How to Start an LLC in California

What Is an LLC in California?

An LLC is a limited liability company, which is a company that offers limited liability protection. Along with liability protection, this type of business structure also offers pass-through taxation. Therefore, the business is something separate instead of being attached to the owner like a sole proprietorship or partnership. In short, LLCs are taxed at the entity level, which means you avoid double taxation. This is a risk with some other legal entities in California.

The purpose of structuring the business this way is to ensure that owners aren’t responsible for liabilities associated with the company. For example, if the company is sued, then the owner’s assets are protected, and the company/person suing can only go after the company.

Limited liability companies also have plenty of options for management. They can be managed by members or you can appoint a manager to handle all of the decisions. This type of freedom is why many people opt for an LLC in California.

What’s the Difference Between an LLC and a Sole Proprietorship?

A sole proprietorship is different from an LLC in many ways. First and foremost, you don’t have to file any paperwork to start a sole proprietorship; once you start doing business and paying tax on that income, you’re a sole proprietorship. Sole proprietorships also don’t have maintenance fees, which an LLC has in California. For example, you don’t have to pay the $800 minimum state franchise tax if you have a sole proprietorship and not an LLC.

That said, sole proprietorships are not separate entities. This means that if the owner of a sole proprietorship is faced with a lawsuit, their personal assets can be on the line. Additionally, sole proprietorships are not taxed as pass-through entries, so the owner is responsible for paying taxes on all the income.

Still, these are only a handful of the differences between an LLC and a sole proprietorship. You can learn more about sole proprietorships vs LLCs here.

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

Starting an LLC in California costs $70; at least, that’s what it costs to start the application process. The California Secretary of State charges this as an initial fee for filing your Articles of Organization. That said, the most expensive cost associated with starting an LLC in California is the state’s franchise tax. This is an annual tax that will cost you $800. You have to pay this tax regardless of your LLC’s income. However, if your company will make more than $250,000 it might cost even more money to maintain your LLC. You can learn more about how much it costs to set up a specific LLC in California here.

What Are the Types of LLCs in California?

Before you start an LLC in California, you need to know about the different types of LLCs available. While a single-member LLC is among the most common, foreign LLCs and other LLC options are also possible. Each type of LLC will have unique benefits and drawbacks, so understanding why you should choose one or the other is part of the process.

That said, you may be limited based on the amount of people you have. For example, if it’s just you, a single-member LLC is your only option. Learn more about each type of LLC in California before you start one.

Single-Member LLC

A single-member LLC is an LLC that only has one member. These are LLCs that are started and operated by one person. In this case, the person is the founder, CEO, and the entire board of the company. Single-member LLCs are the most common type of LLCs formed, and you can always change to a multi-member LLC if you plan to go that route. For single-member LLCs, you have to fill out Form 568. Many of these forms are available online and can be found on the Franchise Tax Board’s website.

Series LLC

A series LLC is one of the more complex LLCs that you can start. Instead of being one LLC, a series LLC is a group of them, hence the name series. Typically, a primary LLC will serve as the primary LLC, and the other LLCs will fall under its umbrella. These types of LLCs aren’t available everywhere, but California does allow them.

Limited Liability Partnership

A limited liability partnership (LLP) is a special type of LLC, of a similar entity to an LLC for professionals. These entities are reserved for people like attorneys, lawyers, and architects. The state requires these firms to register as limited liability partnerships instead of LLCs. While they have different names, most of the paperwork is similar, and the structure is about the same.

There is also another type of limited liability partnership that’s closer to a limited partnership. It’s a limited liability limited partnership. In these cases, one partner is silent or has less responsibilities than another partner. This needs to be written in an agreement and the necessary forms need to be filed with the California Secretary of State.

LLC Treated as a Corporation

An LLC can opt to be treated as a corporation, which is something that’s often done for tax purposes. In these cases, the corporation files from 8832 and gets taxed as a C-corp. You have to make this distinction with the IRS first. Once you have this California will honor the distinction soon after. The benefit of running an LLC as a corporation is mostly related to how it’s taxed. Consult with an accountant if you’re unsure about whether or not an LLC taxed as a corporation is right for you.

Foreign LLC

The last type of LLC worth noting is the foreign LLC. If you already have an LLC in another state, you can move it to California as a foreign LLC. You can even register a fictitious name for your foreign LLC, so even if the name is already taken in California, you don’t have to worry about starting a whole new LLC. You’ll have to fill out the Application to Register a Foreign LLC form.

How to Start an LLC in California in 12 Steps

Starting an LLC in California is similar to how you would start any other type of business in California. This means that you have to file the right paperwork, apply for the necessary licenses/permits, insure your company, secure funding, come up with a plan, and much more. Ultimately, the entire process can be summarized in 12 quick steps:

1. Come up with a Business Plan
2. Choose a Name for Your Business
3. Choose a Registered Agent
4. File your Articles of Organization
5. File your Statement of Information
6. Decide on Member vs Manager Management LLC
7. Create an Operating Agreement
8. Get an Employer Identification Number
9. Apply for the Necessary Licenses and Permits for Your LLC in California
10. Secure Funding for Your LLC in California
11. Get the Necessary Business Insurance
12. Pay Tax on Your Revenue

Depending on the type of LLC that you’re forming, it’s important to note that some of these forms, steps, and tax obligations may vary. We always recommend working with a tax professional and the best LLC services to avoid running into any issues during the formation process. While you can always go back and make revisions, you’re better off getting it right the first time. Not only will you save time, but you’ll also save money.

Learn more about the details of each step for how to start an LLC in California below.

1. Create a Business Plan

The first step is to create a business plan. When you want to start an LLC in California, a plan is necessary because it helps you determine if what you’re doing is a good idea. A good business plan also helps you stay the course, expand your company, and keeps you honest. Business plans are also an important part of the funding process. If you want people to give you money for your business, or even if you want a small business loan, having a good plan in place will give people more confidence in your vision.

Some information to include in a business plan includes:

• Executive Summary
• Marketing plan
• How you meet new needs in the market
• Expansion plans
• How the company will profit
• People who will work for the company
• The legal entity, in this case, that you’re starting an LLC
• Products and services you’ll offer
• The financials
• The type of LLC that you will be operating

Remember, a good business plan can be the difference maker if you’re looking for sources of funding or even approval for your company from California’s Secretary of State.

2. Choose a Name for Your Business

Next, it’s time to choose a name for your business. Once you have the general idea, we recommend reserving it with the California Secretary of State. While it costs about $10 to reserve the name, this will prevent someone from taking it right out from under you.

We also recommend checking to see if the domain is available and to see if any trademarks have been filed for the same name. If possible, also check with other states if you plan on expanding. The last thing you want is to finally expand into a different state, only to be met with someone holding your business name hostage.

Register any Fictitious Names

If you have additional businesses or LLCs, or if you’re moving an existing LLC from a different state to California under a different name, you have to register the fictitious name. Depending on where you plan on doing business, expect to pay around $10 to $100 to complete this process.

3. Choose a Registered Agent

If you want to start an LLC in California you need to select a registered agent. These are people who will function as the point of contact between the state of California and your business. If you don’t have a registered agent who’s available Monday through Friday during business hours, you can run into trouble. In fact, you may have to pay fines or shut your doors if you get caught without a registered agent more than once.

When choosing a registered agent you don’t have too many restrictions. You can choose yourself, a family member, or even someone you’re friends with. Ultimately, the person just has to be available and keep records for the company.

While anyone can be a registered agent, that doesn’t mean they should be. Many LLC owners choose to appoint someone from the company as the registered agent. This can be the owner, a board member, or someone else who works for the company. Many business owners also like to work with registered agent services, which cost around $250 to $500, depending on what you’re looking for.

4. File Your Articles of Organization

One of the most important parts of the process is filing your California LLC Articles of Organization. This document is what you have to file with the California Secretary of State to be recognized as an LLC.

Your Articles of Organization must include the following:

• The name of the LLC and the business address
• The name of your registered agent and their address
• The type of LLC and how the members will manage the LLC

Expect to pay around $70 to file this document. This is one of the most important documents you need to file because the California Secretary of State will review it to approve your company.

5. File a Statement of Information

The Articles of Organization are important, but you also have to file a Statement of Information. According to California LLC law, you have 90 days after the company is formed to file this document. From there, you have to renew this document every two years using the Form LLC-12.

On this form, you have to include the following information:

• The name of your LLC
• The entity number assigned by the California Secretary of State
• The name and address of your registered agent
• A general description of what your LLC offers
• The address of your LLC’s principal address
• An LLC’s mailing address
• Any names of managers, chief executive officers, and the address for all of these people

You’ll also have to provide a valid email address if you plan on receiving documents and updates online. This doesn’t apply to all LLCs, but make sure you include it if you plan on doing this. You’ll have to pay around $20 to file this paperwork, so keep this in mind.

6. Decide on Member vs Manager Management LLC

One of the biggest decisions that you have to make is how the LLC will be managed. You have two options here, which include a member-managed LLC or a manager-managed. The former is an LLC managed by all of the members, and the latter is an LLC that’s managed by appointed managers.

When a manager or a small group of managers are appointed, they function like a board. They decide on income, revenue, expenses, and major decisions for the LLC. When the LLC is managed by the members, all members of the LLC vote on these decisions. Ultimately, it comes down to how you want decisions for the LLC to be made.

7. Create an LLC Operating Agreement

Every LLC also needs an operating agreement. While this is optional in many states, California is one of the few states that requires an operating agreement, so you have to create one. While you can write one after the LLC is formed, we recommend drafting one before you form the company. This is the best way to ensure that you have everything you need within the agreement. The main purpose of the agreement is to detail important company information. It should include the members, their duties, how profit and losses are handled, and any buyout rules.

Aside from including this information, operating agreements also serve a unique purpose for your company. It’s good to have one because they:

• Provide written documentation of the company’s members, their intentions, and how profits and losses will be handled; this is great for any possible legal issues
• It formalizes agreements between members of the company and makes sure they’re in writing to avoid discrepancies
• Forces California to treat your business as an LLC

Unlike some other documents you have to file with the state, this isn’t the case for the operating agreement. All you have to do is ensure that one exists, it’s signed by the members of the LLC, and there is an official copy.

8. Get an Employer Identification Number

The next part of the process involves filling out some basic information with the IRS and then the state of California. Ultimately, you need an employer identification number (EIN) if you want to start an LLC in California. This number is not your entity number, and it’s used by the state and federal government to collect taxes from your company. Unlike a sole proprietorship, you can’t use your Social Security number (SSN) to pay taxes on your business because the LLC is a separate entity.

9. Apply for the Necessary Licenses and Permits for Your LLC in California

Most LLCs will need some type of business license and permit to conduct business. Whether it’s something simple like a zoning permit or something more complex like a health inspection permit, you need to evaluate what your company requires and have the right paperwork.

The good news is that the process for how to get a business license in California isn’t that challenging. Typically, it comes down to looking into the counties you plan on doing business in and looking for the right permits.

It’s also important to note that there are specific permits and licenses for specific industries. This means that you may need a unique license if you’re a handyman, attorney, lawyer, or accountant. Doctors and other specialized professionals will likely require these licenses in order to function properly. Without the right license, your company will face fines and other legal problems.

10. Secure Funding for Your LLC in California

When starting an LLC in California, you need to have the right amount of funding in place. Otherwise, your company might not make it very far. In fact, most small businesses fail within the first five years, so it’s important to have funding in place to prevent this from happening to you. Typically, you have four options when it comes to funding. These include:

• Grants
• Lines of credit
• Investors
• Self-funding

Grants

Small business grants are available in California, and there are dozens of ways you can earn them. Some grants can pay as little as $5,000, but others may net you more than $100,000 in funding. Ultimately, the type of industry you’re in can determine what types of grants are available to you. For example, the green industry is known for having more grants than some other industries due to the need to lower emissions across the United States. We recommend looking into state and federal grants.

Self-Funding

Another common way for a business to secure funding is to bootstrap it. This process involves the owner spending a lot of their own money on the company. Money can come from other businesses, personal loans, savings, or even W-2 income. Ultimately, it’s a way to start an LLC if you don’t have additional financial aid from external sources.

Lines of Credit

Credit is helpful for most types of businesses. You’ll find that lines of credit can help you secure new equipment, pay your workers, and even keep the lights on. While many businesses have credit cards for purchases, many LLCs will seek small business loans for funding. These are loans from the bank or sometimes individuals who want to invest in the company. Loans often have a lower interest rate than credit cards, so they’re a good option if you need a large amount of capital fast.

Investors

In California, it’s possible for investors to purchase shares of an LLC. This may complicate things and is more common for corporations, but it’s possible for an LLC to receive funding from angel investors and venture capitalists. Angel investors are individuals who invest in LLCs, while venture capitalists are a collection of people who pool their money to invest in a company. If you have a million-dollar idea, this type of funding might be right for you.

11. Get the Necessary Business Insurance

When you’re starting an LLC in California, you need to consider the type of insurance that you need. There are a handful of insurance options that you can choose from, and some bundles are available. That said, you’ll have to work with insurance companies to determine what the rates will look like and to better understand the type of coverage you may need. The good news is that California has a Commercial Insurance Guide that can help you learn more about your insurance options.

Some examples of insurance covered in the guide include:

• Property insurance
• Inland marine insurance
• Crime insurance
• Peak season insurance
• Glass insurance
• Inflation insurance
• Insurance for specific types of machinery, including vehicles

When starting a business in California, if you have more than 50 employees, you also have to consider your employer health insurance requirements.

12. Pay Tax on Your Revenue

As an LLC, you still have to pay tax on your revenue. While it’s not a tax on your personal income, the company still has to pay taxes. Plus, if you pay yourself a salary from the LLC, you’ll have to pay tax on that income as a W-2 or 1099 employee. In California, someone who works for an LLC can be either, so keep this in mind based on how you want to pay yourself.

Sales and Use Tax

One of the most common taxes that you have to pay is the sales and use tax. It’s on your LLC to collect this tax from your customers, so make sure you apply this tax to your transactions. The tax rate in California is 7.25%, so keep this in mind when you’re setting your prices. While you don’t have to add it to the price of your items on the price tag, you do have to apply it to the transaction. Fortunately, most people shopping with your LLC will know about and prepare for this tax.

Franchise Tax

As an LLC, you have to pay the franchise tax, which is set by California’s Franchise Tax Board. This tax is $800 annually, and you have to pay it to avoid fees and penalties. While you don’t have to pay it during your first year of business, if you founded the LLC in 2021-2024, you’ll have to pay it every year after. It’s also important to note that you have to pay this tax regardless of how much your company makes in profit. Even if your LLC makes $0, you still have to pay this tax.

Payroll Taxes

When you hire employees, or sometimes if you pay yourself or someone else, you have to pay payroll taxes. There are four types of payroll tax that you have to pay, and you’re responsible for two of them; the other two must be paid by your employees. Even if you only have one full-time employee, prepare to pay this tax.

The two taxes that employers have to pay are Unemployment Insurance (UI) and the Employment Training Tax (ETT). UI tax varies based on how much an employee makes with the minimum amount being $434. For the Employment Training Tax, expect to pay .1% based on the employees income; this goes up to $7,000.

While these taxes that you have to pay, you still have to collect state and federal income tax from employees based on how they report in their work documents; you don’t have to do this for non-w2 employees. Employees also pay state disability insurance, which is taxed at a rate 1.1% based on the employees wages.

How to Start an LLC in California FAQ

Have questions about starting an LLC in California? We have answers to the most common questions below.

Do Employers Have to Offer Health Insurance in California?

Yes and no. Only employers who have more than 50 total full-time equivalent employees have to offer health insurance in California. Companies that have less than 50 employers don’t have to offer health insurance. That said, many small businesses in California choose to offer health insurance because it’s tax deductible and a good incentive for hiring employees. There may also be exceptions based on the specific industry.

Is a California LLC Worth It?

An LLC in California can be worth it, but it depends on the circumstances. For example, if you only make a few hundred dollars per year in revenue or if you don’t plan on selling anything for a few years, paying the $800 minimum state franchise tax can be a waste of money. Starting an LLC might also not be worth it for other tax purposes. While it’s a pass-through entity, you can still end up paying more in taxes with an LLC. It’s also important to note that California has stricter operational compliance rules and regulations than many other states. While this is good for people who work with LLCs, it’s not ideal for the company.

On the other hand, starting an LLC in California can be worth it if you’re worried about the risks associated with your business. It can protect you from liability, legal trouble, and even financial loss. Additionally, the tax benefits can make sense if you generate a lot of revenue. In fact, more than half a million LLCs are formed in California annually, so there’s definitely a reason to start one.

How Fast Can I Form an LLC in California?

You can form an LLC in California fast. On average, the process shouldn’t take you more than six weeks. If you follow the steps we covered in this article and provide the necessary information, you can have your LLC up and running in less than a week. However, there may be some exceptions based on the industry that you work in.

It’s also important to note that there are fees you can pay to expedite this process. You can opt for same-day expedition, which costs $750 or 24-hour expedition that costs $350. Some counties, like Sacramento, allow you to walk in and drop off documents for $15, which can shorten the process to three days for approval. Each county is different, so make sure you research the process in your county.

Start an LLC in California Today

Starting an LLC in California is one of the best ways to get your business off the ground. While LLCs aren’t for everyone, they’re one of the best legal entities that you can form for basic liability protection and pass-through taxation. While starting an LLC in California is easy when you follow the steps that we covered in this article, the process can still feel complicated at times. Remember to work with the best LLC services and slow down through the process. Starting a business is an exciting experience, but going too fast can result in you wasting your time and money.

The good news is that if you follow the steps we covered in the article you shouldn’t have any issues getting started. Take your time, download and file the right forms, and set up any accounts you may need before you get started. Ultimately, you want to launch properly to avoid having to pay fines or fees the second time around.

If you don’t think an LLC is right for you after reading this article, don’t panic, because there are plenty of options in California. Plus, we can teach you how to start other types of businesses in California.