LLC California
The requirements for forming a limited liability company (LLC) in California are similar in most respects to those needed to form an LLC in any other state. Since the state’s 1996 enactment of the Beverly-Killea Limited Liability Company Act, LLC’s have become an increasingly widely-used alternative to forming a corporation. The act has since been amended to specifically authorize forming single-member LLCs.
The California agency responsible for administration and enforcement of California corporate, business and personal income taxes is the Franchise Tax Board.
Choosing an LLC Name
The name you choose for your California limited liability company must be recognizably different from any other LLC, corporation, or other business entity authorized to do business in the Golden State. This goes for entities originally formed in California, as well as those originally formed elsewhere but authorized to conduct business there.
The LLC’s name must include “Limited Liability Company” or the abbreviations “LLC” or “L.L.C.” at the end; the words “Limited” and “Company” may be abbreviated respectively as “Ltd.” and “Co.” The LLC’s name may also include the name of one or more members. On the other hand, it is not allowed to contain the words “bank,” “trust,” “trustee,” “incorporated,” “inc.,” “corporation,” “corp., “insurer,” “insurance company” or any other language implying or suggesting that it is in the business of issuing insurance policies or assuming insurance risks.
You can apply to the California Secretary of State to reserve a proposed LLC name for 60 days; the fee is $20.
Articles of Organization
Forming an LLC in California requires that you file articles of organization with the California Secretary of State’s office; the filing fee starts at $70, and can be expedited for an additional fee. The articles of organization must include the LLC’s name, the name and address of the initial registered agent (unless a corporate agent is designated, in which case only the name of the agent has to be specified), and whether the LLC will be managed by one or more managers, or by its members. The articles may also include other provisions that the members decide on, as long as they are not inconsistent with state law.
Under the Beverly-Killea Limited Liability Company Act of 1994, the LLC does not have to state specifically what its business purpose is; it just has to state that “the purpose of the limited liability company is to engage in any lawful act or activity for which a limited liability company may be organized.”
One or more persons may form an LLC, but they don’t have to be members of it to organize it. An organizer may be an individual, partnership, limited partnership, trust, estate, association, corporation, another LLC, or other entity, either domestic or foreign.
Your LLC is “organized” once the articles of organization are received by the California Secretary of State’s office with the appropriate filing fee, and are found to be in compliance with state requirements. One certified copy of the articles of organization will become a public document, and the other certified copy will be returned to the organizer or members.
Articles for LLCs are filed in the Sacramento office of the California Secretary of State; the San Diego and Los Angeles locations only process corporate articles of incorporation.
Additionally, depending on the type of business, some cities and counties require a license to do business inside their boundaries, and some city governments require a business permit.
Registered Agent and Office
California LLCs must appoint a registered agent in the state to receive official state correspondence. A LLC’s registered agent can be a resident individual in California State, a corporation, or a corporation originally formed in some other state that is authorized to transact business in the Golden State. It is allowable but not required for the registered office to be the LLC’s place of business.
Operating Agreement
While the articles of organization begin the legal existence of the LLC, they don’t provide any structure for the organization. After its articles of organization, an LLC’s most important document is its operating agreement, which can be amended or repealed as laid out in the agreement or state law as applicable.
In California, unlike some other states, having an operating agreement is required by the state. The operating agreement is a very important internal document that officially states how the LLC will be run. It should list the LLC’s members, how much each one has invested, how the profits will be divided, and how much weight each member has when matters come to a vote.
The operating agreement should also specify requirements for meetings, voting procedures, and so on. Normally, though, the operating agreement includes state requirements, and it contains limits or rules regarding the members’ authority to adopt, change, or repeal any operating agreement. If the LLC has more than one member, the operating agreement must be initially approved by all the members in writing.
Managers, if the LLC uses them, are normally elected for an indefinite term unless otherwise provided in the articles of organization or operating agreement.
Members
The owners of an LLC are called “members” instead of “shareholders” or “partners” as in a corporation. An LLC must have at least one member, who may be an individual, a corporation, a partnership, another LLC, or any other legal entity. Members may acquire an interest in or become a member of the LLC when it is formed, in a method stated in the operating agreement, or when the majority of the LLC’s members approve by voting.
Unless otherwise specified in the articles of organization or operating agreement, the LLC’s members vote in proportion to their profit interests in the LLC.
A member normally needs to pay cash, make a contribution, or transfer property to the LLC in order to become a member. However, an individual may be admitted as a member without acquiring a membership interest if there is such a provision in the articles of organization or operating agreement, or if all the LLC’s members consent and the admission is documented in the official records.
A member can only resign from the LLC in the manner stated in the articles of organization or operating agreement. These also usually specify a minimum period of time a member can be a member before being allowed to resign. LLCs have the option of pursuing legal compensation for damages to the LLC because of a member’s resignation.
Ongoing Requirements
A California LLC is required to make an annual statement regarding its financial condition to both its members and the California Department of State. In addition, along with the minutes of board and any member/owner committee proceedings, each California LLC must keep the following records open to inspection at its office:
- A current alphabetical list of the members and their mailing addresses
- Each member’s contribution and share of profits and losses
- If member-managed, a list of the managers and their mailing addresses
- The articles of organization and any amendments
- The LLC’s operating agreement and any amendments
- Federal, state, and local income tax returns for the last six fiscal years
- Any powers of attorney used to execute a certificate or amendment
- The LLC’s internal books and records for the current and last four fiscal years
Dissolution
An LLC is considered dissolved when any of the following events occur:
- Event(s) occur which are specified in the articles of organization or operating agreement as requiring dissolution
- A majority of the members or groups of members agree to dissolution
- An event that makes it illegal for the LLC to continue
- A judicial order mandates dissolution
Taxes
An LLC has some tax advantages compared to a corporation, including more potential tax deductions. Also, an LLC does not have to be a separate tax entity like a corporation; instead, it can be a “pass-through entity” when it comes to taxes, so that the LLC owners report business losses or profits on their personal tax returns, in the same way that a partnership does.
The IRS treats single-member LLCs as sole proprietorships for tax purposes. This means that the LLC itself does not pay taxes and does not have to file a tax return. The IRS treats multiple-owner LLCs as partnerships for tax purposes, unless you choose for your LLC to be taxed as a corporation. The result of this is that LLC owners each pay taxes on their lawful share of the profits on their personal income tax returns, rather than the LLC itself paying taxes.
California state taxes vary depending on taxable income. However, California LLCs that are not taxed at the entity level (like corporations) are subject to an annual minimum franchise tax of $800 per year—and the first payment must be made within three months of the LLC’s formation.
Click here to obtain more about forming an LLC
