In California, an LLC is one of the most preferred business structures because it offers several unique perks and protections. It’s key benefits include limited liabilities and ‘pass-through’ taxation which help protect members’ personal assets while aiding efficient business operations.
The provisions for the formation and operation of an LLC in California are outlined in the Corporations Code; specifically the California Revised Uniform Limited Liability Company Act (RULLCA). Per =Title 2.6, Section 17701.01, the process of forming an LLC in California can be summarized in 5 steps:
- Step 1: Naming The LLC
- Step 2: Appointing a California LLC Registered Agent
- Step 3: Satisfy California LLC Filing Requirements
- California LLC Articles of Organization
- California LLC Operating Agreement
- California LLC Statement of Information
- Step 4: Apply for The LLC
- Filing the LLC via mail or in-person
- Creating an LLC Online in California
- Step 5: Get an EIN Number
- Step 6: Register for State and Local Taxes
- Maintain Compliance with Annual Filing Requirements
California’s Secretary of State is tasked with overseeing the process of LLC filing and registration in the state. With over 4 million businesses under its purview, the office processes thousands of LLC formation queries each year. Its Business Programs Division also maintains records related to LLCs. Using the California Business Search tool, individuals can access free PDF copies of over 17 million imaged business entity documents (including LLC files) from the SOS website.
What Is an LLC?
A limited liability company (LLC) is a business entity comprising one or more members owning a certain company share. In California, an LLC blends partnership and corporate structures. An LLC can be formed to run a business or to hold assets. The owners of an LLC are called members and are protected against personal liabilities. An LLC with only one member is considered a disregarded entity and referred to as a single-member limited liability company (SMLLC). However, an LLC with more than one owner is a partnership. It is referred to as a limited liability partnership, limited liability limited partnership, or series limited liability company. Lastly, an LLC can also be taxed as a corporation.
California Revised Uniform Limited Liability Company Act authorizes the formation of LLCs in the state. The Act permits foreign LLCs to do business in California. Only California residents doing business in the state and registered with the SOS are eligible to form LLCs. In contrast, foreign and non-registered businesses can only be eligible to form LLCs in California if they are treated as a partnership, have California source income, and do not do business in California. Per Section 17701.08 of the LLC Act, the name of a limited liability company must have the words “limited liability company” or abbreviations such as “LLC” or “L.L.C.” The word “Limited” and “company” can be abbreviated as “Ltd.” and “Co.” respectively. The business name should not contain words like corporation, trustee, inc., bank, corp., incorporated, trust, or any words suggesting that the LLC issues insurance policies (like insurer or insurance company).
Step 1: California LLC Name Search
Before filing an LLC application, applicants are advised to perform a California LLC name search. This is to ensure that their selected name is unique and compliant with California’s LLC naming requirements.
California’s naming requirements are as follows:
- The name must include “LLC,” “L.L.C.,” “Limited Liability Company,” “Limited Liability Co.,” or “Ltd. Liability Company”
- It must be unique and distinguishable from other existing business names in California
- The name must not include restricted words or phrases that require special approval
To perform a California LLC name search, use the Business Search feature of the California Secretary of State’s website. In addition to the name search, inquirers may search the United States Patent and Trademark Office (USPTO) website to ensure the desired name doesn’t infringe on any registered trademarks.
If the name is available and compliant with the state’s requirements, the applicant can opt to reserve it for up to 60 days by filing a “Name Reservation Request” form with the California Secretary of State
Step 2: Choosing an LLC Registered Agent in California
Section 17701.13 of the California Corporations Code requires all LLCs to designate and maintain a registered agent in the state. Also known as an agent for service of process, a registered agent receives legal documents and notices on behalf of it’s LLC.
An LLC registered agent in California should:
- Have a physical street address in California (a P.O. Box or mailbox service is not sufficient)
- Be a resident of California
- If the registered agent is a business entity, it must be authorized to do business in California and not the LLC itself.
- Be available during normal business hours to receive service of process and other legal documents.
To find a company’s registered agent in California, inquirers can search the California Secretary of State’s business search database. After entering the company name or entity number, inquirers will be furnished with information about the company, including the name and address of its registered agent.
How Do I Change My Registered Agent for My LLC in California?
To change a registered agent in California, business owners may file an updated Statement of Information with the California Secretary of State. The required form, LLC-12, must be completed with the new agent’s information and address, as well as the LLC name and entity number. The form, along with the applicable filing fee may be submitted in person, online or via mail to:
California Secretary of State
P.O. Box 944228
Sacramento, CA 94244-2280
Step 3: LLC Filing Requirements in California
To file for or form an LLC, the company must meet one or all of the following requirements:
- Be doing business in California.
- Be registered with the California Secretary of State (SOS).
If the LLC is foreign and non-registered, it must meet all of the following:
- Treated as a partnership
- Has California source income
- Not doing business in California
LLC Articles of Organization in California
California Articles of Organization (Form LLC-1) is a legal document required to establish an LLC in California. It is typically filed with the Secretary of State and they provide basic information about the LLC, its purpose, management structure and registered agent. In addition to the aforementioned, the form must specify the organizer of the LLC and whether the LLC will be managed by owners or appointed managers.
LLC Operating Agreement in California
A California LLC Operating Agreement outlines the operating procedures for an LLC in the state. It features details regarding the LLC’s management and ownership structure, establishes profit-sharing and loss allocations and outlines the process for adding or removing members. While not required by California state law, an LLC operating agreement is recommended to ensure a clear understanding of the LLC’s operations among its members.
California LLC Statement of Information
An LLC statement of information is an Annual Report or Biennial statement that serves to update the state with the latest information about an LLC. It aids the government in effectively regulating businesses and maintaining public records for taxation and legal compliance.
Do You Need a California Address for LLC?
Yes, California LLCs are typically required to have a principal office address within the state. This address must be listed on the Articles of Organization filed with the Secretary of State. However, where the business does not have a physical location, there are services that can provide a California address for the LLC. These services typically include a registered agent service and a virtual office or mailbox service that can provide an address for the LLC’s legal requirements.
How To Get a Virtual Address for LLC in California
There are several considerations to evaluate when choosing a virtual address for LLC in California. Some virtual address providers often include mail handling services such as mail forwarding, scanning, and package reception. Some also offer meeting room rentals, phone answering services, and coworking spaces that can be a cost effective solution for selected businesses.
After researching virtual mailbox providers, the LLC owner may compare plans and pricing and then sign up for the most suitable plan. It is worth noting that each LLC must have a registered agent with a physical street address in the state, and a virtual address cannot be used for this purpose. However, a virtual address can be used as a replacement for a principal office address.
Step 4: How To File for an LLC in California
Individuals can file for an LLC by mail, or in person at the California Secretary of State (SOS) office.
Mail filers must complete the Articles of Organization – LLC-1 form and Statement of Information (Form LLC-12) and send them to the SOS office. No processing fee is required, but individuals requesting a certified copy of the document must pay $5. Fees should be paid via checks or money orders. All mail should be addressed as follows:
California Secretary of State
Document Filing Support
Po Box 944228
Sacramento CA 94244-2280
In-person submissions should be made during SOS business hours. Filers are required to pay $15 for the handling fee. They would be giving the LLC-1 form to fill out at the office. The SOS office is located at:
California Secretary Of State
1500 11th Street
Sacramento CA 95814
Note that every California and registered foreign LLC must file a Statement of Information with the SOS within 90 days of formation and every 2 years after that during a specific 6-month filing period based on the formation date. In addition to filing the Articles of Incorporation and Statement of Information forms, an LLC must have operating agreements among its members. The operating agreement is not filed with the SOS but is filed at the office where the LLC’s records are kept.
How To Create an LLC Online in California
To form an LLC online in California applicants may:
- Go to the SOS bizfile Online website
- Click the Login button in the upper right corner of the page
- Click Sign Up near the bottom of the page when the Okta screen appears
- Fill in the appropriate information in the fields and click “Register.” For future logins, put the email address as the username.
- Log in to the portal with the username and password.
- After logging into the bizfile Online portal, ensure the Business tab is selected at the top and click on “Forms” on the left navigation pane.
- Select “Articles of Organization – CA LLC,” and a pop-up window describing the form and the fee will appear. Select “File Online.”
- Each section of the workflow is listed on the left bar. A click on any of the links leads to a specific workflow section.
- The first page of every workflow is the Privacy Warning / Terms and Conditions of Use. Users must scroll to the bottom of the text, check the box, and select the Next Step button.
- A click on the Next Step button leads to the “Submitter Information” page, where the submitter’s contact details will be required. This section is optional.
- The next section is the “Entity Name.” Users can select “Yes” if a previously reserved entity name will be used or “No” to enter the entity name to be used. If Yes is selected, the user’s previously reserved names that are active will appear in a dropdown box.
- Click on the “Save Draft” button located in the lower-left corner of the page to save work. Go to the “My Business Work Queue” and select the “Resume Editing” button (pencil icon) under “Actions” to continue filings.
- Go to the “Business Address” section to fill out the principal and mailing address of the LLC. Click the Next Step button.
- The next step is to fill in the “Agent for Service of Process” section. Select an “Agent Type,” which could be a California resident over the age of 18 or a California Registered 1505 Corporate Agent.
- Select a filing date option which could be a current date or future file date.
- If additional information is required, upload a PDF attachment of size 8 1/2 x 11, and click Next Step.
- Review previous submissions and select one or multiple signatures. If the user selects one signature, a window opens to add the signature and date. However, users who select the multiple signatures will be guided to the next page of the document (Processing Fees) to complete. They will not “send for signatures” until they reach the “File Document or Send for Signatures” page.
- At the “Send for Signatures” page, click the “Add Signer(s)” button to type in the signer(s) name and email address.
- The next page is “Processing Fees.” The fee is $70, payable by Visa or Mastercard. The user can also select a request for a Certified Copy, which costs $5 per copy as part of their filing. Select a service option: Standard, 24-Hour Expedite (costs $350 plus processing fees), or Same Day Expedite ($750 plus processing fees)
- Click the Preview Form button to download and review the current document in PDF Format.
In addition to filing the Articles of Incorporation, online applicants are required to file a Statement of Information form. To do this:
- Log in to the SOS bizfile Online website.
- Go to “My Records” in the left navigation pane and select “My Business Records.”
- Select the Business tab at the top.
- Click on the correct online entity record to find the entity details. Then confirm that it is the correct entity.
- Click on the top middle button – File Statement of Information.
- Click on the “Add” button in front of the Manager(s) or Member(s) tab to add the name and address of a manager or member.
- Fill in the “Type of Business” section by describing the service conducted by the entity in at most 50 characters.
- Users can choose to either opt-in for email notifications or not by checking the appropriate box.
- The submitter must electronically sign and affirm that all information provided is correct and true and that they are authorized by California law to sign.
- Proceed to the “File Document” tab, select “File Online,” and make the necessary payments.
Can You Have Multiple Businesses Under One LLC?
Yes. The California Business and Professions Code allows any entity including an LLC to register fictitious business names (DBAs) and conduct business under multiple names without forming separate legal entities for each business. However, depending on the nature of the business, separate business licenses and permits may be required for each one. In addition, it is important to maintain separate financial records for each business, and consider the liability implications of this arrangement since the entire LLC and all its assets is at risk following a debt or lawsuit.
How Long Does It Take To Set Up an LLC in California?
In California, the processing time for an LLC varies with the method of application. For online filing through the California Secretary of State’s Business Portal, the processing time is 1-2 business days. In-mail queries are processed between 5-15 business days, but in-person or over-the-counter filings may be as quick as the same day or up to a few business days. However, these timeframes are subject to change.
Step 5: How To Get an EIN for LLC in California
To get an EIN for LLC in California, applicants may query the IRS online or via mail.
For online applications, using the IRS EIN Assistant to submit the required information. Once the applicant is complete, the EIN will be processed and issued immediately.
To get an EIN via mail or fax, download and complete the Form SS-4 and submit to:
Internal Revenue Service
Attn: EIN Operation
Cincinnati, OH 45999
For persons with no legal residence, place of business, or principal office in the U.S submissions may be made to:
Internal Revenue Service
Attn: EIN International Operation
Cincinnati, OH 45999
Fax: 855-215-1627 (within the U.S.)
Fax: 304-707-9471 (outside the U.S.)
Step 6: Do LLCs Pay Taxes in California?
Yes, LLCs pay taxes in California. They are subject to two types of taxes; the annual LLC tax and the annual LLC fee. However, tax laws and regulations are frequently modified so inquirers may consult the California Franchise Tax Board (FTB) for the most up to date information on the tax expectations of their organization.
How Are LLCs Taxed in California?
The Franchise Tax Board (FTB) requires all LLCs conducting business in California to pay their first-year annual taxes every 15th day of the 4th month from the formation date. Subsequent annual tax payments must be made on the 15th day of the 4th month of the taxable year.
Annual taxes are a minimum of $800, and are also referred to as the “Franchise Tax.” This tax is due even if the LLC has no business activity or does not generate any income.
In addition to the annual LLC tax, California imposes an annual fee based on the LLC’s total income derived from, or attributable to, California sources. This fee is called the “Annual LLC Fee” and applies to LLCs that generate a certain amount of income in California. The fee structure is as follows:
- $0 if the total income is $250,000 or less
- $900 if the total income is between $250,001 and $500,000
- $2,500 if the total income is between $500,001 and $1,000,000
- $6,000 if the total income is between $1,000,001 and $5,000,000
- $11,790 if the total income is $5,000,001 or more
California LLCs can be taxed differently depending on how they are structured. Single-member LLCs are usually treated as sole proprietorships for tax purposes, while multi-member LLCs are treated as partnerships. LLCs can also elect to be taxed as corporations. Each taxation structure has different implications for taxes and filing requirements.
Tax Benefits of An LLC in California
There are several tax benefits accrued to LLC organizations in California, they include:
- Pass-through taxation: Like other states, California LLCs enjoy pass-through taxation, which means profits are not taxed at the company level but instead pass through to the owners’ personal tax returns. Pass-through taxation helps to avoid double taxation, which is a common issue with C-corporations.
- Flexibility in income allocation: LLCs can allocate income and losses among members in different proportions than their ownership percentages, as long as it is clearly outlined in the operating agreement. This flexibility can help members optimize their tax situations.
- Self-employment tax: LLC owners may be able to save on self-employment taxes. Depending on the structure of the LLC and the member’s involvement in the business, some members may qualify as limited partners and avoid paying self-employment tax on their share of the profits.
Maintaining Compliance With Annual Filing Requirements in California
After formation, LLCs will be required to maintaining several ongoing requirements including:
- Pay the required $800 annual tax on the 15th day of the 4th month after the current tax year begins. File the Limited Liability Company Tax Voucher (FTB 3522) with the Franchise Tax Board.
- Pay the LLC fee on the 15th day of the 6th month after the current tax year begins. File the Estimated Fee for LLCs (FTB 3536) form with the Franchise Tax Board.
- File the Limited Liability Company Return of Income (Form 568) at the appropriate time. An LLC that files an extension should use the Payment for Automatic Extension for LLCs form (FTB 3537). Review the Limited Liability Company Tax Booklet (568 Booklet) for additional information.
- LLCs with income or loss inside and outside California can use the Apportionment and Allocation of Income (Schedule R) form to determine California source income. Review the Instructions for Schedule R for further information.
Do You Have To Renew LLC Every Year in California?
No. California business owners do not have to renew LLC yearly. An LLC does not have an expiration date or predetermined lifespan as long as it remains in good standing with the state. To maintain their active status, business owners must:
- File their statement of information biennially
- Pay their annual franchise tax
- Comply with both California and federal regulations
Failure to meet these requirements, may result in penalties and ultimately lead to the suspension or dissolution of the LLC.
How Much Does It Cost To Start an LLC in California
California law requires individuals whose LLC income exceeds $250,000 to pay a fee. All fees must be paid by the 15th day of the 6th month of the current tax year. Individuals who refuse to pay the required fees by the original return due date will be subject to penalties and interest. Use the form FTB 3536 to remit the estimated fee payment. Below is the fee expected from LLCs based on their income:
- LLCs with a total income between $250,000 and $499,999 pay $900
- LLCs with a total income between $500,000 and $999,999 pay $2,500
- LLCs with a total income between $1,000,000 and $4,999,999 pay $6,000
- LLCs with a total income worth $5,000,000 or more pay $11,790
LLCs classified as partnerships or disregarded entities are subject to an $800 annual tax. This applies to LLCs operating in California or those that have submitted their Articles of Organization (LLC-1) or Application for Registration as a Foreign Limited Liability Company (LLC-5). LLCs registered in California are required to pay the annual tax even if they are not actively conducting business interactions in California (R&TC Section 17941(b)(1)). However, Assembly Bill 85 provides a first-year annual tax exemption for LLCs registering with the SOS between January 1, 2021, and December 31, 2023. LLCs not conducting any business in California during the taxable year and with 15 days or less taxable year (R&TC 17946) are not subject to the annual tax. Individuals must file and pay the annual tax by the 15th day of the 4th month of the LLC’s tax year. All payments alongside the completed FTB 3522 form should be sent to:
Franchise Tax Board
Po Box 942857
Sacramento CA 94257-0631
Can You Form an LLC for Free in California?
No. However, while it is not possible to form an LLC for free in California, applicants can minimize cost by handling part of the creation process.
How To Start an LLC in California at Minimal Cost
Generally, LLCs are expected to pay a filing fee, a total income fee, and an $800 annual tax. However, the $70 online filing fee has been waived for applications submitted between July 1, 2022, and June 30, 2023. Also, mail applicants do not need to pay any filing fee except they request certified copies of their registration, which costs $5. LLCs can complete the filing process for less by submitting applications in person at the SOS. Only a $15 handling fee is required.
LLCs with income up to $250,000 are not required to pay any LLC fees. There is also a first-year annual tax exemption for LLCs that register with the SOS between January 1, 2021, and December 31, 2023. LLCs not conducting business in California during the taxable year and their taxable year is up to or less than 15 days ( R&TC 17946) are exempted from annual tax..
What Businesses Should Consider Forming an LLC in California?
LLCs are especially suitable for small and medium-sized businesses, as they provide a simpler structure and lower administrative requirements compared to corporations. For businesses with multiple owners, an LLC also allows for flexible ownership and management structures. Ultimately, an LLC can be formed by almost any type of business, as long as it is legal and operates within the regulations of the state where it is being formed..
What Are the Benefits of an LLC in California
The benefits of forming an LLC in California are as follows:
- Ownership flexibility: An LLC can be a single-member or multi-member entity.
- Simplicity: LLCs are very easy to form with little paperwork requirements. Unlike corporations, LLCs do not need to create bylaws, hold annual stockholder or director meetings, or assign formal officer roles.
- Increased credibility: LLC formation brings about added credibility to a business. People recognize an LLC as a more formal business structure than partnerships and sole proprietorships. Most customers and partners consider businesses with LLCs in their names as credible.
- Limited liability: LLC members’ personal assets are protected from debts or obligations in case of lawsuits. LLC members cannot be sued, excluding any tort claims that might arise due to members’ actions.
- Fee exemptions: LLCs with income less than $250,000 are not required to pay LLC fees. There is also a first-year annual tax exemption for LLCs that register with the SOS between January 1, 2021, and December 1, 2023.
How Does an LLC Work in California?
LLCs protect their members from personal liabilities. They operate as a combination of partnership and corporate business structures. LLC members enjoy similar advantages of limited liability as corporation shareholders while paying taxes as individual members, like partners in a partnership.
An LLC can operate as a one-member company or a multiple-member company. This distinguishes LLCs from other business structures, which operate strictly as either owned by one man (sole proprietorship) or multiple individuals (corporation and partnership).
The best way to keep an LLC active is to file the Statement of Information with the SOS during the filing period and file and pay the necessary income taxes. Refusal to file a Statement of Information attracts a $250 penalty. Individuals who want to close their LLCs must file their final current year tax returns with the Secretary of State and Franchise Tax Board (FTB). They must also stop doing business in California after the final taxable year. Review the FTB Publication 1038 for more information.
LLC VS S Corp in California
An LLC is a business entity that protects the personal assets of its owners. Conversely, an S Corporation (S Corp) is a structure that allows income and losses to flow through to the shareholders. These income and losses are usually reported on the shareholders’ personal tax returns. The major difference between LLC and S corp is the annual tax. For S Corp, the annual tax is 1.5% of the corporation’s net income or $800 (whichever is greater). In contrast, the LLC annual tax fee is set at $800.
There are no limitations on the number of members an LLC can have. These members can vary by type (individuals, corporations, or other LLCs and foreign entities). Conversely, S Corps are limited by the types of owners (shareholders) and cannot be more than 100 shareholders.
An active LLC member may be required to pay a 15.3% self-employment tax on the distributive share of LLC income. Meanwhile, S Corp shareholders only pay payroll tax on the wages received from the corporation as its shareholder/employee. This provides tax savings to shareholders for self-employment tax purposes.
Per California Corporation Tax Law, an LLC can be treated as an S Corporation if they classify as an association and taxable as a corporation for federal purposes. However, they must file Form 100S (California S Corporation Franchise or Income Tax Return).
LLC VS Sole Proprietorship in California
A sole proprietorship is an unincorporated business owned and controlled by an individual. There is usually no distinction between the owner and the business. Conversely, an LLC is a business entity with one or more owners (members). The business exists independently of its members.
Since there is no legal separation between a sole proprietorship and its owner, the owner gets all the business’ profits and bears all losses and debts. On the other hand, LLC members enjoy limited liability, which protects them from being held personally liable for the company’s financial obligations.
Starting an LLC is more complex than creating a sole proprietorship. LLCs must register with the California Secretary of State (SOS), draft and submit the Articles of Organization, and pay a filing fee. A sole proprietorship does not require filing documents with the SOS. A sole proprietorship is limited to one person, so bringing another person into the business can cause it to end. However, LLCs have no limitation on membership.
LLC VS Corporation in California
A C-corporation is an entity that is owned by its shareholders (owners) but exists separately from its owners. An LLC is a business entity that blends partnership and corporate structures. An LLC can be owned by one member (Single-member limited liability company (SMLLC)) or more than one member (partnership). Conversely, the ownership of a C-corporation is divided among shareholders, directors, and officers who perform diverse roles.
The formation process of LLCs and C-corporation involves filling out different forms. LLCs are required to file an Articles of Organization form, while C-corporations file Articles of Incorporation forms. After filing the appropriate paperwork, a C-corporation is required to take further formation steps that are not required for LLCs. For example, they will need to create bylaws that cover director meetings, stockholder meetings, and a number of officials and their responsibilities.
Business License Vs. LLC in California
In California, a business license and an LCC are two different concepts. A business license is a permit allowing individuals to do business within the state. However, an LLC is just a business structure formed by filing the appropriate paperwork with the California Secretary of State and paying the required filing fees. Most LLCs operating in California must obtain business licenses from the appropriate government agencies.
Do I Need a Business License if I Have an LLC in California?
Yes, most LLCs are required to have business licenses. Depending on the business type, LLCs can obtain business licenses from the California Department of Industrial Relations (DIR) or the California Department of Tax and Fee Administration (CDTFA). Per Section 17701.04(e) of the California Corporations Code, domestic and foreign LLCs are not permitted to render professional services (Section 13401 and Section 13401.3). However, a public opinion issued by the California Attorney General in 2004 states that businesses can conduct activities as LLCs only if their services require non-professional occupational licenses.
How To Dissolve an LLC in California
To dissolve an LLC in California, business owners must consult their LLCs operating agreement for any provisions outlining the process for dissolution. Subsequently, the LLC members may hold a meeting to vote on the LLC dissolution and document the final vote decided. After the vote, file a certificate of dissolution with the California Secretary of State along with the form LLC-3 and a certificate of cancellation (Form LLC-4/7). After the filing, notify the FTB of the LLC’s dissolution by submitting a final tax return (Form 568), indicating it is the final return.