With High Taxes, Is California Still Attractive For LLC Incorporation?
There are a number of popular states for small businesses to incorporate in, such as Delaware and Nevada. What all these ‘business friendly’ states share as a commonality is that they offer taxation benefits to incorporated companies, without the need for the owner to live or the business to be based here.
Strangely, California is similarly attractive for LLC incorporation despite its comparatively high levels of taxation. Indeed, 48.8% of California’s private workforce is employed by small businesses in this state. This article will explore the reasons California is attractive for LLCs despite the high levels of taxation, before detailing how you can incorporate here.
Benefits of California
Pass-Through Taxation
It is an inherent benefit of LLCs to be subject to a form of taxation called ‘pass-through’ taxation. All this means is that it is not the business’s profits that are taxed, but the personal income the owners receive from this sum. The owner is then required to pay income and self-employment taxes on the salary they pay themselves from the LLCs profits.
Without this protection, businesses would be required to pay the ‘double taxation’ that is standard for California corporations, with both the business’s net profits and the owner’s income being taxed.
Limited Liability Protection
Limited liability protection is another inherent characteristic of LLCs. It describes the asset separation that this business structure affords. Furthermore, a business owner’s personal assets cannot be pursued by creditors for business debts as the two are made separate.
While corporations also offer limited liability protection, this structure is complicated to establish and is generally not recommended for smaller businesses anyway.
Flexibility
Another benefit of this business structure is the small number of restrictions concerning an LLC’s structuring of its members, managers and owners. Furthermore, LLCs in California are able to be either single or multi-member.
How To Form An LLC In California
Choose A Name
The first step associated with the formation of your new LLC is choosing its name. The name you decide upon must be compliant with the naming regulations of California (e.g. that the name must require “limited liability company” in any of its forms), and it is an added benefit if it is memorable and original.
The second check you must verify before settling on your new name is that it is unique in the state of California. What this means is that the name is available in this state (i.e. it is not already in use by another business). This can be quickly and easily checked on the State of California’s website.
Nominate a Registered Agent
Incorporated businesses are required to appoint a registered agent for themselves. This is a third party that handles important documents (such as legal summons, tax bills, lawsuits etc.) on the company’s behalf. Put simply, they are the medium of communication between your company and the state.
They can be an individual or a completely separate company that specializes in registered agent services.
File Articles of Organization
Now comes the time to register your new company in the state of California. To do this, your LLC must fill out and submit Articles of Organization (Form LLC-1) to the Secretary of State. Fortunately this form can be filed by mail, online or in-person – so there is some flexibility afforded there.
File Initial Statement of Information
All California LLCs are required to file an Initial Statement of Information (Form LLC-12) with the California Secretary of State within 90 days of formation. This can be done online, in-person, or by mail.
Create Operating Agreement
The final document that must be endured in order to finalize the creation of your business is the operating agreement. In the state of California this document is mandatory, though this is not the same in several other states.
All this document stipulates are the proceedings that should occur with regards to the LLC’s ownership and management. It ensures that all major players within the company are of the same mind moving forwards in order to prevent arguments in future.
Get an EIN
The final step involves an application for an EIN to the IRS. This is the business equivalent of a social security number and just enables the IRS to connect a business to their tax liabilities.
Final Words
As you can see, there are numerous benefits to starting your LLC in California, and the process to incorporate there is quite straightforward too. For more information on how to start a california llc, please see the attached link.
