You\u2019re in the process of starting a business in California, and you have a critical question to answer \u2014 what business structure should you choose?<\/p>\n\n\n\n
You have options, including a corporation or partnership, but a limited liability company (LLC) structure is often a great choice for new business owners. This article explains why that is and how to set up an LLC in California.<\/p>\n\n\n\n
An LLC, or limited liability company, is a business structure. The California Secretary of State<\/a> describes an LLC as a business that\u2019s similar to a corporation but with more flexible tax and management benefits.<\/p>\n\n\n\n LLC formation grants business owners, also known as members, certain liability protection. The members generally can\u2019t face personal legal action, such as lawsuits, related to business activities. Because of this, you get some separation between your company and your personal life.<\/p>\n\n\n\n However, that separation isn\u2019t absolute. In certain cases, such as if you break the law, a judge may order action against your personal assets.<\/p>\n\n\n\n An LLC in California pays an annual tax and an LLC fee.<\/p>\n\n\n\n The annual tax is simple \u2014 you pay the California Secretary of State $800 annually<\/a> to keep your LLC in good standing. Think of it as an annual franchise tax for your company. You can make that payment online<\/a> or via mail to the following address:<\/p>\n\n\n\n Franchise Tax Board The LLC fee<\/a> is a little more complicated because it\u2019s based on how much the business earns. When you start an LLC in California, you commit to submitting an estimate of earnings by June 15 every year, along with paying the LLC fee associated with those earnings on the same date. (Learn more about the California tax deadline<\/a> for small businesses.)<\/p>\n\n\n\n The LLC fees are as follows:<\/p>\n\n\n\n Before you rush to send your formation documents to the California Secretary of State and start your LLC, it\u2019s a good idea to understand precisely why this entity type is a good choice.<\/p>\n\n\n\n Imagine you have a sole proprietorship – which means the business is in your name alone and you have not created a formal entity yet – and there\u2019s no separation between your company and yourself. If your business gets sued, that\u2019s equivalent to you getting sued, which places your personal assets at risk.<\/p>\n\n\n\n An LLC offers your California business protection against this form of personal liability<\/a>. If the business gets sued or falls into debt, you usually don\u2019t have to worry about those issues passing over into your personal life.<\/p>\n\n\n\n Given that both LLCs and corporations offer liability protection, you may wonder why you shouldn\u2019t just form a corporation instead. The answer is two-fold \u2014 simplicity and flexibility.<\/p>\n\n\n\n Corporate structures are rigid because you have to maintain a board of directors and declare ownership stakes based on shares. It can get complicated. LLCs have more flexibility in how you choose to structure your business and its ownership.<\/p>\n\n\n\n Corporations also require a lot of paperwork<\/a>, like conducting annual board of director\u2019s meetings and maintaining minutes; LLCs require less formal reporting. You can form an LLC by completing and filing Articles of Organization correctly. LLCs require some paperwork to maintain, such as filing an annual report every year, but they\u2019re generally lower compared to a corporation.<\/p>\n\n\n\n An LLC is a pass-through tax entity<\/a> for federal tax purposes, meaning all of the income, losses, distributions, and profits your LLC generates pass directly through to the LLC members. In other words, the business doesn\u2019t pay separate federal taxes on its earnings.<\/p>\n\n\n\n That doesn\u2019t mean you pay no taxes at all. Instead, you pay taxes on the LLC\u2019s income on your personal income tax return at your personal tax rate. Nevertheless, the pass-through taxation model is advantageous because it helps you avoid the issue of double taxation, which is when tax is paid twice on a company\u2019s earnings \u2013 once by the company on its income and again on profits paid to owners.<\/p>\n\n\n\n Many business owners feel a sense of accomplishment and credibility<\/a> once they take the plunge and form an LLC. It\u2019s tough enough to form business partnerships without having to worry about what a potential partner might assume about your company based on its structure. But that\u2019s a problem you\u2019ll face if you maintain a sole proprietorship. Your credibility may diminish in the eyes of partners and even clients because you don\u2019t have a formal business structure.<\/p>\n\n\n\n Forming an LLC solves that credibility problem. Better yet, sole proprietors can form a single-member LLC, giving them the control they want while offering the credibility and liability protection they don\u2019t get from the sole proprietor structure.<\/p>\n\n\n\n Though LLCs offer plenty of benefits in terms of simplicity and business structuring, there are some downsides to consider before you move ahead:<\/p>\n\n\n\n If you believe LLC formation offers what you need from a business structure, this step-by-step guide will take you through forming an LLC in California. Keep in mind, many business owners choose to outsource this process<\/a> to save time and gain peace of mind knowing that the process is being completed correctly.<\/p>\n\n\n\n Every new LLC needs a name, but choosing that name isn\u2019t as simple as putting some words down on paper and running with what you have. There are rules in place<\/a>, starting with these basic naming conventions:<\/p>\n\n\n\n Assuming you\u2019ve found a suitable name for your California business, you may reserve that name so no other company can snatch it from under you. The state offers a name reservation process that allows you to safeguard your desired name for up to 60 days, giving you time to handle your formation documents.<\/p>\n\n\n\n Complete the Name Reservation Request form<\/a> and submit it along with a check for $10 made out to the California Secretary of State to the following address:<\/p>\n\n\n\n Secretary of State If you choose to form your business with Block Advisors<\/a>, we will work with you to ensure your business name meets all California requirements and reserve that name on your behalf.<\/p>\n\n\n\n You\u2019ve settled on an LLC as the right type of business structure, and you have a name ready to go. Next, you must file California Articles of Organization with the California Secretary of State to formally request permission to start an LLC.<\/p>\n\n\n\n Your Articles of Organization inform the state of key information about your business, including:<\/p>\n\n\n\n You must pay state fees of $70 plus an optional $5 certification fee to submit this form. (California has temporarily suspended the state fee through June 30, 2023.)<\/p>\n\n\n\n You can submit these to the California Secretary of State<\/a> online or mail the form and fee to the following address:<\/p>\n\n\n\n Secretary of State If you choose to form your business with Block Advisors<\/a>, we will create the Articles of Organization based on information you provide and submit it to the California Secretary of State on your behalf.<\/p>\n\n\n\n Your California LLC needs a registered agent to keep your business in good standing with the state. A registered agent is a designated individual or business entity that handles the following responsibilities:<\/p>\n\n\n\n You must appoint your registered agent in your Articles of Organization.<\/p>\n\n\n\n Though you or an employee can serve as your registered agent in California, doing so comes with administrative and compliance burdens. It\u2019s also often not a possibility for business owners who maintain irregular business hours or are rarely on premises at the business address on file with the state.<\/p>\n\n\n\n Because of this, many choose to hire a professional third-party service. These agents handle your business\u2019s compliance and legal document processing needs so you always have a registered presence on the public record in California.<\/p>\n\n\n\n If you choose to form your business with Block Advisors<\/a>, you can appoint a third-party registered agent during the ordering process.<\/p>\n\n\n\n Every domestic or foreign LLC in California must submit a Statement of Information<\/a>, also known as an Initial Report, as part of the LLC formation.<\/p>\n\n\n\n The form is due within 90 days of submitting your Articles of Organization and carries a $20 filing fee. You must also resubmit your Statement of Information every two years to stay in good standing with the state.<\/p>\n\n\n\n Your Statement of Information goes to the California Secretary of State, and you can file it either online or by mail along with payment for the state fees. If you choose to submit by mail, use the following address:<\/p>\n\n\n\n Secretary of State If you choose to form your business with Block Advisors<\/a>, we will create the Initial Report (Statement of Information) based on information you provide and submit it to the California Secretary of State on your behalf.<\/p>\n\n\n\n Unlike many other states, California legally requires your California LLC to have an LLC operating agreement<\/a>. This agreement is a legal document that allows you to draft specific criteria relating to your LLC for its members. It should contain the following information:<\/p>\n\n\n\n You don\u2019t have to submit this document to the California Secretary of State. Instead, you simply have to keep the agreement with your LLC records. If you choose to form your business with Block Advisors<\/a>, we will create the Operating Agreement based on information you provide and store it in your online account.<\/p>\n\n\n\n An Employer Identification Number (EIN) identifies your business to the government, much like a Social Security number identifies an individual. It\u2019s a unique code that the Internal Revenue Service (IRS) assigns to your business to help it to process employer taxes related to your business.<\/p>\n\n\n\n Technically, if you are a single member LLC you generally don\u2019t need an EIN if you have no employees, though it\u2019s still a good idea to get one for the following reasons:<\/p>\n\n\n\n You can apply for an EIN<\/a> online, via mail, fax, or, in the case of international applicants, by phone. All Block Advisors<\/a> LLC packages include an EIN application.<\/p>\n\n\n\n Prospective LLC owners have some work on their hands if they want to form a California LLC<\/a>. The state has more stringent requirements than many others, mainly due to the need to submit a Statement of Information every two years and to keep up with the Annual Tax and LLC Fees.<\/p>\n\n\n\n If an LLC business still sounds right for you, Block Advisors Business Formation<\/a> can help with every stage of the California LLC filing process. With prices starting from $149 plus state fees, you can get started in just 10 minutes.<\/p>\n\n\n\n Whatever route you choose, to create an LLC or select another entity type, to form in California or another state, it\u2019s important to consider the needs of your business and your personal situation. Laws vary from state to state. This article is intended to be informative, but it is not legal advice or a substitute for legal advice. A business attorney can review your specific circumstances and guide your decisions to confirm that you are doing what\u2019s right for you. Likewise, the California Secretary of State\u2019s office offers resources for small business owners<\/a>, including online information that may help you decide the best options \u2013 and possible requirements \u2013 for your specific circumstances. <\/p>\n\n\n\nTax treatment of a California LLC<\/h3>\n\n\n\n
P.O. Box 942857
Sacramento CA 94257-0631<\/p>\n\n\n\n\n
Benefits of forming an LLC in California<\/h2>\n\n\n\n
1. Personal liability protection<\/h3>\n\n\n\n
2. Simplicity and flexibility<\/h3>\n\n\n\n
3. Pass-through taxation<\/h3>\n\n\n\n
4. Increase your credibility<\/h3>\n\n\n\n
Downsides to the LLC structure<\/h2>\n\n\n\n
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Ready to get started?<\/h3>
How to start a California LLC<\/h2>\n\n\n\n
1. Choose your California LLC name<\/h3>\n\n\n\n
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Name Availability Unit
1500 11th Street, 3rd Floor
Sacramento, CA 95814<\/p>\n\n\n\n2. File your LLC Articles of Organization<\/h3>\n\n\n\n
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Business Programs Division
Business Entities
1500 11th Street
Sacramento, CA 95814<\/p>\n\n\n\n3. Choose a registered agent service<\/h3>\n\n\n\n
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4. File your LLC Statement of Information<\/h3>\n\n\n\n
Statement of Information Unit
P.O. Box 944230
Sacramento, CA 94244-2300<\/p>\n\n\n\n<\/a>5. Prepare an LLC Operating Agreement<\/h3>\n\n\n\n
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<\/a>6. Obtain an Employer Identification Number<\/h3>\n\n\n\n
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Handle your business formation needs<\/h2>\n\n\n\n
Navigating your options <\/h2>\n\n\n\n