You probably just want to jump to whatever you consider the fun stuff, but first you should file legal paperwork that formally establishes your business.
There are many forms of business organizations to choose between, but the most common among small businesses is the Limited Liability Company (LLC). LLCs combine the flexibility of a partnership with the limited liability of a corporation, meaning as an owner, you aren’t responsible for the company’s debts and obligations. This means the most you can lose is your investment in the business.
Before you jump to the fun stuff, like creating logos and branding, you need to file some paperwork to take advantage of that limited liability and protect yourself in case the business doesn't work out.
LLCs are governed by state law, and each state has its own guidelines for forming an LLC.
Here are the rules for forming an LLC in California.
1. Decide if you want a lawyer's help.
You don't need a lawyer to form an LLC in California. But lawyers can save you a lot of time and energy, as well as protect you from liability in case your business doesn’t work out.
Lawyers also are less likely to make mistakes on paperwork, which will prevent a lot of future headaches. Read up on a few reasons why you need a lawyer.
Remember that our prices start at $249 and we have interest free payment plans available.
2. Pick a name and search its availability.
An important aspect of your business is its name. Your business name must include some variation of the term “Limited Liability Company,” LLC, or L.L.C. You want to put people, especially creditors, you’re dealing with as a business on notice that you are limiting your liability and they can’t come after your personal assets, such as your car or home.
Your name also can’t include any words reserved for governmental agencies, such as FBI, Treasury, State Department, etc. Some restricted words (e.g. Bank, University) require additional paperwork and a licensed practitioner, such as a doctor, to be a member of your business.
You can find the complete list of the naming rules in California here.
Although not required, it is a good idea to conduct a name search on the State of California’s website. If the name of your LLC is the same or too similar to another LLC, corporation, or limited partnership then you will not be allowed to establish your business and will have to refile. So conducting a search beforehand will save you a lot of time and money on filing fees.
Furthermore, you should search through the U.S. government’s trademark database (a trademark is the sign or name that people use to identify your company, i.e. the checkmark for Nike). If you are creating a brand, you want to make sure no one out there already has a claim on that name, or a close variation of it.
Customers generally expect the domain name of a company website to match the business name, so conduct a search to see if the domain name is available.
Once you settle on a name, you can reserve the name for 60 days. Fees and instructions for reserving a name are included on the Name Reservation Request Form.
This form is linked above or can be found on the California Department of State website. Click here to find a list of potential documents you may need in forming an LLC.
3. File the Articles of Organization
An LLC is formed by filing the Articles of Organization with the California Secretary of State’s office. You can find sample Articles here.
The Articles typically include:
- The name of your LLC
- The purpose of the LLC, i.e. the services your business will offer
- The name and address of the agent for service of process, so if someone wants to sue your LLC, there is a public record of where the LLC may be served.
- Whether your LLC will be member-managed or manager-managed
- Pay the state filing fee
In California, you want to learn the different between a member managed LLC and a manager-managed LLC.
In a member managed LLC, the owners are engaged in the daily operation of the business. On the other hand, in a manager managed LLC, a designated manager handles the day-to-day affairs of the business.
You may file the Articles online ($70), by mail ($70), or in person ($70 + $15 drop-off fee).
5. File an Initial Statement of Information
Next, you need to file an Initial Statement of Information (Form LLC-12) with the California Secretary of State within 90 days of forming the LLC. You can file this form online, by mail, or in person for a $20 fee.
The Statement of Information must include:
- the LLC’s name, address, and California Secretary of State file number
- the name and address of the LLC’s agent for service of process
- the name and addresses of any manager(s) and CEO, or the names and addresses of all the members
- an email address to receive renewal notices from the Secretary of State, and
- the LLC’s purpose
Note that a Statement of Information must be filed every two years (biennial). The filing period starts on the month when the Articles of Organization was first filed.
6. Create an Operating Agreement
An Operating Agreement is required in California. This document usually dictates how the LLC will be governed. California’s LLC statute will fill in gaps in the Operating Agreement, so make you include everything you need to and check that the default rules are appealing to you.
7. Get an EIN Number
You will next want to get an EIN for your California LLC, which is basically a Social Security number for your business. The Employer Identification Number (EIN) is a nine-digit number issued by the IRS to identify a business entity and keep track of a business’s tax reporting.
You’ll need an EIN number to:
- To open a business bank account for the company
- To file Federal and State taxes
- To hire employees
What did we tell you? It's not so easy to form an LLC. But if you want to protect yourself, you will. And one of our lawyers can make the whole process easier.
This article is intended to convey generally used information only and does not constitute legal advice. Any opinions expressed are soley those of the author, and not LawChamps.
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