Benefits of Forming an LLC in California

The key benefit of forming a limited liability company (LLC) in California is limited liability protection.

Limited liability can protect your personal assets in the event your business is sued or can't pay its debts.

Other California LLC benefits include:

  • Pass-through taxation
  • Tax options like S corp
  • Simplicity
  • Ownership flexibility
  • Increased credibility
  • Name registration

Recommended: Visit our Should I Start an LLC for help with choosing the right structure for your small business.

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Benefits of an LLC in California

LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.

Benefits of an LLC in California vs other business structures are:

  • Pass-through taxation
  • Tax options
  • Simplicity
  • Increased credibility
  • Name registration
  • Ownership flexibility

Limited Liability Protection

When a business owner has limited liability protection, they can't be held personally responsible if the business suffers a loss. This means personal assets (car, house, and bank account) are protected.

In order to have limited liability protection, the LLC must maintain its corporate veil.

Other business structure types, like sole proprietorships and partnerships, don't offer limited liability protection.

Corporations offer limited liability but are difficult to maintain and often offer unfavorable taxation for a small business.

Pass-Through Taxation

LLCs, by default, are subject to pass-through taxation, just like a sole proprietorship or partnership. This means that the business's net income passes through to the owner's individual tax return. The net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.

Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.

In a California corporation, profits are subject to "double taxation". This means profits are taxed before being distributed to owners and taxed again when owners report their share of profits on their individual tax returns.

Tax Options

Once a small business grows and can pay owners a reasonable salary and at least $10,000 in distributions each year, they might benefit from another LLC tax option, the S corporation (S corp) tax status.

When an LLC elects S corp tax, it reduces self-employment taxes and overall tax burden under the right circumstances.

For questions about tax solutions for your small business, we recommend scheduling a free tax consultation.

A limited liability company can choose among three different ways of paying income tax. One popular option is to be taxed as an S corporation. Technically an S corp is a tax designation, not its own type of business entity.

You can learn more about choosing the S corporation tax designation in our LLC vs S Corp guide.

Simplicity

Limited liability companies in California are relatively easy to form and maintain with little paperwork or expense. Unlike corporations, LLCs aren’t required to assign formal officer roles, hold annual meetings, create bylaws, or record company minutes and resolutions.

Increased Credibility

Forming your California business as a limited liability company brings added credibility. An LLC is recognized as a more formal business structure than a sole proprietorship or partnership.

Including LLC in your business name lets customers and partners know that you are a credible business.

Name Registration

When you form an LLC in California, you’ll choose a unique name that will be registered when the LLC is formed. By registering your name, no other businesses in California will be able to use the name while your business is active.

A sole proprietorship or partnership must use the names of the owner(s) as the business name. A sole proprietor or partnership would need to register a doing business as name (DBA) in order to use something besides their personal name.

Ownership Flexibility

There are very few restrictions on how you can structure the ownership and management of a California LLC:

  • Your LLC can be single-member or multi-member
  • A Multi-member LLC can be managed by its members, termed as member-managed
  • A Multi-member LLC can be managed by a manager that is appointed by its members, termed as manager-managed

Learn more about LLC management in our member-managed vs manager-managed LLC guide.

Disadvantages of Starting an LLC in California

LLCs offer many benefits but there are some cases where it might make sense to form a California corporation or sole proprietorship.

  • Businesses that need to carry large amounts of profit from tax year to tax year should consider a corporation.

    Learn more in our LLC vs Corporation guide.

    If your business is more of a hobby, carries zero risk, and you don't intend to scale up, then running a sole proprietorship might be a better option.

    Learn more in our LLC vs Sole Proprietorship guide.

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Recommended: If you're still not sure if an LLC is the right business structure for your California business, visit our Choosing a Business Structure guide.

How To Form An LLC in California

Forming an LLC is easy. Our Start an LLC in California guide streamlines the process into five easy steps.

You can hire one of these best llc services to form an LLC for you.

Five Basic Steps to Start an LLC in California


Step 1: Name Your LLC

You will need to give your business a unique name that is distinguishable from all registered names in California when you file your Articles of Organization.

Our Business Name Generator and our How to Name a Business in California guide are free tools available to entrepreneurs that need help naming their business.

Step 2: Choose a Registered Agent

Your California registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your Certificate of Formation.

Step 3: File the Articles of Organization

The Articles of Organization is the document you will file to officially register an LLC with the Secretary of State.

Step 4: Create an Operating Agreement

A California operating agreement is a legal document that outlines the ownership and member duties of your LLC.

Our operating agreement tool is a free resource for business owners.

Step 5: Get an EIN

An Employer Identification Number (EIN) is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business.

EINs are free when you apply directly with the IRS. For more information about whether your LLC is required to obtain an EIN, visit our EIN for LLCs guide.

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Step 2: Choose a Registered Agent

Your California registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your Certificate of Formation.

Step 3: File the Articles of Organization

The Articles of Organization is the document you will file to officially register an LLC with the Secretary of State.

Step 4: Create an Operating Agreement

California operating agreement is a legal document that outlines the ownership and member duties of your LLC.

Our operating agreement tool is a free resource for business owners.

Step 5: Get an EIN

An Employer Identification Number (EIN) is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business.

EINs are free when you apply directly with the IRS. For more information about whether your LLC is required to obtain an EIN, visit our EIN for LLCs guide.

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Visit our free How to Start an LLC in California guide for help with registering and maintaining your LLC.

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