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Form a Single Member Limited Liability Company in California
Do you need one, and steps to forming one
SUMMARY
Before forming a single member limited liability company, ask yourself, do you really need one, or would doing business under your own name, or using a lawful Fictitious Business Name work just as well. Next, decide who will be your agent appointed for process of service, which can be yourself, if you disclose a physical address on the public records, or a service, which hides your address and offers other convenient services. Next, you’ll need to file Articles of Organization with the Secretary of State and within 90 days, a Statement of Information, followed by an annual update. Within 30 days you need to file a Statement of Beneficial Ownership with FinCEN, that includes your physical address and a copy of either your driver’s license, state ID or passport. If you expect to receive a significant number of 1099s, you may want to obtain an employer identification number from the IRS, rather than expose your social security number. In any case, you will need to file IRS Form 8832 electing to be treated as a disregarded entity for federal tax purposes, meaning you will not be forced to file a separate tax return for the business, but you will report your income or losses on Schedule C of your personal tax return. Despite electing to be treated as a disregarded entity for federal tax purposes, you will need to file a California Franchise Tax Board Limited Liability Income Tax return on Form 568 annually. You may also be required to obtain a business license and home occupation permit from the city, town or municipality where you work.
DETAILS
Can you use an LLC with your business?
In California, you cannot use an LLC to operate a business that requires a license, like a real estate license.
An LLC name must end with the designation, LLC. So the legal name must be Capital, Funds, Assets, WM, LLC.
LLC’s offer limited liability and protection against personal liability, but not protections against personal liability for your acts as a person, so do you really need on?
Before moving ahead with the LLC process, it may be worth considering why you want an LLC.
Generally, for an individual doing business as a single individual an LLC is used to protect against liability. For example, if you rented or owned a premises and saw clients there, the use of an LLC could help limit your personal liability for claims for money related to premises liability. An LLC does not protect against liability from claims related to the services that you as an individual perform.
The other negatives to using an LLC is that it requires annual filings with the FTB and Secretary of State, as well as filing a Franchise Tax Board ("FTB") form 568 annually along with paying minimum annual tax of $800 to the State of California. Despite these requirements, the LLC does not provide complete insulation from personal liability from potential claims.
So, often people think they need an LLC when all they really need is a business name that a bank will open and maintain a checking account for.
If the latter is your situation, as an alternative, you might consider simply obtaining a Fictitious Business Name ("FBN"), by filing a FBN Statement with the County Clerk, publishing the required information, and then filing proof of publication. There are services that do all that for you for a reasonable price. The benefit of using a FBN is that you can use a business name without your personal name in it, but, you are not required to file the California Franchise Tax Board Form 568 and the required minimum tax. You also do not have to file the Beneficial Ownership form with FinCEN. So, a FBN could meet your needs with less cost and less time & effort on regulatory compliance in the future.
Steps to form a Single Member LLC in Califoria
If you decide you want an LLC, here are the steps.
You need to appoint a registered agent for service of process, before you submit Articles of Organization to the Secretary of State.
You can be your own registered agent, if you are willing to disclose your physical address on the public record, or you can use a service.
It is very common to use a service for many reasons, including convenience. There are two primary benefits of using a service as an agent. One, the service can automatically file regularly required filings with the Secretary of State, which is an be very convenient and avoid losing standing with the State. Two, the service can file your required Statement of Beneficial Ownership, described below for a small fee.
If you want to use a service, such as Corporate Agents Service, you will need to establish an online account with them, which requires access to your email to confirm your new account and payment of their fee by credit card.
Alternatively, you can simply be your own registered agent.
To do use a service as an agent, you will need to be able to access your email and confirm newly created online accounts using your phone. If you cannot access your email and confirm newly created online accounts using your phone, you will need to be your own agent appointed for service of process.
Secretary of State Requirements
After you select a registered agent, you will need to submit the Articles of Organization to the Secretary of State, which is a minimum $75 fee. Then an initial statement of information must be filed with the Secretary of State within 90 days, although we can take care of that tomorrow, as well. You will need to authorize me to electronically sign for you. Every year or every two years you will be required to file an updated statement of information, including a statement of no change, if there is no change. Again, some registered agent services do this automatically for you, if you maintain an active credit card on file and authorize charging for the service.
Within 30 days of forming a new entity, such as an LLC, you need to file a Beneficial Owners Statement with FinCEN that identifies the owner and filer, you, and provides a copy of a current valid state driver's license or passport. That can be done online and I can assist you, if you provide the identification. There is a $10,000 penalty for willful failure to file.
If you don't want to provide your social security number to others who may be issuing you 1099s and the like or have employees and you don't already have an Employer Identification Number issued by the Internal Revenue Service, we can obtain an EIN from the IRS online. You can use an EIN with a FBN, as well.
In any case, once you have filed the articles of information and after you decide if you want to use your social security number or EIN, you can complete and mail file an IRS Form 8832 that states you elect the LLC to be classified as a disregarded entity. Being classified as a disregarded entity means that you do not have to file a separate federal tax return for the LLC. However, you will need to report income of the LLC on your personal tax form, usually on Schedule C. You will owe and be required to pay income tax on any income that the LLC generates.
Note, even if you elect to be a disregarded entity for Federal Tax purposes, you will be required to file a Form 568 with the California Franchise Tax Board and pay the minimum tax of $800.00 annually. You do not need to file Form 568 or pay the $800.00 annual tax if you choose an FBN.
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