How to form a California LLC by yourself (Part 1)
[Disclaimer: I am not a lawyer, nor do I aspire to be one]
I recently decided to take the plunge and incorporate–partially so I can have rad business cards, but mainly for legal and tax reasons. While operating as a sole-proprietorship has worked well so far, I run the risk that I could be held personally liable in the event of a nasty lawsuit. It also forces me to comingle my personal and business finances (which makes accounting and taxes difficult).</p>
Ground to Cover:
- Why an LLC?
- Where to incorporate?
- Should I pay LegalZoom $150 to mail a letter? No.
- Prep. work
- Completing the Paperwork
- Pay your fees and send
- How long will it take?
- Next steps
- Additional Resources
Why an LLC?
After some research both online and offline, I finally settled on a single-member Limited Liability Corporation (LLC). For me (a single founder), an LLC was a great choice for several reasons:
- LLC’s provide me with sufficient legal protection–as long as I’m smart about how I operate, I will face no personal legal liability
- Pass-through Federal tax treatment—my taxes will remain doable and I won’t be doubly taxed (i.e. only once at the personal-level, and not at the corporate level)
- Since I don’t intend to seek VC funding (or any sort of significant outside funding for that matter), the shareholder restrictions of an LLC aren't onerous enough for me to consider a C-corporation.
Where to incorporate?
Once I decided on an LLC for the business structure, I had to decide which state to incorporate in. Since I am a resident of California and am doing business there, I decided to register in California. Before doing research, I was contemplating registering in Delware—as far as I know, for California residents, this is a bad idea and will not prevent you in any way, shape, or form from paying franchise taxes and fees to the California state government. Bottom-line: if you live in California and are registering an LLC, do it in California.
If you are unsure at this point if an LLC is the right choice for you, I highly recommend consulting the book, The Entrepreneur’s Guide to Business Law. Chapter 4 is devoted to the pro’s and con’s of each type of business structure. It is a great resource for pretty much any serious startup founder (or startup employee for that matter).
Should I pay LegalZoom $150 to mail a letter? No.
Robert Shapiro would have you believe that you need his help to register your LLC. In fact he will do this for the low, low price of $150. Why this service thrives is beyond me. You will only need to file 2 forms and you can do everything in less than an hour. Please, do not use LegalZoom–you can do all of this by yourself.
Before you start filling out forms, you’ll need to answer 3 questions:
- What will you call yourself? You’ll need to do a search to ensure that your company name hasn't already been registered. The State’s website has a search function at http://kepler.sos.ca.gov/. Although it is pretty limited, it should be sufficient for most purposes—I picked a name for which I also own the dot-com and that made me feel a little bit more sure that it was unique.
- Who will serve as the Initial Agent for Service of Process? This basically means, who will receive all legal communication for the company. The registered agent must be a resident of the state and have a physical address in the state (no post office boxes). While you can use yourself, I would strongly advise that you go with a registered agent service. This service is provided by companies who will collect documents on your behalf and forward them to your home address. I went with InCorp Services, but there are numerous options to choose from. The service should run you around $100 a year, and save you the hassle of changing your address if you move. You’ll need to sign-up beforehand so you can get the company’s address to use when you file the registration paperwork.
- How many owners the company will have? If you’re a one-man show like me, this should be simple :-)
Completing the paperwork
The paperwork to register an LLC was initially intimidating—the instructions provided on the state’s website aren’t the best. While there are many books written to guide you through the process, it honestly isn’t that complicated. Let me restate that—it is surprisingly simple.
The first form you’ll need to complete is FORM LLC-1. The form along with instructions can be downloaded as a PDF from the California State Government website. There are only several places on the form that you’ll need to enter information—the instructions do a thorough job of covering what you’ll need to fill out.
- Box 1 – Enter the name of the LLC you’ve decided on. Remember that you’ll need to add the proper ending to the name of the company (e.g. Limited Liability Company, LLC, or L.L.C.)
- Box 2 – You can ignore this
- Box 3 & 4 – Enter the name of your registered agent. If it is an individual (such as yourself), enter your full name in box 3, and your address in box 4. If you are using a registered agent service, enter the complete company name in box 3 and leave box 4 blank (the address for the company should be on file with the state)
- Box 5 – Indicate how many managers your LLC will have
- Box 6 – You can attach additional documents if you’d like to. I did not.
- Box 7 – Date and Sign
Pay your fees and send
Once you’ve completed and signed FORM LLC-1, wipe the sweat from your brow and make a couple of copies—the state will certify up to two copies without charge. Write a check out to the Secretary of State for $70, and put the check and FORM LLC-1 along with the copies in a stamped envelope and send it to the address specified on the instructions.
How long will it take?
Unfortunately, at the time of this post the turnaround time on Articles of Organization filings are about 40 business days (or nearly 2 months). This is not normal and you can thank government furloughs for the delays. There are options for fast-tracking your filing, but this can potentially be very expensive.
Once you have successfully filed your Articles of Organization you'll need to do the following:
- File FORM LLC-12 within 90 days. Failure to do so will result in a $250 fine.
- Pay a franchise tax payment of $800! Yes I know, it’s steep, but it’s the cost of doing business in California.
- Adopt an operating agreement. For a single-owner, this isn't as critical, but if you have multiple owners, this is a must. This document does not need to be filed with the Secretary of State–you can consult an attorney or use a boilerplate operating agreement, however the former would probably be most advisable.
I am still waiting to hear back on my Articles of Organization, so I'll cover these three points in more detail in an upcoming post.
[UPDATE: The second post is now finished]
Thanks to @driek for the great picture