CREATING AN LLC
To create an LLC, you go through your state’s Secretary of State office (California: www.sos.ca.gov). Filing fees vary by state but expect around $100 (California is $70).
The application can be filled out online or by mail. The application is traditionally known as your Articles of Organization (In California, the application is Form LLC-1). The application is fairly simple, but there are a few steps:
You’ll need to come up with a business name that’s not already taken in your state. Your state has a database where you can check what names are in use (In California, use BusinessSearch.sos.ca.gov).
- The LLC name must include: LLC, L.L.C., Limited Liability Company, Limited Liability Co., Ltd. Liability Company, or Ltd Liability Co.
- The LLC name may not include: bank, trust, trustee, incorporated, inc., corporation, or corp.
- The LLC name may not include: insurer, insurance company, or any other words suggesting that the LLC is in the business of issuing policies of insurance and assuming insurance risks.
- The name is not likely to mislead the public and is distinguishable from other LLCs of record or reserved with the California Secretary of State.
You’ll need to choose your main office address and mailing address.
- The designated office does not need be the place of the LLC's activity in California.
- Your physical address cannot be a PO Box, but your mailing address can.
You’ll need to list an agent. An agent is who the government contacts in regards to the company. In most cases the agent is you. If you have more than one owner, pick the most responsible person.
Select how the company will be managed. An LLC's daily business operations are conducted either by all of the members (member managed LLC) or by selected managers (manager-managed LLC).
Here is where you give your statement of purpose (In California, this is pre-filled out by the state and cannot be changed).
Once you submit your application and pay the filing fee, you will usually hear back within a week. Assuming you are accepted, your next step is to pay the startup fee. Most startup fees are around $100, in California it’s $800. But our weather’s nice. You have until the 15th day of the 4th month from the date you file to pay the fee. You pay to CA’s Franchise Tax Board.
That fee will actually become an annual fee, assuming you still want the LLC. The annual fee is due every year by April 15th. I’m saying this so you can properly plan the creation of your LLC. Say you create your LLC in September. Your $800 only covers the remaining three months of the year. Then at the start of the year, you’re on the hook for another $800 renewal fee due by April 15th. Moral of the story, don’t create companies near the end of the year. That being said, when you submit the application they give you the option of postponing the startup date.
Another step you must do after being accepted is to send in a Statement of Information (Form LLC-12). This is basically a form that has your contact information. You have 90 days to send in this form. It costs $20.
If you want to become an S-Corp, there is one extra step. You must file additional paperwork with the Internal Revenue Service (IRS). You must file Form 2553 within two months and fifteen days. This form is what tells the IRS you want to be taxed as an S-Corp. If you don’t file the form within the time limit, then your re-classification won’t take place until the start of next year.
You can start your LLC as a Sole Proprietor or Partnership and then switch to an S-Corp years down the road if you want. Simply submit Form 2553 by March 15th to be counted as an S-Corp for that year. You can also terminate your S-Corp status but won’t be able to reapply for S-Corp status for five years.
You’ll notice at this point there’s nothing on record that says how many owners are involved with your company. This is where your Operating Agreement comes into play. An Operating Agreement is a document that you and your partners will create. It is similar to a corporation’s by-laws. Your Operating Agreement basically says how the company will be run and who will run it. There is no specific or mandatory structure to an Operating Agreement, but it should list things like:
- How your company will be managed
- Who owns how much of the company
- How are profits and losses shared
- Who has the power to do what
An Operating Agreement can be updated (but your previous draft of the agreement will probably say who can update and how: do you require a vote?). In most states, you are not required to submit your Operating Agreement to a government agency. It is for your own internal purposes. If you are the sole owner of the company, then you really don’t need one, you can just do what you want.