The information provided below is assuming you have already made the decision to create an LLC, and therefore does not discuss LLCs in general or compare them with other forms of doing business. We have already done two blog posts on Trusts vs. LLCs for your real property so if you want specific information there, they will be linked below.

Read more: Land Trust vs LLC | When to Use One Over the Other

Read more: Real Estate Investing: Trust vs. LLC for Second Homes and Investment Properties

Choose a Name

Firstly, you have to pick a name for your business, which aside from a general presentation standpoint, is very important as without a name, you cannot proceed with the next steps. Your business name must be unique enough that it is available for the California Secretary of State to approve it. You can check on the Secretary of State’s website for existing names, which we recommend you do, to make sure the name you want has not been taken already.

Additionally, if you think your business name is an excellent name, but you are not ready to create the LLC yet, you can pay the Secretary of State $10 to reserve the name for 60 calendar days meaning you can reserve the name, without going through everything else if you are not ready. Again, picking a name is important as it snowballs into everything else.

Filing the Articles of Organization

Next is the actual creation of the LLC as a business entity in California by filing the Articles of Organization, which is different from Articles of Incorporation, which is for corporations, so be sure you’re picking the right articles. The Articles are the legal documents that establish the LLC and are filed with the Secretary of State either online or by mail. Frankly, we recommend not to bother with filing by mail, but the option is there if you want it.

Filing online is easy. It’s a one-page form and a filing fee of $70. However, this is where the name comes in. Simply filing the Articles does not reserve the name and mean the LLC is established. You need approval from the Secretary of State. That approval is typically given within 7-10 or 10-15 business days depending on the current processing time, which you can also check on their website, since a human reviews the application. Only upon approval, will the LLC be established, with an establishing date of the day you initially filed the Articles.

However, you might be wondering if there was a way to expedite that process. Well, there is, and of course, it costs a little extra. $350 to be precise. For $350, you can shorten that processing time to 24 hours. However, you can shorten it even more by paying either $500 or $750 for same day processing. The Secretary of State is pretty good at processing Articles though, so even if you are in a hurry, then the $350 is typically good enough for same or next day processing. We have even had them process Articles within 5 minutes only paying the base $350 expedite fee.

Jumping back to the name of the LLC, what happens if you pick a name that is already in use or a name so close to an existing entity that the Secretary of State rejects it? Well, that’s a great question. In that case, the Secretary of State will contact you and give you 72 hours – 3 days – to cure the situation and keep the same initial filing date. As in, you have 3 days to come up with a new name. If you let those 3 days lapse, then you have to begin again and you lose your filing fee.

However, this raises the question of what if you paid the expedited fees but get a rejection due to an existing similar LLC name? You still get 3 days to come up with a new name, but when you resubmit with the new name, you are back on regular processing time, unless you again pay for expedited processing. With all that said, just take a few minutes and make sure your desired LLC name is not taken by using the Secretary of State’s entity search feature. Doing so will save you time and a headache.

One last note about filing the Articles. Once filed, you will need to file a Statement of Information within 90 days with the Secretary of State. However, we will discuss that in more detail when discussing maintaining the LLC in good standing going forward.

Obtain an EIN from the IRS

You have the perfect name, you have filed the Articles and have received approval from the Secretary of State. You are ready to open a bank account and get to business, right? Not exactly. To open a bank account, you need an EIN – employer identification number – issued by the IRS. It’s a number used to identify your business for tax purposes. Essentially a social security number for the businesses.

Fortunately, getting an EIN for your business is fairly easy but just looks more complicated than it truly is. Simply search “IRS EIN Application” and the first link should be the IRS’s website. Quick side note, you can pay someone else to do this for you but, don’t. Unless you hire an attorney’s office to do everything for you where it makes sense for them to do this too, then just do it yourself. It’s simple. It’s an online form that takes all of 4 minutes and you get your EIN right then and there as a PDF.

After you find yourself on the IRS website, there will be a blue button that says, “Apply Online Now.” Click that to begin the application. The IRS will ask for basic information, just make sure you know your own social security number as the responsible person, and that you make sure to check that this is for an LLC at the start, as the process is the same for many other entities such as corporations, some partnerships, estates, and irrevocable trusts.

Also, even though this is an online form, it can only be accessed on Monday through Fridays, from 7am to 10pm eastern time, or 4am to 7pm pacific time for us in California. The IRS also closes the portal on the last couple days of the year for regular maintenance so make sure not to try to grab an EIN on New Years Eve. Additionally, when the site gives you that PDF, save it, print it and write that number down because once you close that window (or it times you out because you sat on the portal for too long), it’s gone and the only way to get that number again is to either call or fax the IRS – neither of which will be a fun or fast process.

A note about the order to steps here. While you can technically get and acquire an EIN online prior to filing and receiving approval for the Articles of Organization, We do not suggest doing so. The EIN is assigned to the business name and you as the applicant and responsible party can only acquire 1 EIN per day. You do not want to be in a situation where you somehow acquired an EIN for your desired business name but as it turns out, it was not available from the Secretary of State. Then you are in the situation where you have a useless EIN and must either call or fax the IRS or apply for another EIN. The IRS will not run out of numbers and does not care about similar sounding names like the Secretary of State does. File your Articles, get them approved, then get an EIN and open your bank account.

Create an Operating Agreement

This brings us to the Operating Agreement. While not technically required by law in California, we highly suggest you get one, especially if you are going into business with another person. The Operating Agreement is going to function like a corporation’s bylaws. It’s going to set forth the rules and procedures governing the operations of the LLC and will often also include provisions on who is providing capital, how capital is to be repaid, and what to do if either a member wants to sell their interest or what if a new member is going to be brought into the LLC.

Due to this, and especially where there are members contributing capital at different rates, we highly recommend creating an Operating Agreement or having one drafted for you. It simply does not make sense to jump into a business venture, especially with others, yet not lay out the rules of the game and how everyone is going to operate going forward. You can always agree to changes these rules in the future, but not setting out these processes and procedures can lead to disorder later.

Register for State Taxes

Next, we have registering for state taxes. This step is dependent on what sort of business you are undertaking. Are you opening a store to sell your handmade artisan soap? Then you will need to register for state taxes because you are going to be collecting sales taxes. If you are selling strictly digital goods or only provide services, then at least here in California, you do not have to collect sales taxes.

However, there are other taxes you may have to register for as well, such as sales and use tax, employment taxes, excise taxes and more. To register, you simply complete the appropriate registration forms online through the California Department of Tax and Fee Administration’s website. Keep in mind, however, registering here does not take care of any local tax registration that may be required as well. In that case, check your county and city’s websites for specific information.

Comply with Other Local Requirements

On top of registering for any local taxes that may be required, you will need to make sure you are on top of any other requirements as well. For example, a business license or permit, which are often fairly local matters – again we’re talking city or county level. Check their website for more information or contact their local business office if they have one.

Maintain Your LLC

This brings us to a big step that is often overlooked – the maintenance of the LLC going forward. Your LLC needs to remain in good standing in order to continue to do business. Part of this is filing a Statement of Information, again with the Secretary of State. This keeps information like the business address current for the LLC and must be done every 2 years during a 6 month period based on the initial filing date of the Articles of Organization – the month of filing or during the preceding 5 months. There is of course a $20 filing fee each time, but if you need to file prior to your 2-year period, then you can file for free as the state wants to encourage us to keep our information current.

Additionally, and this is a point that irks people. Each year, you will need to also pay $800 to the state no matter what activity is conducted in the business. It’s a minimum business tax that is due until you cancel or close the LLC, so don’t forget that an LLC costs money each year in order to simply maintain it.

Those are the basic steps for creating an LLC in California. Of course, each state is going to have slightly different requirements so check your local state laws for more details, but the steps will generally be the same. It’s usually the fees that differ by state.

Read more: Spendthrift Trusts Explained: Protecting Beneficiaries and Assets from Creditors

 

 

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