Are you a California entrepreneur looking for liability protection and tax flexibility for your business? If so, consider forming a California limited liability company (LLC).

An LLC provides the liability protection of a corporation with the tax benefits and flexibility of a partnership or sole proprietorship. LLCs are also easier and less expensive to form and maintain compared to corporations.

Other benefits of forming a California LLC include credibility, name protection, and perpetual duration.

Be sure to consider the following factors when forming a California LLC, to ensure everything is set up properly from the start. Mistakes during the formation process could lead to issues down the road.

Consult with a California Business Formation Attorney

Many entrepreneurs take the do-it-yourself approach when forming an LLC. However, this can lead to mistakes and oversights that may cause problems later on.

Consider working with an experienced California business formation attorney to ensure your LLC is set up correctly from the beginning. They can help with paperwork, provide guidance on tax elections and operating agreements, and answer any questions you have.

Look for an attorney with specific experience forming LLCs in California. Discuss key issues like formalities, liability protection, management structure, and timing.

If you would like to have your LLC formed by a California business formation attorney, simply call us at (310) 765-2525 or securely get the process started online.

Choose an Available LLC Name

Your LLC name must be distinguishable from other business entity names on file with the California Secretary of State. It must also comply with California naming rules.

In California, LLC names must contain the words “Limited Liability Company” or the abbreviation “LLC” or “L.L.C.” The name cannot include words like “bank,” “trust,” “trustee,” “incorporated,” “inc.,” “corporation,” or “corp.”

Do a name search on the California Secretary of State’s business search website to see if your desired name is available. Consider reserving the name if you’re not ready to file yet.

Choose a Registered Agent

California LLCs must appoint and continuously maintain a registered agent in the state. The registered agent receives service of process and other important legal notices on behalf of the LLC.

You can name an individual residing in California (including yourself) or a company authorized to do business in California as the registered agent. The agent must have a physical address in the state.

Many LLCs choose to hire a professional registered agent service for privacy, convenience and reliability. The agent will be available during normal business hours to accept important documents.

File Articles of Organization

To legally create your California LLC, you must file Articles of Organization with the California Secretary of State along with a $70 filing fee.

The Articles of Organization must include the LLC name and address, registered agent name and address, whether the LLC will be member-managed or manager-managed, and name and signature of the organizer.

File online, by mail, or in person. Processing times vary but are typically 5-10 business days. Expedited filing is available for an additional fee.

Create an Operating Agreement

Although not required by law, having a written operating agreement is highly recommended for California LLCs, especially multi-member LLCs.

The operating agreement is an internal document that outlines the LLC’s ownership structure, management, voting, dispute resolution, dissolution procedures, and other key provisions that govern the LLC.

A clear, comprehensive operating agreement can help prevent conflicts among members and ensure the LLC is run according to your rules, not default state law. It can also help preserve your limited liability status.

Have an attorney draft or at least review your operating agreement to make sure it is thorough and legally sound. Keep it on file with other important LLC records.

Obtain an EIN

An Employer Identification Number (EIN), which is also known as a Taxpayer Identification Number (TIN) is like a Social Security number for your LLC. You’ll need it to open business bank accounts, file taxes and hire employees.

You can get an EIN for free from the IRS website, by fax, or by mail. If you have a Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN), you can apply online. It only takes a few minutes and you’ll get your number immediately.

Be sure to keep your EIN secure as it can be used for identity theft. Do not use your personal SSN for business purposes, after the EIN is obtained.

File a Statement of Information

California LLCs must file an initial Statement of Information with the Secretary of State within 90 days of formation, and then every 2 years thereafter. The filing fee is $20.

The Statement of Information keeps the state updated on your LLC’s contact and management information. It requires the LLC name, California Secretary of State entity number, address, registered agent, type of business, and names and addresses of managers or members.

You can file online, by mail, or in person. Failure to file can result in penalties and the suspension of your LLC. Mark your calendar and file on time.

File a Limited Offering Exemption Notice (if Applicable)

If your California LLC will have more than one member or be manager-managed, and you plan to issue membership interests (the LLC equivalent of shares), you may need to file a Limited Offering Exemption Notice with the California Department of Financial Protection and Innovation (DFPI).

This notice is required under California Corporations Code Section 25102(f) if you rely on that exemption from securities registration when issuing membership interests. It basically informs the state that you’re not selling interests to the general public.

You must file the notice within 15 calendar days after the first sale of membership interests in California. The filing fee is $25 if the value of the interests sold is less than $25,000. Higher fees apply for larger offerings.

The notice must include the LLC’s name and address, the names of its managers, a brief description of the offering, the exemption you’re relying on, and other details about the interests being issued. You can file online through the DFPI website.

Failure to file the exemption notice when required can result in significant penalties, including the inability to legally continue the offering. Consult with a business attorney to determine whether your LLC needs to file this notice.

Obtain Required Licenses and Permits

Depending on your LLC’s location and type of business, you may need to obtain local business licenses, professional licenses, seller’s permits, zoning permits, or other state or federal licenses.

Use the state’s CalGold website to get a list of license and permit requirements for your LLC. Contact your city and county about local requirements.

For example, most California cities require a business license to legally operate. You must renew it and pay a fee each year. In the City of Los Angeles, you can register for a business license (Tax Registration Certificate) online.

Failure to obtain required licenses can result in fines, penalties and the closure of your business. Do your research to ensure compliance.

Open LLC Bank Account

To maintain your LLC’s liability protection, you must keep its finances separate from your personal finances. The first step is to open separate bank accounts in the LLC’s name.

Take your filed Articles of Organization and EIN to the bank to open checking, savings, credit card and other accounts. The accounts should be used solely for your LLC’s financial transactions.

Never commingle personal and business funds, as this could potentially invalidate your LLC’s liability protection. Have a clear paper trail showing money going into and out of the LLC’s accounts.

Consider getting a business credit card to build your business credit score. Good credit will give you more financing options down the road.

Pay the California LLC Minimum Franchise Tax

In California, all LLCs are subject to an annual minimum franchise tax of $800. This tax is owed regardless of whether your LLC is active or inactive, and regardless of its income level.

For LLCs formed in 2024, the first $800 payment is due by the 15th day of the 4th month after the month of formation. For example, if you form your LLC on January 10, 2024, your first franchise tax payment would be due by May 15, 2024.

In subsequent years, the $800 tax is due by April 15th. You must pay this tax for as long as your LLC remains in existence, even if it does not conduct any business or generate any income in a given year.

Failure to timely pay the minimum franchise tax can result in penalties, interest, and the suspension of your LLC by the Franchise Tax Board (FTB). A suspended LLC cannot legally operate, defend itself in court, or file suit against others.

Maintain LLC Formalities

Although LLCs have fewer formalities than corporations, there are still certain formalities you should follow to maintain your liability protection:

• Keep your personal and business finances separate
• Hold and document annual member/manager meetings
• Sign contracts and checks in the LLC’s name, not your own name
• File your biennial Statements of Information on time
• Maintain accurate financial records and file annual tax returns

Keeping up with formalities helps preserve your limited liability status and shows that the LLC is a legitimate business entity, not just an extension of you personally.

Understand Your Tax Obligations

By default, single-member LLCs are taxed like sole proprietorships and multi-member LLCs are taxed like partnerships. This means the LLC itself does not pay federal income taxes. Instead, the profits and losses pass through to the members’ personal tax returns.

However, LLCs can elect to be taxed as C-corporations or S-corporations for potential tax benefits. Discuss the pros and cons of each option with a CPA or tax attorney to determine the optimal tax treatment for your LLC.

In addition to federal taxes, California LLCs are subject to various state taxes, including:

• Annual franchise tax ($800 minimum) (as mentioned above)
• Annual LLC fee (based on gross receipts)
• State income taxes on LLC profits
• Payroll taxes
• Sales and use taxes if you sell goods

If you opt to have your California LLC taxed as an S corporation, the initial $800 tax payment will not be due until 2025.

Stay on top of your LLC’s tax obligations to avoid penalties and maintain good standing with the state. Work with a business accountant to ensure proper compliance.

Comply with Other Ongoing Requirements

Depending on your LLC’s industry, location, and activities, there may be additional ongoing requirements to follow, such as:

• Renewing business licenses and permits
• Updating your registered agent or principal office address
• Filing reports with the Secretary of State
• Notifying the state of major changes to your LLC
• Following labor laws and workplace posting requirements

As your business grows and evolves, periodically review your compliance obligations with your attorney and make any necessary updates to your LLC.

Understand the Corporate Transparency Act

A new federal law called the Corporate Transparency Act (CTA) requires LLCs and corporations to report information about their “beneficial owners” to the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

Beneficial owners are individuals who own 25% or more of the company or exercise substantial control over it. The goal is to prevent bad actors from using anonymous shell companies for illegal activities.

Under the CTA, you’ll need to provide each beneficial owner’s full legal name, birthdate, address, and a government ID number. Failing to report this information, or reporting false information, can lead to civil and criminal penalties including fines and jail time.

Work with your business attorney to determine whether your LLC is subject to the Corporate Transparency Act and how to comply with its reporting requirements.

Also See

Top 5 Mistakes California LLC Owners Make (and How to Avoid Them)

How LLC Owners Get Paid: Salaries, Distributions and Combinations

LLCs for California Real Estate: Why they are Crucial