How to Form a Single Member LLC in California

How to Form a Single Member LLC in California

Learning how to form a Single Member Limited Liability Company is not that difficult, but there are some choices you need to make. A limited liability company (LLC) that has one owner is designed to protect that owner against personal liability. Accordingly, it should be treated as a separate "person" for legal purposes, and thus the sole member and equity holder should be shielded from any liabilities of the LLC, including debts and lawsuits.

A Guide to Forming a Single Member LLC in California

Learning how to form a Single Member Limited Liability Company (LLC) is not that difficult, but there are some choices you need to make.

A limited liability company that has one owner is designed to protect that owner against personal liability. Accordingly, it should be treated as a separate "person" for legal purposes, and thus the sole member and equity holder should be shielded from any liabilities of the LLC, including debts and lawsuits. An LLC is an affordable option for setting up a legal business that isn't too hard to obtain.

Another benefit of forming an LLC is that the member's share of the net profits is not subject to self-employment taxes. These steps will make sure that you meet all requirements in the state of California to set up a legal LLC.

1. Choose a name

The first step in setting up an LLC in California is choosing a name. It must end with the words Limited Liability Corporation, or you can abbreviate to LLC. Limited can be abbreviated to Ltd., and corporation can be abbreviated to Corp. The name cannot mislead the public by including words that suggest it is in the insurance business. Examples of misleading words include:

• Trust
• Bank
• Incorporated
• Corporation
• Inc.
• Insurer
• Insurance Company
• Corp.

Other restricted words include those that would confuse the name of an LLC with a state or federal agency, such as treasury, FBI, secret service, etc.

An LLC's name also cannot be too similar to an existing name filed with the California Secretary of State records. Before submitting a request to establish an LLC, the owner should research existing names in the California Secretary of State database. This search will include other LLCs already registered in the state.

Perform a quick URL search to make sure the domain name you want is available. This search will allow you to more easily set up a website. Even companies that don't plan on immediately creating a website will want to reserve the domain name to avoid competitors from taking it.

If the name you choose is available, you may reserve it by submitting a Name Reservation Request Form. Mail the completed form, along with the required $10 fee, to the California Secretary of State's office. You can also hand-deliver it, but online completion of the form is not available.

2. File Articles of Organization with the California Secretary of State

The next step is filing Articles of Organization, Form LLC-1, with the California Secretary of State to form your new LLC. There are minimum requirements that need to be listed in the Articles of Incorporation in order for them to be accepted. These include:

• LLC name (must include LLC, Limited Liability Corporation, or Ltd. Liability Corp. as the last words)
• Purpose of the LLC
• Information on how the LLC will be managed
• LLC address
• Name and address of the LLC's registered agent
  • All LLCs in California must have a registered agent who agrees to accept legal documents on behalf of the LLC in case of legal action. You can designate only one agent, and this agent must live in California.
  • The agent does not have to be associated with operations of the LLC. Some LLC owners choose an attorney or CPA as the registered agent.
• LLC protection information and indemnification of officers and managers
• How the LLC will allow new members to join (if applicable)
• Provisions that limit the business in which the LLC will engage (if applicable, this item is more important if members participate in other business endeavors)
• Event(s) that will cause the LLC to dissolve (if applicable)
• Date that LLC will dissolve (if applicable)
  • Most LLCs register with a "perpetual existence" with no plans to dissolve.
• Limitations on authority of managers of members (if applicable)

Provide the form to the California Secretary of State. Review the form for more details about the minimum information required for the Articles of Incorporation to be accepted by the state (see page 3 for the actual Article of Incorporation).

Complete the provided form and mail it with the $70 filing fee to:

Secretary of State
Document Filing Support Unit
PO Box 944228
Sacramento, CA 94244-2280

You may also hand-deliver the Articles of Organization and request expedited filing for an extra fee.

When completing the Articles of Incorporation, if you plan to be the sole owner and employee of the company, place your name and address under the Agent For Service of Process. You will also check the box "All LLC Members" under Section 5 since the LLC will be managed by the sole owner (a "Member").

If you plan to have someone other than the sole Member manage the LLC, under Section 5, you will need to mark "One Manager" or "More Than One Manager," depending on your circumstances.

After filing the Articles of Organization, you will receive an information request statement from the Secretary of State in California. You must complete and return the form within 90 days or the LLC will be dissolved immediately.

3. Optional: Execute Single Member LLC Operating Agreement

The Operating Agreement of any Limited Liability Company (LLC) is the primary document that governs the operations of the LLC and the rights or obligations of its owners (called "Members"). It is not required in California, but this document is highly advised.

A Single Member LLC Operating Agreement will cover fewer materials than a Multi-Member Operating Agreement because there is no one to impose rights and obligations on aside from the sole owner. Like a shareholder agreement, the operating agreement protects the owners from one another, which is not the case here. An operating agreement can be verbal or written.

Some of the major concepts covered in a single member LLC agreement are:

1. The contribution of capital by the sole member
2. The limitation of liability
3. The management of the LLC (methods for choosing officers, duties, and salaries)
4. The number of members
5. Rights and duties of the members
6. Maintenance of business records and how information will be delivered to members
7. How profits and losses are allocated
8. Procedures for admitting a new member
9. Voting interests and requirements of members
10. Duration or dissolution of the LLC (if applicable)
11. Procedure to amend the operating agreement in the future
12. Grounds for terminating a member

The sole member should pay the individual's contribution to the LLC, deposit this amount in a separate checking account created for the LLC, and make a record of the payment. This activity increases the legitimacy as a legal entity.

The limitation of liability in the Operating Agreement expressly lays out that which is already inherent in an LLC. Again, this activity increases the legitimacy of your LLC. The limitation of liability prevents creditors and claims against the LLC, or its member, from attaching to the personal assets of the owner and is instead limited to the assets of the LLC which may be little to nothing.

Management of a Single Member LLC is generally done by the single member, which is considered "member managed." While less common, a single member LLC can be run by a manager ("manager managed") who may or may not be the single member in the LLC.

4. File a Statement of Information

Another requirement in California is to submit a Statement of Information, or Form LLC-12, within 90 days of filing the Articles of Organization. You must file the statement of information every two years, within the month (or the five months prior) that you filed the original Articles of Organization. You can print Form LLC-12 from the California Secretary of State's website, but you must mail or hand-deliver the completed form. The filing fee for this form is $20. Information required includes:

• LLC name
• California Secretary of State file number
• Name and address of LLC's agent
• Main office address of the LLC
• Mailing address of the LLC (if different)
• Names and complete business addresses of any manager(s) or chief executive officer
  • If there are no manager(s) or CEO, include names and business addresses of all members
• Valid email address (if desired to receive electronic renewal notices and other notifications)
• Principal business activity or general type of business of the LLC
  • Examples: wholesale liquor distributor, retail store

5. Optional: File S-Corporation Election

One of the attractive, but often confusing, aspects of forming a limited liability company (LLC) is the flexibility for deciding how the LLC and its owners, called "members," will be taxed. This flexibility exists because the federal government does not recognize an LLC as a classification for federal tax purposes. In fact, multi-member LLCs are often taxed as partnerships while single-member LLCs are taxed as sole proprietorships. However, even though an LLC is not a corporation, it can be taxed as one.

When members of an LLC choose to be taxed as a corporation, the default is to be taxed as a C-Corporation. However, an election can be made to be taxed as an S-Corporation. Being taxed as an S-Corporation allows LLC members to take advantage of certain tax benefits not available to partnerships or sole proprietorships while, at the same time, avoiding the "double taxation" concept of a standard C-Corporation.

Does it make sense for an LLC to be taxed as an S-Corporation?

In short, the answer to the preceding question has to do with money and how much money the LLC makes. If the business of the LLC generates a profit over and above what would be considered reasonable compensation for the services that the owners provide, the LLC may be unnecessarily subjecting its profits to self-employment taxes. The profits of partnerships and sole proprietorships are subject to self-employment taxes, which as of February 2012, are 15.4 percent of profits (that is, $100,000 profit is subject to $15,400 in self-employment taxes).

Being taxed as an S-Corporation allows the LLC to pay its employee-members (those members who are actively working the business of the LLC) a wage in addition to the LLC's profit. This is a benefit because only the wage is subject to the self-employment tax while the profit distributed to the LLC member or members is not. (Note: Members who are not actively working in the business will not qualify for payment of a wage, so S-Corporation election is not likely to impact a passive member's tax liability).

More often than not, this arrangement results in a lower tax liability or "tax bill" for the members. The catch, however, is that the wage must be "reasonable," meaning that the wage cannot be too low. In order to determine whether a wage is reasonable, LLC members should consult with a tax attorney or CPA. In addition to paying LLC members a reasonable wage, there are other restrictions to the S-Corporation election:

• The LLC may not have members who are corporations, partnerships, or non-resident aliens.
• The LLC may not have more than 100 members
• The LLC can only have one category of ownership (that is, it cannot have multiple categories of ownership such as voting and non-voting).

For single member LLCs, meeting the above criteria usually is not a problem. For multi-member LLCs, however, these criteria can be troublesome, so care must be taken to confirm before electing to make the LLC qualify for S-Corporation taxation.

Electing to be taxed as an S-Corporation requires filing Form 2553 with the IRS no more than two months and 15 days after the beginning of the tax year that the election is to take effect, or at any time during the tax year preceding the tax year it is to take effect. This election is optional, and to make the election with the highest level of confidence and clarity, you should consult the appropriate professional, such as an attorney or CPA.

6. Obtain an EIN from the IRS

Your Employee Identification Number (EIN) is your company's Social Security Number or tax ID number. This number allows you to get a bank account and is required to hire any employees and register with state and local tax agencies.

An EIN can easily be obtained by filing Form SS-4 with the IRS (available online). For questions, call 800-829-4933.

You can get the EIN in less than 10 minutes. The business owner will need his or her Social Security Number and the filed Articles of Organization with the assigned California entity number printed on the articles.

Your business might also require local and state business licenses depending on what type of business the LLC engages in and where it is located.

7. Pay required taxes and obligations

LLCs that meet certain criteria must pay taxes and other obligations to the California Franchise Tax Board. These requirements include:

• LLCs that are registered, organized, or conduct business in the state of California, and
• LLCs that have not elected to be taxed as corporations, such as sole proprietorships and partnerships
  • Those that are taxed as corporations must follow the state corporate tax laws.

The annual minimum franchise tax for an LLC in California is $800, and those with income over certain levels are required to pay an additional fee based on the annual income. If you don't pay the $800 tax fee on time, you'll be assessed a $25 late fee.

In order to meet this requirement, an LLC must file Form 568 by the 15th day of the fourth month after the close of the taxable year. This form is called "Limited Liability Company Return of Income."

If your LLC sells goods and collects sales tax or employs people, you will need to register with the correct taxing authority in the state.

LLCs in California cannot provide professional services, which are any services that require a professional state license. If your business falls under this category, you can form a limited liability partnership instead of an LLC.

Related Documents & Filings: California Articles of Organization Single Member LLC Operating Agreement

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