California LLC Overview

A California limited liability company (LLC) is a specific form of a private limited company. California LLCs are more flexible and require less record-keeping and reporting than other choices of entities, such as corporations, S-Corps, and limited partnerships. However, the California LLC Fee can be a tax trap for those who do not do their homework before selecting a limited liability company for their business in California.

California LLC Liability Overview

A California LLC offers its owners, referred to as members, liability protection. This means that members are generally not personally responsible for the debts, liabilities, obligations, and lawsuits of a limited liability company. However, limited liability companies in California can lose liability protection under certain circumstances, including without limitation, when members fail to keep business and personal finances separate, engage in fraudulent activities, or if the California LLC was inadequately funded at its inception.

California LLC Income Tax Overview

One of the best features of a California LLC is the flexibility of taxation, as members may elect to have limited liability companies taxed as a partnership, S-Corp, or C-Corp if that is a better fit for their business in California.

A California LLC may also be treated as a disregarded entity for income tax purposes under certain conditions, specifically, if the LLC only has one member and does not elect to be treated as an S-Corp or a C-Corp, in which case the revenue, expenses, and net profit of the California LLC are reported on Schedule C to the sole members IRS Form 1040 and California Form 540 annual tax returns.

California LLC Formation Cost Overview

In terms of filing fee cost, the initial filing fee for a California LLC is $70 for the Articles of Organization with the California Secretary of State and $20 for the Statement of Information which must be filed with the California Secretary of State.

While a business in California can certainly form its own California LLC or use an online service, the best approach to establishing an LLC in California is to seek assistance from corporate attorneys. The corporate attorneys at San Diego Corporate Law can streamline the process, ensuring compliance with all legal procedures and regulations. With their extensive experience and in-depth knowledge of California’s corporate laws, they can save you time and effort while minimizing potential legal issues in the future.

For details on the cost of getting a California LLC formed by San Diego Corporate Law, please refer to our California LLC page. However, to determine the exact flat fee and receive personalized guidance, we recommend you schedule a consultation with us so we can review all the details and assist you through the entire process.

California LLC Fee and Annual Franchise Tax Overview

However, the most substantial cost for all California LLCs is the annual franchise tax. The minimum amount is $800, even for LLCs with minimal income or those not actively conducting business.

In addition to the annual franchise tax, there is a California LLC Fee for those limited liability companies whose total annual income exceeds $250,000. This California LLC Fee can range from $900 to $11,790.

While LLCs provide significant advantages in terms of liability protection and taxation, they also come with ongoing costs that should be considered when choosing the best structure for a business in California.

Why Form an LLC and Pay the California LLC Fee?

Forming an LLC provides a myriad of benefits for business owners. Primarily, it offers limited liability protection, meaning that LLC members are not personally liable for the debts and legal issues of the company; the business itself is liable. This ensures the personal assets of members remain separate and protected from business liabilities.

Additionally, an LLC offers tax flexibility, as profits and losses can pass through to the personal income of members without facing corporate taxes. LLCs also provide enhanced credibility to your business, making it more appealing to potential clients and partners. Lastly, they offer management flexibility, allowing members to manage the LLC themselves, or appoint one or more managers to do so.

How are California LLCs Formed?

The easiest way to form a California LLC would be to contact San Diego Corporate Law and let us form your California LLC for you!

However, if you are determined to go it alone and do it the hard way, forming an LLC in California involves the following series of steps:

First, you need to choose a name for your LLC that is unique and complies with California naming requirements. The name must include the phrase “limited liability company” or one of its abbreviations (LLC or L.L.C.), and it cannot include words that could confuse your LLC with a government agency (like FBI, Treasury, State Department, etc.). Additionally, the name cannot already be in use by another LLC registered in California.

Second, you need to appoint a registered agent who can receive legal papers behalf of your LLC. The agent must be a resident of California or a corporation authorized to do business in California.

Third, you need to file the Articles of Organization with the California Secretary of State and pay the associated filing fee. This document includes information about your business, such as its name, purpose, information about the registered agent, and management structure.

Fourth, you need to create an Operating Agreement, which outlines the ownership and operating procedures of the LLC. Even though California does not require this agreement to be in writing, it is highly advisable to have one as it helps establish the separation of your personal assets from the liabilities of your LLC.

Fifth, you need to obtain a federal employer tax identification number from the IRS.

Last, but not least, a Statement of Information must be filed with the California Secretary of State (and failure to file this when due and every two years thereafter may cause a California LLC to be suspended or involuntarily terminated!).

A more in-depth description of each of these steps is as follows:

California LLC Articles of Organization

To draft the Articles of Organization for a California LLC, you will need to provide specific information about your business. This includes the name of the LLC, the purpose of the LLC, the name and address of your registered agent, and whether the LLC will be managed by all members, one manager, or more than one manager.

Specifically, the document must include:

1. The name of your LLC: This must adhere to naming requirements for California LLCs.

2. The purpose of your LLC: This is a brief description of the kind of business your LLC will conduct.

3. The name and address of your registered agent: This is the individual or business entity that will receive legal papers on behalf of your LLC.

4. Management structure: State whether your LLC will be managed by its members or by one or more managers.

After you have drafted the Articles of Organization, file the document with the California Secretary of State. You can do this by mail, in person, or online. Filing fees apply and must be paid at the time of filing.

Upon filing, the state will review your document. If it meets all the requirements, they will send you a filed copy of your Articles of Organization, officially establishing your LLC.

California LLC Registered Agent

A California Registered Agent is a designated individual or entity that is authorized to receive official legal and tax correspondence on behalf of your California LLC. This role is crucial as it ensures that all important documents, notifications, and summons from the state are received and addressed promptly.

The registered agent must either be a resident of California or an authorized corporation doing business in California.

Note that the LLC itself or a member of the LLC can also act as the registered agent. However, the nominated agent needs to have a physical street address in California (P.O. boxes are not accepted) and must generally be available during regular business hours.

Why Do I Need a California Registered Agent for a California LLC?

The role of a registered agent is a legal requirement for LLCs in California. Having a registered agent serves several crucial functions.

First, it ensures that there is a designated point of contact who will receive and process important legal and tax documents on behalf of the business. This includes service of process notices, correspondence from the Secretary of State, and other official government notifications and tax forms.

Second, having a registered agent who is consistently available during standard business hours ensures that important documents are promptly received and addressed, reducing the risk of missed deadlines, legal repercussions, and potential dissolution of the California LLC by the California Secretary of State or the California Franchise Tax Board.

Finally, a professional registered agent (or an attorney willing to act as your California registered agent) can save you from the embarrassment of having a lawsuit or other sensitive documents served upon you personally in front of your employees or customers. For this reason, San Diego Corporate Law offers to act as the California registered agent for all California LLCs it forms for its clients without additional charge, and will continue to act as a California registered agent for as long as you wish provided you maintain at least a minimal business relationship with the firm.

Obtaining a California Registered Agent for Your California LLC

To obtain a California registered agent for your California LLC, you have several options.

1. Act as Your Own Registered Agent: If you are a resident of California, you can choose to act as the registered agent for your LLC. However, keep in mind that you must be available during regular business hours at the address you provide, and as discussed in the previous section, this means that lawsuits and other potentially sensitive documents may be served on you in front of your employees and customers, which could be rather embarrassing.

2. Appoint a willing individual: You could appoint another individual to act as your registered agent, provided they are a resident of California and agree to act in this capacity. Again, they must be available during regular business hours at the physical street address provided, but you also must be sure this person is reliable and trustworthy to ensure they forward all documents served upon them to you immediately upon receipt.

3. Hire a Professional Registered Agent Service: There are professional registered agent services available that will act as your registered agent for a fee. These services ensure that a representative is always available during business hours to accept service of process and other official documents on your behalf. They will also provide a physical address for receiving these documents and promptly forward them to you.

4. Hire San Diego Corporate Law to Form your California LLC: San Diego Corporate Law offers to act as the California registered agent for all California LLCs it forms for its clients without additional charge, and will continue to act as your California registered agent for as long as you wish provided you maintain at least a minimal business relationship with the firm.

Once you have decided on your California registered agent, you must include their name and California address in the Articles of Organization of your LLC that is filed with the California Secretary of State. Note that if you choose to change your registered agent at any point, you must notify the Secretary of State by filing a Statement of Information with the updated details.

California LLC Operating Agreement

A California LLC Operating Agreement is a legal document that outlines the ownership structure and operational procedures of a Limited Liability Company (LLC) in California. While this agreement does not need to be in writing under California law, it is highly recommended as it ensures clarity in business operations and provides an additional layer of legal protection for your personal assets.

The Operating Agreement can specify various aspects, including, but not limited to, the roles and responsibilities of members, profit sharing, dispute resolution mechanisms, and procedures for adding or removing members. This document is kept on file by the LLC itself and does not need to be submitted to any California state agency. However, it should be updated regularly to reflect any significant changes in the business or its operations.

A California LLC Operating Agreement is a highly crucial document that governs the structure, operations, and management of the LLC. For this reason, it is highly recommended to engage a corporate attorney for this task due to several reasons, including the following:

Firstly, a corporate attorney has expert knowledge of business laws and regulations and can ensure that the operating agreement is compliant with all necessary legal requirements.

Secondly, an attorney can provide valuable advice on complex aspects such as distributions of profits and losses, ownership percentages, and dispute resolution mechanisms, thereby preventing potential conflicts among members in the future.

Thirdly, an attorney can tailor the agreement to match the specific needs, objectives, and circumstances of your LLC, providing a level of customization that off-the-shelf templates or generic forms cannot offer.

Lastly, in the event of legal disputes, courts often rely heavily on the operating agreement. Therefore, a professionally drafted agreement by a corporate attorney can provide robust legal protection for the business and its owners.

California LLC Federal EIN

An Employer Identification Number (EIN), also known as a Federal Tax Identification Number, is a unique nine-digit number issued by the Internal Revenue Service (IRS) to businesses operating in the United States. It is essentially the business equivalent of a Social Security number.

This number is used by the IRS to identify businesses for tax purposes, track their tax obligations, and ensure compliance with tax laws. Whether you are starting a new business, hiring employees, or opening a bank account in the name of your company, an EIN is typically required. It is important to note that an EIN is specific to each business and does not expire or need renewal but may be required to change in certain circumstances, such as if you change the tax classification of your California LLC.

Obtaining an EIN for your California LLC involves a straightforward process:

1. Online Application: The IRS offers an online EIN application service. This is the fastest and easiest method to get your EIN. Visit the official website of the IRS and complete the EIN application during the hours of operation (Monday to Friday, 7 a.m. to 10 p.m. Eastern Time).

2. Mail or Fax: You can complete Form SS-4, which is the Application for Employer Identification Number, and either mail or fax it to the IRS. If you choose to fax the completed form, the IRS will generally provide the EIN within four business days. If you mail the form, expect the EIN within four weeks.

3. Telephone Service: For international applicants or those who prefer not to use the online system, the IRS also provides a Telephone service. An EIN can be obtained by calling the Business & Specialty Tax Line at (800) 829-4933. The hours of operation are 7 a.m. – 7 p.m. local time, Monday through Friday. An assistor takes the information, assigns the EIN, and provides the number to an authorized individual over the telephone.

Whichever method you choose, remember to have all the necessary information ready, including the legal name of the entity, the name and social security number of the responsible party, the mailing address, and the business category that best describes your entity.

Of course, if you allow San Diego Corporate Law to form your California LLC, we also obtain the EIN you need at no additional charge.

California LLC Statement of Information

The Statement of Information for a California LLC is a document that every limited liability company registered in California is required to file with the Secretary of State. It provides updated information about the business, including the name of the LLC, the name and California address of the registered agent, and the names and addresses of the managers or members.

This document must be filed within 90 days of registration of the California LLC and subsequently every two years during the applicable filing period.

It is important to note that failure to file or late filing of the Statement of Information can result in penalties and even suspension or involuntary termination of the LLC by the California Secretary of State.

San Diego Corporate Law files the required Statement of Information with the California Secretary of State for each California LLC it forms for its clients, and will even track the biennial due dates and file the subsequently required statements of information for a reasonable fee.

How Much Does it Cost to Form LLCs in California?

Forming an LLC in California involves various government filing fees, namely a $70 filing fee for the Articles of Organization and a $20 filing fee for the initial Statement of Information.

Furthermore, there may be additional costs, such as municipal business license fees depending on your type of business in California and the city or county where it is located.

In addition, hiring a corporate attorney will add to the cost, but as with most things, you do get what you pay for, and allowing a law firm like San Diego Corporate Law to form your California LLC will ensure the work is done professionally and completed correctly the first time.

How are LLCs in California Taxed?

LLCs in California are subject to several types of taxes, primarily depending on how they choose to be classified for tax purposes.

By default, LLCs are taxed as pass-through entities, meaning the profits and losses of the company pass through to the members, who report them on their individual income tax returns. However, an LLC can also choose to be taxed as an S-Corp or a C-Corp.

All California LLCs must pay an annual LLC tax of $800, irrespective of their income level. If the income of a California LLC exceeds $250,000, it must pay the California LLC Fee based on its total gross income. This additional fee ranges from $900 to $11,790.

Furthermore, LLCs may also be liable for California sales tax, payroll tax, and potentially other state and local taxes, so it is advisable to consult with a tax advisor to fully understand your potential tax obligations.

California LLC Income Tax Options

California LLC Disregarded for Tax Purposes

California LLCs with only one member are subject to income tax obligations identical to those of a sole proprietorship. Unless the California LLC with only one member opts to be taxed as an S-Corp or a C-Corp, the default tax classification is as a disregarded entity, and the profits and losses are passed directly to the sole member, who then report this income on their personal tax returns just like a sole proprietor.

The sole member is taxed at their individual income tax rates, and all net income is subject to self-employment tax of 15.3% up to the statutory limits. It is imperative to note that even if the LLC does not generate any income, it will still be required to file a return on Schedule C to the IRS Form 1040 federal and California Franchise Tax Board Form 540 annual tax return.

California LLC Taxed as Partnership

When a California LLC has two or more owners (who are not married persons filing joint personal income tax returns), it is by default classified as a partnership for tax purposes.

Federal and California partnership taxes mean that income taxes are not paid at the company level, but instead, profits and losses are reported on IRS Form 1065 and California Franchise Tax Board Form 565 and are passed through to the members who report them on their individual tax returns.

Each member pays taxes on their individual tax returns for their share of the profits and losses of the California LLC as determined by the allocation of profits and losses set forth in the operating agreement.

California LLC Taxed as S-Corp

If a California LLC elects to be taxed as an S-Corp, it can potentially reap significant tax benefits. An S-Corp is a special tax designation granted by the IRS (and recognized by the State of California) that allows the profits, and some losses, to be passed directly to the personal income tax returns of the owners (called shareholders) without being subject to corporate tax rates.

In California, S-Corp profits are not subject to the same franchise tax as California LLCs, but they do have to pay a 1.5% tax on net income (against an $800 minimum franchise tax). This can be a favorable choice for some businesses, as only the salary paid to the owner-employee is subject to the 15.3% employment tax, and any remaining income is distributed which is not subject to self-employment taxes.

Designation as an S-Corp for income tax purposes comes with certain restrictions and additional administrative requirements, so it is advisable to consult with a tax professional before making this election.

California LLC Taxed as C-Corp

If a California LLC chooses to be taxed as a C-Corp, it is subject to double taxation. This means the profits are taxed once at the corporate level and again when they are distributed to the members as dividends.

The current corporate tax rate in California is 8.84% (against an $800 minimum franchise tax). While this may seem unfavorable due to the double taxation, there are certain benefits, such as the ability to retain and accumulate earnings from year to year (which can be beneficial for growth) and the ability to offer a range of fringe benefits to employees which can be deducted as business expenses.

As with designation as an S-Corp for income tax purposes, the administrative requirements for operating as a C-Corp for income tax purposes are complex and it is crucial to consult with a tax advisor before making this decision.

California LLC Annual Franchise Tax

All LLCs operating in California are required to pay an annual franchise tax to the California Franchise Tax Board. This annual LLC tax is $800 and is due by the 15th day of the 4th month of the taxable year, typically April 15th. It is important to note that this tax applies and must be timely paid even if the LLC is not actively conducting business or if it is operating at a loss.

The $800 annual franchise tax is separate from other state taxes, fees, or income level-based taxes, and if not paid on time, the LLC might have to face penalties and interest charges as well as suspension and eventually involuntary termination.

California LLC Fee

In addition to the annual franchise tax, every LLC in California is also required to pay a California LLC fee. The California LLC Fee is in addition to the annual $800 franchise tax and is due annually. It is also worth noting that the California LLC Fee is not based on net income but on gross revenues.

The calculation of the California LLC fee is based on the total gross income, not net income, of the California LLC. This distinction is crucial as gross revenue refers to the total income generated by the business before any deductions for expenses, costs, or taxes, whereas net income implies the income remaining after all those deductions are made.

The gross income is the total revenues (i.e., sales) an LLC generates from all sources, without subtracting any costs or expenses. The California LLC fee is a sliding scale amount that increases with the gross revenue, beginning at $0 for gross income less than $250,000 and reaching up to $11,790 for those with a gross income of $5 million or more.

This means even if your business expenses are high and your net income is low, you could still face a higher LLC fee if your gross revenues are significant. Therefore, managing members of LLCs must be aware of their total gross income since it directly impacts the LLC fee.

It is important to remember that this fee applies regardless of whether the LLC is active, inactive, or operating at a loss. If the LLC fee is not paid in a timely manner, penalties may apply, so it is advisable to consult with a tax advisor to ensure compliance with this requirement.

Ways to Avoid the California LLC Fee

Have Your California LLC Taxed as a C-Corp or S-Corp

The California LLC Fee applies specifically to California LLCs that are disregarded for tax purposes or taxed as partnerships. If your California LLC falls under these tax classifications, you are required to pay this fee. To avoid the California LLC Fee, avoid having your California LLC taxed as either a disregarded entity or a partnership by electing to have it taxed as an S-Corp or a C-Corp.

LLCs that elect to be taxed as S-Corp or C-Corp in California receive relief from the California LLC Fee. This means, that if your LLC is taxed as either an S-Corp or a C-Corp, it is not subject to the California LLC Fee based on gross revenues. This exemption can be a significant advantage for larger businesses with high gross revenues, potentially saving thousands of dollars annually. However, remember that S-Corps and C-Corps have their own tax structures and obligations, along with certain restrictions and additional administrative requirements, not the least of which is the potential impact on capital gains tax.

S-Corp Capital Gains Tax

When an LLC taxed as an S-Corp sells a capital asset, such as real estate or shares of stock, the gain is passed through to the members and reported on their individual tax returns as income, not capital gains. This means the normal capital gains tax rate will not apply, and the income tax rates of each member will determined by the individual tax bracket of the member. If the business in California has significant capital gains or the potential for significant capital gains, S-Corp taxation is not advisable.

C-Corp Capital Gains Tax

As previously mentioned, a California LLC taxed as a C-Corp faces double taxation, and this includes profits from the sale of capital assets. When taxed as a C-Corp, the California LLC will pay taxes on the sale of a capital asset, such as real estate or shares of stock, at the corporate level. If those profits are then distributed to the shareholders as dividends, the shareholders must pay tax on those dividends at their individual dividend tax rate. This double taxation can lead to a higher overall tax burden as compared to normal capital gains rates available to California LLCs disregarded for purposes of taxation or taxed as partnerships.

Capital Gains Tax Conclusion

Deciding whether to have your LLC taxed as an S-Corp or a C-Corp can have significant implications for capital gains tax. Therefore, it is crucial to consult with a tax professional to understand the potential tax outcomes of your decision before electing S-Corp or C-Corp taxation for your California LLC.

Form a California Limited Partnership Instead

A California limited partnership is a business entity that comprises at least one general partner and one limited partner. The general partner is responsible for managing the business and bears unlimited liability for the obligations of the partnership. On the other hand, the limited partners contribute capital and share in the profits but do not participate in the management of the business.

Based on these liabilities, San Diego Corporate Law always suggests that general partners of limited partnerships be an entity with limited liability, such as a California corporation, California S-Corp, or California LLC, provided that the general partners are not given a significant allocation of profits and losses.

Since the liability of limited partners is limited to the extent of their investment, individuals, trusts, and other entities without limited liability are generally acceptable choices as limited partners.

Because they are generally taxed as partnerships, sales of capital assets by California limited partnerships provide normal capital gains taxation to the general and limited partners (assuming those general and limited partners are not taxed as S-Corps or C-Corps).

The California limited partnership business structure offers an advantageous blend of limited liability protection for limited partners and operational control for general partners, but most importantly for this discussion, California limited partnerships are not subject to the California LLC Fee, and are only subject to an $800 franchise tax fee (in addition to income, employment, and other taxes as discussed elsewhere in this discussion).

California limited partnerships have their own tax and regulatory requirements, so consultation with a tax advisor or legal professional is advised before formation.

Frequently Asked Questions About California LLCs

How much is the California LLC Annual Franchise Tax?

The California LLC Annual Franchise Tax is $800. This tax applies to all LLCs operating in the state, regardless of whether the LLC is actively conducting business or operating at a loss. It is important to note that this is separate from other state taxes, fees, or income level-based charges your LLC may be subject to. If not paid on time, your LLC might incur penalties and interest charges, so it is strongly recommended that you maintain a regular tax filing schedule.

How much is the California LLC Fee?

The California LLC fee is a sliding scale amount determined by the total income of the California LLC for the year. If the annual income of a California LLC is less than $250,000, there is no fee. However, if the annual income ranges between $250,000 to $499,999, the fee is $900. The fee scales up with income, maxing out at $11,790 for LLCs with an income of $5 million or more. It is important to note that this fee is separate from the annual $800 franchise tax.

What happens if the California LLC Annual Franchise Tax and LLC Fee are not paid?

The California LLC fee must be paid annually, just like the California LLC Annual Franchise Tax. It is crucial to timely pay the California LLC Fee and annual franchise tax to avoid any penalties and maintain good standing with the California Franchise Tax Board.

Ready to Form Your LLC in California?

At San Diego Corporate Law, we are committed to your business success. Our team of experienced professionals is ready to guide you through every step of forming your LLC in California. We understand the complexities of business law and the unique stipulations California imposes on LLCs. Do not navigate these waters alone – let us handle the legalities so you can focus on growing your business. Contact us today to get started on forming your California LLC. San Diego Corporate Law, A Professional Law Corporation: tailored legal advice for dedicated entrepreneurs.