An LLC’s simple and flexible business structure is ideal for many small businesses. While both LLC and corporation offer business owners limited personal liability, LLC can also take advantage of LLC tax benefits, management flexibility and little recordkeeping and tax reporting.
If a business owner or entrepreneur is confused about the process, or simply wants some guidance, then they should consider contacting a business attorney to help with opening an LLC. A law firm specializing in helping business can assist in the following ways:
- Take care of filing
- Search the availability of a business name
- Act as a registered agent
- Handle compliance paperwork
And more! A lawyer can help with all aspects of forming a business in California, including a limited liability company.
In order to review the process of creating an LLC, let’s go over the basic steps how a lawyer forms an LLC:
- Picking a Name
A limited liability company is required to have a unique name. This means that a company cannot share a name with another LLC in existence, and it cannot use a name that is “deceptively similar.”
What does deceptively similar mean in this case? Let’s say that a business owner wants to open a burger restaurant and decides to call it MacDonald’s. This name is so similar to McDonald’s that it would confuse customers; therefore, it is deceptively similar.
A business must also not use the words “corporation” or “incorporated” because the business is an LLC and not a corporation. This would create legal confusion. Instead, an LLC must have an abbreviation as part of its name that indicates the company is a limited liability company. This means the name should include “Limited Liability Company,” “LLC,” “L.L.C.,” or some other variation.
Also, an LLC’s name cannot have words like “insurance,” “bank,” or “trust,” since these may be deceptive in nature if the LLC does not offer these services.
Once a business owner comes up with a unique and distinguishable name, they will need to check its availability to make sure that no one else is using it or has reserved it. The owner should check the Secretary of State’s website to review their name database. If an owner hires a business lawyer to assist in the LLC creation process, then the lawyer will be able to do this type of search.
- Include Other Members
There is a lot of flexibility in an LLC’s structure. That means that there is more freedom when it comes to formation, taxation, and personnel than one would have as a C Corp or an S Corp.
In California, an LLC can be run by a single person. However, there can also be other owners, otherwise known as members, of an LLC. If there are other members involved in the LLC, then it may be a good idea to draft an Operating Agreement. This divides rights and responsibilities, as well as determines how profits and losses are distributed among members.
Members don’t even have to be from California. Let’s say Dan opens an LLC in California, but he wants his best friend Mark to be a member. Mark lives in Maryland. Even so, he can still be a member of Dan’s LLC in California.
- Finding a Registered Agent
An LLC is required to have a registered agent. This agent is a person who agrees to receive legal, tax, and government documents on behalf of the business. An owner can serve as his or her own registered agent, choose a separate one, or have a law firm serve as the registered agent. The main point is to have the individual agent available during business hours to receive documents.
While it is possible to serve as one’s own registered agent, it is advisable to pick a separate agent. This is because registered agents must have a physical address in the state and need to be present to receive documents during business hours. By picking a third-party to serve as registered agent, a business owner may move locations or take a trip without fear of missing important communications or documents.
- Getting a Federal Tax ID
LLCs in California need to have an EIN tax number. This is essentially a social security number for a company. It is needed to complete tax filings, business contracts, and other important documents. A business owner can submit a request to receive an EIN from the Internal Revenue Service (IRS).
In California, companies are not required to have a state identification number, only a federal one.
Again, a business lawyer will be able to complete this step if a business owner prefers.
- File Articles of Organization
This document is the founding charter of an LLC and is filed with the state. The state will review the name and other information about the company before officially registering it. Once the paperwork is approved, you’re in business!
If this task seems daunting, or a business owner would like to ensure it is done properly, then he or she may hire a business attorney to handle completing and filing the Articles of Organization.
Once a business has followed these steps, it will be ready to start business as an LLC. It is important that the company remain in good standing in order to maintain the benefits of an LLC, specifically the limited liability. In order to run a successful LLC, one should consider the following steps.
- Creating an LLC Operating Agreement
Under California law, limited liability companies must have an operating agreement. In fact, only four other states have this requirement. An operating agreement addresses how a company will be run or operated. It will detail management structure and how managers will relate to one another departmentally and in terms of deference. The operating agreement will also determine how profits and losses are distributed among members, as well as any terms by which more members are added. This agreement can technically be oral or written, though having it in writing is highly recommended. A written operating agreement helps protect a company’s limited liability. An agreement can always be amended at a later time, and these amendments should be in writing and preserved. The operating agreement does not need to be filed with the state or any agency. It should simply be kept in the company’s records.
A business lawyer can always help an LLC construct an operating agreement so that all bases are covered.
- Filing a Statement of Information
In California, LLCs must submit a statement of information every two years. This document is only one page long and mostly contains information that is already asked up front. This form is the state’s way of monitoring the business and any changes that may have been made. It costs $20 to file a statement of information, and it must be completed every other year.
The information required includes:
- State filing number (as printed on the Articles of Organization)
- Address of company
- Address where business records are stored
- Names of other members and managers
- Name of CEO
- Registered agent’s information
- Kind of business
It is possible to file Statements of Information online using the California Secretary of State’s website.
- Filing Taxes
Limited liability companies are also flexible when it comes to taxation. LLCs are typically “pass-through” entities, which means that any profits and losses will pass through to the owner(s) and be represented on their personal tax returns. Business taxes will therefore be paid on personal tax forms. That said, an LLC can also choose to be taxed in the manner of a corporation. If an LLC chooses to do this, it is most likely because the owners want the benefit of “retained earnings.” This means keeping the profits a business makes within the business.
Still, the default is that LLC profits and losses will be reported on the member’s personal tax return.
LLCs in California must also pay an $800 franchise tax each year. The first payment should be made no later than ninety days of the LLC’s formation, and then each year after.