How to Start a California LLC

Are you looking to form a limited liability company (LLC) in the state of California, but you’re not sure how the formation process works? There are several important steps when it comes to creating a California LLC that is compliant and able to do business in the state.

To get started, please reference our 6-step guide below or hire an affordable online LLC formation service.

What is a California LLC?

The California LLC is one of the most popular business structures in state. It's a more casual and flexible type of business than a corporation, but includes personal asset protection that's lacking from sole proprietorships and general partnerships.

LLCs in California have simple formation and maintenance requirements, several options for how they can be taxed, and flexible management. From one-person businesses to multi-member LLCs with several owners, the LLC is a popular choice for a reason.

Forming an LLC in California (in 6 Steps)

Step One) Choose an LLC Name

Your LLC’s name is often the first impression you get to make on potential customers, and therefore it goes without saying that this is an important step. There are a few different aspects to take into consideration when selecting a name for your business:

Legalities

In the state of California, every limited liability company is required to have either the initials “LLC” or the phrase “limited liability company” in the name. In addition, you cannot include any words that refer to other business types (like “corporation” or “incorporated”), and you also can’t use words that are typically used to refer to specific kinds of businesses (like “bank” or “law office”).

Explanatory Naming

Another aspect to consider is including language that explains what your business does ― for example, if you’re a plumber, put the word “plumber” or “plumbing” in your LLC name. Additionally, if your business has strong values like being environmentally friendly, you can indicate that by including the word “green.”

Do You Like It?

At the end of the day, this is your business, and you should choose a name that makes you proud. You should also make sure your LLC name both sounds good when spoken out loud, and looks good when written down.

The most important consideration for naming an LLC is to not get too attached to any one business name until you have either reserved the name with the state of California, or you’ve officially formed your business. Why? California is more strict than some other states on how unique your name must be compared to other businesses. Your name cannot be “the same or similar to” the name of another business entity. To check name availability, you can search LLC names in California at this link. If you’re not quite ready to form your LLC, you can also reserve your desired name with the Name Reservation Request Form. Reserving your name gives you 60 days to get all your LLC’s details in order.

Step Two) Designate a Registered Agent

Every LLC in California is required to designate a registered agent, which is the individual or registered agent service that receives government correspondence on behalf of your business, then forwards those documents to you.

According to the California Secretary of State,

Corporations, limited liability companies and limited partnerships are required by statute to designate an agent for service of process.”

Incorporation Rocket Note: While in some states you can serve as your own agent, this is not permitted in California. You can hire a service to act as your Registered Agent, or even use an accountant or other business professional’s address – with their consent, of course.

Without a registered agent, you could lose your good standing with the state of California, and the state also has the right to dissolve your LLC if they decide to. In a worst-case scenario, the state could fail to alert you regarding a lawsuit against your company, which could even lead to a judgment against your business because you didn’t defend yourself.

Step Three) File Formation Documents with State

Once you are ready to form your California limited liability company, you will fill out the articles of organization.

This is THE document that will register your LLC with the state. You’ll want to ensure all of the following information is correct on the form:

• Your chosen business name
• Name and address of your registered agent
• Management style (member-managed or manager-managed)
• Name(s) and address(es) of the LLC’s manager
• Name and address of the LLC’s organizer
• Signature of organizer and registered agent
• Effective date

You can fill out this form online here, or you can download the form and submit it in person or by mail. Please note that there is an additional $5 fee to receive a Certified Copy of your electronic file.

Cost to Form an LLC: The state of California charges a $70 fee to form an LLC.

Processing Time: If you elect not to pay any expedited processing fees, it takes around 10 business days for the state to process your electronic California LLC formation paperwork and get your finalized documents in the mail to you. Mailed filings can take up to 20 business days. That said, California does offer several expedited processing options. The simplest is a $15 expediting fee for forms dropped off in person at the Sacramento office, which will move your filing up in priority. LLCs needing the most rapid turnaround can pay $350 or $750 for a 24-hour and same-day turnaround respectively.

Step Four) Create an Operating Agreement

After you register an LLC in California, create a detailed outline that explains how you will run and manage your new business. Even though it doesn’t need to be filed with the state, put one together and keep it for your records.

When you open a bank account, you may be asked for this document in order to open an account. You’ll also want to keep in mind that any future business partners or managing members may also be interested in seeing your Operating Agreement before joining your company. After all, this document essentially serves as your overall plan for success.

An attorney can help you outline your Operating Agreement or create one from a free template online. You can read more about Operating Agreements here, but some of the basic information you’ll want to have includes:

• Individual members' ownership percentages
• Rights and responsibilities
• Voting powers and meeting guidelines
• Allocation of profits and losses
• Management rules for the LLC
• Provisions for buying a member owner out, or transferring their shares in the case of illness or death

Step Five) Handle Taxation Requirements

Federal Requirements

The vast majority of LLCs require a federal tax ID number, or EIN. An EIN is basically the business version of a social security number, and it’s used for a variety of important LLC functions.

For instance, you’ll need an EIN if you want to hire any employees, and many banks require them to open business bank accounts as well. You’ll also need one for tax purposes, hence the name federal tax ID number. Get an EIN for your LLC for free through the IRS.

State Requirements

All LLCs are subject to California’s Annual Franchise Tax, regardless of income or membership structure. That means sole proprietorship LLCs, partnership LLCs, and LLCs filing as corporations are all subject to pay at least $800 for the Annual Franchise Tax.

However, there is a tiered structure to this; LLCs with a gross income that exceeds $250,000 will also have to pay an additional Annual LLC fee. Corporations are exempt from the additional Annual LLC fee because a corporation’s additional taxes are levied in a tiered-income structure. For more information on the Annual Franchise Tax, please consult the Franchise Tax Board’s Filing Requirements.

California requires all retails businesses to pay a sales and use tax. Each retail LLC can register for a seller’s permit from the California Department of Tax and Fee Administration here. California also has an extensive list of special taxes and fees ranging from timber tax to tire taxes to alcoholic beverages. Find out what taxes may apply to your business here.

Local Requirements

Depending on where in California your business is located, you could also need to pay some local taxes. Each country and city has its own tax rate, and you’ll want to be sure you don’t overlook your local fees. Fortunately, the California Department of Tax and Fee Administration provides a simple address lookup for tax rates for each county and city in the state.

Step Six) Obtain Business Licenses and Permits

As part of registering your business, California requires a business permit that each LLC needs to acquire in order to do business. You can begin the process here. As mentioned in Step 5, you’ll also need a seller’s permit (which subjects you to sales and use taxes) if you’re selling retail products in California.

However, much like the state has industry-specific tax requirements, it also has licenses and permits that are required for businesses in certain industries. This includes both federal and state licensing requirements. Find a run-down of the federally-regulated industries here, and you can check for any state-specific licenses at the California Business Portal.

Sound confusing? Fortunately, California provides a one-stop search for any licenses your business may need at CalGold. Get started here.

Next Steps: What to do After Creating a California LLC

Open a business bank account

We highly recommend that you establish a separate business banking account so that your business and personal finances are maintained completely separate. This is important because it helps protect your personal assets and also makes filing taxes much easier. Once you receive your EIN from the IRS, you’ll be able to use it to establish an account at the bank or credit union of your choice.

Get Business Insurance

Every California business with employees is strictly required to acquire unemployment insurance, disability insurance, and workers’ compensation insurance, even if they only have one employee on the payroll. For more information, check out the California Department of Industrial Relations for workers’ compensation or the Employment Development Department for unemployment and disability insurance requirements. After you obtain these legally required policies, it’s probably also a good idea to pursue general liability insurance, as well as some industry-specific policies.

Understand income reporting

Income reporting is just what it sounds like – reporting the income you made from your business. It’s important to note that you must file this form whether you made or lost money over the course of the year. The state of California has several forms based on how your business is set up. LLCs run as sole proprietorships can find their form here, while this form is used for partnership LLCs.

Understand annual reporting

California requires that all LLCs file an initial report within 90 days of formation. After that, LLCs must file every two years. There is a $20 fee for both reports. (You must also file between periods if there are important changes to you LLC, such as a new registered agent, at no charge). You can find and file all three reports online here.

Find an accountant

We don’t recommend that you attempt to manage your business finances without the help of a professional. There is too much room for error, and a professional can ultimately save you time and money by guiding you on how best to manage your business finances. At a minimum, enlist professional help to set you up with software and the steps for keeping up with your finances on a regular basis. Then, consult back with your accountant at least a couple of times per year – and especially at tax time – to ensure you’re keeping track of everything correctly.