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Whether you’re an existing small business owner or you’re just starting a small business in California, registering your business as an LLC should be your top priority. An LLC protects you, as a business owner from inheriting any debt from your business in case it fails.
Starting an LLC in California may be a daunting task if you don’t have the right information on how to go about it. Not to worry, we’ve put together all you need to know about starting an LLC; the benefits and drawbacks, the steps involved, and any other questions you may have about LLCs in California.
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Pros and Cons of Starting LLC in California
As a small business owner, deciding on the best business entity can be very tricky. It is important to weigh the advantages and disadvantages of each business entity before choosing the one that’s best for your business. An LLC, however, has a lot of advantages that can benefit you as a business owner but it is not without its own disadvantages.
In this section, we’ll be discussing the pros and cons of starting an LLC. Is starting an LLC the best decision for your business or not? It’s time to find out.
Pros
Starting an LLC for your business offers lots of advantages. Here are some:
Flexibility
Many businesses are opting for the LLC business structure because of its flexibility. The taxing system of an LLC is flexible and can help reduce the tax burden on the business.
There is no limitation to the number of owners an LLC can have and this will determine how the LLC is taxed. An LLC can be classified as either a sole proprietorship, a C corporation, or an S corporation. The number of owners doesn’t need to be stated at the inception of the LLC, as the business grows, the number of owners can multiply and the management of the LLC will be adjusted accordingly.
Limited Personal Liability
As its name implies, an LLC offers limited personal liability to you as a business owner in case of business loss. In an LLC business entity, the business and the owner(s) are separate entities. The loss of one doesn’t affect the other. If your business is faced with bankruptcy, unpaid debts, lawsuits, or any other financial loss, for example, your assets will not be affected.
If you’re trying to protect your assets and lessen personal risks, you should register your business as an LLC. With this, your assets such as your house, personal investments, savings, and heirlooms are secured in case your business fails.
Builds Credibility and Trust For Your Business
When your business is registered as an LLC, it commands credibility and respect, this is because of the transparency that comes with the statutory compliance and requirements that a limited liability company has to follow. This creates a good impression for your business and projects you as a professional.
The impression that your business is transparent and can be trusted can benefit you in so many ways, such as:
- ability to compete with top businesses in your industry
- access to a wider range of lending opportunities
- ability to expand your business however you like
- ability to attract new customers and investors
- creating a credible and trusted footprint for your business
Owning and Protecting your Business Name
Before you register your business as an LLC, you’ll be required to choose a unique name for your business. This allows you to own and protect your business name, as no other business can share the same name as yours. Your business name will be trademarked so that nobody else can use the name and impersonate your business.
Pass-through Taxation
LLC offers a taxation system that is called pass-through taxation. This system allows the business revenue to be passed to the owners of the LLC. Members pay tax on the profits of their own federal income tax. The benefit of this system is that it makes filing taxes easier and helps avoid double taxation.
Cons
Here are some of the drawbacks of starting an LLC.
Self-employment Tax
As a business owner, your LLC may be taxed as a partnership company, the effect of this is that all members of the LLC will be considered self-employed and taxed based on the business’s total net earnings. This means members will be charged to pay self-employment taxes such as Social Security and Medicare taxes.
Maintaining Corporate Veil
If you do not maintain a corporate veil in an LLC, your personal assets may be affected if your business fails. A corporate veil is the ability for LLC owners to maintain separate entities from their business. Forming an LLC is not enough to ensure the limited liability of your business, you have to make sure you and your business maintain separate identities to avoid being liable for your business’s debts.
8 Steps on How to Start LLC in California
Here’s a step-by-step guide on how to open LLC in California.
Step 1: Find a Name For Your California LLC
This is the foremost step in starting an LLC in California. Before you start an LLC, you need to choose a unique name to include in your paperwork before you register.
California has a naming requirement that you must comply with before you come up with a name. Here are the things you need to consider:
- Your business name must be unique, that is, it must not be an existing business name registered in the state. You can confirm the availability of the name of your choice on the Secretary of State’s website.
- The business name must end with Limited Liability Company or the abbreviations LLC or L.L.C. The Limited and Company can also be abbreviated as Ltd. and Co.
- The name must not be associated with any government agency such as FBI, CIA, Treasury, State Department, etc.
- Some restricted words that require special documentation and paperwork should not be included in your business name. Some of these words are corporation, inc., trustee, bank, insurance, corp, insurer, etc.
Another thing to consider before choosing an LLC name is the URL availability of the name. You might need to open a website for your business in the future, considering the URL availability of your LLC name will make purchasing a domain name feasible.
Also, in case you are not ready to register your LLC and you don’t want the name to be taken by someone else, you can reserve it by paying a fee. You can reserve it for up to 60 days in California by contacting the state authority.
Step 2: Choose a California Registered Agent
California requires every LLC to have a registered agent who will be in charge of the legal process. A registered agent may be anyone or company that is authorized to accept legal papers on behalf of your LLC.
The registered agent will be responsible for receiving the service of process for your LLC and also receiving legal documents such as tax forms, lawsuits, and government correspondence on behalf of your LLC.
The agent must be a resident of California and their address must be stated in the article of organization. The registered agent may or may not be affiliated with the LLC and must be available to receive documents when needed.
Step 3: File the Articles of Organizations
To register an LLC in California, you’re required to file an article of organization with the California Secretary of State. The Articles of Organization is a document that will consist of the basic information about your LLC. This step requires you to fill out a form, either online, through an email, or in person.
You’ll need the following information to prepare your articles:
- the name and address of your LLC
- the name and address of your registered agent
- the purpose of your LLC
- the management structure of your LLC; whether it is member-managed or manager-managed
- the signature, if you’re the one forming the LLC
After filing your Articles, they will be reviewed by the Secretary of State, and if approved, your business will become a liability limited entity.
Step 4: Create an Operating Agreement
To form an LLC in California, you need an operating agreement. An operating agreement is a document outlining the way your LLC business will be conducted. The document is needed to resolve any future conflict among all business owners and members of the LLC.
The operating agreement has to be generally accepted by all members of the LLC and easily accessible in case of any litigation. Some of the things that the operating agreement should include are:
- LLC’s name and address
- Management of the LLC
- Information about how the profits and losses will be divided among members
- Purpose and goals of the business
- Duration of the LLC
- Information about the registered agent
- Information about the Articles of Organization
- Requirements for admitting new members and what to do about outgoing members
The content of the operating agreement is not limited to the list above. It may include many other things depending on the members of the LLC.
Step 5: File a Statement of Information
Every LLC in California must file a statement of information (Form LLC-12) with the California Secretary of State within 90 days of forming the LLC. After this, the LLC is required to file a Statement of Information every two years.
The Statement of Information should include:
- The name of the agent in charge of the LLC and the address
- The LLC’s name and the file number of the California Secretary of State file number
- The principal address of the LLC
- The mailing address of the LLC
- The name and address of each member of the LLC or the executive manager of the LLC
- Details of business of the LLC
Step 6: Get an Employer Identification Number (EIN)
An EIN is a nine-digit number assigned by the Internal Revenue Service to your LLC to have it taxed as a corporation. You can obtain your EIN online through the IRS or by mail.
Apart from tax management at the state and federal levels, an EIN is also useful when you want to open a business bank account for your LLC and when you want to hire employees.
Step 7: Comply with Tax Payments and Other Requirements
Your LLC must comply with the California tax regulation and other regulatory requirements for LLCs. The tax regulation in California mandates every LLC to pay an annual tax fee. You may also need to register for sales and employer taxes if your business involves selling goods and collecting taxes and if you also have employees.
Apart from tax, you may also need to obtain some local and state business licenses for your LLC depending on the type of business your LLC is running.
Step 8: Open a Business Bank Account
If you do not already have a business bank account, it is important to open a business bank account for your LLC. This will further help distinguish your personal assets from your business’s. You have to choose the best bank for your LLC that would offer great opportunities for your business.
FAQs on Starting LLC in California
Conclusion
An LLC is a legal business entity that allows business owners to lessen personal risks and protect their assets while running their businesses. Starting an LLC has lots of benefits like building credibility for your bank, limited liability protection, a favorable tax system, etc. Start your California LLC today by following the above steps and protect your assets.
