Types of LLCs in California - howtostartabusinesscalifornia.com

What Is an LLC?

An LLC is a limited liability company. It’s a type of business structure, or legal entity, that shields the owner from lawsuits and other liabilities associated with the company.

The goal of an LLC was to create a tax-friendly legal entity that shields people from liabilities, and that’s exactly what was accomplished. In fact, the LLC structure dates back to the late 1800s in Germany but became popular in the United States throughout the late 20th century.

What makes an LLC special is how the financials are handled. Instead of owners mixing funds or being responsible for the assets of the business, everything is separate. If the business has legal problems or financial issues, the owner can often get away with not losing their assets.

While this is beneficial, LLCs aren’t right for everyone and may have some drawbacks including higher taxes, more public attention. Additionally, sometimes if owners commingle funds it can result in the liability protection being nullified.

Do You Need a License to Do Business as an LLC in California?

Yes, you’ll need a license to do business in California. A California LLC license functions as a seller’s permit that allows you to sell your goods and pay taxes.

There are also specialized licenses you may need to get from the state, federal government, or city you operate in. For these reasons, it’s important to understand the various types of licenses you may need to start an LLC in California.

How Is an LLC Taxed in California?

An LLC in California is taxed as a pass-through entity unless it’s a single-member LLC. Single-member LLCs are taxed in a similar way as sole proprietorships, but you still have to pay the minimum state franchise tax.

California has an annual tax for LLCs that will run you $800 per year. It doesn’t matter if you make $100,000 or $5; this is a tax that you have to pay if you form an LLC in California or do business in California with a foreign LLC. That said, California has been waiving the fee for LLCs in their first year. If you start one in 2024, you don’t have to worry about the tax for the first year.

LLCs in California can also be taxed as an S corp. It will still be an LLC but members of the LLC can elect to be taxed as an S corp instead. This can come with unique benefits for LLCs but you should always consult with a professional before making this switch.

Is California LLC Worth It?

One of the biggest questions we get about forming an LLC in California is whether or not it’s worth the cost. Unlike other states, California has a minimum franchise tax that you have to pay if you want to start an LLC. Unfortunately, this tax is $800 per year.

While the tax is $800 annually, it is tax deductible from the company’s revenue, so you can get some of that money back during tax season. Additionally, you can get around paying this tax for the first year.

While the cost of living can also be higher in California, we believe it’s worth it to start an LLC in the state. According to data from 2022 1.7 million private sector businesses would agree. This is because California is one of the largest economies in the world – in fact, it’s the 5th largest economy on the planet.

Therefore, there are plenty of opportunities to make money in California, and keeping up with those costs shouldn’t be an issue once you get started.

The last thing to note is that there are more industries in California than in other states. Its proximity to the coast creates a massive maritime industry and it’s one of the leading places for technology innovation from companies like Facebook.

Overall, California is a great place to start an LLC if you have a plan and know what type of LLC you want to start.

What Are the Types of LLCs Available in California?

Before you start your business, you may be wondering about how many types of LLC in California. California allows you to form three different LLC structures in the state – single-member, multi-member, and limited liability partnerships, which are similar to LLCs. We’ll go over all of these in detail below.

You can even create a business entity in other states and move it to California, so California is available for most LLC structures. So, if you have a series, foreign, or anonymous LLC set up already, you can move it to California and still be able to operate.

You may be wondering, “What is the best type of LLC to get?” It’s all about your business needs, so you’ll have to weigh the pros and cons. Learn more about the most common types of LLCs you’ll run into in California below. We include a mix of LLCs you can start in California as well as LLCs you can move to California as a foreign LLC.

Single-Member LLC

Single-member LLCs are unique business structures designed for a single person – as the name implies. These LLCs are usually the next step in the evolution of sole proprietorships, but many solo-entrepreneurs start these right out of the gate.

When it comes to how they’re handled, a single-member LLC is handled like most other LLCs, except you only have one person. This makes it easy to make decisions and agree on how to move the company forward because, well, it’s just one person.

While it’s nice to make these decisions on your own, that doesn’t mean it’s all rainbows and butterflies. You’ll find that you’re now in control of the entire business, which includes taxes, financial obligations, and legal representation if something does happen. Still, for people who are just starting, it’s not a bad choice for an LLC.

When it comes to taxes, single-member LLCs are the simplest of LLC entities. It’s treated as a pass-through entity by the IRS, so you pay taxes on it in the same way as a sole proprietorship. However, California has a minimum $800 franchise tax you will have to pay on an LLC, even if you don’t make $800 in profit.

Advantages of Single-Member LLCs in California

Single-member LLCs are a great choice if you’re going at this as a one-man army. All of the important decisions will fall to you, so you have total freedom to take the company anywhere you want. Some other advantages of single-member LLCs include:

Paying taxes is simple, almost as simple as a sole proprietorship
You can pass ownership to someone else
It’s possible to start small and add members as you go
Low startup costs

Depending on your situation, you may enjoy more or less advantages, so keep that in mind when choosing single-member LLCs.

Disadvantages of Single-Member LLCs in California

Single-member LLCs aren’t perfect. Depending on your situation, they may not be right for you, especially if you don’t like paperwork. Another obvious drawback is that you can only start one of these if you’re a single person, so take any partnerships or other members off the table. Other disadvantages include:

A lot more paperwork and filing needs compared to a simple structure like a sole proprietorship
You have to submit compliance forms and remain compliant to avoid penalties
It puts your name out there, which can be a target for some if you’re a smaller company
It makes your personal information easier to find

It’s also important to note that you can run into problems if you mix any of your funds illegally, so avoid doing so to keep liability protection in place.

Multi-Member LLC

The second-most common type of LLC you’ll come across in California is a multi-member LLC. It’s similar to a single-member LLC but it has more than one member.

For people who want to start an LLC with a group of members instead of going at it alone, the multi-member LLC is the ideal choice. In California, you can have as many members as you want and you have a lot of freedom with how decisions can be made.

While you can have a lot of members, getting them to all agree may be another issue, which is where the operating agreement comes into play. Multi-member LLCs must have an operating agreement that determines how the company should be handled in detail to prevent any disputes.

It’s also important to note that there are two types of multi-member LLCs: member-managed and manager-managed.

Member-managed multi-member LLCs are controlled by each of the members. On the other hand, manager-managed multi-member LLCs have a manager or group of managers that make decisions. The latter is common when LLCs have silent investors who don’t want responsibility for day-to-day operations.

Advantages of Multi-Member LLCs in California

Multi-member LLCs have a lot of advantages that range from having more people to help with tasks and being able to add as many members as you want. Some other advantages of multi-member LLCs include:

Members don’t have to be people, so you can have corporations, other LLCs, and other people as members
Members don’t have to be from California or even from the United States
Considered a pass-through entity

Another advantage is that you can choose how the LLC is taxed. You can have it taxed as an S Corp or even a C corp, so you have a lot of flexibility there.

Disadvantages of Multi-Member LLCs in California

Multi-member LLCs aren’t perfect. While having more people in the company can help you solve problems more efficiently, it can also create unexpected problems as well. Some disadvantages include:

You have to register the company with each state it will operate in, and California is strict on this
More paperwork than single-member LLCs
Everyone has to agree on the operating agreement

It’s also important to note that people who own the LLC can’t work for it as an employee until their tax status is changed, which complicates things further.

Foreign LLCs

California allows foreign LLCs to operate in the state. These need to be established by an LLC from outside California if the company is trading full-time in the state. Having a physical location in California may also force you to have to register with the California Secretary of State.

A great example of a foreign LLC is something simple like an LLC that was founded in New York.

While the company’s main office is in New York, if the LLC opens a physical location in California and begins to sell goods full-time, the LLC needs to be registered in California. This includes paying the California franchise tax, and even applying for the necessary California LLC business licenses.

When it comes to how taxes are handled, it depends on the type of business. This is because California may allow unique entries, like series LLCs, to operate in the state. You need to verify how taxes with your entity type are handled to get that answer.

Advantages of a Foreign LLC in California

There are a lot of advantages that come with foreign LLCs, especially in California, because the state doesn’t allow all types of LLC options if they’re formed there. For this reason, the biggest advantage is that you can form something like an anonymous LLC and then move it to California. Other advantages include:

More reach for your business if you already have locations in other states
If your home state isn’t working, it gives you another option
California boasts a powerful economy that you can take advantage of by moving a company there

Depending on the type of foreign company, some of these advantages can quickly become disadvantages, so keep this in mind.

Disadvantages of a Foreign LLC in California

Foreign LLCs in California aren’t perfect. You’ll find that many of them come with disadvantages, with the most notable problem being the amount of tax you have to pay. Learn more about the disadvantages below:

You have to file articles of organization in another state
You have to pay taxes in another state, plus California has a minimum $800 franchise tax for LLCs
California may deny your entity

Also, moving a business to California requires counsel from accountants, attorneys, and other consultants to ensure that you maintain compliance with state laws.

Series LLC

A series LLC is a type of LLC that functions as a group of companies or subsidiaries. One LLC is the primary company, and then it manages a handful of smaller LLCs. This can quickly get messy, so they’re only applicable in rare situations where it makes sense to split up.

For example, an LLC may have a mining operation and a manufacturing plant; a series LLC can be useful to have two separate LLCs for both businesses. Since they’re closely related, it can help keep things more organized than having two separate LLCs. As you can see, this is a very niche type of LLC.

According to California state law, you can’t form a series LLC in California. While this is the case, that doesn’t mean you can’t form a series LLC in a different state and move it to California. States that allow the formation of this entity include:

Alabama
Arkansas
Delaware
Illinois
Indiana
Iowa
Kansas
Missouri
Montana
Nebraska
Nevada
North Dakota
Oklahoma
Tennessee
Texas
Utah
Virginia
Wyoming

Aside from these states, Puerto Rico and the District of Columbia are two territories that allow series LLCs to be formed. Once you know where you want to start your series LLC, you can form it and then move its operations to California.

Advantages of Series LLCs in California

The biggest advantage of a series LLC in California is that you can have more than one company under the same umbrella as another LLC. This brings with it unique advantages and use cases like:

You only have to pay one filing fee, and everything is filed together in California
Tax returns only have to be filed for the primary LLC in the series
Series assets are independent from one another, which means they’re all protected separately
Less complex than a corporation with subsidiaries

These are complicated entities, so we recommend speaking with an accountant or a consultant before forming one to maximize these advantages.

Disadvantages of Series LLCs in California

Due to their complexity, you’ll run into a few disadvantages of a series LLC. These include:

You’ll need a separate bank account, credit line, and balance sheet for each LLC in the series
More expensive to form than other LLC types
Newer structure with some legal gray areas
You’ll have to pay taxes in California and your home state

We always recommend speaking with a consultant of some kind before going down the series LLC route.

Anonymous LLC

An anonymous LLC is exactly as the name implies: anonymous. It’s one of the few LLCs that you can start without providing information about yourself.

In most cases, information about the owner of an LLC is a public record. For some people, this poses problems because it makes it easier to find if someone has a problem with the company.

Additionally, anonymous LLCs can make it easier for you to hide behind the entity and avoid some liabilities. These can be formed by individuals or even groups of people, depending on the state.

California does not allow anonymous LLCs to be formed in the state. This means that you’ll have to form one in a state that allows them, which is only three. You can form one in Wyoming, New Mexico, and Delaware.

Once you form the company, you can register with the California Secretary of State and operate as an anonymous LLC in California.

Advantages of Anonymous LLCs in California

Like other legal entities, there are benefits and drawbacks to starting an anonymous LLC. The biggest benefit is that your personal information is kept private, but some other advantages make the process worth it. These include:

No association with the company, so there’s no negative fallout if there are any problems
Nobody can gain access to your data without going through the proper channels
Same benefits as other LLCs

Disadvantages of Anonymous LLCs in California

While an anonymous LLC can be advantageous, it’s not always ideal. For example, you still have to pay California’s mandatory minimum $800 franchise tax. Some other disadvantages include:

During a lawsuit, your private details can be made public during the case
You’re not anonymous from banks, creditors, or the IRS
Shares disadvantages with other types of LLCs

You also have to form the LLC in another state and then register it in California, which can be a time-consuming hassle.

Limited Liability Partnership (LLP)

While a limited liability partnership is not technically an LLC, it’s similar to a professional limited liability company (PLLC), so it’s important to note. For entrepreneurs in California who want to start law, accounting, or architecture firms, a limited liability partnership (LLP) is what the state allows.

As the name suggests, it offers limited liability protections that are similar to a liability company, but it’s set up like a partnership.

To form an LLP in California, you have to fill out the Application to Register a Limited Liability Partnership.

Advantages of LLPs in California

Like other legal entities, LLPs have perks and drawbacks. The biggest advantage is that they function like a limited liability company, so the assets of the partners are kept separate. Other advantages include:

The only option for lawyers, accountants, and architects who want LLC-type protection
Can be taxed in different ways
Great recognition for people who have these firms

The advantages don’t stop there, and you may find more for your specific needs.

Disadvantages of LLPs in California

LLPs also have disadvantages in California. The biggest example is that they’re only available for three professions. Other disabilities include:

Having to pay the minimum California franchise tax of $800
Similar disadvantages to single-member and multi-member LLCs

Still, LLPs are the only option for the three professions it covers, so the advantages often outweigh the drawbacks.

How to Form an LLC in California

Knowing the types of LLCs is important, especially if you’re getting ready to form an LLC. Once you have the type of LLC that you need, you can begin the formation process. While it may seem complicated, it’s a simple process and many of the steps are the same for each type of LLC.

The steps to start an LLC in California are:

Come up with a business plan.
Select the type of LLC you want to form.
Register your LLC’s name with the California Secretary of State.
Choose a registered agent.
File your articles of organization.
For LLCs with more than one member, create an operating agreement.
Apply for a business license.
Apply for the necessary permits.
Get the necessary business insurance.
Create business bank accounts and lines of credit or secure funding.

We also have an article that can help you learn more about how to start an LLC in California. It’s more detailed than these steps and will take you through the process for each type of LLC.

How Fast Can I Form an LLC in California?

If speed is something you’re looking for, we advise you to slow down, especially if it’s your first time.

However, if you’re not new to the game and want to start an LLC in California fast, you can file your articles of organization and have them processed in less than 24 hours. All you have to do for this quick processing is pay the necessary rush fee. Otherwise, you have to wait a few days before you can form an LLC.

If you’re starting with the steps we covered from the beginning, expect to spend at least a few weeks or months in the planning phase. We always recommend slowing down because it can give you a better outcome and chance to survive.

Types of LLCs in California FAQ

Have more questions about the types of LLCs in California? We have answers to the most common questions on the subject below.

Is it Better to Be an S Corp or LLC in California?

This answer depends on your situation and tax preferences, so it’s never inherently better or worse to have an LLC or an S corp.

If you’re looking for something on the simpler side you’re better off with an LLC. S corps require a lot more paperwork and bylaws, and sometimes even have higher tax burdens. You also need a board and a lot more people compared to something like a single-member LLC.

When it comes to LLCs and S corps, it’s something you should talk about with an advisor and accountant before making your decision.

What’s the Cheapest Way to Form an LLC in California?

The cheapest way to form an LLC in California is to form something simple like a single-member LLC. This is the least complex type of LLC, so starting one is a good idea if you’re looking for a cheap way to start the process.

People who start an LLC in California in 2024 can also avoid the minimum state franchise tax, so you don’t have to worry about paying $800 for the first year.

If you file your articles of organization online and don’t have any fictitious names or DBA needs, you can get started for about $75. You can also avoid high costs by being your LLC’s registered agent – just be prepared to function as the point of contact between your business and the state.

What Type of LLC Is Most Common?

A domestic single-member LLC is the most common type of LLC. It’s the easiest LLC to form, and it’s owned by a single person. For these reasons, it’s a popular choice and can serve as the foundation of your business. This is because you can always transition to a corporation or multi-member LLC later.

Why Is California LLC Tax So High?

The state of California is responsible for setting the taxes high, which comes down to a need to keep up with infrastructure and voting for state policies.

While the tax might be high, California uses the money to provide small business grants, provide infrastructure, and continue to grow the economy.

How Do I Avoid $800 LLC Fees in California?

Unfortunately, you can’t. You have to pay the state franchise tax and it’s a minimum of $800; there’s no such thing as a free LLC California.

However, you can start a sole proprietorship or partnership to avoid paying this tax. The drawback is that you’ll lose that liability protection.

You can’t get around this fee unless it’s your first year, or if you create an LLC in a different state and don’t do business full-time in California.

Start an LLC in California Today

Starting an LLC is only complicated if you make it complicated. Sure, you can dive in head-first and fix any issues down the road, but who wants to do that? The good news is that you should have a great understanding of how LLCs work now that you’ve made it through the article. So, you shouldn’t have any issues choosing the type of LLC that’s right for you.

Choosing the right type of LLC is only part of the process. Once you know what path you’re taking, it’s important to learn more about how to start an LLC. We offer plenty of resources to help, and the California Secretary of State has plenty of additional online resources to help you get your LLC off the ground.