Here’s the process I’ve used to start several California LLCs. I hope it’s helpful if you’re considering starting a business.
Disclaimer: I’m not a lawyer. This is not legal advice.
There are generally two main benefits to forming an LLC:
- Liability protection. You are not personally liable for the debts of the business.
- Tax benefits. You can deduct qualified business expenses from the total income of the business. Here’s a simple example: If you spent $1,000 on servers and your website made $10,000, then you’ll only pay taxes on the $9,000 in profit.
How to form the LLC
There are three steps for forming an limited liability company (LLC) in California.
Step 0 – Choose a company name
Make sure that the company name you’d like to use is available for use.
- Use the California Business Search site to see if the name you want is available.
- Optional: Use US Trademark Search Database to see if your company name has been trademarked. You may run into trouble if someone has protected the name in the category of business that you’re starting. Also, if you decide to trademark the name in the future, then you’ll want to know it’s still available.
Step 1 – File Articles of Organization
To establish your LLC in California, you need to file Articles of Organization with the California Secretary of State.
- File Articles of Organization (Form LLC-1).
- Cost: $70, one-time
Wait for LLC-1 to be returned, which confirms your LLC is active, before completing the following steps.
Step 2 – File Statement of Information
The next step is to file a Statement of Information with the California Secretary of State. This lets California know some basic information about who is operating the LLC.
- File Statement of Information (Form LLC-12). This step can be completed online here.
- If your contact info has not changed since the last filing of LLC-12, file Statement of Information No Change (Form LLC-12NC) to save time. This step can be completed online here.
- Cost: $20, repeat every 2 years
- Complete this step within 90 days of filing LLC-1
Certain tasks must be completed on an ongoing basis to keep your company in good standing. Filing a statement of information is one such task.
- RECURRING: Add this to your calendar to repeat every 2 years: Re-file the Statement of Information
Step 3 – Pay annual tax
The next step is to pay taxes. Every LLC in California has to pay an “LLC Fee” of $800 per year, even if the LLC has no profits. Since you now have an active LLC, you must pay the current year’s LLC Fee even though it may be part-way through the year. The exact due date is technically the 15th day of the 4th month after the founding of the LLC.
- File Annual Tax (Form 3522). This step can be completed online here (select “Web Pay (Business)” and then “Annual Tax (Form 3522)”).
- Cost: $800, repeat every year
- Complete this step within approx. 4 months of filing LLC-1
In future years, the due date is April 15. For example: the 2019 LLC Fee is due on April 15, 2019. (Note: This is different than peronal taxes which are due the following year, i.e. for personal taxes, the 2019 taxes are due on April 15, 2020. But for an LLC the 2019 taxes are due on April 15, 2019)
- RECURRING: Add this to your calendar to repeat every year: File Annual Tax Form 3522
That’s it – you have an LLC! 🎉🎉🎉
Congrats, you have an LLC!
Generally, it’s also a really good idea to do the following recommended steps:
Step 4 – Get a Federal EIN number
Apply for a Federal EIN number online. An EIN number is like a social security number (SSN) for your company. It’s most useful for opening a bank account. You should use the EIN instead of your SSN whenever possible.
- Apply for a Federal EIN number online
- Cost: FREE, one-time
Step 5 – Open a business checking account
Open a business checkout account. Use your new EIN number instead of your SSN to open the account. Going forward, you’re going to want to use your business checking account (or an attached credit account) to pay for all business expenses.
Step 6 – Capitalize the business
Capitalize the business. That means putting some initial capital into the business. Transfer $1,000 – $5,000 of your own money into the business bank account to get the business started. This makes the business “real” and gives it some funds to start using to pay for expenses.
Step 7 – Create a Capital Contribution Agreement
Draft and sign a “Capital Contribution” to document which personal assets you want to transfer into the business. It’s important to document this so it’s very clear in case there’s ever a question about which assets are yours vs. the business’s.
Here’s a simple Captial Contribution template you can use:
INSERT_COMPANY_NAME – Capital Contribution (tax-free)
As of INSERT_DATE, all “INSERT_COMPANY_NAME assets” are transferred from INSERT_INDIVIDUAL_NAME (current owner) to INSERT_COMPANY_NAME (new owner).
“INSERT_COMPANY_NAME assets” include domain names and websites, code and servers, online accounts (GitHub, Twitter, etc.), business relationships, legal agreements, and intellectual property (copyrights, trademark rights, etc.).
INSERT_INDIVIDUAL_NAME (sole proprietor)
INSERT_INDIVIDUAL_NAME (Member, acting on behalf of INSERT_COMPANY_NAME)
Step 8 – Keep personal and business expenses separate
Be diligent about keeping personal vs. business expenses separate. Or else, someone could claim your business is not really separate from you personally and attempt to sue you personally for the debts of your business. This is known as “piercing the corporate veil”.
Limited liability protection is one of the most important reasons for starting an LLC, so you don’t want to lose this protection by careless bookkeeping.
Step 9 – File a single tax return
When filing your personal taxes at the end of the year, your LLC’s income and expenses can be included with your own personal income/deductions. This is because a “single-member LLC” (an LLC owned by a single individual) is considered a “disregarded entity” for tax purposes. That means that it doesn’t have the obligation to file taxes separately. The tax obligations just pass straight through the LLC to you. This is nice, because it keeps things simple.
Hope this guide was helpful!