How to Form an Limited Liability Company (LLC) in California
The California limited liability company is a relatively new form of legal business entity that provides for liability protection as well as pass-through tax status, without all of the complications of corporations. In other words, you get the best of both worlds: liability protection of a corporation and no payment of federal income taxes similar to a sole proprietorship, S corporation, etc. California limited liability companies are owned by their members. California LLCs can be managed by their members, or they can be managed by designated managers. The structure, maintenance, operation, and termination of LLCs is less complex than that of corporations.
The following is a brief overview of the steps that need to be taken to form a limited liability company (LLC) in California. The attorneys of Theta Law Firm are familiar with the formation, maintenance, and dissolution of various business entities in California. For advice on how to form your business or other legal questions relating to your business, please feel free to give us a call or send us an email.
Keep in mind that before forming an LLC, you should consider whether forming an LLC is the best fit for your business. More on that can be found here: www.thetafirm.com/articles.
Note that LLCs cannot be formed to provide certain professional services that require a professional state license. More information about professional services can be found here: http://www.dca.ca.gov/about_dca/aboutwho.shtml. Professional service businesses can consider alternative business entities.
Step 1: File the Articles of Organization with the California Secretary of State (required)
The first step in forming a limited liability company is filing the Articles of Organization with the California Secretary of State. The Articles of Organization form is available on the California Secretary of State's website here: http://www.sos.ca.gov/business/be/forms.htm. This form can be submitted online, mailed, or hand-delivered to the California Secretary of State's office. You must also pay a $70 filing fee.
The Articles of Organization must include: (1) the LLC's name, (2) its purpose, (3) how it will be managed, (4) its address, (5) and the name and address of its registered agent for service of process.
Name selection: The name you choose for your LLC must be available. You can check the California Secretary of State's website for business entity names that are taken by going here: http://kepler.sos.ca.gov/. Notably, California law requires that the LLC's name end with the words "Limited Liability Company" (which can be abbreviated) or with LLC/L.L.C. Other restrictions do apply. You can also search nationwide through the US Patent and Trademark Office in order to avoid any possible trademark issues, which you can do at http://www.uspto.gov/trademarks/index.jsp.
Registered agent for service of process: California law requires LLCs to designate one agent for service of process in the state. This is the individual or entity that will accept receipt of lawsuits on the LLC's behalf if it is sued. An LLC may not serve as its own agent for service of process in California, but the agent can be affiliated with the LLC. You can have either a corporate agent, or an individual agent. Individual agents must reside in California. Corporate agents must file with the California Secretary of State's office a Certificate under California Corporations Code section 1505, which can be found here: http://www.sos.ca.gov/business/corp/pdf/amendments/corp-1505.pdf. For a list of businesses that serve as registered agents, go here: http://www.sos.ca.gov/business/private-service-companies.htm/.
Foreign LLCs: Out of state LLCs must register with the California Secretary of State to do business in California. LLCs can register by filling out the Application to Register a Foreign Limited Liability Company, Form LLC-5, which can be found at: http://www.sos.ca.gov/business/llc/forms/llc-5.pdf.
Step 2: Prepare an Operating Agreement (not mandatory, but recommended)
An operating agreement, as its name suggests, is the agreement which governs the operation of an LLC. As of the writing of this article, operating agreements are not required in California (and they do not need to be filed with the California Secretary of State). However, it is highly advisable to have one! The law of LLC's in California is still in some ways one of the frontiers of the law; it is not fully defined. Well-crafted LLC operating agreements can help protect businesses from lawsuits and disputes.
New law in California applicable to LLCs: One thing to keep in mind when drafting the operating agreement is that in January 2014, the existing limited liability company act in California (the Beverly-Killea Limited Liability Company Act) will be repealed and superseded by the California Revised Uniform Limited Liability Company Act (RULLCA). Existing LLCs can consider drafting new operating agreements that account for the changes in California's LLC law.
The attorneys of Theta Law Firm are experienced in preparing Operating Agreements and can assist clients in preparing the agreements at a low cost.
Step 3: File a Statement of Information with the California Secretary of State (required)
California and foreign LLCs must file a Statement of Information with the California Secretary of State within 90 days after filing the Articles of Organization. The Statement of Information form must be filed every two years from that point forward. It must be filed during the applicable filing period, which is the calendar month during which the original Articles of Organization or Application for Registration (for foreign LLCs) and the five calendar months leading up to that month.
The Statement of Information must include all of the following:
- The company name;
- State file number;
- Address of LLC's principal executive office (if the LLC's mailing address is different from the street address of the principal executive office, the mailing address must be included as well);
- Name and address of the LLC's agent for service of process;
- Name and address of any manager and CEO, if any;
- If the LLC has no appointed/elected manager, the name and address of each member must be included;
- An email address (if the LLC opts to receive electronic notices from the California);
- The general business category of the LLC's principal business activity
Step 4: Pay California LLC Taxes/Fees (required)
A common misperception about LLCs is that they don't have to pay anything annually for taxes; this is not entirely correct. LLCs that are organized in California or conduct business in California must pay taxes to the California Franchise Tax Board if they have not elected to be taxed as corporation. In other words, if the LLC has elected to be taxed as a partnership or sole proprietorship, the LLC must pay California taxes. Note, however, that the benefit to an LLC is that you don't have to pay certain federal taxes as well (whereas corporations have to pay both state AND federal taxes).
What taxes does a pass-through LLC have to pay?
1) Annual minimum tax: as of the writing of this article, the annual minimum tax in California is $800.
2) Income-based tax: an LLC must pay additional taxes if its income is over a certain level. As of the writing of this article, LLCs with income above $250,000 must pay additional taxes to the California Franchise Tax Board (the amount of additional taxes increases as the LLC's income increases).
California's LLC tax form: LLCs must file a Limited Liability Company Return of Income form California Form 568, which can be found here: https://www.ftb.ca.gov/forms. The form must be filed by the 15th day of the 4th month after the close of the LLC's taxable year.
Don't forget to obtain your Employer Identification Number (EIN): If an LLC has more than one member, it should obtain an Employer Identification Number from the IRS. This applies even if the LLC has no employees. Single-member LLCs, on the other hand, only are required to obtain an EIN if it elects to be taxed as a corporation instead of a pass-through entity. Information about the EIN form and the form itself can be found at: http://www.irs.gov/businesses/small/article/0,,id=98350,00.html.
Pay California's payroll tax: Businesses in California are subject to California's payroll tax if they pay more than $100 of wages in any quarter of a calendar year. This will open your business up to numerous additional regulations/laws/requirements. For more information, see the California Employment Development Department (EDD) here: http://www.edd.ca.gov/.
Step 5: Obtain Local Business License and Comply with Local Laws (often required)
Different localities have unique rules that apply to businesses within their jurisdiction. Cities in Southern California often require you to obtain a business license to do business in their city. This could be as simple as submitting a form to the city, or it could be much more complicated and require the approval of various local governmental entities.
For example, businesses operating in the City of Los Angeles are required to obtain a business license from the city. Forms necessary for doing business in the City of Los Angeles can be found at: http://finance.lacity.org.
In addition to obtaining the necessary business permit/license, the locality may also require you to pay certain fees and follow other rules.
Each locality is different, so it is best to consult with experience counsel on the subject before opening your doors. The attorneys of Theta Law Firm can help guide you through the web of laws at a low cost.
Additional information can be found at the CalGold Business Permits website: http://www.calgold.ca.gov/
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