Setting up an LLC or Limited Liabilities Company is a good option for many small businesses and startups in California. Setting up an LLC is a relatively simple process. Many businesses choose and LLC because they are easier to set up than Corporations and offer more flexibility. Each state has its own set of guidelines for setting up an LLC. In California the process is pretty straight forward. Here is what you need to know about setting up an LLC in California.
What is an LLC?
LLC stands for Limited Liabilities Company. LLC’s allow business owners to separate their personal finances from their business. This protects the owners assets in the event the business is sued. LLC’s are also favorable to business owners because it prevents them from paying double taxes. In addition, LLC’s are a good option for small businesses with more than one owner, as they can be structured as single member LLCs or multi-member LLCs.
How to Set Up an LLC
Setting up an LLC is a simple process. While legal representation isn’t required, it may be advisable if there is more than one owner or outside investors. Here are the steps of setting up an LLC.
1 – Determine Name
The first step in setting up an LLC is determining the name of the LLC. For some this may be the most challenging part of setting up an LLC. There are several areas of concern when it comes to naming the LLC.
- The name has to be original, and not a trademark of another business. Most states only allow one business to operate under a given name, and California is no different. California has a database of all existing business names. To find out if a name is available, check the database first. If the name is available proceed to the next steps.
- LLC must be apart of the name.
- The name cannot contain “inc” or “corp” so there is not confusion over whether or not it is an LLC
- Check the list of prohibited words. These are words like “bank”, “trustee”, or “insurance company”. These words cannot be apart of the name.
- If the business is being operated under a different name than the LLC, a fictitious business name or DBA (doing business as) must be filed.
- It is also a good idea to check if the domain name is available before naming the LLC.
2 – File Articles of Organization
The articles of organization must be filed with the California Secretary of State. The form must contain the LLC’s name, its purpose, information on how it will be managed, its address, and the name and address of its registered agent. The articles of organization can be filled out online at the California Secretary of State’s website, then either mailed or hand delivered. A $70- fee will be assessed. If hand delivered, expedited filing is available for an additional fee.
3 – Establish Registered Agent
California requires a registered agent to be designated. The registered agent is the person who is designated to receive legal documents on behalf of the LLC. The registered agent must be included in the articles of organization, and their street address, not P.O. Box must be listed. An LLC cannot serve as its own agent for service of process, and only one registered agent can be named.
4 – Create Operating Agreement
LLC Operating Agreements are not a requirement in the State of California. However, they are advisable because provide a road map for how the business will operate. Operating agreements help determine the following:
- The members percentage of ownership in the business
- The members financial obligations to the business
- How profits and losses will be allocated
- How the LLC will be managed
- Meeting and voting rules
- The members voting power
- Buy sell provisions which determine what happens in the event an owner wants to sell their interest, become disabled, or pass away.
It is also advisable for businesses who want to enter into certain contracts or economic activity. For example, banks may request the operating agreement to verify the owners in the business. Operating agreements are also requested for legal proceedings. In the event that a legal issue arises among members of the LLC, a properly written operating agreement can prove particularly helpful during legal proceedings. In addition, if an operating agreement is not in place, it leaves the business at the mercy of the state. By allowing the state to govern the LLC, the business could suffer unintended and adverse consequences.
5 – File Statement of Information with The State
A Statement of Information must be filed with the State of California 90 days after the articles of organization have been filed and every 2 years thereafter. The initial form must be filed by mail or hand delivered. Subsequent forms can be filed online. The filing fee is $20.
The Statement of Information must include the following information:
- The name of the LLC and the California Secretary of State file number.
- The name and address of registered agent.
- The street address of the LLC’s executive principal office.
- Mailing address of LLC if it is different from the executive principal office.
- The name and address of managers or members if there are not managers.
- A valid email address if LLC chooses to receive electronic mail from the Secretary of State.
- The general type of business the LLC operates.
6 – Pay Required State Taxes
All LLCs must pay California taxes to the California Franchise Tax Board. The annual minimum tax for LLCs operating in California is $800. Additional taxes may be required based on annual income levels. Working with a tax professional can help insure that taxes are filed correctly with the state and on time.
7 – Tax and Regulatory Requirements
If a business has more than one member, an employer identification number (EIN) will need to be obtained from the IRS. This can be filed with the IRS on their website. In addition for employer taxes, the business can register with California Employment Development Department.
Depending of the type of business, additional local and state licenses may be required. Visit the California Office of Business and Economic Developments website to learn more.
If the LLC collects sales tax, the business must be registered the the State Board of Equalization. This can be done online or in person.
A Few Things to Keep in Mind
California does not allow businesses offering professional services to operate under an LLC. These are professions that require a state professional license. Check the California Department of Consumer Affairs website to learn more. In addition, some states require a public notice to be published with a local newspaper state the intent of the LLC. This is not a requirement in the State of California.
When a business operates under an LLC, it is a good idea to have a bank account opened under the name of the LLC. This keeps personal finances separate from business finances. As a result, managing financials will be easier for both the business and the member. After an LLC is filed it is important to stay up to date on annual requirements. Many states require annual report filing. Failure to comply, can result in fees and penalties or even suspension or dissolution of LLC. Questions about setting up an LLC? We can help! Contact Tax Hack today!