When launching a new business in California, you’ll have to make the decision about what type of business structure you want to operate as. A sole proprietorship? California corporation? What about a California LLC?
There are benefits to each type of business entity, but in this article, we’re going to look at the limited liability company and why it might be a good fit for you. We’ll also talk about creating an LLC in California to help you down that path.
What is an LLC?
A limited liability company is a business entity that keeps your personal assets safe and separate from that of your company, while providing pass-through tax benefits like that of a sole proprietorship or partnership.
You can have a single member LLC or a multi-member LLC, depending on whether you’re the only owner or not. Which you choose will have an impact on how you file your taxes.
Your LLC will either be a foreign LLC or domestic LLC. The former means it was created in a state other than where you do business. A domestic LLC is one formed in the state where you do business.
If your business has some sort of liability to customers, such as a rental property, restaurant, or retail store, having the protection of a California LLC could be a smart idea.
Benefits of a California LLC
So why choose a limited liability company over other types of business entities? First of all, if you operate as a sole proprietorship, your personal assets could be at risk. Should you ever be sued or file bankruptcy, the court can seize your personal assets if your business can’t pay your debts. If you operate an LLC, those personal assets are more protected.
There’s also less paperwork with the LLC versus California corporation, which has to hold shareholder meetings and make annual reports.
And creating an LLC in California has some tax benefit: they can opt for what’s called “pass-through” taxation, which is a fancy way of saying the LLC doesn’t pay any taxes, but the income and expenses pass through to the owner’s personal tax returns. This is in contrast to the double taxation that a C corporation experiences, where both the business and the owner pay income taxes.
How to Create an LLC in California
Each state has a slightly different process for setting up a limited liability company. For the California LLC, these are the steps:
- Register Your LLC with the Secretary of State
- File a Statement of Information
- Apply for an EIN
- Create an Operating Agreement
- Open a Bank Account for Your LLC
- Register with the Franchise Tax Board
- Hiring Employees? Register with the EDD
- Apply for a Seller’s Permit
- Comply with County and/or City Tax Requirements
Register Your LLC with the Secretary of State
The first step to creating your California LLC is to visit the California Secretary of State website. There’s an easy-to-use online filing system for your LLC. Otherwise, you can fill out your Articles of Organization (also known as Form LLC 1) and mail them in.
You will be asked the name you want your LLC to have. If it already exists, you’ll be told, and you will need to pick a different name. You’ll fill out your contact information and then need to select your service of process. If you’re filing your California LLC paperwork yourself, you’d choose Individual. If you’ve hired a registered agent (more on that shortly), you’d select California Registered Corporate Agent.
Next, you’ll select whether the LLC will be managed by one manager, more than one, or all LLC members. Then you’ll enter the Organizer name and email (this person will get updates and information on the LLC). There is a $70 filing fee.
File a Statement of Information
Next comes filing your Statement of Information. This is a document that contains information about your business’s registered agent (if you have one) and its management or officers, as well as general contact information. You’ll need to fill this out when you initially file your LLC in California, and then every two years afterward.
Apply for an EIN
Just like you have a Social Security number, your business also needs a unique identification number, called an Employer Identification Number (EIN). You’ll need this to file your taxes as well as open a business bank account.
Get your free EIN.
Create an Operating Agreement
Another of the LLC documents you need is an operating agreement. This establishes the purpose of your business, who the members of the LLC are, how you will share the profits, and what, if any, tax considerations you have are.
There are templates you can use to create your LLC operating agreement online.
Open a Bank Account for Your LLC
If you’re wondering why you need a separate bank account for your LLC, here are a few reasons: not only does it make it easier to file taxes, but it also can help you qualify for financing down the road. Separating your business and personal finances just makes it easier to stay organized.
You might decide to open a business checking account at the same bank you have personal accounts with. On the other hand, explore your options, because you might find one that better suits your needs elsewhere.
A side note: while you’re at it, apply for one or two business credit cards so you can separate your business finances while earning credit card rewards.
Register with the Franchise Tax Board
To view LLC documents and manage your LLC online, you’ll need an account with the Franchise Tax Board. Once you register, you’ll need to wait to receive a PIN in the mail, which can take about a week. Once you enter the PIN, your account will be active.
Hiring Employees? Register with the EDD
If you plan to have employees, you’ll need an account with the Employment Development Department. Once you do so, you can log in to pay employment tax, print reports, or report new hires.
Apply for a Seller’s Permit
If you plan to sell products, you may be required to possess a seller’s permit in California. Apply for a seller’s permit through the California Department of Tax and Fee Administration’s online portal. Once you have your permit, you can view it, pay sales tax, or file a return online.
Comply with County and/or City Tax Requirements
In addition to the seller’s permit, there may be other business licenses or permits you need, according to your city or county’s regulations. Check those website to make sure you’ve covered all your bases.
Should You Work with a Registered Agent Service?
While California LLC formation isn’t difficult, know that you also have the option for help. Registered agent services can complete the LLC filing on your behalf as well as ensure you stay compliant by paying any required annual fees or filing your Statement of Information.
You, of course, pay for these Calfornia registered agent services, but it may be worth the expense to not have to worry about the headache of maintaining your LLC status. If you operate in multiple states, having a registered agent can make sure you stay compliant with regulations in each state where you do business.
Costs of Maintaining a California LLC
Your business will need to do a few things to maintain your limited liability company status after filing. This includes paying an annual franchise tax of $800. This state fee is due on the anniversary of your California LLC being filed.
(Just a side note: this franchise tax is due every year you operate as an LLC. If it’s too steep an expense, you may be better off operating your business as a sole proprietorship.)
Additionally, you will need to file your Statement of Information every two years. There is a $20 filing fee.
Importance of Forming an LLC to Qualify for Financing
If you decide down the road to apply for business loans for small business or bring on investors, having an LLC may work in your favor. Some investors won’t loan money to a sole proprietorship, and instead want to see your business run as a California corporation or LLC because of the fact that investors are limited in their liability once they have equity in your company. The same goes for an S corporation or C corporation. None of the personal assets of the members (and that includes investors) can be taken to cover business expenses.
Also some lenders may require an applicant to be an LLC or corporation, so by filing an LLC, you’re already increasing your financing options.
Nav’s Verdict: Creating an LLC in California
As you can see, forming a California LLC can be a great business move. Yes, you’ll have that $800 a year franchise tax, but you’ll also limit your personal liability and keep those personal assets safe.
Whether you retain the services of a registered agent or DIY your LLC filing, be sure to stay on top of those annual deadlines for your franchise tax fee and that deadline every two years for your Statement of Information, otherwise you could be hit with a penalty fee or even cause your company to lose its status as an LLC.