Form a California LLC

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, offering asset protection against judgments towards the company. Understanding the benefits and requirements, including the fees associated with establishing an LLC, is crucial. This involves drafting an operating agreement, comprehending the taxes implications, and submitting an annual report. Whether you're considering a single member LLC, seeking privacy through an anonymous LLC, or comparing LLC vs sole-proprietorship, it's important to know the differences. Filing the articles of organization sets the foundation, while knowing how to dissolve, reinstate an LLC, or amend articles allows for flexibility. Deciding between manager vs member managed structures, exploring a series LLC, or conducting a search to ensure your business name is unique are all steps in the process of creating a robust business entity.

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.

Liability Protection

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.

Raising capital

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.

Flexible Tax Management

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:

Step One: Create a Name for Your California LLC.

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:

1. It must include “Limited Liability Company” or contain an abbreviation flagging it as such (LLC, L.L.C., Company or Co., Limited, Ltd.)
2. Avoid misleading words, or terms that flag it as a government agency (FBI, Treasury, State Department, etc.)
3. Certain restricted words may require additional documents and licensure paperwork (Attorney, Bank, Credit Union, Lawyer, University, etc.)
4. Make sure the name you desire is not already taken. You can check for availability on the California Secretary of State business search page. If the name you want is available and you’re worried it will be taken before you get started, you can reserve it for up to 60 days by paying a fee and filing out a Name Reservation Request form.

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.

Step Two: Choose and Appoint a Registered Agent.

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.

Step Three: File Your California Articles of Organization.

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:

1. LLC purpose, name, and address.
2. The name and business address of the registered agent.
3. Whether or not your company will be manager or member-managed.
4. A formal signature from the creator of the LLC.

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.

Step Four: File the Initial Statement of Information.

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:

1. Your LLC’s name, street address, and mailing address (if they are separate).
2. Your registered agent’s name and mailing address.
3. The name of the manager(s) as well as their business/residential addresses.
4. An official email address that will communicate with the California Secretary of State.
5. The California Secretary of State filing number.
6. A statement of purpose for your LLC.

Step Five: Create a California LLC Operating Agreement

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:

1. Your LLC’s name and address.
2. Your registered agent’s name and mailing address.
3. Information concerning the Articles of Organization.
4. The duration and purpose of the LLC.
5. Who the members are and how they contribute.
6. Division of profits and losses.

Step Six: Get a California Employer Identification Number.

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.

Step Seven: Beware of California Tax Laws

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:

1. If an LLC from out of state has a California resident member, it’s treated as doing business and therefore is subject to the $800 annual tax.
2. Even if no money is generated, an LLC must still pay.
3. If the LLC issues a K1 to the resident, the LLC will most likely receive the $800 bill. The penalties for failing to pay the state LLC tax include a $2000 fine, an additional $20 per day fine up to $10,000, being unable to bring lawsuits in California, and treatment of all members as general partners, imposing more penalties for acts committed in California. There are several options to handle these excessive tax amounts:
   1. Form a California LLC and pay the $800 fee. It’s the simple approach, but that makes it the easiest to protect yourself from broad interpretations of California tax laws. You get limited liability protection, at least in theory. If your LLC owns property in California, this is the easiest solution.
   2. Don’t form an LLC. Instead focus on increasing your liability insurance coverage limits. Courts will most likely ignore the LLC and hold you personally liable for judgements imposed on the LLC. The proper insurance policy with high enough limits will help you avoid a situation where someone suing you needs to come after your personal assets to satisfy their claims.
   3. Equity Stripping. In California, assets will be easy for the courts to seize. Even if you have a California LLC, the value of your property will be subject to the claims of the creditors of the LLC. You can minimize the value of your LLC’s assets by funding the LLC properly documented loans to the LLC from banks or from other entities controlled by you.
   4. Personal Property Trusts. If you are a Member of an LLC from another state, your LLC will be forced to register as a foreign entity and pay the $800 annual fee. However, if you form a Wyoming Personal Property Trust and claim yourself as beneficiary and trustee, and this trust owns the LLC, then the LLC will no longer have a California Member. This might avoid forcing the foreign entity tax in California, but it is not guaranteed.
   5. Form a Corporation. A corporation which has a shareholder from California is not considered to be doing business in California and will avoid the foreign entity $800 fee. If you want to protect business assets outside of California and want to protect your personal assets from business liability, you can avoid the $800 annual fee. Corporations are, however, subject to taxation at both the shareholder and corporation levels if distributions are made.
   6. Form a Land Trust or Statutory Trust. These trusts rely mostly on a lack of transparency. They protect your assets because they are not a business entity, they cannot be subject to the $800 annual fee, even if property is owned in California. The idea is that the trust prevents a lawsuit before it’s even filed by depriving a plaintiff of financial motivation. If a lawsuit is filed it is difficult to obtain the beneficiaries’ assets, but they will still be able to get to the assets held by the trust, since they hold jurisdiction in California courts. These trusts are tricky to use because few banks will loan them money, forcing you to use cash when purchasing property, exposing assets to liability. If you own property in your own name and want to transfer to one of these trusts, a competent attorney will notice the connection between you and the trust. Ultimately, a judge is unlikely to allow you to escape liability using this structure.

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.