LLC

How to Start an L.L.C. in California?

Before starting a business, one must decide which business entity is best. An L.L.C. is a business-friendly and popular choice in California. L.L.C. is a typical business structure in the United States, accounting for over a third of all businesses nationwide. A significant benefit of running an L.L.C. is that it provides limited liability to business owners by shielding them from legal and financial responsibility and many business debts. The owners of an L.L.C. are known as “members”. You can form an L.L.C. in California through the California Secretary of State. To start operating an L.L.C., you must register with the Secretary of State and pay L.L.C. formation fees.

Steps to Start an L.L.C. in California

Name your California L.L.C.

Before you register your L.L.C., you need to choose a name to include in the articles of organization. The name of the L.L.C. must comply with the naming requirements, which are as follows:

1. The name of the L.L.C. must include words such as Limited Liability Company, L.L.C. or L.L.C.
2. The name of the L.L.C. must be unique and not the same as an existing business in the State. A search can be conducted on the Secretary of State’s website to determine if a business name is in use or not.
3. The name of the L.L.C. cannot use words used by government agencies such as State Department, C.I.A., F.B.I., Treasury, etc.
4. A few restricted words, such as a bank, attorney, lawyer, credit union, etc., may require a few more documentation and license paperwork.

Additional considerations:–

• URL availability: Even if you think you’ll not need a webpage, at least reserve an option to have one in the future by buying a domain name. Ensuring the URL is available before you register your L.L.C. name is good.

• Reserve your name: If you are concerned that someone else might take your name, you can reserve the name for up to 60 days by paying a small fee.

Choose a registered agent

Appointment of a registered agent is mandatory for an L.L.C. A registered agent can be either a person or an entity authorized to accept service of processes and other official legal documents and notices on behalf of your L.L.C. The registered agent offers a registered agent service and can be a person or an entity. A registered agent has to qualify for the following criteria:

1. It must provide registered agent services.
2. It must have an address in California.
3. It must be on-site and available to accept documents during regular business hours.

Prepare and file Articles of Organization

Articles of Organization are the document that establishes an L.L.C. formally by laying out basic information about it. In California, the Articles of Organisation are filed under Form LLC-1. One has to prepare the articles of organization and file them with the California Secretary of State to register California L.L.C. properly. It includes filing a simple online form and submitting it. It can also be sent by mail. Usually, the following information is provided to prepare the certification of formation:-

1. Name of the L.L.C.
2. Address of the L.L.C.’s principal place of business
3. Purpose of the L.L.C.
4. The effective date of the L.L.C.
5. Expected duration of the L.L.C.
6. When will the articles become effective?
7. Name and address of the registered agent of L.L.C.
8. Name and address of the managers if the L.L.C. is manager-managed or the name and address of the members if it is member-managed.
9. The name, address, and signatures of the organizers

Receive a certificate from the State

On filing the certificate of formation, the secretary of State reviews the filing, and if the approval is granted, the L.L.C. becomes a legal business entity. The State issues a certificate confirming the L.L.C. formally comes into existence after the L.L.C.’s formation documents are filed and approved. This certificate allows the L.L.C. to obtain an Employer Identification Number (E.I.N.), obtain business licenses and open a business bank account.

Create an Operating Agreement

It is a document outlining the way an L.L.C. conducts business. It is not mandatory to have an operating agreement. Still, it is highly advisable as it is helpful for various reasons, such as settling disputes arising over financial agreements and other potential litigation. Without an operating agreement, the courts make determinations based on state law, which might not necessarily be in the L.L.C.’s and its members’ best interest. The operating agreement includes the following:-

1. Name and principal address of the L.L.C.
2. Duration of the L.L.C.
3. Information about the Certificate of Organization
4. Name and address of the registered agent
5. Purpose of the Business
6. Process in which profits and losses will be divided
7. Members and their contributions
8. Procedure for incoming and outgoing members
9. Indemnification and liability clauses
10. Management of the L.L.C.

File a statement of information

A statement of information is required to be filed by all L.L.C.s in California with the California Secretary of State. The statement of information shall include the following:-

1. Name of the L.L.C. and File number in California Secretary of State.
2. Name and address of agent of the L.L.C.
3. Office address of the principal executive of the L.L.C.
4. The mailing address of the L.L.C.
5. Name and complete business and residence address of any manager or chief executive officer. In case no manager is elected, each manager’s name and address and business or residence address. 
6. Email address of the L.L.C.
7. Principal business activity of the L.L.C.

Get an Employer Identification Number (E.I.N.)

E.I.N. is a nine-digit number assigned by the Internal Revenue Service to identify L.L.C.s for tax purposes. An E.I.N. can be obtained either by mail or online through the I.R.S. E.I.N. serves the following purpose:

1. Open a business bank account
2. To hire employees
3. To file and manage taxes at the State as well as the federal level.

Pay the annual franchise tax

For carrying out a business in California, the L.L.C. must pay an $800 franchise tax fee. The fee must be paid irrespective of whether the business makes any income and is due every year. Where the L.L.C.’s annual gross revenue exceeds $250,000, an additional annual fee is also charged. L.L.C.s formed in the years 2021, 2022 or 2023 are exempted. As per the new legislation, an L.L.C. registered or organized to do business in California is exempt from the State’s minimum annual franchise tax for the first taxable year. From the second taxable year onwards, the L.L.C. must pay the $800 annual franchise tax fee.

Wrap Up

In this blog, we have seen the requirements to start an L.L.C. in California. From choosing a name for the L.L.C. to obtaining an employer identification number, all are simple steps that must be followed to ensure that your L.L.C. in California is legally compliant.

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