Are you wondering how to get an LLC in California?
If you are considering making an LLC in the beautiful state of California, then this is an exciting time for your business.
For those who don’t know, an LLC is simply a company that you will form that offers limited liability to its owners. An increasingly popular choice for small and larger business owners, LLCs offer tax advantages as well as flexibility in terms of the way you manage your business.
Here, we will cover some of the things you need to know about making an LLC in California so you will be ready to start when it is go-time.
LLC Meaning
If you are excited about the prospect but have been wondering how to make an LLC in the first place, you are not alone.
A company with limited liability is known by its abbreviation: LLC. It’s easier to say, right? But what does this business arrangement consist of?
LLCs offer business owners a unique structure since they offer protection with limited liability as well as flow-through taxation. Notably, LLCs are separate from their owners. What does this mean, and why is it important?
LLCs are separate and unique entities; therefore, owners of LLCs are not personally responsible if the business incurs debt or other liabilities. This sort of protection can be useful and is one of the main reasons this business structure has become so popular.
If you are not familiar with flow-through taxation, all these means is that the income from your LLC will not be taxed at the level of the entity. However, it is important to note that if an LLC has multiple owners, you will need to fill out a tax return, and owners would be responsible for the reporting of any income or losses in their respective personal returns. These taxes would be paid if necessary.
At anytime you need assistance, please contact our business attorney!
Brad Nakase, Attorney
Advantages of an LLC
There are multiple benefits to structuring your California company this way in California. Of course, there are disadvantages, but overall the benefits outnumber them.
LLC members are protected personally from any liability that is derived from the LLC, as well as other members. This means, put simply, that your personal assets are safe from creditors, for example. This is in stark contrast to a sole proprietorship or a general partnership, in which creditors would be able to seek out the assets, such as bank accounts or a house, of LLC members.
LLCs can lose this advantage of limited liability. However, if you take all the necessary steps to make your LLC and exercise responsibility, caution, and good sense, you should be able to maintain your LLC in its correct form and structure.
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LLCs are Flexible
LLCs can be corporations, trusts, or even partnerships. Most members, though, are individuals.
There also exists no limit regarding the number of members in your LLC. Compare this to an S corp, for example, which are less flexible. In an S corp, only certain people can become shareholders, and the number of members is limited. So, overall, if you make an LLC, you will enjoy the fact that these unique business structures are truly malleable.
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Flexibility for Owners
There is also flexibility afforded to LLC owners and members in this category. Members are able to run the LLC themselves, or they can find a group of managers to run the company. In contrast, corporations must act in accordance with their board, on which sit directors, instead of shareholders.
If you choose to have your LLC managed by managers you appointed, then the LLC will act similarly to a corporation. In this case, the officers, as well as the directors, will be in charge, as opposed to the shareholders.
When we say shareholders, we also mean owners of the LLC, and vice-versa. Hopefully, that clears up any confusion.
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LLC Tax Structure
LLCs do not normally pay taxes on the same level as other business entities. Both profits and losses “flow-through” to the owners of the LLC, who report these on their own returns. Therefore, taxes are paid on an individual level.
On the other hand, corporations that are taxed as C corps pay differently. These corporations are taxed on the level of a business entity. C corp shareholders pay taxes on income that is distributed from the corporation, down to them. The LLC structure of taxation is more simple than this, which is attractive for many business owners.
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LLCs and Credibility
Many experts posit that when you make an LLC, your business will seem more credible to others in the business world. Increased credibility can lead to good things, such as increased confidence and success.
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LLC Requirements
When you make an LLC, your business will deal with a lesser number of compliance requirements from California. Now, that’s something to get excited about: fewer restrictions from the government so you can focus on growing your business.
Disadvantages of an LLCs
In our analysis, the benefits clearly overpower the drawbacks, but there are some things you should be aware of.
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Cost of Making an LLC
As you are making your California LLC, you should be aware that LLCs generally will cost you more to create than other business structures. You will want to check with the state office of California, but there may be two sorts of fees: one, when you make your LLC, and then ongoing fees. These vary by state.
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Transfer of Ownership
LLCs can prove more difficult to transfer in terms of ownership. While corporations are easier to transfer by selling stock shares, if you desire to transfer the ownership of your LLC, you will need to obtain the approval of all the involved members. You could also change the percentages of ownership that belong to existing members, and this also requires approval by all.
Step for Creating an LLC: A Checklist
Step 1: Choose a state for your LLC
Most LLC startups are begun in the state where the owners plan to do business. So, while it is true that you can make an LLC within various states, even if you will not be conducting business there, most individuals choose the state where they live. If you live in California, then you will probably plan on starting your business in California.
Why is this true? Well, if you make an LLC in a different state: Utah, for example, you will be tasked with registering your LLC as “foreign.” This label will change your tax status and can increase your overall fees.
However, each state enforces different laws and regulations, which is why you may have heard of business owners starting LLCs in foreign states on purpose, because they have done the research and discovered that there are advantages there. Usually, however, we recommend working where you live.
Step 2: Choose a Name for your LLC
A creative, original name is one of the best ways to get the word out about your LLC and officially establish it in the business world. But before you rush to name your LLC with the title you have been dreaming about, make sure it does not already exist.
You will want to do some research so as to check whether or not your name is already registered as a domestic LLC, a foreign LLC, or any other entity. Most states have databases you can easily search through. You will also want to make sure no one is using your name as a DBA. Speaking of DBAs, this could also be an option for you if you would like to make your LLC under a name that is not your legal name.
If you are not quite sure of your name yet or are still working on some of the administrative tasks necessary to make an LLC, we suggest reserving your name so that no one else can take it or use it in the meantime. You may have to pay a fee, and you should check on how long you are able to reserve it for, but this is a helpful idea that will save you aggravation further down the line.
Lastly, you will also want to run a search on the trademark of your chosen name. This will help you to avoid confusing your prospective customers. It will also help lessen the probability of any issues with infringement of intellectual property.
Step 3: Find an Agent for Service of Process
One aspect of making an LLC that many are not familiar with is the idea of locating an agent who is registered for your business.
If you plan to register your LLC in a different state and conduct business, you will need to find an agent within that state. Most people are aware of this since it is part of the process of registering your business in a new state. But even if you are just forming your LLC in the home state you have chosen, in this case, California—you still need an agent. Why?
The point of this agent is for your company to have an individual who is dedicated to receipt of any legal action against you. This agent may also receive tax documents and important forms and notices from the government, such as statements and annual reports. We know you do not want to think about receiving a summons, a subpoena, or any other legal action, but it is good to be prepared. If, for example, you are sued by another entity or individual, your agent will be responsible for accepting the lawsuit and additional court documents.
Remember, every agent who is registered and, therefore, a part of an LLC in California must possess a physical mailing address, not their PO Box.
Step 4: Fill Out an Operating Agreement
In California, as in many states, you will need to fill out and sign and submit an operating agreement. Some states allow this to be done orally, but we recommend that you fill out and submit this in writing. This document presents the contract or agreement between the business and its members, which describes exactly how the business will be run. This agreement should be filed whether you are making your LLC with numerous members or just one.
Part of this is symbolic: the agreement shows that the member/members recognize the unique existence of the LLC. But this document also allows you to dictate what will happen in adverse circumstances, for example, if you are no longer fit to run the business. It also lets you have some control over the requirements you expressed in the statute if your opinion regarding the LLC changes. Again, flexibility is key here in making an LLC.
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Multiple Members
Is your LLC made up of several members? If so, be certain you have this agreement in place. It can help keep in order:
- Ownership divisions
- Labor and resulting profits
- Any disputes that arise
This integral agreement will also lay out the terms regarding authority, describing who is able to perform what tasks in your company, how voting impacts transactions, the way in which members’ interests may be split and transferred, the order in which members are added, the splits between profits as well as costs, and distributions. This agreement can also cover other key points.
We recommend that your operating agreement, once finished, is reviewed by an attorney. If you need help with this in California, please contact our offices. Our California business lawyers & corporate lawyers have the knowledge and expertise to help you with the finer points of these types of legal agreements.
Step 5: File your LLC’s Article of Organization
For your brand-new LLC to be recognized by California as a lawful business, you need to file the necessary articles with the state. The certificate that you file, once approved, will mean that your LLC now is now official. Take a second to reflect on the hard work you have done, but then set your sights forward; there is always more to do.
We usually described LLCs as being “formed” as opposed to being “incorporated.” This is another thing that separates LLCs from corporations. However, you will often hear people mixing these terms up. We want you to know the difference!
What are the specific elements of the incorporation certificate? In most states, they can be broken down into:
- The LLC’s purpose
- The LLC’s primary location; where you will do business
- The LLC’s name, the name, and address of the agent (remember, no PO boxes)
- The LLC’s management
If you are unsure of how to set this form up, you should be able to find a template for the state of California or simply contact someone from the state’s government offices or the Secretary of State. Whoever made the LLC is the individual who should sign the forms, so, not necessarily the manager or a member. Some states do require the chosen agent, who is registered, to also mark down their consent.
In return for sending in this certificate, your LLC will receive a document of confirmation. Now, you possess legal evidence of your status. You can now start a bank account for your business and complete many other important tasks.
Step 6: Get an EIN for your LLC
One of the things that your new certificate allows you to do is to get an EIN from the IRS. This number will serve to identify you with the agency, and it will be used for your bank accounts and filing of all types of taxes.
If you are planning to expand your operation to other states in addition to California, you will need to put in an application with the new state’s department of taxation and receive the corresponding ID numbers—you should also register your LLC with the new state’s department of labor.
Step 7: Start a Business Bank Account and Get Credit
While this may not be required legally, we recommend that when you make your LLC, you open a new account. This is your choice, but many business problems originate when personal finances are not cleanly separated from that of a business. If there are any problems with your LLC in the future, legal or otherwise, then this is something that the court will pay attention to. Divide your personal accounts from your LLC’s accounts when you make your LLC. It is that easy.
You should also apply for a credit card for use solely with your business. If you are not ready to do this yet, just be aware of the card offers as they come in, and when the time comes, choose the credit card with the balance and interest rates that will suit your business for years to come. You will be glad that you did!
It is customary for banks in California to request some details about your LLC, so perhaps get in touch with the branch first to make sure that you have all of the bases covered. Then, hit it out of the park!
Step 8: Branch Out
If you are wondering how to make an LLC in an additional state (or more), there are some key things you’ll need to put on your to-do list. First, you will need to register in that state. Any state that you plan to do business in that is not California is considered a “foreign entity.” Therefore, registering will usually include filing the appropriate forms with that state, but remember to pay attention because every state is different.
When you file the correct reports and pay the expected fees in your “foreign” state, you will usually receive an official certificate. Hold onto that certificate because it is hard to prove that your LLC has been approved to conduct business in that particular state.
What else will you need to do to start up in another state? Well, first, your LLC needs to be approved, as we mentioned. But how is that decision made? The state will look at your business and the state it is in.
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Foreign State Requirements
How do you make an LLC in another state? Here is what they are mainly looking for:
- Has the LLC already established itself in the state, physically?
- Does the LLC have employees within the foreign state?
- Is the LLC equipped to accept and fill orders within the foreign state?
- Does the LLC have an agent for the new state?
All states possess different policies. Just because your LLC is all set to go in California, this does not mean that other states will not require you to complete additional tasks. Usually, though, branching out your LLC is worth it. Just be prepared.
We hope we have answered all your questions concerning how to make an LLC. If you are still unsure whether it is the right time to practice business in an additional state or have any additional questions, our California corporate lawyers at Nakase Wade are here to offer legal consultation.