|> California LLC Laws

California is the most populous state in America, and its enormous landmass is known for offering a sometimes overwhelming amount of choices. You can dine on banh mi at a Vietnamese grocery store in San Francisco or nosh on injera in Los Angeles’ Little Ethiopia neighborhood; ski down the snowy slopes at the Mammoth Lakes; or hike under the blistering sun in the dunes of the Mojave Desert.

Those choices are definitely present when it comes to starting and classifying a business in the Golden State, too. The California Governor’s Office of Business and Economic development offers at least seven different types of business-unique structures, with the limited liability company offering arguably the most flexibility. But what about “how to register an LLC in California?” It’s easier than it sounds.

Among numerous other types of businesses, California state law allows the creation of a limited liability company (LLC) as a type of business structure, a more recently created alternative to the S corporation and limited partnership.

In the eyes of California law, an LLC acts as a separate legal entity from the owner. As such, LLCs in the state can open bank accounts, enter into contracts, file lawsuits, run businesses, issue insurance policies and assume insurance risks, and hold assets (even real estate and personal property). The general partner of an LLC is fully liable for the obligations of the business, while other partners cannot take control of business operations – otherwise, those partners risk their limited liability protections.

It’s totally legal in California to have an LLC, known as a single-member LLC, which is an LLC with just one member. Naturally, LLCs with more than two members are called multi-member LLCs.

When stacked up against other types of business structures, LLCs act as a sort of hybrid option that often tends to offer business owners greater flexibility, with some caveats.

The phrase limited liability is right there in the name. This means that LLCs protect the owner’s personal liability, much like a corporation. So, owners of an LLC will not be held personally liable for the LLC’s debts or obligations, including some liabilities that may arise when an LLC is taken to court.

The LLC also serves as a tax pass-through option, much like a sole proprietorship. Owners of LLCs pay taxes only once, as the limited liability company’s profits are part of the owner’s personal income tax return. In contrast, a corporation pays taxes on both corporate and personal levels.

Compared to a corporation, a limited liability company features a more streamlined setup process and significantly more affordable fees. LLCs also require less in terms of record keeping. In these ways, the corporation caters to larger businesses with multiple shareholders, while LLCs generally cater to smaller business operations. While partnerships and sole proprietorships also serve smaller businesses, they do not protect personal assets as LLCs do.

Just like adopting a dog or cat, the first thing a new business owner has to do when forming an LLC in California is come up with a name. When it comes time to register an LLC name in California, that name must include: “limited liability company,” “LLC, “L.L.C.,” “Limited,” “Ltd.,” “Company” or “Co.” The name also can’t include certain restricted words, such as those similar to government agencies or those declaring that the LLC is a licensed entity like a bank, university, doctor or attorney. Of course, the name also can’t have already been taken in the state.

Next, an Agent Service of Process must be named. This title simply refers to the person who will be responsible for receiving tax forms, legal notices and government letters, serving as the LLC’s official point of contact. By law, the Agent Service of Process has to be a full-time California resident or a corporation authorized to conduct business within the state.

As long as the LLC is formed in accordance with California laws, just about anyone can form a limited liability company in the state. There’s no need to hire a lawyer, though the option is there. In the same manner, many commercial websites and services offer to handle the setup process – for a price, of course.

By and large, the process to register an LLC in California revolves around the Articles of Organization. Basically, this is just a fancy term for the legal document used to officially form the LLC. The Articles of Organization lay out the name of the company, the registered agent and a description of the services performed by the company. These articles also state whether the LLC will be managed by its members or by a specific manager.

In addition to the Articles of Organization, the applicant fills out and files an initial Statement of Information, form LLC-12. This document is just what it sounds like, and it includes essential information such as the business addresses and names and contact information for the managers, members and officers. The Statement of Information must be filed within 90 days of forming a limited liability company.

The registrant submits these materials, along with all of the necessary filing fee, to the Business Entities department at the California Secretary of State’s office in Sacramento. This can be done either by mail, in person or online at the California Secretary of State’s official website via bizfile California (the same is true for corporations). LLC owners can also use the SOS website to terminate an existing LLC.

Read More: Can an International Corporation Own a California LLC?

Among the owners of the limited liability company, the creation of an operating agreement is crucial to have on hand, especially if legal conflicts occur for the company down the line. This document details the ownership and operating procedures of the company.

LLCs also need an employer identification number (EIN) to open a business bank account, hire employees, or pay state or federal taxes. The IRS issues these nine-digit numbers free of charge, and LLC owners can get them immediately upon completion of an online application.

According to estimates from LLC University, an organization that provides free LLC education throughout the country, the state government typically approves newly formed LLCs within three to five business days in California, though peak filing season in December and January can delay that estimate by a few days.

To register an LLC in California, the cost comes down to filing fees and annual taxes. As of 2020, those filing fees amount to a one-time cost of $70, while the annual LLC franchise tax clocks in at $800. Additionally, all LLCs must file a Statement of Information every two years to maintain their business status. The Statement of Information costs $20 to file. Business people who file their LLC paperwork in-person at the Secretary of State Office in Sacramento are also subject to a $15 counter drop-off fee.

If an LLC makes less than $250,000 per year in California, that LLC does not have to pay yearly estimated fees to the state’s Franchise Tax Board. Otherwise, the amount of those estimated fees relies on the LLC’s income. They break down like this, as of 2020 rates:

• $250,000 to $499,999: $900.
• $500,000 to $999,999: $2,500.
• $1 million to $4,999,999: $6,000.
• $5 million or more: $11,790.

In the Golden State, licensed professionals are excluded from forming limited liability companies. This is a protective measure that intends to prevent these professionals from the personal protections of an LLC in the event of harmful events such as malpractice or negligence. California does offer a small exemption to this exemption, though, which is the registered limited liability partnership, or RLLP.

Only attorneys and public accountants can form an RLLP in the state. One of the newest types of businesses structures, first codified by the Texas Uniform Partnership Act in 1991 before crossing state lines in California, the registered limited liability partnership frees a partner from liability for debts and obligations. It includes those caused by errors, omissions, negligence, incompetence or malfeasance that occurs in the course of the RLLP’s business, which are caused by another partner when that partner is not under the supervision of the protected partner.

The LLC is just one of seven different types of popular business structures in the state of California. The other six include:

• Sole proprietorship: A business owned by one individual or a married couple who has full control of the company – and also full liability for debts and taxes.
• General partnership: A business owned and operated among two or more partners, where the partners have liability and split their shares of income taxes.
• Limited partnership: Similar to a general partnership, but it files taxes as a separate entity. It's ubject to an annual franchise tax.
• Limited liability partnership: Caters only to certain professional practices – such as lawyers, accountants, engineers, architects and land surveyors – in which all partners are able to directly manage the business. Partners aren’t subject to debt liability, and the business files taxes as a separate entity.
• C corporation: A business owned by shareholders and managed by the board of directors that they elect. The shareholders do not have liability, and the business is taxed at corporate rates while the shareholders also pay individual taxes.
• S corporation: Also owned by shareholders and managed by a board of directors, none of whom have personal liability. Income and losses are passed through the company to the shareholders.

Is there any case in which it’s beneficial to register a Delaware LLC in California, meaning to register an LLC out of state while the owner lives in Cali? Well, California LLCs are intended for businesses located in California, when the owner lives in California or owns real property in California.

When a Californian forms an LLC out of state, it’s known as a foreign LLC. Commonly, business owners do this to save money on taxes and fees, which are typically cheaper than those charged by the notoriously expensive California. Legally speaking, though, Californian business owners who register an out-of-state LLC will have to register that foreign LLC in California, too. That means that to be on the right side of the law, they’ll end up actually paying two sets of filing fees and two sets of state taxes – not necessarily the most savvy business move.