Key Takeaways

  • California LLC law offers liability protection and potential tax advantages for members.
  • Forming an LLC in California requires filing Articles of Organization, appointing a registered agent, and creating an operating agreement.
  • The California Revised Uniform Limited Liability Company Act (RULLCA) governs LLCs formed or operating in California.
  • LLCs must comply with naming, record-keeping, and reporting requirements, including paying an annual franchise tax.
  • Additional regulations include requirements around publication, foreign LLC registration, and dissolving an LLC.

What Is an LLC?

The California LLC law includes any regulation around forming a limited liability company (LLC) in the state of California. This type of business includes members who own the company and have limited liability on a personal level for any court judgments or debts against the company. A limited liability company can provide tax benefits to its members, such as allowing a member to report losses and profits of the LLC on a personal tax return. The California Corporations Code includes laws that govern all LLCs operating within the state.

Laws on Formation

An LLC in California can include one member or more than one member, which is the same regulation that exists in all states. When the members of an LLC file the Articles of Organization with the Secretary of State in California, the LLC is legally formed. LLC laws in California also mandate that every LLC in the state must have an operating agreement in effect. The law also requires that a notification is sent to all LLC members, informing them of the annual franchise tax that is imposed on the LLC.

Additional Formation Requirements in California

In addition to filing Articles of Organization with the California Secretary of State, LLCs must pay a $70 filing fee and submit a Statement of Information (Form LLC-12) within 90 days of formation. This statement must be updated every two years. LLCs that plan to operate under a different name from their legal business name must file a Fictitious Business Name (FBN) statement in the county where they do business.

If an LLC has more than one member or intends to be taxed as a corporation, an Employer Identification Number (EIN) from the IRS is required—even if the LLC has no employees. An EIN is also needed to open a business bank account in the company’s name.

Foreign LLCs Operating in California

Out-of-state LLCs that intend to do business in California must register as a foreign LLC by filing an Application to Register (Form LLC-5) and paying the appropriate fee. California defines “doing business” broadly, and it can include transacting sales, holding property, or maintaining a physical presence in the state.

Foreign LLCs must also designate a California-based registered agent and comply with annual franchise tax and reporting requirements, just like domestic LLCs.

What Is an Operating Agreement? 

An LLC's operating agreement includes details about the operations of the company and how it will be run. It serves as a contract among all members.

The operating agreement could include details about:

  • How losses and profits are shared
  • How the LLC plans to add any new members
  • How the LLC will be managed

Importance of Customizing an Operating Agreement

While California does not require an operating agreement to be filed with the state, having a detailed and customized agreement is essential. A well-drafted operating agreement can help prevent disputes by clarifying:

  • Capital contributions and ownership percentages
  • Voting rights and procedures
  • Profit distributions
  • Withdrawal and buyout procedures
  • Succession planning and dissolution terms

Without an agreement, the LLC will be governed by the default rules under the California Revised Uniform Limited Liability Company Act (RULLCA), which may not reflect the members' preferences. 

Naming Laws

Any LLC operating in California must have a business name that includes the words limited liability company or one of the accepted abbreviations (LLC or L.L.C.). The name must be unique and can't be too similar to or exactly the same as another business currently registered with the state of California. Laws restrict LLC members from forming companies with names that could mislead people about the LLC's purpose.

For example, an LLC cannot use specific works in its name. These words include:

  • Corporation
  • Bank
  • Trust
  • Insurance company 

Laws on Record-Keeping

LLCs are also required to maintain specific records for as long as they remain in business.

Some of these records include:

  • A copy of the articles of organization
  • Member name(s) and address(es)
  • A copy of the operating agreement
  • Accounting documents with all financial contributions from every member
  • A copy of the business tax documents
  • At least six years of financial statements 

A registered agent is another requirement for every LLC operating in California. This registered agent must reside in California and receive authorization from the members of the LLC to receive court and legal documents on behalf of the company. Another recordkeeping law in California requires an LLC to file an annual statement. The statement should include the name of the LLC, along with its operating status, member name(s) and address(es), and the name of the registered agent.

Annual Franchise Tax and Fee Obligations

All LLCs in California must pay an annual franchise tax of $800 to the California Franchise Tax Board (FTB), regardless of income or business activity. This tax is due by the 15th day of the 4th month after the beginning of the LLC’s tax year. Newly formed LLCs are exempt from the $800 tax for their first taxable year if they register in 2021 or later.

In addition to the flat tax, LLCs with gross receipts over $250,000 must pay an additional LLC fee, which is calculated on a sliding scale based on total income derived from California sources. 

LLC Liability

If the company has any obligations, debts, or court judgments, the members of the LLC will not be held personally responsible or liable for those amounts, just because they are members. However, if an LLC member holds financial control of a company and their personal finances are not separate from the finances of the business, that member could be held personally responsible for court judgments and debts against the business. This situation is referred to as alter-ego liability. If an LLC member chooses to personally underwrite any obligation or debt, they could also be held personally liable for these amounts.

All LLCs operating in California must hold sufficient insurance coverage, which includes insurance against liability. The amount that is sufficient depends on the type of business and industry.

Revised Uniform Limited Liability Company Act

On Jan. 1, 2014, a new law regarding LLCs went into effect in California. The law applies to newly formed LLCs, as well as those that are already registered in the state. This LLC law, called the California Revised Uniform Limited Liability Company Act (RULLCA), replaces an existing law that had been in effect since 1994. Any actions taken by the members or managers of an LLC after Jan. 1, 2014, are now governed by RULLCA. 

Dissolving a California LLC

To legally dissolve a California LLC, members must follow specific procedures, which include:

  1. Voting to dissolve, in accordance with the operating agreement or state law
  2. Filing a Certificate of Dissolution (Form LLC-3) and Certificate of Cancellation (Form LLC-4/7) with the Secretary of State
  3. Settling all debts and obligations
  4. Distributing remaining assets to members
  5. Notifying tax authorities and finalizing any outstanding tax returns

Failure to formally dissolve an LLC may result in ongoing franchise tax liability and penalties.

Frequently Asked Questions

1. Do I need a lawyer to form an LLC in California?

No, but consulting a lawyer can help ensure compliance with California LLC law and provide customized legal guidance, especially when drafting an operating agreement.

2. How long does it take to form an LLC in California? 

Standard processing by the Secretary of State takes 1–2 weeks, but expedited services are available for an additional fee.

3. What is the difference between a domestic and foreign LLC in California? 

A domestic LLC is formed in California. A foreign LLC is formed in another state but registers to do business in California.

4. Can a single person form an LLC in California? 

Yes, California allows single-member LLCs with the same protections and obligations as multi-member LLCs.

5. What happens if I don’t pay the annual franchise tax? 

The LLC may fall out of good standing, incur penalties, and be subject to administrative dissolution by the state.

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