How to Start an LLC in California

Creating an LLC in California can be a good idea. But how do you start one? Read on to learn more about California's LLC formation process.

Starting an LLC in California can offer many benefits to your business, like liability protection and tax benefits.

But the process tends to differ from state to state. That's why knowing where and how to begin can be challenging.

To help you out, here's a guide on how to start an LLC in the Golden State.

Guide to Starting an LLC in California

Whether you do it yourself or hire someone else, follow these 6 steps to start an LLC in California:

Name Your LLC

You need to register a business name when starting an LLC. The name you choose should follow the state's guidelines.

In California, these guidelines are:

• Unique to your business
  No other company in the state should've registered the same business name as yours. You can check if the one you want is available by searching California's business name database before filing the paperwork.
  Your LLC name should be relevant to your business but still catchy enough to be unforgettable. You can use business name generators like Shopify or Canva to come up with ideas.

• Cannot be confused with another business
  It shouldn't be similar to another business' name in any way. You also can't use suffixes, definite articles, or symbols to differentiate your business name from another company's.

• Must indicate it's an LLC
  Your business name should include terms like "LLC" or "Limited Liability Company."

• Shouldn't be similar to a government agency or organization's name
  Implying an association with any government organization or agency is also prohibited.

• Must not promote illegal acts or crimes
  Using obscene words/profanity in your business name is also forbidden. It also shouldn't mislead the public, whether intentionally or not.

• Cannot use words like "bank," "trust," or "insurance"
  These are reserved for specific institutions.

Availability as domain name
It's a good idea to secure your LLC name as your domain name, even if you don't plan on creating a website yet. This will prevent other businesses from using it as their own.

Websites like GoDaddy and Name.com have handy search tools you can use to check if it's still available. If you're on a tight budget, there are ways you can get your domain name for free.

Using a fictitious business name
You can get a fictitious business name (aka a DBA) if you want to use a different name for your business than what's registered.

In California, you need to register your fictitious business name within 40 days of starting your business.

Fictitious business names are valid for 5 years in California. The filing fees vary from area to area. Make sure you double-check with the county office to learn how much you have to pay.

Assign an Agent for Service of Process

Like in other states, you need to have an agent for service of process (aka a registered agent) before you can start an LLC in California. Otherwise, your application will be rejected.

Anyone can do it as long as they meet the following criteria:

• Should be 18 years old or above
  
• Must be a California resident with a physical street address in the state (no P.O. Boxes or virtual addresses allowed)
  
• Should be an individual or a qualified agency (your LLC can't serve as its own agent)
  
• Must always be available during regular business hours (8 AM to 5 PM, Mondays to Fridays) to receive legal documents

That said, you have two main options: be your own agent or assign/hire someone else. Using a registered agent service is usually the most convenient option.

If you're changing your LLC's listed agent for service of process, you need to file a Statement of Information to update your records. More on that later.

File Your Articles of Organization

To start an LLC in California, you need to file your Articles of Organization with the Secretary of State's office. You need to use Form LLC-1 for domestic LLCs and Form LLC-5 for foreign LLCs.

You'll need to include your:

• Name and address
  
• LLC's name and address
  
• Registered agent's name and address
  
• Management structure

These forms already contain the necessary details; you just have to fill them up. But you can include additional information if you want and send it as an attachment.

You can submit the Articles of Organization in three ways: online, via mail, or in person. Filing online is typically the easiest and fastest way of the three.

As for the fees, California has a state filing fee of $70. But if you need a certified copy of your formation documents, you have to pay an additional $5.^[4]

There's also an extra $15 handling fee if you drop off the paperwork in person.^[5] In-person drop-offs should be done during regular business hours (Monday to Friday, 8 AM to 5 PM).

Once you submit your Articles of Organization, you just have to wait until your application is approved.

File the Statement of Information

California requires all LLCs formed in the state to file a Statement of Information (using Form LLC-12) with the Secretary of State's office within 90 days of their approval date.

This information includes:

• Your name and address
  
• California Secretary of State entity number
  
• Your LLC's name and address
  
• Managers' or members' name and address
  
• Your registered agent's name and address
  
• Type of business
  
• Chief Executive Officer (if elected or appointed)

After the first time, you'll need to file it every two years on your LLC's registration anniversary to comply with state requirements.

You can file your Statement of Information online, by mail, or in person. It costs $20 per filing, with an additional $15 handling fee for in-person submissions. You can also request a certified copy for your company's records, which costs an extra $5.

California offers a 60-day grace period to businesses that can't file on or before the deadline. After this, you'll be charged a $250 penalty fee if you still fail to file before the grace period ends.

Create an Operating Agreement

California is one of the few states where a written operating agreement is necessary for LLCs. You don't need to file it with the state, but you still need to create one to stay compliant.

Your LLC operating agreement establishes clear rules for running your business, which helps prevent conflicts among members. It also reinforces that your LLC is a separate business entity, strengthening its liability protection.

That said, an operating agreement usually includes the following:

• Management structure (member or manager-managed)
  
• Members' information (total number, rights, duties, etc.)
  
• Registered agent's information
  
• How profits and losses are distributed
  
• How handling new and outgoing members will work
  
• Clauses regarding indemnification and liabilities

The California Revised Uniform Limited Liability Company Act (RULLCA) also requires including specific information in your operating agreement. You can see the full list here.

Apply for an EIN

Besides the operating agreement, you also need an employer identification number (EIN). You need one to pay business taxes since LLCs are considered separate legal entities.

Single-member LLCs are the only exception because LLC owners can still use their Social Security number (SSN). But it's still better to apply for a separate EIN for your company.

Aside from paying taxes, you need an EIN to:

• Open a business bank account
  
• Get a business credit card
  
• Apply for business loans

You can apply for one directly with the IRS in four ways: online, by fax, mail, or by phone (international applicants only). Applying online is the fastest because you'll get yours immediately after the session if you're eligible.

Getting an EIN through the IRS is completely free. Going for a third-party service can cost you extra.

What to Do After Creating a California LLC

You have to do a few other things after the state approves your LLC's creation, namely:

Get the necessary business licenses and permits.
Like most states, you don't need a license or permit to start an LLC in California. But you may need one to actually conduct business within the state.

The specific licenses and permits you need will depend on your business type, the industry it's in, and its location.

If you're unsure what licenses or permits you need, you can check using California's handy online tool. Here, you can search for the specific licenses/permits you need and where to get them.

Open a business bank account.
LLCs are separate entities from their owners. So you need a separate business bank account. That way, you maintain a clear line between your personal and business finances.

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Pay business taxes.
California LLCs need to pay several taxes to stay compliant with state and federal requirements, namely:

• Business income tax
  As an LLC, your company pays its income taxes as part of the LLC owners' individual tax returns. But if you choose a C-corporation tax classification, you'll need to pay income taxes twice - on individual and corporate levels.
  California's personal income tax rates are around 1% to 12.30%^[7]. The corporate rate of 8.84% also applies if you're filing as a C-Corporation.^[8]

• Annual franchise tax
  Aside from income taxes, California LLCs have to pay an annual franchise tax to the California Franchise Tax Board.

  You need to pay this every year as long as you're doing business in the state. You can do it online or by mail using the form FTB 3522 (LLC Tax Voucher).

  It costs $800 annually and is due on the 15th day of the 4th month after your California LLC's taxable year starts. ^[9]

  Do you have to pay California's LLC fee in the first year?
  LLCs created between January 1, 2021 and December 31, 2023 don't have to pay the annual fee for the first year. You also don't have to pay California's LLC fee if you close your LLC within 1 year of forming it.
  

• Additional LLC fees
  If your company makes more than $250k/yr, you also need to pay an extra LLC fee (around $900 to $11,790^[10]), depending on your income bracket.

Other taxes your LLC might also need to pay are employment, sales, and use taxes if you have employees or sell taxable items.

Get business insurance.
Even with your California LLC's liability protection, getting business insurance is still a good idea because it adds another of protection to your business.

It can cover your company's legal expenses and damages if it's sued or experiences other legal troubles. Business insurance can also cover any losses you incur from natural disasters, theft, and others.

Some of the most common business insurance policies are:

• General liability
  
• Business interruption
  
• Commercial property
  
• Professional liability
  
• Workers' compensation

You can also get business insurance that combines several types in one comprehensive policy, like the Business Owner's Policy (BOP). This usually includes general liability, commercial property, and business interruption insurance.

Create a business website.
Creating a business website for your California LLC is the easiest way to build its online presence, which is now crucial for all businesses, even brick-and-mortar ones.

A business website will help interested customers find your company more easily. It gives them a convenient contact point to reach out to your company if they have concerns.

Don't worry if you don't know how to build a website from scratch. You can use website builders to easily create one.

How Much Does it Cost to Start an LLC in California?

The startup costs to open an LLC in California can be just $90 - $200+. But after that, the ongoing costs can be upwards of $1,000 a year.

That said, you mostly have to worry about these mandatory costs:

• State filing fee ($70 one-time fee)
  
• Statement of Information filing fee ($20 every two years)
  
• Business licenses/permits ($50 to $100+, depending on the location)
  
• LLC state taxes (~$800 to $11k+ per year)
  
• Registered agent services (~$100 to $300 per year)

Hiring formation services or lawyers to help you create an LLC in California can add to the overall cost.

Why Start an LLC in California

There are many reasons it's a good idea to turn your California business into an LLC. Here are some of them:

Personal Liability Protection
In California, claimants of your LLC's liabilities can't hold you or other members responsible for the company's debts and liabilities.

After all, an LLC is considered a separate legal entity, so its assets differ from the owner's. So your personal assets (e.g., house, car, jewelry, etc.) will be safe even if your business goes bankrupt or incurs a massive debt.

But this protection doesn't apply if you or other members commit crimes or other illegal activities.

Flexible Tax Options
LLCs enjoy flexible taxation because they can choose their tax classification. But they're taxed as sole proprietorships by default. So even if they're separate legal entities, they only have to pay taxes as part of the members' individual income tax returns.

If you're a small business owner, this can help reduce expenses, especially since California imposes other taxes on LLCs (e.g., annual franchise taxes and additional LLC fees).

Increased Credibility
California offers plenty of networking opportunities to business owners. But credibility is critical if you want to earn their trust.

Starting an LLC can boost your company's credibility because it'll formalize its identity as a business. This is great if you want your business to be more attractive to potential clients and investors.

Improved credibility can also open up other doors for your business, such as access to better financing options.

How to Create a California LLC

If you want to start an LLC in California, you can generally do it in three ways:

Do It Yourself
This is the least expensive option since you only have to pay the required fees, like the state filing fee. This is best if you're already familiar with how starting an LLC in California works.

But doing it yourself requires more time and effort since you need to do everything yourself.

Use a Formation Service
Using an LLC formation service is generally the most convenient option since they'll handle all aspects of the process themselves. You can just sit back and wait until the state approves your LLC.

The only downside is the cost, especially if you're getting add-ons like registered agent services or annual report filing.

Some of the best LLC services you can try are Northwest Registered Agent, Bizee (formerly Incfile), ZenBusiness, and LegalZoom.

Hire a Lawyer
You can also hire a lawyer to help you start an LLC. The main advantage of this option is their extensive knowledge and expertise. This is best if you need more in-depth legal advice or personalized LLC formation.

Of course, this is generally the most expensive way of the three since the cost will depend on your chosen lawyer's rates.

What the Experts Say

CreditDonkey asked a panel of industry experts to answer readers' most pressing questions. Here's what they said:

Bottom Line

Starting an LLC in California can be a good idea, especially if you want additional protection for yourself and your business.

But it's still best to familiarize yourself with the formation process in California before you file your paperwork. Doing so will help you avoid wasting valuable time, effort, and resources.

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