How to Start an LLC in California: Step-by-Step Guide & Costs

With its numerous rules and regulations, it's essential to start your new business in the strongest possible position when operating in the popular state of California. Many small business owners and entrepreneurs do this by officially establishing their businesses as limited liability companies (LLCs). There are many benefits of operating as an LLC in California, including: 

• Personal liability protection

• Access to a vast and diverse workforce

• Business flexibility

• Varied industries 

While partnerships, S corps, among others, are excellent business entities to operate in the state under the right conditions, LLCs are popular due to the balance of liability protection with ease of management, particularly for small operations where people wear many hats.

Use this article to understand costs, timelines, compliance, and common pitfalls of starting your business as an LLC in California. For entrepreneurs seeking expert guidance at every stage, 1-800Accountant offers a full suite of business formation, bookkeeping, and tax advisory services to help you navigate California’s unique LLC landscape.

Key Highlights

• Detailed step-by-step LLC formation instructions.

• Understand the benefits of operating a California LLC.

• Explore additional steps and considerations.

• Learn about LLC formation costs and the ongoing costs of operating. 

Benefits of Starting an LLC in California

There are numerous benefits and strategic advantages of establishing your business as an LLC in California. The state offers a large workforce, diverse industries, and a robust economy, which makes operating there a great decision.

Other benefits of starting an LLC in California include:

• Asset protection

• Limited liability for LLC members

• Pass-through taxation

• Flexible management structure

1-800Accountant’s year-round tax advisory service can help your new LLC maximize the benefits of asset protection, pass-through taxation, and flexible management by providing personalized advice tailored to California’s regulations.

Asset protection

When you establish your business as an LLC, you're establishing a separate legal entity. That separation protects your personal assets from business debts and lawsuits, which is critical in high-risk industries. 

Take this example of what happens when you operate with asset protection and when you don't. 

• Without asset protection. If you operate as a sole proprietorship, which is a default entity, and your business faces a lawsuit, the claimant could pursue your personal assets, including your home, vehicle, and bank account, to satisfy a judgment against you. This can be devastating regardless of the severity of the ruling.

• With asset protection. Asset protection changes that outcome significantly. If your LLC is sued and a judgment is awarded against it, only the assets owned by your LLC are usually at risk, while your personal assets are protected.  

Consulting with the experts at 1-800Accountant can help ensure your LLC is structured for optimal asset protection based on your goals and business type.

Limited liability

When your personal assets are protected from your LLC's debts and liabilities, that's what is known as limited liability protection.

This type of protection is usually the main difference between obligations involving personal and business assets. In addition to limited liability asset protection, operating your business as an LLC offers superior risk management and tax flexibility. 

Pass-through taxation

Among the popular features of forming your business as an LLC, pass–through taxation is likely at the top. Unlike C corporations, which are subject to double taxation, LLCs pass profits and losses to owners to be handled on their personal income tax returns. 

California LLCs, or LLCs that do business in the state, have additional obligations. These LLCs are responsible for paying an annual $800 franchise tax for the privilege of operating in California. LLCs with total income of $250,000 or more are subject to fees starting at $900, with a ceiling of $11,790 for LLCs with $5 million or more in total income. 

Flexible management structure

LLCs offer a flexible management structure that you can tailor to meet your needs. You can select between a member-managed structure or a manager-managed structure.

• Member-managed LLC. In a member-managed LLC, all owners (called "members") participate in the day-to-day management of the business and are involved in high-level strategic decisions. 

• Manager-managed LLC. In a manager-managed LLC, some owners may choose to manage the LLC, or an employee may be hired to manage the business. The other members might act more like passive investors in this scenario.

Steps to Start Your LLC in California

There are six main steps you’ll need to complete to establish your LLC in California. 

Step 1: Name your LLC

The first step to forming an LLC in California is to select a name. Your LLC name must be distinguishable from other businesses. 

You can locate a business name by using the California Secretary of State's LLC name search tool. After identifying your business name, you have the option to reserve it for a small fee of $10. The typical name reservation processing time is 10-15 business days. 

Be aware of these common mistakes and considerations as you determine the best name for your California LLC. 

• The name should include Limited Liability Company, LLC, or  L.L.C. (can be abbreviated or not).

• Your business name must be unique.

• It should not include words that imply that your company is a government entity or unit (e.g., Commission, Municipal, “Department of,” Village, City, etc.).

• Professorial Corporation or Prof Corp is not allowed.

• Must not include words that imply insurance if you are not in that business (e.g., Insurance, Insurance Broker, or Insurance Agency).

Step 2: Appoint a California-registered agent

The second step to starting an LLC in California is to meet the registered agent requirement. In California, registered agents are known as an "agent for service of process." A California state agent for service of process can be a professional corporation or an individual. They are authorized by your business to receive official legal and government documents in person on your behalf. 

If the registered agent service is a corporation, the corporation must have filed a Registered Corporate Agent for Service of Process Certificate or Form 1505. If the California registered agent for service of process is an individual, the individual must have a physical address in the state.

While you can certainly act as your own registered agent, privacy concerns may arise, and missed deadlines are more likely to happen, which could erase the potential savings of doing it yourself. When you use a registered agent, expect constant availability and expert handling of your sensitive business documentation.

Expect to pay between $100 and $300 annually for a registered agent. 

Step 3: File articles of organization

For the third step, you’ll file Articles of Organization for a $70 fee. When filing Form LLC-1 online, provide the following information to complete the process: 

• LLC name

• LLC information (business street address, city, zip code of initial designated office)

• Agent for Service of Process (your registered agent) 

• Management option 

• Purpose statement

• Signature

While completing these materials, make sure to avoid submitting incomplete forms or incorrect fees, among other common errors.

Once completed, submit your documents and fee to the California Secretary of State. Normal processing times range from one to two weeks, with expedited processing available for an additional fee. 

Step 4: Obtain an EIN

The fourth step to starting an LLC in California is to obtain your business's employer identification number (EIN). An EIN acts as your business's Social Security Number, and allows you to do many things, including:

• File federal income taxes.

• Hire employees.

• Open a designated business bank account.

• Apply for local licenses and permits.

There are several options to get your EIN, but it’s free no matter which option you choose. You can apply by fax, by postal mail, or apply for an EIN online, which is the fastest and easiest way to obtain your EIN. 

Step 5: File initial statement of information

The fifth step to starting an LLC in California is to file your initial Statement of Information. The state of California has three requirements for the Statement of Information:

• You’ll complete the Statement of Information within the first 90 days of filing your California Articles of Organization. 

• After filing your initial Statement of Information, it’s due every two years. 

• It will be due either every odd year or every even year, based on the year of your initial registration.

Missing a deadline can result in penalties, and in more extreme cases, suspension or forfeiture. 

Step 6: Create an operating agreement

The final step is to draft an LLC Operating Agreement. LLCs in California must maintain Operating Agreements, but LLCs aren’t required to file them with the Secretary of State’s office. 

Your Operating Agreement will contain detailed information about your LLC, including:

• Basic Information

• Contributions, Interest, Members

• Management Information

• Leaving or Terminating Information

• Conditions for transfer of ownership

• Liability Clauses

• Dissolution procedures

• Governing laws

• Amendment agreements

Basic information includes your LLC name, Articles of Organization information, and registered agent information. You’ll also need to provide the duration of your LLC. Make sure to avoid common pitfalls as you complete this step, including not documenting your member roles or associated profit-sharing arrangements. 

Additional Steps and Considerations

In addition to your responsibilities for forming your LLC, you'll also need to generate biennial reports and select your membership structure.

Manager vs. Member management

The first consideration you’ll need to make is how you’ll manage your LLC. As mentioned earlier in this blog, you have two options:

• Manager-managed

• Member-managed

The most significant distinction between the two is that owners typically take a more involved role in member-managed LLCs. Owners are less involved in day-to-day operations with a manager-managed LLC.

Smaller LLCs typically opt for a member-managed approach, while larger LLCs turn to the manager-managed option. If members are interested in taking an active role in the business, member-managed is the way to go, although that management type has less appeal to outside investors.

Ensure you're selecting the optimal management style by avoiding common mistakes, such as not fully understanding operational flexibility and failing to consider the implications of future growth projections. 

Filing biennial reports

The second consideration you’ll make is to complete the Biennial Report in compliance with the Statement of Information requirement. 

It’s not an annual report. You’ll complete the Biennial Report every two years after the year of initial registration. There is a $20 fee to file, and the deadline is based on your LLC's filing anniversary month. Filing online is optimal. 

Tax obligations and compliance

LLC owners are responsible for paying:

• California's $800 annual franchise tax.

• California LLC fees ($900 minimum - $11,790 maximum) for businesses with $250,000+ in total income.

LLCs are pass-through entities, meaning profits and losses are passed through to owners for handling on their personal federal tax returns.

Single-member LLCs use:

• Internal Revenue Service (IRS) Form 1040 (U.S. Individual Income Tax Return)

• Schedule C (Profit or Loss From Business (Sole Proprietorship)\

Multi-member LLCs use: 

• IRS Form 1040 (U.S. Individual Income Tax Return)

• Schedule E (Form 1040), Supplemental Income and Loss

• IRS Form 1065 (U.S. Return of Partnership Income)

• Schedule K-1

Filing late or with incomplete or inaccurate information can result in penalties and an increased focus on your business from the IRS. 

Licenses and permits

Whether your LLC is in retail, food service, or consulting, chances are you will need city, county, and state business licenses and industry-specific permits to operate. 

Use the CalGold database to search for applicable licenses for your LLC. 

There is a fee to obtain each license or permit, with cities and counties typically charging $50 – $100 for a general business license.  State-level costs vary, as do processing times. 

Cost of Forming an LLC in California

The costs of forming an LLC in California will vary and depend on whether you use a professional service or file on your own.

Initial formation costs

California will collect several fees associated with starting your LLC, including: 

• LLC Articles of Organization ($70) 

• Articles of Organization certified copy ($5, optional fee)

• Statement of Information ($20) 

• Name Reservation ($10 optional fee)

Review California's LLC fee schedule for more information. 

Ongoing fees and taxes

Your California business will be responsible for ongoing taxes and fees, including:

• Annual franchise tax

• Biennial Statement of Information filing fee

• Industry-specific or local license renewal fees

Your ongoing LLC tax obligations vary based on income and business activity, such as California LLC fees that trigger once a business earns $250,000 or more in total income. Maintain compliance by filing accurate materials by each deadline. 

Conclusion

While California is a desirable place to do business, the numerous rules, regulations, and fees require a strategic approach to maximize the impact of your LLC operations. Engaging experts for tax support is central to that approach, which is why many California LLCs trust the affordable, tax-deductible services of 1-800Accountant, America's leading virtual accounting firm.

Our suite of financial services, including year-round tax advisory and business tax preparation, is handled on your behalf, so you can spend more time focusing on building your LLC instead of agonizing over paperwork and formalities. 

Schedule a free 30-minute consultation with a small business expert today to get started. 

FAQs About Forming an LLC in California

What types of businesses cannot form an LLC in California (e.g., professional services)?

Certain professionals (lawyers, doctors, architects, and engineers) and financial institutions cannot form LLCs in California. The need for oversight and regulations for these professions is often cited as the reason they cannot operate as LLCs.

What are the tax filing requirements and thresholds for California LLC fees beyond the $800 minimum?

If your LLC makes $250,000 or more in total income, you will have to pay California LLC fees.

• $900 ($250,000 - $499,999)

• $2,500 ($500,000 - $999,999)

• $6,000 ($1,000,000 - $4,999,999)

• $11,790 ($5,000,000+)

How do I dissolve or cancel my California LLC if I decide to close it?

You have responsibilities associated with closing your California LLC. File specific forms with the Secretary of State, settle any debts or outstanding financial obligations, and possibly a final franchise tax return with the Franchise Tax Board. Retain good records, including formation documents, and abide by any legal requirements even after your business's closure.

How do foreign LLCs register to do business in California, and what additional steps are involved?

A foreign LLC is established outside of California. In this case, a domestic LLC is established in California. File an Application to Register a Foreign LLC with the Secretary of State, obtain a Certificate of Good Standing from your current state, designate a California registered agent, called an Agent for Service of Process, and file a Statement of Information with any required fees.

Can I convert my sole proprietorship or partnership into an LLC in California?

Yes, you can convert your sole proprietorship to an LLC in California. You must first form the LLC and then transfer your current sole proprietorship's assets to it, among other steps.