California is a notoriously diverse state when it comes to business opportunities. Backed by the largest state GDP in the country, California provides fertile ground for entrepreneurship, both new and expanding, including LLCs, corporations, and LLPs.
While it’s easy to make the decision of launching a California LLC, the actual process involves its fair share of bureaucratic trouble. Even experienced entrepreneurs might need help in navigating California business regulations that often diverge from what other states practice.
If you plan to open an LLC in California but don’t know where to start, this article might come in handy. We will outline the key points of the formation process, including
Table of Content
The first item on the agenda of imminent business owners is to find a good name for their company ahead of the LLC formation. As per California law, you have to follow quite a few rules to appropriately name a business, much like corporations and any other business entity type.
According to California corporate code, specifically section 17701.08 of the limited liability company act, all LLCs in California must reflect their legal classification by including their designation in the actual name.
As such, to name LLCs in a compliant fashion, members must use one of the following indicators:
Another essential rule for LLCs is to ensure the name is unique. California Secretary of State determines the validity of the name. It also decides whether the name has any potential to mislead the public and whether it’s appropriately distinguishable from already existing California businesses, including:
However, the same may apply to California corporations and other formal entities.
For instance, you plan to start a California state business to provide handyman services and name your company “Santa Monica Handyman Services, LLC” but a California business search shows that there is already a corporation called “Santa Monica Handyman Services, Inc.”
While not a limited liability company, this corporation still uses the same name which, according to California law, can be misleading. To rectify the situation, you can add words or rephrase the entire name to distinguish it from the corporation, e.g. “Santa Monica Home Repairs, LLC”.
Another aspect of California law to keep in mind when you name LLCs is the set of restrictions imposed on company’s functionality outlined in section 17701.04 of the limited liability act. It states that while LLCs are allowed to pursue any lawful purpose, they are prohibited from engaging in:
As a natural outcome of this provision, it’s forbidden to name busienesses using words that actively imply their involvement in any of these industries. Additionally, LLCs must not use indicators of other business structures other than the limited liability company. As such, a company can’t use words like:
The same ban applies to licensable industries in California. This means that if your LLC does not have a license to provide certain professional services, its name should not indicate that it does provide them in any way or otherwise mislead the public on the nature of the business.
If you are not sure whether your California state business requires a license, make sure to consult an attorney or contact the Secretary of State office before going ahead with the LLC formation.
In addition to eliminating forbidden words when you name California corporations and LLCs, business owners are also required to do a thorough check on their preferred entity name. It’s best to have checked this step before you went ahead and filed the articles of organization.
Naming regulations, according to California law, state that a business name must be distinguishable in a way that isn’t easily confused. Even if your name is not identical to an already existing LLC or corporation but is still similar, such a name could doom your LLC formation application as a whole.
Fortunately, you can use a free California state business search tool available on the Secretary of State website to reference your naming options with the database of California businesses, including corporations.
One of the main reasons corporation members and LLC owners choose to register a fictitious name—also called Doing Business As or DBA—is to accommodate the expansion of the original trade. If, for instance, your business initially had a fairly narrow scope but since, then you began to diversify your services, using a DBA is a great way to ensure your actual job matches your LLC’s name.
According to section 17900 of the California Business and Professions Code, the classification of a company’s fictitious name encompasses any name that’s clearly distinct from the one used in the filed articles of organization or official California Secretary of State records.
The process of DBA registration is a bit different in California compared to some states. Here, you will need to submit a fictitious business name statement form (stipulated in section 17913 of California BPC) with the county clerk of the county you are registered in, as well as every county where you plan to do or are doing business. Some counties will likely have their own standardized form such as San Francisco County fictitious business name statement (PDF).
Note that the DBA statement is valid for 5 years from the date of filing. Upon expiration, LLC and corporation owners will need to renew their DBA.
Every California entity is legally required to appoint a registered agent or, as it is referred to in the general provisions of the California limited liability company act, an agent for service of process.
The “service of process” in this definition of the registered agent refers to the act of serving court summons. This term for a registered agent emphasizes the service of process as the sole part of an agent’s duties, but in reality, a registered agent handles all official correspondence and other papers mailed to the LLC, thus maintaining a line of communication between the state and the company.
If you’re wondering why having a California registered agent is such a big deal—after all, it’s just forwarding mail—then consider quite serious legal repercussions your company might face in the absence of such an agent.
If your California state business is sued, the plaintiff is required to send the service of process directly to your registered agent and no one else. And if you somehow miss this service of process, the hearing will proceed without you and will likely be resolved with a default judgment.
So who can be a registered agent to get an LLC in California? According to section 17701.13 of the California Corporations Code, an LLC agent of service of process (or registered agent) can be:
A common strategy among small business owners is to appoint themselves as their own registered agent. Another money-saving alternative is to assign a family member or friend to be a registered agent for their California LLC registration.
Indeed, this method has its uses, including:
While being your own company registered agent is a highly effective cost-effective method for business owners working with limited budgets, it poses its fair share of issues:
Most of these drawbacks are enough for some business owners to consider hiring a professional LLC service that assigns its own registered agent or connects you to a third-party agent. On average, this service costs about $100 per year as most registered agents charge annually.
Another reason why you may want to appoint a professional registered agent service is a foregin LLC. When you expand your company to other states, you can’t simply use the same agent for each branch in each new state.
The same goes for business owners that want to register their foreign LLC with the California Secretary of State. In other words, you won’t be able to gain authorization for operating in California as a foreign entity without a local registered agent.
In the state, a limited liability company can only become legal after the organizers file the California Articles of Organization. One or more LLC members can sign and file the articles with the California Secretary of State, but the LLC can only be considered officially open if the state approves the formation documents.
If you don’t really want to deal with all this paperwork that goes into LLC formation, we suggest you look into hiring an LLC formation service. You can find out more about your potential options in our Best LLC formation services article.
As stated in section 17702.01(b) of the California limited liability company act, the state requires every LLC organizer to include the following information in their filed articles of organization:
Fortunately, you can use a simple form (PDF) provided by the Secretary of State to fill out your LLC articles. This way, you can be sure you won’t miss any details.
The bare minimum of LLC formation costs is estimated by the filed California articles of organization state fee. In California, this filing costs $70. Find more information about business entity costs in the California fee schedule (PDF).
Filing your LLC formation paperwork in California can take slightly longer than in states with lower population density. After all, California is the most populous state in the country, so it’s hardly surprising that the Secretary of State might take longer to process business applications.
Standard processing times for LLC articles of organization typically ranged between 3-5 business days, although the wait usually extended to 6-7 days in the December-January application window.
However, current processing times may differ due to extenuating circumstances. Since the start of the COVID-19 pandemic, the California Secretary of State had to further increase their processing times. As of January 2022, their turnaround speeds are consistent with their 2020 quarantine output levels.
Although processing times tend to vary on the type of filing, method of application, and location, the general rule that the Secretary of State introduced on March 3, 2021 still applies. For LLC formation applications this means the following:
Note that e-forms review times could extend to 10+ days, while mail and in-person reviews could take up to 14 days.
If you wish for your formation to be processed faster, the Secretary of State offers two express options: preclearance services and expedited filing services. More on that below.
Unlike expedited filing services that prioritize the processing itself, this service is a precaution meant to pre-approve the documents before the actual filing. The way this works is simple: you take your LLC formation documents to the Sacramento Secretary of State office and pay for the preclearance service.
The officials review your paperwork to ensure everything is in order and issue a statement that your articles are in order and can be approved faster, eliminating the usual delays or risk of rejection due to filing errors.
According to the preclearance and expedited services statement (PDF) issued by the California Secretary of State business programs division, there are four types of preclearance responses:
Even if you choose not to preclear your paperwork, you can still get expedited filing services provided you file your LLC formation application in person at the Secretary of State office. You can choose between three levels of expedited filing services (PDF):
*Class A service is only available for applicants with precleared documents.
Expedited filing services can only be requested in person at the public counter of the Sacramento Secretary of State office at 1500 11th Street, Room 390. The counter is open during standard business hours from Monday to Friday between 8:00 a.m. and 5:00 p.m.
Although in most jurisdictions, the drafting of the operating agreement is technically optional, in California, every limited liability company must draft an operating agreement. While you don’t have to file it with the Secretary of State, you must keep a copy of the operating agreement in the designated office at all times as well as its future amendments.
As stated in section 17701.13 of the California limited liability company act, the operating agreement could be arranged in either verbal or written form, but we strongly advise you to devise your LLC’s operating agreement in writing.
The whole purpose of the operating agreement is to establish the internal rules for the LLC to help standardize procedures, assign responsibilities, percentage shares, and outline other inner workings of the company. This is why it’s much safer to have your operating agreement done in writing.
California does not provide a formalized template for the operating agreement, but the general provisions tend to be the same across the board. They include:
Remember that your California LLC will be able to dodge common legal risks and default laws if you create a written operating agreement that goes into specific detail. Drafting a half-hearted generic operating agreement may cause you quite a lot of trouble down the line.
One very Californian thing about LLC formation is the state requirement to file the statement of formation. According to section 17702.09 of the California Limited Liability Act, this document should be filed with the Secretary of State within 90 days of the initial articles of organization filing. After that, the statement of information must be filed biennially.
The statement is similar in content to the original articles of organization. It should include:
Fortunately, the state of California provides a standardized form (Form LLC-12) with clear instructions. The state fee for filing this document is $20. It remains the same for each biennial filing.
The purpose of the statement of information could be confusing at first—after all, isn’t it the same information provided in the LLC articles of organization? And while yes, the contents of these two documents are similar, the factual application is very different.
The articles of organization officially form an LLC, and the state uses it as the primary document for creating a business record for your entity in their database. The initial articles and every future amendment are historic in nature.
The statement of information is meant to notify the state of any internal changes (or lack thereof) that may have occurred since the previous filing. In a way, this document acts as a regular annual/biennial report with the exception of the original first filing. They are publicly available, so it allows potential customers to run a background check on an LLC’s legitimacy based on the relevancy of the information.
To pay federal income taxes, all individuals must use their SSN when reporting to the IRS. Similarly, the IRS requires the use of the Employer Identification Number, or EIN, for business entities that pay income tax.
Technically, not every LLC legally requires an EIN. For instance, owners of single-member LLCs can use their SSN. But if you wish to operate your LLC without certain restrictions, you might want to apply for an EIN.
The number is required for LLCs that plan to:
Some formation services offer EIN applications as a paid feature, but one thing you should know about it is that the IRS does it for free if you apply yourself. You can do it online through the IRS website.
Compare the conditions for opening an LLC in California with other states:
Quite expectedly, getting your articles approved and drafting an operating agreement is not really enough to commence your business activities. Even though your LLC is officially open, you will still need to make a few arrangements to ensure the legality of your future business operations.
Some business owners choose to use their own personal accounts to run their LLC, especially if it concerns single-member LLCs. While allowed, this method of managing your business finances is far from ideal even for sole LLC owners.
There are a few reasons to start a business bank account for your LLC:
More accurate bookkeeping being the first item on the list is no accident. Every month, you will receive a statement from your bank detailing all transactions and expenses. If you use your personal bank account to conduct your business, it could be incredibly difficult to track each business transaction and transfer it to your LLC’s books.
Banks also remain one of the main sources for business credit. It's true that you can find alternative sources of raising money such as SBA or crowdfunding, but those can never be as sure and immediate as a traditional bank loan.
And of course, one of the essential traits of every LLC is its ability to shield LLC members from personal liability. By implementing the concept of the corporate veil, an LLC can ensure that the owners’ private assets remain untouched by creditors.
However, personal liability protection can only be upheld if the LLC has a separate bank account. There is truly no point in choosing an LLC structure for your business if you lose its main advantage by refusing to open a business bank account. This is why owners also draft operating agreements—to have further proof of the LLC status.
It’s incredibly common for people to get personal insurance, for instance getting their house insured or their car or, more commonly, their health. The same goes for business entities. Your LLC might not need every business insurance there is, but it will likely require at least a few, including:
We generally recommend consulting an attorney or insurance specialist to understand how these policies work in California.
After taking care of the basics of LLC formation, your next step is to make sure everything remains compliant during daily operations and other routine business activities.
In California, every business requires licensing on the county and municipal levels. Every jurisdiction and industry is different, but generally, license fees range between $50 and $100 plus regular renewal.
If you provide professional services or work in a heavily-regulated industry, be sure to check with the California professional licensure guide before doing any activities that may later be considered illegal due to lack of permits or licensing.
By definition, LLCs are flow-through entities, meaning that LLC members do not pay tax on behalf of the company but report all business profits and losses on personal returns (Form 1040) according to their shares. Find out more about the filing procedure for LLCs on the California Franchise Tax Board website.
There are exceptions to the rule, of course. When an LLC has employees, it must register as a California employer and pay unemployment tax. Retail businesses are subject to sales and use tax in California.
On the federal level, LLCs are also classified as pass-through structures, meaning all profits and losses must be reported on Schedule C. However, if you elect a specific corporate taxation system for LLCs, then you might be subject to federal income tax.
As mentioned in our previous section, California doesn’t have the typical annual report requirement. Instead, LLC members must file the statement of information every two years.
As for the franchise tax in California, it’s calculated based on the LLC’s profit threshold. The fees for LLCs are filed using Form FTB 3536 (PDF). While the mandatory fee is $800, businesses that generate over $250 thousand of annual income have different rates. Business taxation tends to be convoluted, so it’s important to have a business accountant.
A limited liability company is a welcoming legal structure for many businesses. Start an LLC is easy. Select your state to start.