The California LLC
The Sunshine State is one of the most largest economic zones in the World. America's largest state economy is California, which produced $2.75 trillion of economic output in 2017, more than the United Kingdom's GDP last year of $2.62 trillion. California is a great hub of business and includes spots such as Beverly Hills, Silicon Valley, and San Francisco. Some of the largest companies in the world are in California, and it is home to thousands of smaller businesses as well.
Are you Located in the State?
One of the main reasons that people use to decide where to setup an LLC, is based on where their business is located. In general, if you are located in California, this is probably the best state for you to file in. We have a number of sections on this page, will which describe to you many of the benefits, issues, and requirements for filing an LLC in California. So, take time to read all of the valuable content and reach out if you have questions.
How to Proceed?
This California LLC pages are laid out with links on the left and tabs on the top. Please read all about issues related to limited liability companies here, and you can proceed by filing with a top quality service provider. We do not file here...but we can tell you how to do it on your own, or where to find a great provider to help you.
Find LLC Name
The process of choosing a name for a California LLC can be a difficult one. It will require you to be flexible in what you want to get out a name. The reason for this need to be flexible is that simply so many names have already been registered. When you start to look for a name, you'll see that many, many, many are already registered. But with time, and good searching tactics, you'll be able to find the right name.
Domain Name Search
The domain name search process is a complex one that can be frustrating if you don't approach it with the right attitude. First, the naming of a website is really important and this is why we mention it up front in the business naming process. Often people want to have their LLC name perfectly match with their domain name. This is the right way to do it in a perfect world. For example, the business name Starbucks is also www.Starbucks.com which makes it easy to associate the two. So, if possible it is best to have a LLC name that matches with the domain name that you are using.
How can you pick a domain name that matches with your LLC Name:
- You can end any ending that you want to the domain name. Let's assume your name is Crunch Guy, LLC. You can setup a domain such as Crunchguy.com, thecrunchguy.com, crunchguyco.com, crunchguyonline.com, crunchguyLA.com. As you can see, you are still using the primary name of the business but adding a slight identifier to the end of the business name. This may work for you.
- If adding an ending identifier doesn't work, then you may want to keep searching. Start to expand your name search, and think about adding more words to your name. To keep with our Earlier example, if you use two words in the name of your business and the domain name isn't available, you may want to add a third word to the business and domain. So, if your business is car salvaging, you may want to try a domain and business name of Crunch Guy Salvage, Inc. This may be a good solution if you find that your domain name isn't available to match your LLC Name.
- Add the City, State, or Country identifier to the business name. Such as Crunch Guy USA.
- You can add a number to the end of the domain. Such as CrunchGuy1.com
- There are many ways that you can create a unique name and LLC name that will both be available.
You can visit GoDaddy.com to begin your search.
Words to Avoid
There are number of reserved words that you should avoid in your business name. Here are some suggestions:
- California LLCs cannot have the words corp, corporation, inc, incorporated in the business name.
- Banking phrases: such as bank, banker, banking, trust, trustee, savings as these are regulated words that are only usable by approved financial institutions.
- Government related words: Police, navy, army, coast guard
- Medical Terms: Doctor
If you must use one of the words listed above, reach out to the Secretary of State and see how you can goo about getting approval for the restrictred words.
How to Find a Business Name?
You'll want to do extensive research in order to find a good name. You will want to start by opening two tabs in your favorite web browser. You can open one tab to GoDaddy.com, and the second to the California Secretary of States website. Now start to search in each browser, back and forth, looking for matching domain/LLC names. You may find this process somewhat easy, especially if you have a number of unique words in your names, or if you have a brand new word that you may be using. Such as a word from a new process, new industry, or new procedure.
Intellectual Property Issues
Intellectual or IP issues are very real and something that you should pay some attention to. You want to make sure that you stay clear of other peoples trademarks, copyrights, and patents to the best of your ability. It is important because if you willfully infringe on another persons IP and damages can be assessed you may just get sued. In most cases, you will find that you will get a cease and desist letter first, at least if you are a smaller company without great resources. But if you infringe on a large company, they may just decide to sue you without a request to cease infringing. You can also do your best to search here:
The Registered Agent(RA) is a unique role that is required for your new California LLC. The agent is also called the agent for service of process. Every limited liability company is required to have a this role for the business in order to register, and it must exist all throughout the duration of the business.
The LLC can be administratively dissolved if at any time your registered agent is not active.
To rule out the possibility of getting administratively dissolved, make sure that you do the following:
- Always make sure that your Registered Agent Address is correct with the CA Secretary of State.
- Always make sure that you receive and promptly respond to inquiries or mail from the secretary of state.
- Never, ignore mail that you receive for your busines....obvious one?
- Complete your annual filings on time, and make sure that the information is correct.
What is Service of Process?
Service of process is the official paperwork that you will receive when you get sued. The courts will serve your business with "Service of Process". The purpose of this is to ensure and validate, and certify that the office registered agent has been served the court claim. This way the business owner cannot say that they didn't receive the paperwork.
What does the Registered Agent Do?
The purpose of the registered agent is simple. The main requirement is to receive office mail sent from the secretary of state, and forward it on to the appropriate members of the LLC.
Do I have to have a Registered Agent?
Yes, every California LLC must have an RA in order to be compliant with state laws.
Who can serve as Registered Agent, or Agent for Service of Process?
Anyone over 18 can serve as this person. Often, and usually the best person, will be one of the business owners. If you are able to put down your business address and personal name for this, then you have the perfect registered agent. You can definitely serve as this agent yourself, and it makes sense unless you want to have an extra layer of privacy.
Can I pay for a service to be my registered agent?
Yes, and many businesses do just this. For a small annual fee, a service company will be your registered agent. This way, if your business is a home business you will not necessarily need to provide your home address on the filing information. The registered agent service is one that will typically just forward the mail received directly from the California Secretary of State. This is not what some people call a virtual office or a mail forwarding service. Once again, if you get a registered agent service, this is just for the official mail from the state or service of process.
Complete the Articles of Incorporation
When Completing the articles, you will have to follow a number of steps that must be done as required by the State. These steps can be difficult, but often many people can complete them on their own without the help of a service company. With this said, if you don't follow the steps as required you can have your filing rejected cause you a potential loss of time and money. So, take your time to do the necessary research to ensure that your filing will be approved the first time.
From this page you'll be able to locate a professional service provider to help you complete your articles, or you'll be able to start the process for completing the articles on your own.
Find the name
This is the process of finding your corporation name. As we discussed at length on the tab above titled "LLC Name", there are many issues that go into finding a great name for your business. Take the time to review the tab above if you need more tips for getting a great name.
Find a Registered Agent
The registered agent is a required position in your LLC, and not an optional one. So, you must not only have someone fill this role, you must always have the registered agent in place or your business can be administratively closed by the state. Simplly put, if the state attempts to reach you through the registered agent and you cannot be reached, this will begin the process of closing down your LLC.
Simply not reply to mail or service of process does not suffice as a way to close your business, nor will it get you out of any outstanding issues. So, be sure to always keep the CA Secretary of State updated about this position.
Business Postal Address & Physical Address
The address for the business should be located in the state, but it doesn't have to be. You can also supply a physical address..
LLC Managed by Member's or Managers
The next item to enter is to determine if the business is managed by members(owners) or managed by managers.
The California LLC form requires that you provide the purpose statement for the business. The sample form provides a general clause which will be suitable for most business types.
Member Name and Address Information
The member names are submitted in California for LLCs when the Statement of Informaiton is submitted. In this form, you will note the names of the members of the LLC. You will need to provide their address and contact information on this form.
Signature of Organizer
The Organizer is simply the name of the person recording the document. This person does not need to be an owner of the company.
Annual Requirements & Maintenance
The purpose of the annual reports is to ensure that the state has the most current information regarding the company, address, registered agent, and member information. There are also required filings that may be necessary depending on the type of business that you have. Some of the California Annual Reports can be filed by simply going to the Secretary of State website.
California File an Annual Report
In California all LLCs and Corporations must file an annual report, and late fees are due after April 15th. The process isn't too challenging, and you can think of it as simply updating the state with any new or current information. To launch this process you can do so by, click here to file an annual report in CA.
Each year every business and every person must prepare their taxes to report to the government. Well just to make it clear, all LLCs and Corps have to report their income when they file their taxes. The process of filing your taxes is reporting the income and expenses of the entity to the government.
The limited liability company will typically report taxes as a pass through entity for tax purposes. This means that the income earned by the company will flow through the business. The income will then be distributed to the tax returns of the individual owners. The business will not be a separate entity for tax purposes.
California LLC can choose to be treated as a Corporation
The LLC can be setup to be treated as a corporation, and there are forms available to make this declaration. It isn't too difficult to do, but as all forms, they must be completely correctly. You must first file the form to elect for an LLC filing as a corporation or partnership.
How to elect to LLC to file as Corporation or Partnership?
The LLC can elect to file as a corp by filing a form 8832. Once you file for the 8832 you can also elect to file as an S corporation by filing a 2553 for S corp election. So, if you have an LLC you can elect to be treated as a corp or s-corp by using a two step process. First you'll file for the LLC, then the corporation using the 8832, then finally the
What is a K1?
Each owner should show their pro-rata share of partnership income, credits and deductions on Schedule K-1 (1065), Partner’s Share of Income, Deductions, Credits, etc. Generally, members of LLCs filing Partnership Returns pay self-employment tax on their share of partnership earnings. The K1 is a product of completing the tax return of the LLC or the corporation. Your accountant or tax preparer should present this to you with your completed return.
Business Bank Account
An essential part of your business is going to be the business bank account. The will be the hub or center of your financial progress. All of your receipts will be received and expenses paid from this account.
Separating Personal & Business Assets
A key tenet of running an LLC or corporation is keeping the personal and business assets separate. Both the LLC and corporation provide the owners with limited liability protection. Limited liability protection helps to protect personal assets from business creditors and obligations. Typically if a business owner is able to keep a separation between their asset classes, then the courts will limit any claims against the business to be paid for exclusively using business assets. This essentially protects the personal assets of the business and limits loss to the amount of funds in the business.
Business Checking Account
The business checking account is the one essential bank account that every business should have. If you don't have one yet, be sure to get one before you start to receive payments for your goods and services. This will be the main location where you will receive money and pay for expenses.
Business Savings Account
This savings account can be a good cash management tool that a business owner can use to keep funds separated from the daily spending accounts. A good business owner can use this account to slow start to build a reserve or rainy day fund. If you need to have extra cash, you may just find that this rainy day fund has enough in it for you to use.
Business Investment Account
A business investment account is a great place to store any funds that you plan on not needing for a while. If you find yourself not needing funds, an investment account can help you to start earning a return on your idle funds.
The process of accounting must be an integral part of any business, no matter what type of business. The reason for this importance is that it will help your business to have insight into how money is earned and spent. In other words, it will help a business owner to understand exactly where revenue is coming from, and where money is spent on expenses. Once a business owner has this understanding about the flow of money in the business they can start to make changes to maximize their earnings. What you will need as a business owner is a good accounting software that can help you to maximize your earnings or income. The method you will use to do this, will be to use the predefined reports that will take the transactions you input and break them down into useful reports.
How to choose an accounting system?
The three most important accounting statements are the balance sheet, the income statement, and the cash flow statement. The process begins with bookkeeping, or the process of inputing sales and expenses into the accounting system. The accounting system will allow you to configure the software to your specific type of business and it will automatically configure certain entries and reports for your needs. A perfect example of this is with Quickbooks. Quickbooks will have a setup process that will allow you to choose from many different pre-defined business types to ease setup. As you click through the setup process, you will make selections, and once done the process will be much easier.
Why Quickbooks is Perfect for Your Business
Like many small business owners, I started my business without an accounting system in hand. I started first with finding my first customers and figuring out how I was going to start earning money. This was the exact wrong way to do it. Because as the business started to pick up and I was starting to earn decent revenue I wasn't prepared to record the earnings. I had to slow down bringing in new clients, in order to figure out the accounting system that I needed. I was referred to Quickbooks by my friend who was using it for a successful business. Once I started to setup Quickbooks, I was up and running very quickly. The cost is affordable as well with both monthy payment plans or a low cost software to purchase.
What are Financial Statements?
The purpose of having a bookkeeper enter all of the transactions is to get a pretty report that will help the owner assess just how money is earned and spent. Once again, Quickbooks makes this simple with predefined reports that have already been setup for use. Let's briefly mention the Financial Statements (FS) that you can use for your business.
I think of the balance sheet as the boring financial statement. Because it just shows you the amounts of each of your accounts. So, on there you will have an account for your bank account. This amount should match eactly with what you have in your bank account as of a certain date. And this is what the balance sheet will show you, are the values as of a certain date.
I think of the Income Statement(IS) as the exciting financial statement because it shows over a period what you have done. And with a great software like Quickbooks, you can change the range that you are looking at very easily. So, you can run a report that will show you over the past 90 days how much did you spend on shipping costs. This is very helpful and simplifies doing very advanced analysis of your business. When I ran my previous business this simple tool allowed me to save thousands of dollars on my shipping expenses. I was able to use this report to negotiate with shipping companies and use real data to know my expected outcome.
Cash Flow Statement
So far we have discussed the boring balance sheet and the exiting one, and so what do I call the Cash Flow(CF) statement? I call the cash flow statement the "complicated" financial statement. Now, I have passed the CPA exam, so I don't really view it as complicated. But I say this because it isn't as easily understood or explained as the other two financial statements. Baiscially put, the CF statement will help you understand the flows of cash over a period of time. The Cash Flow statement is one of the main three financial statements so it is packed with useful information. But that information is mostly outside of the scope of this page, simply because it takes too much time to explain it. But I'll give it some brief comments. So, the cash flow statement will all the business owner assess transactions and how they affect cash. The other two balance sheets may be affected by transactions that affect both the balance sheet and the income statement. The cash flow statement is helping the business owner to follow the trail of cash and where it went. A good example is the repayment of a loan. The repaid loan is comprised of both principal and interest. The principal affects the loan balance, and cash balance on the balance sheet, and also the interest expense on the income statement.
As you see, the CF statement can start to really get into deep accounting concepts that may or may not help you our initially as a business owner. The great thing about Quickbooks, is that the process of simply entering your transactions it will automatically create these financial statements and greatly simplify your life as a business owner.
Where to get Quickbooks?
We have a referral link to Quickbooks that you can use to make your purchase, and we suggest that you do it early on in your business process. It will be easy to setup and it should be easy to use while keeping you out of the weeds as far as true accounting goes.
State & Local Issues
When you have a business you will definitely need to deal with both state and local issues related to regulations, licenses, etc.
Local Business License
Every business must have a local business license, and if you don't have one yet definitely go and get it. The reason it is required even if you have a LLC or Corporation, is that the local government wants their tax revenue. So, be sure to check with your local business office to get information about how to file for your local business license. Business licenses can ususally be found online by searching in Google for business license in your local county or city.
Many business types can be regulated at the state, federal or local level. These business types are often known by the person who is looking to operate the business, but you can also reach out to your local business office to do some research. Here are a few examples of regulated businesses:
- Establishment who sells liquor
- Medical providers, hospitals
- Taxi Cabs & personal transport
So, if you are operating in a regulated industry be sure to reach out to the regulation division before you file for an LLC or Corporation.
Sales Tax Permit
California does not currently have a sales tax rate. So businesses that sell things will not be required to collect a sales tax. In other states, when a business sells products they must collect a sales tax for the sale. The reason for this, is that the local and state government want to get tax revenue. California currently has a zero sales tax rate.
Employees & Hiring
When many small businesses start out, they have just one or two employees who happen to also be members or owners. The issue is that as the business grows, we business owners just can't do enough to keep up so we hire additional people. This is a great point in the busines lifecycle and a momentous ocassion to celebrate. But don't celebrate too long becuase there are some serious challenges that go with having employees. Here are just a few:
- Workers compensation
- Health Insurance
- Dental Insurance
- Retirement savings
- Vacation and sick days
- Hiring/Firing of employees
- Annual employee reviews
Some of these hiring issues will not be present with just 1 or two employees, but there are still relevant concerns as your business grows. As it grows many real important concerns will begin to surface and you'll have to answers for the issues.
Initially, the staff will just be the owners and eventually this will grow to include additional staff to assist and fill in. Once you decide that you need more help, you'll have to determine what is exactly needed to help your business. You can use the following low cost ways to bring on additional staff:
- Craigslist, will allow you to hire for workers in your area at a low cost. You simply go there and post an add for a $25 fee. Once the post is online, then prospective employees can reach out to you via email or phone. These roles are typically more part time or seasonal roles. The professionalism of the posting and potential employee is typically a little less skilled.
- Monster. or Indeed.com are a next level up in the hiring process. This is a good next step and you can do it with just a few clicks. You will need to make sure that you first register for an account, and then you can place an add. These roles can be anything from entry level to CEO types of positions. If you really want to make sure that you have a good employee, you can find one at these.
Every good business needs to have insurance for the unseen. There really isn't any insurance that is required, unless you have more employees than just the owners. If you have employees then you may need to have workers compensation insurance for those employees. The other types of insurance that you may need is business insurance, E&O insurance, health, dental, etc.
Find a Good Insurance Broker
A good first step will be to ask a business owner friend if they can help you out with a recommendation to a good insurance broker. The broker will have access to many different products that they can help you to apply for. In general so many of these services are run through third party brokers.
Touch base with Costco
Who knew about Costco for business services? I did. LOL. I actually used to use costco for business services about 10 years ago. They offer some competitive services and while they won't fit for all business situations, you still may want to check them out.
Types of Insurance
Dental Insurance - This type of insurance is completely optional. A good provider of this is Delta Dental. You can also think about
Health Insurance - Businesses with greater than 50 employees are required to provide insurance. But smaller businesses are not currently required to provide this to employees
E&O Insurance - For some businesses you'll want to have errors & omissions insurance. This is commonly for service providers who may make mistakes that can be costly in lost revenue or increased expenses. This insurance will protect those service providers from getting sued for heft sums.
General Business Insurance - This type of insurance will protect you from claims against your business that may be unforseeen. Such claims may relate to a variety of claims including bodily injury, property damage, personal injury and others that can arise from your business operations.
Assess Your Business
When you are just starting out, you'll want to self assess just how important it will be to have a lot of insurance. In general it comes down to the type of business registration, the amount of revenue you are earning, and the risks of making mistakes, faulty products, or just plain getting sued. For my previous business, I felt that I really had limited potential for getting sued. So I didn't register for insurance right when I started out because I didn't have a lot of personal or business assets, and my service offering wasn't something that was going to get me sued in the short term. This was a self assessment that I made. If you need help or guidance with this, you'll want to speak with a CPA or attorney in your area.