If you’re ready to form an LLC in California, the best course of action is to hire a professional who specializes in the formation of Limited Liability Companies and corporations. If you make rookie mistakes, it could have a huge impact on your business. You’ll also want to take some steps to develop a plan for establishing business credit.
The first course of action is to complete the necessary paperwork to form your company. There are 7 steps to this process: an LLC for an online business
1.Choose a company name. You’ll need to research the availability of your chosen name. If another company has the name you’ve chosen, you’ll have to modify your choice to create a separate identity. You’ll also have to include the words, “Limited Liability Company” or the abbreviation “LLC” in your name.
2.File the necessary paperwork with California’s Secretary of State Office. Complete the “Articles of Organization” and submit them.
3.Pay the required fees. Submit the correct fee with your paperwork. Make sure you contact the California Franchise Tax Board and you understand when the $800 franchise tax fee is due and for what entities.
4.Pay the State Taxes. Each entity in California has different tax rates. The LLC taxed as a partnership has the franchise tax fee of $800 per year and a world-wide gross receipts tax which is a table based upon gross revenue. The S corporation is taxed at 1.5% of net profits and the C Corporation at 8.84% of net profits. As you can imagine, selecting the best entity for your business will help you save taxes at both the federal and state level!
5.Create an “Operating Agreement.” All LLCs must have an agreed upon Operating Agreement. Conduct an organizational meeting to adopt your agreement. Keep in mind the operating agreement will be different based upon how many members and how the LLC is taxed. You have six options: a single member LLC disregarded, and taxed as an S or C corporation. A multimember LLC taxed as a partnership, and taxed as an S or C corporation.
6.Apply for an Employer Identification Number (EIN). You can apply online at the Internal Revenue Service’s website. Make sure you know what you are doing because the IRS will ask very important questions about the EIN number for the new entity and you may answer a few questions that may come back to haunt you a few years down the road, especially when applying for an EIN for an LLC because there are multiple ways it may be taxed. Keep in mind the IRS’s federal default rules are as follows: If you have one member if the LLC it will be disregarded for tax purposes. If you have two members it will be taxed as a partnership for tax purposes. In either case you must make the proper selections and elections to have the LLC taxed as an S or C corporation.
7.Open a company bank account. Once you have your EIN, you can open a corporate bank account. If you had a DBA (doing business as) name prior to your new entity and you want to continue that name, make sure you “re-link” the DBA to the new entity not you. Once you have a bank account set up, you should consider applying for a business credit card in the name of the LLC or corporation to help separate your business charges from your personal credit charges to protect your personal revolving debt rations that affect your personal credit score.
8.Obtain the necessary county or state business license. Once you’ve completed this step, you’re officially in business! It is recommended, especially in California to touch base with a local CPA for other requirements when it comes to payroll, hiring outside employees and other state or local tax requirements.