How To Create A California LLC (And Why You May Want To Reconsider)

It doesn’t matter if you’re just starting out or have been investing in real estate for a while; protecting your assets is vital. If you live in California, you might be considering creating an LLC in California to protect your investments. However, not only can the process of forming a California LLC be cumbersome and confusing, but other business structures may actually provide you with better asset protection in California than an LLC.

Creating A California LLC: A Play-By-Play

Before we have a chat about your other options, let’s walk through the steps for forming an LLC in California, in case you decide it’s the right choice for you.

Step One: Register With The Secretary Of State

To create your LLC, you’ll need to register with the California Secretary of State. First, you’ll need to choose a unique name for your business and submit a Name Reservation Request Form to the Secretary of State. This submission will reserve your name of choice for 60 days.

Under California law, the LLC name must include one of the following LLC identifiers: 

  • LLC
  • L.L.C.
  • Limited Liability Company
  • Limited Liability Co.
  • Ltd. Liability Company
  • Ltd Liability Co.

Before the 60 days is up, you’ll need to file Articles of Organization (Form LLC-1) with the Secretary of State to formally register your business. 

Your Articles of Organization must include the following information:

  • Your LLC’s name
  • Your business address(es)
  • The name and address of an agent to receive service of process for the business
  • If the LLC will be managed by one manager, more than one manager, or all LLC members

Step Two: File A Statement of Information

Within 90 days of filing your Articles of Incorporation, you’ll also need to file a Statement of Information (Form LLC-12) with the California Secretary of State. You’ll also need to file an updated Statement of Information every two years to keep your business active.

Your Statement of Information must include the following information:

  • Your LLC’s name and Secretary of State entity number
  • Your business address(es)
  • The name(s) and address(es) of the LLC’s manager(s), or, if no manager has been appointed or elected, the name(s) and address(es) of each member
  • The name and address of an agent to receive service of process for the business
  • A description of the LLC’s type of business or services
  • The name and address of the LLC’s chief executive officer, if one has been elected or appointed

creating an llc in california: golden gate bridge

Step Three: Register With The Franchise Tax Board

On top of the taxes you’ll have to pay to Uncle Sam, you’ll also need to pay state taxes to California. To pay your California taxes, you’ll have to register with the Franchise Tax Board. To register to pay your taxes online, call the Franchise Tax Board at 1-800-353-9032 (or 1-916-845-2829 if you’re outside the U.S.) to begin the online registration process. If you prefer, you can also file your taxes by mail with Form 568.

Step Four: Register With The EDD and Request An EIN

If your LLC will have employees, you’ll need to register with the California Employment Development Department (EDD) and request an Employer Identification Number (EIN), also known as a federal tax ID, from the IRS. 

To hire legally in California, you need to register for a payroll tax account number on EDD’s website. You’ll also need to request an EIN from the IRS using Form SS-4, which you can submit online, to set up payroll and pay federal payroll taxes. Even if you don’t intend to hire employees, you may want to apply for an EIN anyway, as it can make it easier for your business to open a bank account and apply for business permits.

Step Five: Apply For A Seller’s Permit

Finally, if you intend to sell or lease any goods, products, or tangible property subject to sales tax through your LLC, you’ll need to register online for a free seller’s permit from the California Department of Tax and Fee Administration. Under California law, you need to obtain a seller’s permit and pay sales tax on items that you sell.

Other Important Steps

California law requires your LLC to have an Operating Agreement that outlines:

  • How your LLC will be managed
  • LLC ownership
  • How capital will be raised
  • The distribution of profits and losses among members
  • How membership changes can occur
  • How the LLC can be dissolved

While California allows you to have either a verbal or written Operating Agreement, it’s strongly advised that you create a formal written Operating Agreement for your LLC to help preserve its limited liability status. Operating Agreements are internal business documents, so while you do need to have one, you don’t have to file it anywhere.

Similarly, opening a separate bank account for your business is not required, but it is an essential step for separating your business assets from your personal assets. If you commingle your assets, you may risk losing your limited liability status if your business is ever sued. 

Disadvantages Of A California LLC

The LLC has been around for a long time and is one of the most popular forms of business entity in the United States. And it’s easy to see why. But there are some disadvantages to this form of ownership, too, particularly in the state of California.

A significant disadvantage of a California LLC is the high costs of starting and operating an LLC in the state. In fact, LLCs in California must pay an annual $800 tax to the Franchise Tax Board, plus additional fees if the LLC’s total income is more than $250K. 

California has also been particularly reluctant to accommodate LLCs from other states and Series LLC. If you want to start a California Series LLC, be prepared to pay $800 each year for each series. 

Alternatives To A California LLC

Other business structures can provide Golden State real estate investors with better protection than a California LLC and save your hard-earned cash at the same time.

Delaware Statutory Trusts

If you’re wondering how to avoid California’s franchise tax, the Delaware Statutory Trust (DST) may be your best option. As a trust structure created in Delaware, assets held in a DST are not subject to the $800 annual franchise tax in California. You can even use a series structure with a DST to enjoy the benefits of a series LLC without the exorbitant taxes. 

Land Trusts

Up until recently, the answer to “does California recognize land trusts?” was no. Recently, however, California began to recognize land trusts, allowing real estate investors to protect their investment properties without having to pay oppressive franchise taxes. A California land trust can also be used to hide property ownership, avoid probate, and create additional protections against California’s community property laws for married investors. You may also want to consider a title-holding land trust, commonly referred to as an Illinois Land Trust. 

California Business Trusts

IRA business trusts are an excellent alternative to a California self-directed IRA LLC, as business trusts aren’t subject to franchise taxes. As with an LLC, you maintain complete control over your assets and investments without having to pay costly custodian fees. However, it’s important to note that a California business trust doesn’t offer the asset protection you would get from an LLC. 

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