Choosing an LLC Name
The name you choose for your California limited liability company must be recognizably different from any other LLC, corporation, or other business entity authorized to do business in the Golden State. This goes for entities originally formed in California, as well as those originally formed elsewhere but authorized to conduct business there.
The LLC's name must include "Limited Liability Company" or the abbreviations "LLC" or "L.L.C." at the end; the words "Limited" and "Company" may be abbreviated respectively as "Ltd." and "Co." The LLC's name may also include the name of one or more members. On the other hand, it is not allowed to contain the words "bank," "trust," "trustee," "incorporated," "inc.," "corporation," "corp., "insurer," "insurance company" or any other language implying or suggesting that it is in the business of issuing insurance policies or assuming insurance risks.
You can apply to the California Secretary of State to reserve a proposed LLC name for $20 for 60 days.
Articles of Organization
Forming an LLC in California requires that you file articles of organization with the California Secretary of State's office; the filing fee starts at $70, and can be expedited for an additional fee. The articles of organization must include the LLC's name, the name and address of the initial registered agent (unless a corporate agent is designated, in which case only the name of the agent has to be specified), and whether the LLC will be managed by one or more managers, or by its members. The articles may also include other provisions that the members decide on, as long as they are not inconsistent with state law.
Under the Beverly-Killea Limited Liability Company Act of 1994, the LLC does not have to state specifically what its business purpose is; it just has to state that "the purpose of the limited liability company is to engage in any lawful act or activity for which a limited liability company may be organized."
One or more persons may form an LLC, but they don't have to be members of it to organize it. An organizer may be an individual, partnership, limited partnership, trust, estate, association, corporation, another LLC, or other entity, either domestic or foreign.
Your LLC is "organized" once the articles of organization are received by the California Secretary of State's office with the appropriate filing fee, and are found to be in compliance with state requirements. One certified copy of the articles of organization will become a public document, and the other certified copy will be returned to the organizer or members.
Registered Agent and Office
California LLCs must designate a registered agent in California to receive official state correspondence. A LLC's registered agent can be a resident individual in California State, a corporation, or a corporation originally formed in some other state that is authorized to transact business in the Golden State. It is allowable but not required for the registered office to be the LLC's place of business.
Operating Agreement
After to its articles of organization, an LLC's most important document is its operating agreement, which can be amended or repealed as laid out in the agreement or state law as applicable. In the same way as a corporation's bylaws, having an operating agreement isn't mandated by the state, but it's a very important internal document that officially states how the LLC will be run. It should list the LLC's members, how much each one has invested, how the profits will be divided, and how much weight each member has when matters come to a vote.
The operating agreement may also specify requirements for meetings and so on, but it is not required to. Normally, however, the operating agreement does include state requirements, and it can contain limits on the members' authority to adopt, change, or repeal an operating agreement. If the LLC has more than one member, the operating agreement must be initially approved by all the members in writing.
Managers, if the LLC uses them, are normally elected for an indefinite term unless otherwise provided in the articles of organization or operating agreement.
Members
The owners of an LLC are called "members" instead of "shareholders" or "partners" as in a corporation. An LLC must have at least one member, who may be an individual, a corporation, a partnership, another LLC, or any other legal entity. Members may acquire an interest in or become a member of the LLC when it is formed, in a method stated in the operating agreement, or when the majority of the LLC's members approve by voting.
Unless otherwise specified in the articles of organization or operating agreement, the LLC's members vote in proportion to their profit interests in the LLC.
A member normally needs to pay cash, make a contribution, or transfer property to the LLC in order to become a member. However, an individual may be admitted as a member without acquiring a membership interest if there is such a provision in the articles of organization or operating agreement, or if all the LLC's members consent and the admission is documented in the official records.
A member can only resign from the LLC in the manner stated in the articles of organization or operating agreement. These also usually specify a minimum period of time a member can be a member before being allowed to resign. LLCs have the option of pursuing legal compensation for damages to the LLC because of a member's resignation.
Ongoing Requirements
California LLCs must make an annual statement regarding its financial conditions to both its members and the California Department of State. In addition, each California LLC must keep the following records open to inspection at its office:
- A current alphabetical list of the members and their mailing addresses
- Each member's contribution and share of profits and losses
- If member-managed, a list of the managers and their mailing addresses
- A copy of the articles of organization, along with any amendments
- A copy of the LLC's operating agreement, along with any amendments
- Copies of federal, state, and local income tax returns for the last six fiscal years
- Copies of any powers of attorney used to execute a certificate or amendment
- The LLC's books and records relating to internal affairs for at least the current and the past four fiscal years
It's also a good idea for your LLC to keep handy minutes of board proceedings and member/owner committees.
Dissolution
An LLC is considered to be dissolved when any of the following events occur:
- Event(s) occur which are specified in the articles of organization or operating agreement as requiring dissolution
- A majority of the members or groups of members agree to dissolution
- An event that makes it illegal for the LLC to continue
- A judicial order mandates dissolution
Taxes
An LLC has some tax advantages compared to a corporation, including more potential tax deductions. Also, an LLC does not have to be a separate tax entity like a corporation; instead, it can be a "pass-through entity" when it comes to taxes, so that the LLC owners report business losses or profits on their personal tax returns, in the same way that a partnership does.
The IRS treats single-member LLCs as sole proprietorships for tax purposes. This means that the LLC itself does not pay taxes and does not have to file a tax return. The IRS treats multiple-owner LLCs as partnerships for tax purposes, unless you choose for your LLC to be taxed as a corporation. The result of this is that LLC owners each pay taxes on their lawful share of the profits on their personal income tax returns, rather than the LLC itself paying taxes.
California state taxes vary depending on taxable income. However, California LLCs are subject to an annual minimum franchise tax of $800 per year-and the first payment must be made within three months of the LLC's formation.
Choosing a Corporation Name
Your California corporation's name must be different from any other authorized business entity on file with the state Secretary of State. This applies to entities formed in the state, as well as those originally formed elsewhere but authorized to conduct business in California.
The corporation's name may include "Corporation," "Incorporated," or "Limited" (or an abbreviation thereof), but doesn't have to do so, unless the name of the corporation is an individual's name-for instance, "John Jones, Inc." The name may not, however, include the words "bank," "trust," or "trustee."
You can apply to the California Secretary of State to reserve a proposed corporate name for 60 days for $20.
Articles of Incorporation
California state law requires that articles of incorporation be filed with the California Secretary of State; filing fees start at $100. The articles must also include information on the incorporators, of which there must be at least one. If initial directors are not named in the articles, the state allows California corporations to do whatever they believe "necessary and proper" to improve the corporation's organization, including adopting and/or amending bylaws and electing directors and officers.
California allows a corporation to be formed for any lawful business activity, but requires a specific statement to be included: "The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business, or the practice of a profession not permitted to be incorporated by the California Corporations Code."
The articles should also specify the number of shares to be authorized for later issuance to shareholders-the standard articles form creates only one class of common shares with equal dividend, liquidation, and voting rights, and no special restrictions-as well as additional information about share numbers, class designation, and rights if the corporation is authorized to issue more than one class of shares.
California also allows other, optional provisions to be integrated into the articles of incorporation for those corporations wishing to formalize additional criteria, such as the names and addresses of the initial directors, special qualifications of shareholders, limits on the duration of the corporation's existence, limits on the liability of a director in specific circumstances, and the like.
Registered Agent and Office
The articles of incorporation should also include the name and address of your corporation's initial agent for service of process-the person you designate to receive legal papers on behalf of your corporation-who must be a California resident. Usually, one of the corporation's initial directors or officers serves as its initial agent. You can list the agent's business or residence address, but be sure to use a California street address and not a post office box.
Bylaws
A corporation is required to keep a copy of its bylaws at its main executive office, but is not required to file them with the state. At its initial meeting, the board of directors should adopt corporate bylaws, and then keep them updated as time goes on. Bylaws describe the corporation's basic managerial and legal operating principles, including information on:
- Shareholders and directors meetings
- The authority, number, and tenure of directors in the board of directors
- Voting procedures
- The duties, responsibilities, and tenure of officers
- How stock is issued
- How and when annual financial information is provided to shareholders
Directors and Officers
The corporation's business is managed by its board of directors. The board must consist of one or more members as specified by the bylaws or by action of the shareholders. Directors are generally elected at each annual shareholder meeting to hold office until the next annual meeting.
Corporate officers may either be listed in the bylaws or elected by the board in compliance with the corporation's bylaws. A corporation must have a chairman of the board or a president (or both), a secretary, a chief financial officer, and whatever other officers with titles and duties as listed in the bylaws or determined by the board.
The president, or, if there is no president, the chairman of the board, is the general manager and chief executive officer of the California corporation, unless otherwise provided in the articles or bylaws. Any number of offices may be held by the same person unless the articles or bylaws require otherwise.
Required Reports
An initial statement of officers must be filed with the California Secretary of State no more than 90 days after the original articles of incorporation are filed, and every year following in the applicable filing period. This report must include information on directors and officers and the corporation's general business activities, as well as additional information regarding corporations which are traded publicly.
Taxes
The California state income tax rate is currently 8.84 percent of net income. The minimum tax is $800, but this is waived during the first fiscal year. This means that for the corporation's first tax year, it estimates and pays only what it owes based on the current corporate franchise tax rate.
S Corporations
A "subchapter S" corporation or "S corp" is one that chooses to be treated as a pass-through entity for tax purposes in the same way as a sole proprietorship or partnership; tax-related information for the S corp is filed as part of the owner's individual income tax.
S corporation status is recognized by the State of California, so a separate state tax form choice is not required. However, California S-corporations are still subject to a separate 1.5 percent S-corporation fee, which is based on the corporation's net income.
