How to open an LLC in California?

How to open your LLC in California

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Opening an LLC in California is a great option for foreigners who want to set up their LLC in the United States, in a state that offers a strong economy, a large market and business opportunities, as well as a strategic location on the West Coast.

If you are considering opening your LLC in California, but you are not yet sure whether it is the best option for you, or you have questions about the steps to set it up, don't worry. In this complete guide, we'll give you detailed step-by-step information on everything you need to know before creating your LLC in the state of California. Let's get started!

Why open an LLC in California?

There are several reasons why opening an LLC in California can be a great option for you:

Limited Liability Protection

Limited or personal liability protects the owner from being held responsible for an LLC's financial debts. This separation between an individual and an LLC is undoubtedly the best reason for an LLC to exist.

 It provides the same level of separation as a corporation, without the same level of complexity when it comes to forming or managing the business. In the event of a lawsuit, the LLC is considered separate from the individual who owns it.

Tax benefits and flexibility

When it comes to taxation, California LLCs get the best of both worlds. LLCs do not have their own federal tax classification; instead, the IRS automatically classifies them as sole proprietorships in the case of a single-member LLC, or partnerships if there is more than 1 member. They can then elect S corporation or C corporation tax status.

This way, unless it elects to be taxed as a C-Corp, an LLC benefits from being a pass-through entity. Instead of paying corporate taxes, income and expenses pass directly to the owners' tax returns.

Flexibility in managing the business

Through an “Operating Agreement”, LLC members can define how they want to operate with complete flexibility. In this agreement, they can set each partner's ownership percentage, compensation, how to transfer ownership, and establish the ground rules according to how they need or want to operate. 

Easy to open and manage

In California, LLCs can be formed easily compared to corporations. The process is online and relatively easy to complete. After that, maintaining an LLC in California is simple. You don't have to hold the same annual corporate meetings, appoint a board of directors or officers, create company bylaws or record company minutes and resolutions like corporations do. All you have to do is file a tax return with the IRS, pay a franchise tax and renew a registered agent.

Who can open an LLC in California?

LLCs in the state of California can be opened by anyone in the world, regardless of nationality or residence, who is over 18 years old and has a valid passport. 

How to open an LLC in California

Now that you know California is your preferred state for opening your LLC in the United States and that you meet the requirements to open one, let's look at the steps you need to follow to have an active LLC in California.

1. Choose your LLC's name

Deciding on your LLC's name is the first step before you can move forward with registration. Names must meet California's naming requirements. Below are the most important requirements to keep in mind:

• Your business name must include the words Limited Liability Company, LLC, or L.L.C.
• Your name must be unique. It cannot already be registered by another company in California. If you already have a business name in mind and want to check its availability in California, you can do so with this LLC name checker. 
• The company name cannot contain words used to name a government agency (i.e., Department of State, CIA, FBI, Treasury, etc.)
• Certain words are restricted (bank, attorney, credit union, etc.) and may require additional documentation and licensing to be used.

2. Choose a registered agent

Whether you decide to register your LLC in Delaware, open it in Florida, create it in Wyoming or in California, every LLC must have a registered agent. A registered agent is basically a person designated to receive official documents on behalf of the LLC.  This is the person or entity that will receive legal documents, government correspondence, tax forms and service of process for lawsuits on behalf of the LLC.

When you form your LLC, your registered agent must provide a statement to the Secretary of State confirming that they accept the role.

A registered agent can be a person (including yourself or an employee of your LLC) or an entity that offers registered agent services. They must meet the following criteria:

• Entities (or companies) must offer registered agent services.
• The agent must have an address in California.
• The agent must be present and available to accept documents during regular business hours.

We recommend working with these recommended companies, which handle registering your LLC and provide registered agent services, renewed annually

3. File the "Articles of Organization" form

The Articles of Organization are a document that officially establishes your LLC by providing basic information about it. In California, the Articles of Organization can be filed using Form LLC-1.

To properly register your LLC in California, you must prepare the Articles of Organization and file them with the California Secretary of State. Although it sounds like a complicated task, it simply involves completing a relatively simple online form and submitting it. You can also send it by mail.

To prepare your articles, you will generally need the following information:

• Your LLC's name and address.
• The purpose of the LLC.
• Your registered agent's name and address.
• Management structure: will members or managers run the LLC?
• The person forming the LLC must sign the Articles.

Once you file your Articles, the Secretary of State will review the filing. If the articles are approved, the LLC becomes a legal business entity. In California, you can file by regular mail, online or in person.

Keep in mind that the standard filing fee for an LLC in California is $70.

5. Draft your operating agreement

An operating agreement is basically an agreement among the members on how the LLC will function and operate. This document lists the details of the financial, legal and management rights of all LLC members: dividend distribution, withdrawal clauses, non-compete clauses, capital contributions... 

California requires an LLC to have an operating agreement, but it does not need to be filed with the authorities. However, it must be readily accessible. A written operating agreement is useful for several reasons, including resolving disputes that may arise over financial arrangements and other potential litigation. Without an agreement in place, courts will make decisions based on state law, not necessarily on what is best for the LLC and its members.

What you include in your operating agreement is up to you, your partners and the specific needs of your business. Here is a free template that will give you a good foundation for drafting your Operating Agreement. . 

Download the Operating Agreement template

6. File a Statement of Information.

All California LLCs are required to file a Statement of Information, Form LLC-12,  with the California Secretary of State within 90 days of the LLC's formation. After that, a Statement of Information must be filed every two years (biennially). The filing period is the calendar month in which the original articles of organization were filed and the five preceding calendar months. You can file the statement online, or print it and mail it or deliver it in person to the California Secretary of State. The filing fee is $20.

A Statement of Information includes the following information:

• The LLC's name and California Secretary of State file number
• The name and address of the LLC's agent
• The address of the LLC's principal executive office
• The LLC's mailing address
• The name and complete business or residential address of any manager or chief executive officer, or, if no manager has been elected, the name and business or residential address of each member.
• The LLC's email address (if the LLC chooses to receive renewals by email instead of regular mail)
• The LLC's principal business activity.

6. Get an EIN

The last important step is to obtain an Employer Identification Number (EIN) from the IRS to pay taxes, apply for business resources and be able to open a business bank account, among other things. Single-member LLCs that have no employees and don't plan to hire any are the exception. 

EINs are free and available on the IRS website. 

Delegate the formation of your California LLC and avoid all these complex processes

What should I do after registering my LLC in California?

Registering your LLC is only the beginning. Once you have completed all the previous steps, there are a few points we recommend you take into account. 

Open a bank account dedicated to your California LLC

Keeping personal assets separate from company assets is essential to benefit from the corporate veil protection that California LLCs offer. 

To do this, it is essential that you open a business bank account, 100% dedicated to your California LLC's activities. 

In addition, by having a bank account exclusively for your business, you can take advantage of other benefits such as simple, centralized bookkeeping, which will save you a lot of time when it comes to taxes or tax reporting.

The recommended banks for your business account as a non-U.S. person are Mercury, Relay, Revolut, AirWallex, Wise, Bank of America, Chase. 

• See the best U.S. business bank accounts for foreigners

Plan your California LLC's taxes

• To do business in California, an LLC must pay an $800 franchise tax. This fee must be paid whether or not the business generates income, and it must be paid every year.
• If your LLC's annual gross receipts exceed $250,000, an additional annual fee is also required.
• If you sell physical products or certain types of services, you may need to collect sales tax and then remit it to the CDTFA. Sales tax is collected at the point of purchase and is made up of three rates: state tax, local tax and any district tax that may be in effect. We strongly recommend that you check with your accountant and the CDTFA to confirm whether your business is required to collect sales tax in California and to make sure you pay the correct amount.

•  If you plan to have employees in the USA, there are also employer taxes (Unemployment Insurance Tax, employee withholding tax). 

Meet your annual obligations

Your LLC will have obligations to meet every year, such as renewing the Registered Agent. 

As we said earlier, if your LLC does not have a registered agent, it can be dissolved within 30 days by the State of California. 

Then there is the biennial report to the California Secretary of State that we mentioned in the previous step. 

Also, don't forget to pay the franchise tax by the 15th day of the fourth month after the close of the LLC's tax year (April 15 for most LLCs).

Your registered agent will notify you of these dates!

Apply for licenses

Depending on the type of business your LLC is engaged in and its location, you may need to obtain other local and state business licenses. For more information, visit the following State of California website