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Prepared By: Melissa C. Marsh, Los Angeles Business Attorney
Written: March 2009

Los Angeles, California attorney, Melissa Marsh provides this Step – By – Step Guide to forming a California Limited Liability Company (LLC), sometimes called a limited liability corporation. To form and organize a California Limited Liability Company (LLC), you will need to complete multiple steps as described below. But first, let's go over some basics.

First, there are different kinds of limited liability companies. First there is the single member limited liability company (LLC) and the multi-member LLC. A single member LLC is any LLC owned by one person, a husband and wife, or domestic partners. A California limited liability company can also be a member-managed LLC or a manager-managed LLC. A member managed LLC is similar to a general partnership in that each member is also a manager. With a manager managed LLC only the designated managers have the authority to run the day-to-day operations of the LLC and to execute agreements on behalf of the LLC.

Second, it should be stated that the limited liability company is the most versatile entity as its rules are primarily governed by an Operating Agreement which is required under California law and which should be prepared before the first Statement of Information is filed with the California Secretary of State.

Now onto how a California limited liability is formed.

Step 1. Name.

You will need to select a name for your California limited liability company, and it must end in: "limited liability company," or "LLC" or "L.L.C."

Once you have selected one to three potential names, you will then need to check to make sure the name is available. The first preclearance check must be made with the California Secretary of State. If you choose to have Melissa C. Marsh, Esq. form your California LLC she will perform this step for you. Pursuant to California law, the name selected cannot already be in use by either a California corporation, or a California LLC. You can check the name availability yourself at the California Secretary of State's Office.

The second preclearance check needs to be performed at the federal level to make sure the name does not infringe on another person or entity's trademark or service mark. Even if the name you select is available through the California Secretary of State's Office, it still may infringe upon a third party's trademark or service mark. The only way to ensure you are not infringing on another person or entity's trademark is to have a trademark search performed. You can perform a Preliminary Name Search of the federal trademark register at the United States Patent and Trademark Office. Remember, a name is not available if it is the same as, or similar to, another person or entity's trademark or service mark in relatively the same industry.

Step 2. Prepare The Articles of Organization.

The Articles of Organization must be prepared and filed with the California Secretary of State along with the $70 filing fee and $15 over the counter fee (if applicable).

Most, if not all, document preparers and online service companies, and even attorneys, will only prepare the standard one page form LLC Articles of Organization (Secretary of State Form LLC-1). However, Melissa C. Marsh often times does not find the standard form Articles of Organization sufficient, and therefore typically prepares a custom one-page attachment.

The Articles of Organization must contain the following information:

1. The name of the limited liability company, which must contain one of the following: "limited liability company," "Ltd. Liability Co.," "LLC," or "L.L.C." as the last words in the name of the limited liability company.
2. The following statement: The purpose of the limited liability company is to engage in any lawful act or activity for which a limited liability company may be organized under the Beverly-Killea Limited Liability Company Act.
3. The name and address of the initial agent for service of process on the limited liability company who meets the qualifications specified in paragraph (1) of subdivision (b) of Section 17061, unless a corporate agent is designated, in which case only the name of the agent shall be set forth.
4. If the limited liability company is to be managed by one or more managers and not by all its members, the statement referred to in subdivision (b) of Section 17151. If the limited liability company is to be managed by only one manager, the articles of organization shall contain a statement to that effect.

The Articles of Organization of a California LLC may also contain one or more of the following (which if desired must be presented on an attachment page):

1. A provision limiting, or restricting, the business in which the limited liability company may engage, the powers that the limited liability company may exercise, or both. This can be very important if the members or managers of the LLC are engaged in other business endeavors.
2. A provision governing the admission of new members to the limited liability company.
3. A time at which the limited liability company is to dissolve.
4. An event(s) that will cause the automatic dissolution of the limited liability company.
5. A statement of whether there are any limitations on the authority of managers or members to bind the limited liability company, and, if so, what the limitations are.
6. The names of the managers of the limited liability company.

Custom LLC Articles Of Organization can help to ensure the smooth operation of the business and affords the members of the limited liability company a few added protections. To prepare the Articles of Organization, you will need to:

Select Whether the LLC will be Member-Managed or Manager-Managed.
An LLC's daily business operations are conducted either by all of the members (member managed LLC) or by selected managers (manager-managed LLC). The LLC "Operating Agreement", a document separate and apart from the "Articles of Organization" controls the relations between members and managers and who will be appointed to act as managers. If the LLC Operating Agreement, either doesn't exist or doesn't provide for the appointment of managers, then all of the LLC members must make and approve each and all of the LLC's operational details.

Select A Registered Agent.
When preparing the LLC Articles of Organization, the LLC must also select a Registered Agent. The registered agent may be an competent adult person, or a company, that will be available from 9am to 5pm Monday through Friday at a physical address within the State of California (P.O. Boxes are not permitted) to receive official documents from the state and service of process should the LLC ever be sued. Any adult member of the LLC may serve as the agent of service of process so long as they have a physical street address, but oftentimes the members will prefer to use a professional company to: (1) alleviate the burden of being available and (2) limit the junk mail that will proliferate due to the public nature of the registered agents name and address.

Determine The LLC's Existence.
The vast majority of LLCs select a "perpetual" existence with no stated date of termination. There are rare circumstances where the members, however, will desire the LLC to have a more limited life (e.g., 5 years, 10 years, 30 years).

Have the Organizer Sign The Articles of Organization.
The LLC Organizer, typically one of the future members of the LLC or an attorney, must be authorized to sign the Articles of Organization to file the Articles of Organization. By signing the Articles of Organization as the "organizer", you are merely giving an oath that the information in the Articles is true and correct. There no real liability, on-going duty, or other significance attached with being the organizer.

Add a one-page attachment to your Articles of Organization
A one page Attachment to the Articles of Incorporation can provide for: (1) limited liability protection; (1) indemnification of the managers and officers of the LLC; and (3) notice to third parties as to which members or managers can bind the limited liability company.

Step 3. File the Articles of Organization with the California Secretary of State along with the $70 filing fee .

You must file the completed and signed Articles of Organization, with any attachments and the $70 filing fee (and $15 over the counter fee where appropriate) with the California Secretary of State in Sacramento. It’s a good idea to submit two original signed copies of the Articles of Organization so the California Secretary of State can send you back a file stamped copy.

Step 4. Wait for the California Secretary of State to either Approve or Reject your Articles .

Within 14 days of receipt of your Articles of Organization, the California Secretary of State will either send you a copy of your accept Articles of Organization, or a notice that your Articles of Organization has been rejected. If the Secretary of State rejects your Articles of Organization, they will tell you why in a letter so you can correct the deficiencies and resubmit.

Once approved, the California LLC will be required to file a Statement of Information with the Secretary of State ($25 filing fee), a Notice with the Commissioner of Corporations ($25+ filing fee), and to remit payment of the $800 minimum franchise tax to the California Franchise Tax Board. Please note that this $800 minimum franchise tax is only owed by a California LLC in the year of formation; a California Corporation is exempt from paying the $800 minimum franchise tax in its year of formation.

Step 5. Prepare the LLC Operating Agreement.

In California, every limited liability company is required to have an LLC Operating Agreement. Cal. Corp. Code. § 17050(a). Next to the Articles of Organization, the LLC Operating Agreement is the most important document in the LLC. Although California law does not set forth any required provisions for an LLC Operating Agreement, it does set forth default rules if certain provisions are neglected. For a multi-member LLC, the Operating Agreement should be around 50 to 80 pages, depending on the number of members. The LLC Operating Agreement for a single-member LLC (which includes an LLC owned by a husband and wife or domestic partners) tend to be only about 15 to 30 pages. Every LLC Operating Agreement, at a minimum, should set forth:

• Whether the LLC is Member Managed or Manager Managed;
• If Manager Managed, the method for choosing managers, their terms, duties, and salaries;
• If Member Managed, the method of choosing the officers, their duties and salaries;
• The number of members;
• The rights and duties of the members;
• How and when the members will be required to make contributions of cash, property, or services and other issues relating to capital structure;
• Maintenance of accounting records and delivery of financial reports and tax information to the members;
• How distributions of the profits, or losses, will be made to the members;
• How profit and losses are to be allocated among the members;
• Meetings of members and managers: method, time and place (may be eliminated for single member LLCs);
• Each members' voting interests and voting requirements;
• Disposition or assignment of ownership interests of members;
• The member's right to withdraw;
• The grounds for termination of a member's interest;
• The procedures to admit a new member;
• The restrictions on a member's right to sell or transfer membership interest;
• The duration or dissolution of the LLC; and
• Procedures for Amending the LLC Operating Agreement.

A custom operating agreement is very important and should be prepared by a California business attorney who knows what default rules can be amended in the LLC Operating Agreement. For example:

• Unless the LLC Operating Agreement provides otherwise, a California LLC Operating Agreement may only be amended with the unanimous written consent of all the members. However, a custom prepared LLC Operating Agreement can provide for a 51% majority, or a super-majority vote of 75%, which is a bit more practical. (Section 17103(b).)
• Unless the LLC Operating Agreement provides otherwise, each members voting rights are equal to the member's profit and loss interest. This is easily amended in an LLC Operating Agreement and one of the most often requested alterations.
• Unless the LLC Operating Agreement provides otherwise, a member who wishes to resign must provide a minimum of six months notice. Needless to say, our standard Operating Agreement has already amended this default rule.
• Unless the LLC Operating Agreement provides otherwise, non-members can vote the proxy of an absent member. Again, this is not what most members would expect or want.
• Unless the LLC Operating Agreement provides otherwise, creditors of an LLC member may have the unfettered right to inspect the LLC records and books. Can you imagine?

The bottom line is, a standard LLC Operating Agreement provided by a document service, or online service, or an attorney who is not familiar with the intricacies of the LLC can lead to very unnecessary and unintended consequences.

Step 6. Prepare a Consent of Spouse, if any of the members are married.

Step 7. Prepare and File IRS Form SS-4.

The LLC should apply for a Federal Taxpayer Identification Number (EIN) by completing I.R.S. Form SS-4. Most banks require a corporation and limited liability company to obtain an EIN as a prerequisite to opening a bank account even if the LLC will not have any employees. An EIN is to a corporation or LLC, what a Social Security Number is to an individual. To obtain an EIN, you will need to: (1) complete I.R.S. Form SS-4, (2) call the IRS and relay the information on the Form to the IRS representative, (3) write down the EIN given to you by the IRS, and then (4) fax or mail the completed SS-4 form back to the IRS. Completing the SS-4 form can be tricky, so you may want to employ the services of an attorney or accountant to review your completed SS-4 before you call and submit the information to the IRS. Detailed instructions on how to complete IRS Form SS-4.

When filing out IRS Form SS-4 to obtain your federal tax identification number, the most important question on the form asks you to check the box that best describes the type of entity you are seeking to establish a tax ID number for. To ensure your California LLC is taxed as a partnership (i.e., that there is no corporate level income tax), you must check the box for "partnership" in response to question 9a. If you formed a single member LLC, then partnership is not option - a single member LLC should check the box for "other" and write next to the box "disregarded entity," unless the member wants to be treated as a corporation for tax purposes.

We suggest you consult a tax accountant, or CPA, before completing IRS Form SS-4 as there may be situations where corporate tax status is advantageous for an LLC.

Step 8. Open a Bank Account.

Step 9. Have each Member of the LLC write an Investment Representation Letter.

Each member should prepare a letter that sets forth what they will be providing to the LLC (cash or services) in exchange for their membership interest. It is important that each of their letters state that they acknowledge that:

• The LLC will not have more than 35 members;
• They have a pre-existing personal or business relationship with the LLC, or one of its managers, or that they will be actively involved in the LLC;
• They are purchasing their interest in the LLC for their own account and not with the intent to sell it to a third party;
• That they there is no advertising or general (public) solicitation with respect to the sale of the LLC interests; and
• The amount of cash or value of services they will be providing in exchange for their percentage membership interest.

Step 10. Issue each member their LLC Membership Interest Certificate.

Step 11. Prepare a Membership Interest Ledger.

The Membership Interest Ledger should set forth the name and address of each member, the amount paid for their membership interest, and the date on which the membership interest was received.

Step 12. Prepare and File The Statement Of Information with the $20 Filing Fee.

Under California Corporation Code §17060, the LLC must file with the Secretary of State a Statement of Information (Form LLC 12) with the required $20 filing fee within 90 days of the filing of the Articles of Organization. The Statement of Information should not be filed until the LLC Operating Agreement has been prepared and executed. The Statement of Information includes:

• The name of the limited liability company;
• The LLC identification number provided by the Secretary of State;
• The state where the LLC was organized;
• The address of the LLC’s principal business office and mailing office;
• The name and address of the CEO, if any;
• The names and addresses of the managers (if manager managed), or of the members if member-managed;
• The name and address of the registered agent for service of process; and
• A statement of the nature company’s business activity

Step 13. Pay the $800 Minimum Franchise Tax to the Franchise Tax Board.

Every California Limited Liability Company (LLC) that is doing business in California and that IS NOT taxed as a corporation must pay an annual franchise tax of $800. The tax is paid to the California Franchise Tax Board and is due on or before the 15th day of the fourth month of the company’s taxable year.

Step 14. Prepare and File the Notice of Transaction with the California Commissioner of Corporations with the $25+ filing fee (if the LLC is manager managed).

The LLC must file a Notice of Transaction with the Commissioner of Corporations within 14 days of issuing membership interests.

Step 15. Prepare the Organizational Minutes.

Although not required, the member(s) should hold an "Organizational Meeting" of the members to adopt the LLC's Operating Agreement (LLC's) and to appoint any managers (if manager managed) and any officers.

Step 16. Determine the tax status of the LLC.

Subject to certain limitations, a limited liability company may be classified for federal income tax purposes as: (i) a sole proprietorship (disregarded entity for single member LLCs and husband and wife LLCs), (ii) a partnership, (iii) a C corporation, or (iv) an S corporation. Whether an LLC can select a particular federal tax classification depends on two facts: the number of members and the type of members.

Before deciding how your California LLC will be taxed, you should consult with your accountant or CPA because the election will have significant economic consequences, and may last for up to two years before it can be altered.

Step 17. Acquire any Necessary City/State Business Licenses and Permits.

Many cities and counties within the State of California require a business obtain a license to do business (Business License) within the city.

In addition, the State of California may require your business to have a license (e.g. contractors, brokers, agents, etc.).

Step 18. Apply for a Seller's Permit (If the LLC will be selling any taxable items) .

Step 19. Employees and Independent Contractors.

If your business will hire any independent contractors, make sure you file Form DE-542. If your business will be hiring any employees, make sure you file Form DE-1 within 15 days of paying that employee $100 or more, and immediately set up appropriate payroll procedures, post the required employee notices, and have an employee offer letter or an employment contract (if appropriate) prepared.

If you would like to retain the services of Melissa C. Marsh to form and organize a California LLC, to discuss whether a California LLC or California S Corporation will better suit your needs, or to prepare an LLC Operating Agreement, please call 818-849-5206 or Send us an Email.

© 2009 Melissa C. Marsh. All Rights Reserved.