A limited liability company (or LLC) is a business entity type that can provide you with business security. Forming an LLC can help to separate your personal assets from the company’s debts, providing a protective barrier against judgments towards the company.
In a worst case scenario, you risk the possibility of losing your personal assets when you don’t establish a business as a separate entity. In an ideal world, you shouldn’t have to worry about lawsuits. No one plans to be sued or run into legal trouble. Forming an LLC provides you with a variety of protections and benefits.
An LLC can help limit your liability for business debts as an owner. Anything owned by your LLC can be taken in the event of bankruptcy, but your personal assets will be protected.
You might seek financial investment to build your business. If you are able to receive financial investment from people or companies, then working as an LLC will allow you to be protected if there debts to be paid later to these investors.
Owning an LLC offers different tax advantages when compared to corporations, or even owning a sole proprietorship. With an LLC, most often, there are no taxes paid by the LLC. Owners pay taxes on profits and losses on their personal tax returns instead.
Each state has a different set of requirements when forming an LLC. In California, you will need to go through the following seven essential steps:
People will need to know what to call your new company. Once you have an idea on what purpose your company will serve, you will need to come up with a name. There are certain guidelines you must follow in California, so consider these things when naming your business:
For a full list of naming rules, you can check out California’s Name Regulations & Additional Statutory Requirements and Restrictions. It’s also a good idea to check out URL availability, in case you want to create a website representing your business.
In California, it is required that you designate a person or company to accept legal papers for your business. A California Agent for Service of Process (or a “registered agent” in other states) will serve as a point of contact with the State. The agent must be available during business hours, and their name must be included in the articles of incorporation. You or anyone else within the company can serve as a registered agent for your LLC. Keep in mind that should you choose to serve as your own agent, you will have to make your personal address and contact information publicly available.
The Articles of Organization is an official document that lays out the basic information of your LLC. First you will need to submit a Form LLC-1. You can submit a file to the California Secretary of State either online or you can download a form to complete and file by mail or in person. It will cost $70 and you will need to include the information you have prepared up to this point including:
Upon receiving the form, the Secretary of State will review it for filing, and upon approval, the LLC will become a legal entity. If you’re expanding an existing LLC to do business in California, it is required to fill out a Foreign LLC form.
In California it is a requirement for all new LLCs to file a statement of information with the secretary of state. This must be filed within 90 days of filing the articles of incorporation and will cost $20. This statement must contain general information about your LLC. The statement of information must also be filed every two years, making it a biennial report. The statement of information will need to include:
An operating agreement is a legal document containing operating procedures and ownership of an LLC and it is required to have one in California. A written operating agreement is useful when settling disputes over financial agreements and other potential litigation. Without one in place, the courts make decisions based on state law. This may not work in the best interest of the LLC and its members. The information an operating agreement can include, but is not limited to, the following:
An Employer Identification Number (or EIN) is a number provided by the Internal Revenue Service (IRS) to identify your LLC for tax purposes. You can also open a small business bank account. Applying for an EIN should always be free. If you come across a website that charges you a fee for applying, it is not a legitimate service. You can apply online, by phone, or download a Form SS-4 to fax or mail. Online application will have an immediate response, while a fax can take 3-4 business days, and mailing an application could take as long as 4-5 weeks.
California requires those who seek asset protection using LLC companies pay an $800 per year franchise tax. This fee must be paid whether or not the business generates any income and is due every year. If your annual gross revenues exceed $250,000, there will be an additional fee to pay. An exception to this is LLCs formed in California during 2021, 2022, or 2023 are exempt from paying this fee for their first taxable year.
California also sends out thousands of letters every year demanding that LLCs from any state doing business in the state must register as a foreign entity. California has broad definitions of what “doing business” means:
If you wish to separate your personal assets from your business, then starting an LLC is a great option. If you want more traditional funding options and are wanting a start-up or enterprise, then there may be a better option. This might include venture capitalists or those looking for investors, who may have tax-exempt partnerships. This prevents them from investing in LLCs.
Forming an LLC protects you personally, despite this situation, and will provide you with anonymity and protect your personal contact information. Look into every aspect of what your goals are and in most cases an LLC will provide you with protection.
Having a business attorney working with you will make the above process much safer and easier. Contact us today to get started! We’ll help you learn more about how to form an LLC legally, learn more about staying compliant with California law, and provide a benefit to both you and your business.