Forming an LLC in California can help you bring your next income stream to life—and for a limited time you can save money and avoid some of the fees.
A law signed in 2020 grants a first-year franchise tax exemption to new LLCs and some other business formations if they incorporate before December of 2023. That fee, a minimum $800, “deters a lot of business owners from starting an LLC in the first place,” says Liku Amadi, Esq., founder of Anasa Law Firm, a San Leandro-based firm that helps consultants and service providers with legal counsel.
If you’ve been thinking about making your California-based business or side hustle official, doing so sooner rather than later will help you keep more money in your pocket.
You can register your California Limited Liability Company (LLC) yourself, hire a CPA and/or lawyer to help you along the way, or use a guided tool like LegalZoom to make the process easier.
California has several state-specific rules and requirements for registering an LLC. Here’s what experts say you need to know about forming your LLC in California.
Step 1: Check and See If Your Industry Has Filing Regulations
The first California-specific quirk is that not all types of businesses can form an LLC in California because of certain industry regulations.
“Most licensed professionals are not allowed to be LLCs,” says Kristen Roberts, Esq., founder of Trestle Law, a firm based outside of San Diego that specializes in helping business owners manage their intellectual property. “These are going to be your doctors, your lawyers, your therapists and physical therapists, people that have a governing body that licenses them.”
The California Business and Professions Code (B&P) will have the most up-to-date information on what business licenses or other considerations you need to take in mind before filing with the California secretary of state.
“There’s also often a naming requirement,” says Roberts. “If you’re a physical therapist, ‘physical therapy’ has to be included in the corporate name. So there’s all different kinds of things to consider when you are a professional, and it may make sense to talk with an attorney. I’ve had to clean up multiple people’s business entities that were not set up the right way because the owners were licensed professionals.”
If you don’t have a business formation, you’ll still be taxed on your side hustle or business revenues if the IRS finds out (and they usually do). You’ll automatically be taxed as a sole proprietor for this income.
Step 2: Choose a Company Name
Your business name can be the only one of its kind in California, so you’ll want to confirm your name is available before taking other steps in the LLC formation process.
“Be sure to check the California Secretary of State website for similar business names,” says Carmen Rosas, founder of Carmen Rosas Law, a firm that specializes in estate planning for both individuals and companies. “State websites typically house the documentation to complete LLC formation on your own, and the pro of going this route is that the cost is much cheaper than hiring an attorney. The con is that you might miss a step or not complete something on time… which can ultimately cost you more money, time and energy than if you hired an attorney in the first place.”
You can quickly check to see if your name has already been taken on the California Secretary of State website. Having your business name in place will also help you start planning out how you want to market yourself.
Step 3: Decide on Your Registered Agent and Manager(s)
Your California LLC formation process will include naming both a registered agent and one or more managers with the California secretary of state.
“California requires you to have your own registered agent to receive any important documentation. This can be a member of the LLC or a separate fiduciary,” says Rosas. The registered agent functions as the contact person or office for your business, and it can be either yourself or a registered agent service.
The registered agent:
- Receives mail related to the business, including any correspondence that notifies you of pending lawsuits, tax forms, official government correspondence, and other legal documents.
- Must have their name and address visible to the public so that anyone who needs to contact your company can do so (Though it doesn’t have to be the same address as where you conduct business).
- Must be an individual’s name. It cannot be a company name or a P.O. Box.
Additionally, you need to define one or more managers for your LLC. Managers will be responsible for the day-to-day operations of the company. Managers are different than members, who are the company’s stakeholders but may not be involved in how the business operates, though there is often crossover. You can elect to have your LLC be a single-member LLC or a multi-member LLC. If multiple stakeholders will be involved, you’ll need to outline agreements clearly in your LLC operating agreement. Having a lawyer in the picture to help you draft your operating agreement may be a good idea here.
“If you’re looking at setting up a multi-member LLC or partnership, you’ll absolutely want to hire an attorney and have them draft your operating agreement,” says Rosas. “I would not advise anyone to form this type of LLC on their own. This is not an area where you want to try and cut costs. Setting it up properly from the start will save you money down the road, but also potentially save you the headache and challenges that could come with a messy business partnership.”
Step 4: Fill Out the Filing Information
When you’re ready, head to the domestic LLC registration checklist on the California Secretary of State website. This page outlines all the paperwork you’ll need to register, and also gives guidance for how to start an LLC in California. This overview can help you collect all the necessary information you’ll need before you start officially setting up your limited liability company with the Internal Revenue Service.
Step 5: Draft and File Your Articles of Organization and Statement of Information
You’ll file your Articles of Organization when you register your California LLC. Additionally, in California you need to file what is known as a Statement of Information within 90 days of registering your limited liability company and every two years thereafter. This is California’s version of annual reports, and LLC owners need to file them to update the state of California on business activity.
How Much Does It Cost to Start an LLC in California?
Expenses for registering your LLC in California will include:
- Your California LLC filing fee: $70
- Your California Statement of Information fee: $20
- Annual franchise tax: $800+/year payment to the California franchise tax board.
- Any fees for using an online registration service like LegalZoom or working with a legal professional.
As previously mentioned, the franchise tax fee is waived the first year for new LLCs in California for a limited time. After that, the fee will be $800 if your business is doing under $250,000/year revenue. Once you pass that threshold, California franchise tax rates fall into the following brackets:
- An additional $900 if the LLC’s annual revenue is between $250,000 and $499,999, for a total annual cost of $1,700.
- An additional $2,500 if the LLC’s annual revenue is between $500,000 and $999,999, for a total annual cost of $3,300.
- An additional $6,000 if the LLC’s annual revenue is between $1,000,000 and $4,999,999, for a total annual cost of $6,800.
- An additional $11,790 if the LLC’s annual revenue is over $5,000,000, for a total annual cost of $12,590.
These numbers may look scary, but remember that your side hustle or small business structure would be raking in a lot of revenue by the time you start hitting these upper thresholds.
Even if you’re just getting started with a side hustle or other business venture, it makes sense to understand how to start an LLC in California, and you may want to invest in professional help to ensure your California LLC is set up for success.
“Legal services can be expensive,” says Amadi. “And so, when you’re starting out, especially if it’s just your side hustle, you don’t know if you want to pay $300/hour or whatever the rate is to work with the licensed attorney or working with a law firm, right? You’re trying to save money. There are people who have gone through LegalZoom or whatever other services are out there, and I personally haven’t used any of those services. But it’s not always 100% true that you’ll be working with a lawyer when you’re getting your LLC filed. It really could just be another person, whether it’s a paralegal or secretary who’s done this before, who is filing your LLC paperwork. You don’t have the advantage of someone walking through the process with you. As an attorney, I like to handhold my clients.”
Is it Worth Starting an LLC in California?
If you want to make money online (or offline) and plan to do it for months and years to come, having a limited liability company is critical, because it will protect you and your personal assets from potential liabilities. It also makes you appear more legitimate, says Rosas.
“As soon as you have one paying client, you open yourself up to potential lawsuits,” she says. “With an LLC, you can protect your personal assets if your business gets sued. There is also greater credibility and legitimacy to having a registered name.”
Because California is one of the highest sales tax states in the country, consulting with a tax professional or CPA prior to formation of your business structure can be helpful, says Roberts.
“People always come to me before having spoken with a tax professional, and I think that that’s the wrong move,” she says. “I think the right move is to always consider taxes, because California has very high state income tax. So I always advise that you consider your tax position, because sometimes starting an LLC or business entity mid-year is going to impact you in a different way from a tax perspective. You’re going to want to know what that looks like before you start the process of forming.”
Can I Form My LLC Outside of California and Then Work In California To Avoid Fees?
You are not the first or second (or thousandth) person to ask this question. Some entrepreneurs try to dance around California’s high tax burden by forming their LLC in a different state. This usually won’t work, though; if your company is conducting any business in California, or you are working in California while generating business activity, you have to register with the state of California as a foreign LLC, and California will collect state tax on your revenues in addition to the fees your paying in the state you’ve registered in. Translation: double tax on your business efforts. No one wants that.
Resist the urge to jerry-rig your LLC formation. Start your California LLC the right way from day one, and focus on how to make more money instead to offset increased costs.
How Long Does It Take to Form an LLC in California?
If you’re filing online and have done everything correctly, you can expect your LLC to be registered within three to five business days. If you’re using snail mail and mailing in physical forms, the process will take longer – about two to three weeks.
Do You Need an EIN to Start an LLC?
You do not need to have an Employer Identification Number (EIN) prior to register an LLC, but you do need one after you’ve formed your LLC in order to do things like open a business bank account. You also need an employer identification number to get a business credit card. You can register your LLC with the Interval Revenue Service and get a federal employer identification number for free by clicking here.
Starting an LLC in California can feel intimidating and expensive, but the perks far outweigh the costs. If you see yourself taking your side hustle or business efforts to the next level in California, having your ducks in a row early on will help you bring your entrepreneurial goals to fruition.
The legal commentary from experts in this article is for educational purposes and is not intended to be legal advice.