How to form an LLC in California in 6 easy steps
If you’re considering establishing a California business, you’ll have many business entities to choose from. One of the most popular business entities at your disposal is the LLC—or Limited Liability Company—which affords business owners the flexibility of running their company like a sole proprietorship, with the tax incentives of a corporation. Flexibility is the name of the game here and is the distinction to remember when thinking about moving forward as an LLC. While C and S corporation designations have more rigid rules and tax structures, LLCs provide greater business freedoms with fewer traditional corporate restrictions.
If your plan for new business formation is to start an LLC in the Golden State, the following steps will help walk you through the process so your entrepreneurial dreams can turn into a successful reality.
1. Check if your business name is available
The name you choose for your business can either help push customers your way or act as a deterrent, which is why choosing the right name for your company is essential. When it comes to naming your business, the key is to select a name that provokes curiosity and leaves an imprint on your customers.
Once you’ve selected your LLC name, you’ll then need to verify that it fits within the California LLC naming guidelines. The guidelines include:
- Using either the phrase “Limited Liability Company,” the words “Limited” or “Company,” or one of the abbreviations “LLC,” “L.L.C,” “Ltd.,” or “Co.,"
- Refraining from using words like “F.B.I.” or “Treasury” that would confuse your company with a government entity, and
- Only using words like “Attorney” or “Bank” if you intend to fill out the additional paperwork.
You’ll next want to verify that your desired business name is available for use in California. To do so, you’ll need to complete a name search using the California Secretary of State’s business name database. If the name is available for use, it might also make sense to secure the corresponding domain name for your business’s website so you won’t have to go back and do this later.
Additionally, if you’re trying to decide between different names—or if you know what name you want but aren’t ready to register it—you can always file a Name Reservation Request Form, which will reserve your name for up to 60 business days and costs $10 per name.
2. Claim your name
With your chosen business name in hand, the next step is to nominate a California Agent for Service of Process, which is a fancy way of saying you need to lock in a registered agent to handle your company's legal documents and lawsuits. The Agent for Service of Process can be an individual over 18 years old and a full-time resident in California—a P.O. box will not suffice—or a corporation legally authorized to conduct business within the state, such as a registered agent service. You can also appoint an individual from your company to act as the Agent for Service of Process. If you’re considering using a company, consult the California Secretary of State website for a list of commercial registered agents and service companies that can act as your Agent for Service of Process in exchange for a fee.
You also have the option to appoint yourself as the Agent for Service of Process if you’re a sole proprietor or the sole owner of your company. While filing all of your formation documents yourself will be your cheapest option, reviewing and completing the paperwork can be tedious and complicated. Hence, it’s best to leave this responsibility in the hands of a well-qualified team member or outsource it to a company that specializes in the registered agent arena.
After selecting your registered agent, your first order of business will be to file your California LLC Articles of Organization by submitting Form LLC-1 to the California Secretary of State. On the form, you’ll be asked to include the following information: Your name, your contact information, your business name and address, the name of your Agent for Service of Process, the signature of the organizer, and a designation if your LLC is member-managed or manager-managed. LLC members manage most of their LLCs, but you may find that it’s more beneficial—depending on the nature of your business—to have a small outside group of managers oversee your LLC operations. LLC managers handle everything from voting on critical issues to purchasing real estate, changing strategic plans, and taking out a loan.
You can submit your Articles of Organization in person at the Secretary of State’s Sacramento office or online or by mail for a nonrefundable filing fee of $70. California Articles of Organization submitted in person will require an additional $15 fee, but you will receive priority processing over mail applications. The standard processing time for your Articles of Organization is 5 days, but if you want to expedite the processing time, you can pay an additional filing fee ranging from $350 to $750.
Suppose you’re establishing a new branch of an existing LLC in the state of California. If so, you’ll also need to fill out a Foreign LLC form, which allows a company to conduct business as a single entity across many states. The Foreign LLC form costs $70 in filing fees.
Another option when submitting your Articles of Organization is to use a trade name or fictitious name—also known as a DBA, or Doing Business As—which is a name other than the registered name of your LLC. To set up a DBA in California, you’ll need to secure the necessary forms from the county clerk’s office in the county in which your LLC is registered.
3. Write your operating agreement
California state is one of the few states that does require an operating agreement to be drafted when forming an LLC. The operating agreement helps legally outline your company's rules and operating procedures and helps reduce potential conflict between LLC members by ensuring they’re all on the same page. The LLC operating agreement also designates your business structure ownership. It helps uphold your company’s limited liability by protecting owners’ personal assets from being accessible in the event of a lawsuit.
Think of the operating agreement as the fallback option for all disputes—legal or otherwise—for your LLC. It’s the blueprint from which important company decisions can be based, and while it’s required to possess an operating agreement in California, it’s not necessary to be filed. Instead, your operating agreement can be kept stored in an accessible place with your other essential business documentation. You may need to show proof of a completed operating agreement down the line to remain in good standing with the state.
4. File your Statement of Information
To maintain your LLC name and status in California, you’ll need to submit a Statement of Information—form LLC-12—with the California Secretary of State within 90 business days after filing your LLC’s Articles of Organization. You can file your Statement of Information online, by mail, or in person in the Sacramento office, for a filing fee of $20. When filing your paperwork, the following information will need to be included: The name of your LLC, the name and address of your LLC’s Agent for Service of Process, the street address of your LLC’s main executive, the names and addresses of any LLC managers or the names and addresses of all LLC members if there are no managers, your LLC’s mailing address if it differs from the main executive’s address, a valid email address for any email correspondence, and a description of your LLC’s main business activity.
After filing your LLC’s initial Statement of Information, you're required to re-submit the form every 2 years. The filing period window is the month in which you originally submitted your Articles of Organization and the 5 months prior.
You may also decide later that you need to part ways with one of your LLC members. To do this, you’ll need to consult your operating agreement, which should contain a provision detailing the process for amendments and the steps that need to be followed, including a voting system and the reallocation of responsibilities. You’ll then need to fill out a new Statement of Information with your updated LLC member info and submit the form to the California Secretary of State along with a fee. It’s good practice to update all of your LLC accounts to reflect the new member status and prevent any miscommunications or misfilings with any of your other essential documents down the line.
If you want to dissolve your LLC, a similar process is to be followed. To do so, you’ll need to submit a Certificate of Cancellation and a Certificate of Dissolution to the California Secretary of State. You may also need to notify creditors regarding any outstanding debts and inform the IRS of any outstanding business.
5. Pay your taxes
Along with your Statement of Information, you’ll also be required to pay an annual franchise tax—or LLC tax—which you can pay through the California Franchise Tax Board, or FTB. Unlike the Statement of Information, the annual franchise tax is paid—you guessed it—annually, but is free for your first year. After that, you’ll need to pay an $800 annual fee if your revenue is less than $250,000, or an $800 fee plus an estimated fee if your yearly income is greater than $250,000. Should you fail to pay your LLC fee on time, you may be charged an additional $250 penalty fee. It’s also important to note that filing fees can be deducted from your state taxes as business expenses, though the minimum annual franchise tax fee ($800) is not tax-deductible.
While you’re not going to be paying any income taxes immediately after forming your LLC, you will need to pay them at some point. To do so, you’ll need to apply for a Federal Employer Identification Number (EIN) through the Internal Revenue service. Your Federal Employer Identification Number—also known as a Federal Tax Identification Number—is essentially a number that acts as a Social Security Number for your business and is how the IRS will monitor your business’s financial activities and income tax reporting for both your state and federal taxes. You can obtain your Federal Employer Identification Number for free by mail or online via the IRS website.
A cool perk of classifying your company as an LLC is that you have the option to choose which tax designation you’d like to roll with: You can be taxed as either a sole proprietor or as a corporation. Take some time to decide which designation best fits your business since each has its benefits.
The amount you pay in taxes in California is primarily based on your income level, so it might be best to speak with a tax professional or hire a business accountant to help you make the business entity designation that positions your company for success in the short and long term. Your business accountant will also know if your particular California LLC will be on the hook for various other taxes such as California sales tax or California state tax, which are to be paid on top of any payroll taxes and federal or self-employment taxes.
If you’re a single-member LLC with no employees and you choose to be taxed as a sole proprietor, your Social Security Number will be used as the means to track and report your income, meaning you don’t need to apply for a Federal Employer Identification Number. However, suppose you choose to be taxed as an S corporation or C corporation. In that case, your LLC is viewed as a separate entity and will require you to apply for a Federal Employer Identification Number. You’ll also need to apply for a Federal Employer Identification Number if your LLC has more than one member or if you’re a one-member LLC that will have employees.
Another reason to consider applying for a Federal Employer Identification Number when submitting your LLC formation documents is to open a credit card or bank account for your LLC. To do so, you’ll need:
- Your Federal Employer Identification Number
- Your Articles of Organization
- Your driver’s license
A business bank account is an integral piece to running a successful LLC because it helps separate all of your business transactions from your personal transactions, making it harder to “pierce the corporate veil,” which is when your business and personal transactions are mixed. A separate business bank account and business credit card also keeps all of your LLC transactions in one place, making it easier to organize and compile when submitting your tax returns and for other tax purposes. Should you ever be involved in a lawsuit or be taken to court, a business bank account can help mitigate any case against you by demonstrating that your LLC is, in fact, its own entity and is unaffiliated with any of your personal assets.
Having a separate business bank account is also necessary if you have folks on your payroll. Suppose you have employees, or you’re planning to hire employees. In that case, your California registered agent can help you report the employees to the state of California, withhold employee taxes, and explore a reputable workers’ compensation insurance policy. You can also comb through the Tax Service Center on California state’s website for additional information on tax payments, state filings, state fees, and other business taxes.
6. Wrap up other regulation and sales tax requirements
Relax those shoulders, take a deep breath, and smile! You’ve just hustled your way to the formation of your very own California LLC and can now enjoy the calm as you put on the finishing touches to process. Part of those finishing touches is obtaining the necessary business licenses and permits specific to the industry in which your California LLC operates. For a comprehensive look at the business licenses and permits you may need to acquire at all levels, consult the U.S. Small Business Administration (SBA) guide, the state of California’s CalGold website, and your local county clerk.
Some of the other final housekeeping items involve registering your LLC with the proper California taxing authority. Suppose you’re collecting sales tax, for example. In that case, you’ll need to register your LLC with the California State Board of Equalization (BOE). If you’re distributing payroll to your employees, you’ll need to register with the California Employment Development Department (EDD) to facilitate your employer taxes.
Given the physical, mental, and emotional costs of your entrepreneurial journey, another finishing touch is to procure small business insurance for your California Limited Liability Company.
Small business insurance means you’re legally protected from the unexpected, which helps put your mind at ease knowing you can spend more time growing your LLC without worrying about if your business is legally exposed. While there is a multitude of small business insurance options that might be right for your LLC, the following are the three most common types of insurance that address most LLC needs:
- General Liability Insurance: One of the most popular insurance options available to you, this is a general policy offering a wide range of liability protection to you and your LLC from potential lawsuits.
- Professional Liability Insurance: Professional service providers such as accountants or consultants are the main beneficiaries of this policy since it helps cover against malpractice and other different types of business errors.
- Workers’ Compensation Insurance: Provides coverage to your employees in the event of on-the-job injuries, illnesses, or death.
You may also want to chat with your business accountant for advice on the other types of business insurance that might be relevant to your specific LLC’s operation. Your business accountant can also ensure your LLC remains compliant with all federal tax and state tax laws, regulations, and filing requirements.
Get LLC insurance in minutes by following these steps
Now that you understand how business insurance can benefit your LLC, the next step is to purchase the right policy. That’s where Huckleberry can help.
Huckleberry is a quick and easy solution for all of your business insurance needs. We make business insurance simple. Here’s how you can get started:
1. Go to Huckleberry.com and choose the “Instant Estimate” option. Within minutes we’ll provide you with quotes for LLC insurance and other types of coverage designed to meet the needs of your specific LLC.
2. Add in the professional service your LLC is involved in, which helps Huckleberry customize your insurance options.
3. Answer a few basic questions about the nature of your company, which allows Huckleberry to tailor its insurance option results to only those that can directly benefit your LLC.
4. After a few short minutes, you’ll receive a quote containing customized small business insurance options.
Bravo! You did it! You’re ready to set sail and captain your new LLC in the state of California. Before your voyage, don’t forget to snag a quality business insurance policy to keep you, your assets, and the future of your LLC safe and protected.
For all things business insurance, Huckleberry has you covered. In less time than it takes to prep your board for a morning Cali surf, Huckleberry can serve you a platter of insurance quotes and policy options that will protect your LLC for years to come.