If you are starting a new business or have decided to take your San Diego based business and convert it to an LLC, you may be intimidated by the process, but trust me it is not that hard. Literally anyone can do it. There are some perils to look out for however, so I created this step by step guide to help you through the process. *Note: While legally anyone can form an LLC, it is advisable to seek the advice of an attorney and a tax professional to become fully aware of potential legal and tax implications.

Back to our step by step guide. So after deciding you do indeed want to form an LLC, first you are going to need a name for your LLC.  You must choose a name for your LLC that is not in use for your business. It cannot be the same as, or too similar to, an existing name already registered by the California Secretary of State (SOS). Also, it cannot be misleading to the public. Names may be checked for availability by searching the California Secretary of State’s business name database. You can reserve a name if you are not ready to pull the trigger, but generally speaking, this is unnecessary if you plan to file for your LLC soon.

Under California law, an LLC’s name must end with Limited Liability Company or the abbreviations LLC or L.L.C. The words Limited and Company may be abbreviated to Ltd. and Co. The LLC’s name can’t contain the words insurer, insurance company, bank, trust, etc., so you must be careful when selecting your name. The SOS website is going to be your friend and they have some great guides here.

Next, You will need to go back to the SOS website and file your Articles of Incorporation (Form LLC-1). You can also file online here, which is even easier. The form or online registration is fairly straightforward. You will need to insert the company name, principal address, and some other general information. You will have to make a couple of choices of importance however:

Registered Agent: The LLC will need a registered agent who agrees to receive legal papers for the LLC. The registered agent cannot be the LLC, but it may be a Member or Manager of the LLC. Essentially, any California resident can be appointed to be a Registered Agent provided they are over 18 years of age and have a California mailing address (not a P.O. Box). Be careful here if you choose to work with an online provider as they are known to charge recurring fees for acting as the Registered Agent, which is fair game, but is also a waste of money in my humble opinion. 

Member or Manager Managed LLC: Next you will need to decide if you want your LLC run by Members or a Manager. Most small multi-member LLCs choose to be managed by the Members. However, LLCs can appoint a manager or managers to manage the LLCThis gives control of some key business decision over to Managers, who may or may not also be Members of the LLC. Ultimately it is a choice of how much control is going to be put into the hands of the Membership, and should be carefully deliberated over before making a decision. If you are the sole member of the LLC then the choice is a lot easier. 

Now that you have hopefully completed the form you need to mail it to the SOS or pay online if you are filing through the SOS website. The current registration fee for the Articles of Incorporation is $70. Now you can sit back and wait for the SOS to process your application with a cold beverage, or many as processing times wildly vary depending on how you submit the application and the current backlog at the SOS.

In the interim, you can begin working on your Operating Agreement. An Operating Agreement is essentially the rules, bylaws and procedures, your LLC will run under and abide by. An Operating Agreement is optional because if the LLC does not have one then it will be governed by California’s default rules. I have seen many litigation cases where the default rules come into play – either because of a lack of an Operating Agreement and also from poorly drafted, DIY Operating Agreements – and the outcome is usually a lot more expensive than hiring an Attorney to draft one for you. This is a critical document to your business, particularly when multiple members or complex financial decisions or distributions are involved.

When the SOS processes your application, assuming there were no problems, they will send you back a stamped and approved copy! Congrats, you are almost there! Next, within 90 days of receipt you must file a Statement of Information with the SOS along with a fee currently set at $20. The Statement of Information asks for information such as the LLC’s name and California Secretary of State file number; the name and address of the LLC’s agent for service of process; the address of the LLC’s principal office; the name and addresses of any manager or managers and CEO, if any; the name and address of each member; and the LLC’s principal business activity. Pretty straightforward information, provided you sorted all these issues out while filing the Articles of Incorporation and hopefully in drafting an Operating Agreement.

When this is complete you should be able to file for a Federal Tax ID (EIN) and open a business bank account. You may also need to get various business licenses from your local City or County government as well. For more information on the City of San Diego’s requirements click here. 

A few other things to note: LLC’s carry a MINIMUM annual franchise tax to the Franchise Tax Board of $800. The $800 scales up once a business has reached a net income of over $250,000.00 in a given year. This is separate from any other taxes or tax liability the LLC may owe. Again, it is highly advisable to seek a tax professionals guidance to see if an LLC is right for you and what tax implications may come. 

The Statement of Information must be refiled every two years, or in the interim period if anything on the form changes within your business (i.e., change of address, resignation of member, etc.). 

So hopefully now you have all the tools to set up your LLC. Feel free to call Dennaoui Law Firm with any questions or contact us via email: [email protected].

Best,

Frank Dennaoui, Esq.