fees will depend on your LLC's income range. You can check the exact rates here.

If you have employees or sell goods and services, your California LLC might also need to pay employment, sales, and use taxes.

How Much Does it Cost to Start an LLC in California?

The startup costs to open an LLC in California can be just $90 - $200+. But after that, the ongoing costs can be upwards of $1,000 a year.

You mostly have to worry about the mandatory costs, like:

• State filing fee ($70 one time fee)
  
• Statement of Information filing fee ($20 every 2 years)
  
• Business licenses/permits ($50 to $100+, depending on the location)
  
• LLC state taxes (~$800 to $11k+ per year)
  
• Registered agent services (~$100 to $300 per year)

Hiring formation services or lawyers to help you create an LLC in California can add to the overall cost.

Why Start an LLC in California

There are many reasons it's a good idea to turn your California business into an LLC. Here are some of them:

Personal Liability Protection
In California, claimants of your LLC's liabilities can't hold you or other members responsible for the company's debts and liabilities.

After all, an LLC is considered a separate legal entity, so its assets differ from the owner's. So your properties (e.g., house, car, jewelry, etc.) will be safe even if your business goes bankrupt or incurs a massive debt. You don't have to worry about losing everything.

But this protection doesn't apply if you or other members commit crimes or other illegal activities.

Flexible Tax Options
LLCs enjoy flexible taxation because they can choose their tax classification. But they're taxed as sole proprietorships by default. So even if they're separate legal entities, they only have to pay taxes as part of the members' individual income tax returns.

If you're a small business owner, this can help reduce expenses, especially since California imposes other taxes on LLCs (e.g., annual franchise taxes and estimated LLC income fees).

Increased Credibility
California offers plenty of networking opportunities to business owners. But credibility is critical if you want to earn their trust.

Starting an LLC can boost your company's credibility because it'll formalize its identity as a business. This is great if you want your business to be more attractive to potential clients and investors.

Improved credibility can also open up other doors for your business, such as access to better financing options.

How to Create a California LLC

If you want to start an LLC in California, you can generally do it in 3 ways:

Do It Yourself
This is the least expensive option since you only have to pay the required fees, like the state filing fee. This is best if you're already familiar with how starting an LLC in California works.

But doing it yourself requires more time and effort since you need to do everything yourself.

Use a Formation Service
A formation service is generally the most convenient option since they'll handle all aspects of the process themselves. You can just sit back and wait until the state approves your application.

The only downside is the cost, especially if you're getting add-ons like registered agent services or annual report filing.

Hire a Lawyer
You can also hire a lawyer to help you start an LLC. The main advantage of this option is their extensive knowledge and expertise. This is best if you need more in-depth legal advice or personalized services.

Of course, this is generally the most expensive way of the three since the cost will depend on your chosen lawyer's rates.

Bottom Line

Starting an LLC in California can be a good idea, especially if you want additional protection for yourself and your business.

But it's still best to familiarize yourself with the formation process in California before you file your paperwork. Doing so will help you avoid wasting valuable time, effort, and resources.

References