In 2020, California had 4.1 million small businesses which made up 99.8% of all California businesses. These companies helped to generate 214,569 net new jobs. Are you ready to follow in their footsteps?
Like many entrepreneurs, you’ve decided to form your LLC in California, home to Silicon Valley and a number of successful startups. But before you venture headfirst into starting your business, here are five things you should know before forming an LLC in California.
1. You Cannot Form a Series LLC in the State of California
A series LLC operates like any other LLC in terms of the liability protection it provides to the business owner. The difference is that with a series LLC, there is a “parent” LLC that umbrellas over one or more independent series or LLCs, like “mini LLCs”. Each series underneath the parent LLC has its own separate assets and members and is responsible for its own debts and obligations.
The main advantage that a series LLC provides is the separate liability protection provided to individual LLCs. Each LLC operates as a separate entity, so in the worst-case scenario that one of your LLCs goes bankrupt or is sued, the remainder of your LLCs will be protected from any liability.
Did you know that real estate and rental leasing firms are #3 out of the top 5 small business industries in California? That’s 377,937 real estate-related businesses. Think of this example: you'd want a series LLC if you own a real estate company with ten properties operating as separate series. Say one of your properties ends up going under. When the bank comes to seize its assets, the rest of your nine properties will be protected since each series or property is responsible for its own liability.
So, in which states can you form a series LLC? You can form a series LLC in Alabama, Arkansas, Delaware, Montana, Nevada. You can find the full list here.
2. California Does Not Allow Professional LLCs
California is unique in that the state does not allow a PLLC entity type.
The reason for this is that professionals are held to a higher standard and have a responsibility to uphold the public’s safety. Therefore, the California Legislature doesn’t allow professionals to limit their personal liability for their mistakes.
This begs the question, which entity can California professionals use?
Things get a little complicated here, but it's recommended to speak with an attorney to determine your professional requirements and restrictions in California.
Because California does not allow for the formation of PLLCs, which means that licensed professionals are prohibited from forming any kind of limited liability company. However, there is an alternative to PLLCs that come in the form of limited liability partnerships (LLPs). In the state of California, LLPs are limited to the professions of law, architecture, and accounting. You can go here to form an LLP.
3. You’ll File a Statement of Information Every Two Years
Your first Statement of information is due within 90 days of your LLC’s approval date (this date can be found on Articles of Organization). After that, it’s due every two years by your LLC’s “registration date”.
Every California LLC is required to file a Statement of Information. The purpose of the Statement of Information is to keep your California LLC contact information up to date with the California Secretary of State. The filing fee is $20 (every two years).
Filing Tip: If the Articles of Organization was originally filed with the California Secretary of State in an even-numbered year (see example below), file the Statement of Information every even-numbered year. If the LLC was originally filed with the California Secretary of State in an odd-numbered year, file every odd-numbered year.
Example: Your California LLC is approved on August 10, 2020 (that is your “registration date” also known as “anniversary date”).
- The first Statement of Information is due November 8, 2020 (90 days from August 10, 2020)
- Then your ongoing Statement of Information is due every two years, by your “registration date” (August 10, 2022, August 10, 2024, etc.). You can file your ongoing Statements of Information up to six months before the due date.
If you fail to file the Statement of Information within the 60-day grace period, you have to pay a $250 penalty.
The Secretary of State will send a postcard reminder (by regular mail) to your LLC’s business address one to two months before the due date. However, if you don’t receive a reminder, it is still your responsibility to file your Statement of Information on time. For this reason, putting a repeating reminder on your Google calendar is recommended.
4. Be Warned There is an Annual Fee of $800
Every California LLC is required to pay an annual franchise tax of $800. This tax will be due as long as you are doing business or organized in California. There are a few exceptions to the first-year annual tax. Your LLC will not be subject to the annual tax if both of the following are true:
- You did not conduct any business in California during the tax year
- Your tax year was 15 days or fewer
Otherwise, you have until the 15th day of the fourth month from the date you file with the Secretary of State to pay your first-year annual tax.
This can be confusing, so here is an example: Your LLC was approved on June 18, 2021. Your $800 annual franchise tax will be due on September 15, 2021 (the 15th day of the 4th month).
When it comes time for you to pay the annual $800 tax for your LLC, you will need to file a couple of forms. Is the $800 franchise tax all you really have to pay? Find out here.
5. Don’t Use a PO Box
When it comes to forming your California LLC, you will need an address for a multitude of purposes. If you’re considering using a PO box, stop that thought right now. Here are 3 BIG reasons to skip the PO Box:
A PO Box Address Won’t Work as Your Business Address
The first address you’ll need is a business address in order to form your LLC with the Secretary of State. You want to choose a business address separate from your home address (it’s public information), and California does not consider a PO box address as a physical address, and thus, it will not be accepted as a form of address for your LLC.
A much more ideal option that will count as a physical address is a virtual mailbox address. Read PO Box vs. Virtual Mailbox for the full comparison.
If you do not have a separate address that allows you to protect the privacy of your home, then a virtual mailbox address is the perfect choice for you. Look into VirtualPostMail’s (VPM) California virtual mailbox location.
A PO Box Won’t Work as Your Registered Agent Address
Every California LLC is required to designate a registered agent in order to receive legal communications and service of process on behalf of the LLC. All registered agents are required to have a physical address at which someone will be present to receive and sign for deliveries. As you know, PO boxes will not always have someone available to receive correspondence so skip this option altogether. It’s not worth risking your LLC’s compliance and good standing with the state just because you choose the wrong address option.
If you’re using a virtual mailbox for your business address, the best decision you can make is to combine it with a registered agent. Did you know that combining a registered agent and your virtual mailbox will save you $100 or more a year? VPM’s FREE registered agent services make this possible!
PO Box Address Won’t be Accepted When Opening a Business Bank Account
If you want to keep your LLCs liability protected, you need to keep your finances separate. A business bank account allows you to do that. Business banks will require you to present a physical address when opening a business bank account, and… you know the rest. A PO box won’t work! Banks will often accept an address that is considered a commercial or residential address (a good rule of thumb is it needs to be attached to a tangible building).
Your home address is an option, but if you don’t permanently reside in the state of California, things get complicated. You could obtain a commercial address by leasing an office space, but that is an expensive choice.
What else can you choose? VPM’s TruLease service helps you solve this exact problem. How you ask? VPM partners with commercial building owners to provide you physical office spaces. You’ll sign a lease agreement to show proof that you have an office space. If needed, you can request a utility bill for additional proof of address.
California is an ideal place to form your LLC, but there are certain things you should know before you get started. If you need to form a series LLC or PLLC, California might not be the place to incorporate. Make sure to file your Statement of Information every two years and be prepared to pay the annual $800 franchise fee. And most importantly, do not use a PO box as your address for your formation process because all that will do is cause you headaches (hint: a virtual mailbox is the ideal choice). And for a business bank account, a PO box doesn’t work either (you can check out TruLease as a physical address option).