Starting a company is undoubtedly an interesting undertaking. One of the most important decisions you have to make is choosing the appropriate business entity.
A limited liability company (LLC) is one of the most widely used business entities in the United States. This is, in part, due to its flexibility and simplicity. With that being said, there are still nuances to the process.
If you are planning to form an LLC but don’t know how to go about it or have often wondered about how to start one, you’re in the right place.
Keep in mind that we may receive commissions when you click our links and make purchases. However, this does not impact our comparisons and recommendations. We try our best to keep things fair and balanced, in order to help you make the best choice for you.
There are different things to consider when starting an LLC in California; we’ll walk you through all of the required processes in this article. To do this, we’ll start from the basics.
What is an LLC?
A limited liability company (LLC) is a business structure in the United States that ensures a business is not liable for its debts. An LLC offers business owners a certain tax and management structure.
A Limited Liability Company is undoubtedly one of the most notable business forms in the U.S. because it ensures the business owners are not held responsible for its liabilities. Part of the reason they’re so popular is that they don’t require rigorous reporting standards like C corps but still protect your assets like one. You can also elect to be taxed in many different ways.
How to form an LLC in California
Forming an LLC could be a relatively easy task depending on where you live. The following steps are generally applicable in every state but the nuances related to California LLC formation are also highlighted.
Choose a name
Selecting a name for your business is an essential step when forming an LLC Everything else happens after that. The business owner(s) needs to confirm the desired business name is not on the records of the secretary of the state when starting an LLC
You can confirm this through a name search on the state of California website. Also, ensure you choose a name that complies with naming requirements in California and can be searched easily by prospective clients.
Guidelines for naming an LLC in California include:
- Your desired business name must include either of the following phrases: ‘Limited Liability Company,’ LLC, Ltd, Limited, Company, and Co.
- The business owner should not include terms that could create a similarity between an LLC and government agency, e.g., treasury, F.B.I., state department, etc.
- Restricted words such as an attorney, university, or a bank may require a licensed person who could be a lawyer or a doctor to be part of your LLC It may also need additional paperwork.
Business owners can also confirm that the domain name of their businesses is available. It may be a good idea to buy the domain even if you’re not ready to build the website.
Importantly, business owners have the option to reserve their LLC name if they are not ready to file their LLC formation yet. However, there is a separate fee for a name reservation.
Choose a registered agent.
Business owners are required to have a registered agent when forming an LLC A registered agent is also known as an ‘agent for service of process’ in California.
The registered agent receives important legal documents, tax forms, and official government correspondence on behalf of your company. The registered agent must be a resident of the state (California) full-time and have the authorization to conduct business in California.
All businesses, without exception, require the services of a registered agent to avoid the mishandling of important documents.
Create an operating agreement
An operating agreement is a legal document that outlines the operating routines and ownership of an LLC
It’s needed when forming an LLC in California. A thorough operating agreement minimizes the risk of future conflict in the company.
An operating agreement determines how certain situations are handled; it also ensures that all members are on a page.
The operating agreement must be comprehensive and encompass details on labor and profits.
It must also include details on transfer membership interests, how the profits and losses will be shared, division of ownership, etc. It’s recommended to take on the expense of an attorney upfront to save cash down the line.
Once you’re done, simply file the documents with your documents with
Obtain your E.I.N. (Employer Identification Number)
An E.I.N. is issued by the internal revenue service (I.R.S.). It is useful for identifying a business entity and also monitoring the tax reporting of a business. It is a social security number (SSN) for the firm.
The basic reasons business owners need to obtain an E.I.N. are: to create a business bank for the firm, to hire employees, and also for federal and state tax purposes.
The benefits of an LLC
- Simplicity
One of the factors that led to the popularity of LLC is that it’s relatively easy to form and maintain. An LLC in California enterprise does not require the owners to have directors and officers, board meetings, and some other tricky administrative duties as it is with a corporation.
- Flexibility
An LLC does not have a maximum, neither does it have a minimum number of owners or members. Its members can be up to tens or hundreds. It provides business owners flexibility in terms of ownership, taxation, and management.
All LLC members share the day-to-day handling of the business or designate the role of managing the company to either one or more individuals. The assigned managers could be members, nonmembers, or both.
Another interesting part is that it can choose its mode of taxation. More often than not, it is taxed as a partnership or proprietorship.
However, single-member LLCs and multi-member LLCs can opt for corporation taxing. This mission is fulfilled by filing a document that is known as an election with an I.R.S.
- Credibility
Forming an LLC to operate your company gives your business credibility. Aside from the fact that the owners will have an official business name, it also assures prospective clients that your business is legit.
- Personal asset protection
This is one of the notable benefits of forming an LLC Forming an LLC It ensures that its owners are not liable for debts incurred by the business or any lawsuits. And because the LLC owners are not liable, their assets such as home, bank accounts, or personal car are secure.
- Pass-through taxation
LLC provides its business owners with pass-through taxation. The profits or the losses incurred from the business pass through the company to the founder’s tax return. The profits are taxed at the owners’ tax rates. There are many instances where the owner could save a considerable amount of tax because of this.
Disadvantages of an LLC
- Investment disadvantages
For business owners who seek outside investors, LLCs can be cumbersome. This is because the process of investing in an LLC and getting LLC ownership interest is more difficult than issuing or selling shares in the company.
Corporations, on the other hand, are ideal for outside investments because it allows the issuance of stock in exchange for investor money. Conversely, you can usually sell a stake in your company without getting approval from other members.
- Cost
It’s often more expensive to form an LLC than to have a partnership or a sole proprietorship. This is because of the bills paid along the line; bills such as filing bills must be paid to establish an LLC legally.
Also, the founder will be required to pay annual fees and taxes to the state. The business owner might also need to adopt a written operating agreement that explicitly states how the LLC will be operated.
- Transfer of ownership
Ownership transfer in an LLC can be tricky. However, it’s relatively easy to transfer ownership with a corporation. Unless it has been agreed upon earlier, all the LLC members must approve the inclusion of a new member or adjust the ownership percentage of members.
Recommended services to make registering your LLC easy
To make the whole process of forming an LLC easy, we’ll highlight below some of the reputable LLC formation services.
ZenBusiness
ZenBusiness is one of the most reputable business formation services in the industry. Some of the attractive features it offers its clients are domain name privacy, the New York publication service, and its cheap pricing.
ZenBusiness is one of the cheapest LLC formation services available despite the top-notch services it offers its clients. It has helped thousands of businesses since its establishment in 2015.
Some crucial products and services that can be purchased from the company are operating agreements, worry-free compliance, registered agent services, and annual report filing.
ZenBusiness customer support representatives are highly rated as they display a high level of professionalism, and they offer support to clients via phone, email, or webchat.
Incfile
Incfile is also one of the reliable LLC formation companies in the industry. The most interesting features of the company are:
- Its free business formation services.
- Free registered agent services for a year.
- A quick turnaround time.
The business experts at Incfile are familiar with the entity formation requirements of all fifty states. Incfile helps its clients obtain a federal tax I.D. number, offers tax filing services, and publication service, and so on.
Northwest Registered Agent
Northwest Registered Agents are notable for two services, registered agents and new business formation services.
The company also helps its clients draft and prepare articles of organization, and it has grown to be one of the best in outlining business information over the years.
Northwest Registered Agent provides its clients with online document access, reminders on annual reports, and it also prioritizes its customer’s security and privacy.
Northwest Registered Agent’s customer support is top-notch. It offers both email and phone support to its clients, and its fees are transparent.
LLC Vs. other types of companies
Choosing an entity type is one of the basic decisions you will make when starting a new company. Most entrepreneurs often consider forming an LLC, a corporation, and an S corp. We’ll look at how these entities differ in the subsequent paragraphs.
LLC vs. corporation
The most notable difference between an LLC and a corporation is that one or more individuals own an LLC, shareholders own a corporation.
An LLC and a corporation also differ in terms of taxation. I.R.S. rules permit an LLC to choose an option between being taxed as a corporation or partnership.
On the other hand, corporations are taxed as a different legal entity that can earn income autonomously.
Corporations pay tax on their profits and a tax on the dividends shared by the entity to its shareholders. This is known as double taxation.
Another notable difference between an LLC and a corporation is the ownership structure of the business. Shareholders can own a huge part of the company through share transfer and purchasing more stocks, and they can choose to own a few stocks by selling off their stocks.
LLC vs. S Corp
A glaring difference between an LLC and an S Corp is that while an S Corp has a limited number of shareholders (not more than 100), an LLC has an unlimited number of owners.
Also, while an LLC permits the membership of non-US citizens as owner/member, and S Corp doesn’t. LLC owners pay the I.R.S. self-employment taxes that change yearly, S Corp shareholders are paid salaries, and the company pays the payroll taxes.
Conclusion
The article gives deep insights into the required steps to take when forming an LLC in California. It also highlights the pros and cons of forming an LLC, recommends reliable services that could make your LLC formation easier, and explores other topics around it.
Are you planning to start an LLC in California? Then, this article might be just all you need to get started.