HOW TO START AN LLC IN CALIFORNIA
If you’re ready to Start an LLC in California, the State requires some specific procedures and has some unique ongoing requirements. Follow the simple steps outlined below to walk through the process.
Naming the LLC
- Your business name is your brand and will become a silent ambassador for your company. For marketing purposes, your LLC name should represent what your business does or be a brandable name. For California business registration, your LLC name needs to be unique and needs to follow some particular guidelines.
Naming Guidelines in California
- The words Limited Liability Company or an acceptable abbreviation must appear in the name of your business entity. Acceptable abbreviations are L.L.C. or LLC.
- The use of some words is restricted. For example, the word, “Bank” or any variation of its spelling will require additional paperwork and may not be approved unless your business is a bank.
- Some words are also prohibited. Words that may confuse your LLC name with a state or federal agency will not be allowed. You also cannot use the words Corporation or Incorporated, or their abbreviations in the name of your LLC.
- More detailed information on naming guidelines is available through a comprehensive document provided by the state.
Is the Name of the LLC Available in California?
- LLC names that are the same or deceptively similar to existing businesses will not be allowed. Each business in California must have a name that is distinguishable from other existing businesses. This rule is not just a requirement for the State of California, but also wise for your business. For legal and marketing reasons, you want a distinct identity for your LLC.
- California provides a portal to search LLC name availability. Be aware that this search portal is a useful tool, but does not guarantee name availability nor approval by the State.
Is the Matching Domain Name Available?
- At some point, or perhaps right away, you may want to develop a website for your business to educate customers about your products or services or to offer some online functionality for your clients. You’ll want a domain name that closely matches your business or industry. If the specific domain name that you want for your LLC is not available, most domain registrars will provide suggestions for similar names that are available.
- Your domain name will become part of your brand, so try to avoid names with obscure numbers in them, names that are too long, or names that are just difficult to remember.
- If no suitable name for a domain is found, now would be the best time to consider other options for the business name.
- While checking domain name availability, you’ll also want to check the availability of a matching name on popular social networks. Having the same identity everywhere that your business interacts with customers online is helpful for branding and prevents confusion.
Selecting a Registered / Statutory Agent
- The state of California requires that every LLC have a Registered Agent, which is a person or business selected to receive and send official papers on behalf of your LLC. This might include state filings for the LLC or communications from the state. Your Registered Agent must be a resident of California or business authorized by the State of California. If you reside in California, you may choose to elect yourself, or any other person within your company provided that they are a California resident. Incfile offers FREE Registered Agent service for the first year with every package or as a $0 standalone service.
Filing Articles of Organization
- California requires that you file Articles of Organization for your LLC. Your Article of Organization will contain your LLC’s name and address, type of management for LLC, and contact information. Download the PDF here. There is a $70 fee to file your Articles of Organization. For an additional fee of $15, expedited service is available for forms dropped off in person at authorized locations.
Creating an Operating Agreement
- An Operating Agreement sets the rules of your LLC. This legal document details the ownership of the LLC and its operating guidelines. If forming a multi-member LLC, you may wish to consult an attorney or trusted source to draft your Operating Agreement because its language can create legally binding obligations. This agreement may be written or oral.
Does California require an Operating Agreement to form an LLC?
- California does require that an LLC have an Operating Agreement but does not require that you file the agreement with the state. However, the Operating Agreement and any changes or amendments to it must be kept with the LLC’s other business records.
RUNNING YOUR BUSINESS
Getting Your EIN
- An EIN is an employee identification number, issued by the Internal Revenue service. Sometimes it is also called a Federal Tax Identification Number. It’s a unique number issued to each business. You’ll need an EIN to open a business bank account; file Federal and State Taxes; and hire employees.
- Before you get your EIN make sure your new business has been properly formed before applying and be wary of paid sites. EINs are free direct from the IRS.
- The easiest way is to apply online for an EIN. Note, the IRS website has office hours, and is only available Monday through Friday, 7am to 10pm. Yes, we also agree this is one of the most ridiculous things we’ve ever seen. You can call 1-800-829-4933, between 7am to 7pm of your time zone, Monday to Friday. Snail mail: You can download the form and mail it in.
Keeping Business and Personal Accounts Separate
- Get a business bank account for your business. This will help you protect your personal assets from potential creditors and lawsuits, and will also make life a lot easier come tax time.
- Get a business credit or debit card. This will help you keep your expenses separate and easier to track.
- To keep the books up to date, you have multiple options. If you don’t wish to do the bookkeeping yourself, bookkeeping services can be provided by an accounting firm or one of many online services.
Software for Accounting
- Software and cloud solutions simplify accounting tasks, import data from your bank and other financial sources, and can even perform simple inventory management.
- Business owners may or may not be skilled at double entry accounting, so in many cases, it’s best to have accounting professionals involved at some point of the process. If you’ll be using an Accountant or Enrolled Agent to file taxes and prepare some of your reporting, their system may support the import of your data from one or more of these software options.
- If possible, have a conversation with your accountant or service provider to find out if one software or cloud solution will work better than another in regard to compatibility.
Filing California LLC Taxes
Will Your LLC Have Employees?
- If your California LLC hires employees, or if you or another member of the LLC will be an employee of the LLC, you will need to Register for Payroll Taxes with the State. Employers with 10 or more employees are required to file employment tax returns electronically.
Will Your LLC be Selling Taxable Products or Services?
- Businesses selling taxable goods or services will need a California Seller’s Permit which authorizes the collection of Sales Tax for remittance to the State.
- Most businesses should register for a Seller’s Permit even if the business will not be selling anything taxable immediately.
- California imposes a Use Tax as well as a Sales tax. Items such as equipment purchased online or out-of-state for use in California are subject to Use Tax.
- Some regions and municipalities have a different tax rate for a specific district, which differs from the State-wide rate. The California Board of Equalization provides an online tool to look up Sales and Use Tax rates by address.
How to Register for Sales and Use Tax in California
- You can apply for a California Seller’s Permit online or at a local California State Board of Equalization office.
- Filing due dates for Sale and Use Taxes are available on the California Board of Equalization Website.
California Franchise Tax
- LLCs in California must pay an annual Franchise Tax regardless of business activity, meaning even those LLCs without any business activity are responsible for payment.
- The Franchise Tax is $800 for businesses with revenue under $250,000. Businesses with sales above $250,000 will pay a higher tax amount based on revenue tiers. You can pay for the California Franchise tax online.
Get the Right Licenses and Permits
- For many reasons, including consumer and employee safety, businesses must have permits or licenses for certain types of business activity.
- For example, Insurance Sales Producers must be licensed by the State and even some simple, service-related tasks require a license. Other business activities may require licensing at a Federal level.
- When in doubt, invest the time in research. Operating your business without the proper permitting or licensing can create personal liability and could lead to a closure of your business by governing bodies if you are not in compliance.
- Be aware that licenses or permits typically will require a fee, and perhaps specialized training. Where fees or training are required for licensing, these expenditures will likely be recurring annual or biannual costs to your business.
- The Small Business Administration provides a guide that details which business activities require federal authorization. As a rule of thumb, Federal regulations center on industries and activities that affect the public at large such as aviation, transport of certain cargo, and broadcasting.
- The State of California provides a guide to State and Local licensing and permitting requirements. However, it’s recommended that you verify requirements at the Local level because they may have changed or may require clarification.
- You local Chamber of Commerce can provide guidance regarding which permits or procedures, if any, are required to operate your LLC. For example, some municipalities may require fingerprinting and background checks before issuing a business permit. Rules will vary by municipality and may not be related to State or Federal requirements.
Getting Insurance for your LLC
Workers’ Compensation Insurance in California
- Workers’ compensation insurance is required for employers in California and provides basic benefits for workers. These benefits may include medical care, temporary or permanent disability benefits, and death benefits.
- Required coverage can be purchased through insurance brokers or through the State if you are unable to obtain insurance privately. Workers’ Compensation Insurance purchased through the State is facilitated by the State Compensation Insurance Fund.
- In select cases, high-net-worth companies may self-insure, subject to State approval.
- California provides an online resource for Frequently Asked Questions by employers.
General Liability Insurance
- General liability insurance may be required by landlords, vendors, or lenders, but is not required by the State. Even when not specifically required, liability coverage protects your business and the investments you’ve made in time, effort, and capital.
- If your LLC is sued, general liability insurance covers the most common risks. Specialized coverage, such as Errors and Ommissions coverage may also be a prudent purchase for some businesses.
- Have a conversation with an insurance provider to understand what is or is not covered by a general liability policy. Discuss your potential exposures. Some additional risks may be covered by purchasing riders or added policies.
- If your business will be hiring employees, you will need to follow Federal and State hiring guidelines. These will include meeting eligibility requirements and following non-discriminatory practices. Additionally, you must be in compliance with labor laws and State minimum wage requirements for new or existing employees.
General Employee Compliance
- Eligibility – New hires need to complete a Federal I-9 form and provide documentation that shows that they are eligible for work in the US
- Department of Labor – Employers must also comply with the Fair Labor Standards Act. Notices regarding employee rights must be posted conspicuously.
- OSHA Compliance – the Occupational Safety and Health Administration governs workplace safety. Depending on your industry, you may need to invest in additional safety measures or follow specialized procedures for OSHA compliance.
California Employee Compliance
- Your LLC must adhere to California labor laws. The State provides a resource for Frequently Asked Questions which is a useful starting point to understanding your obligations as an employer.
- You may wish to draft an employee handbook that helps both management and employees to understand the rights, obligations, and terms or employment. This step can limit miscommunications and reduce exposure to lawsuits.
KEEPING YOUR LLC COMPLIANT
Annual Reporting Obligations
- LLCs in California are required to submit a Statement of Information (Form LLC-12) within 90 days of formation and again on a biennial schedule which is every two years following the initial filing. The report is due within a six-month window based on the original filing date as detailed on the linked form. Filing the report costs $20.
- The California Franchise Tax must be paid annually. The fee for the Franchise Tax is $800 annually for LLCs with revenue up to $250,000. LLCs with income above $250,000 will pay additional fees based on tiers.
Late Filings & Penalties
- California charges a $250 fee for late filing of the Statement of Information.
- Late payment of the California Franchise Tax for LLCs will be a minimum of 10% of the tax due
FILING A FOREIGN LLC IN CALIFORNIA
- A Foreign LLC is simply an LLC from another state. LLCs formed outside of California will need to register as a Foreign LLC in California to transact business in the State.
- Failure to register as a Foreign LLC if required can result in significant fines or penalties. The filing fee to register a Foreign LLC in California is $70.
- There is also an option for expedited service if the form is delivered in person at a state-authorized location. The cost for expedited service is $15. The filing form can be downloaded from the State.
- Laws and regulations for business transacted in California or for employees hired in California follow the same guidelines detailed above.
ABOUT HOW TO START AN LLC
I'm an entrepreneur myself. When talking to others who want to start their own business, they often get wrapped up in the nitty gritty of paperwork and forming the company. They forget that what really matters is customers, sales, and profit. That's why I created How to Start an LLC.org: a simple resource and guide so you can spend less time on forming your company, and more time on building it.
My lawyers want me to remind you that I'm not a lawyer and that I'm completely unqualified to offer legal advice. This site is meant to serve as a reference for you on your journey. If you have questions or concerns, please contact a qualified lawyer (or accountant) to help you. Also, as a general rule, never take random legal advice on the internet.