Richard Keyt has practiced law for more than twenty years. During this twenty year period, Richard has formed thousands of limited liability companies (“LLC”). However, he has seen many people form their own LLCs without consulting an attorney. This can create headaches down the road for the do it “yourselfers.” Often times, the headaches become more like migraines, very painful (from an emotional point of view) and very debilitating (from an economic point of view). A business migraine can lead to expensive litigation and acrimony between the former members of the LLC. However, these problems can be avoided by using our California LLC formation service. But for those who choose to go it alone and brave the waters, this article provides you with detailed instructions on how to form your California LLC.
Step 1 — Choose the Name of Your Limited Liability Company
Every California LLC must have a name and this name must be found in the Articles of Organization (“Articles”) of the LLC. The name must be followed by one of the following designations “limited liability company,” “LLC,” or “L.L.C.” The LLC cannot use the words “bank,” “trust,” “trustee,” “incorporated,” “inc.,” “corporation,” “corp.,” “insurer,” or “insurance company.”
The California Secretary of State could reject the name if the name is similar to an existing California company or a company registered to do business in California. The standard is whether the name“…is likely to mislead the public and shall not be the same as, or resemble so closely as to tend to deceive.” See Cal. Corp. Code § 17052(c). A prospective LLC may not choose a name under this standard that is:
- The name of any entity or LLC that has filed Articles with the California Secretary of State;
- The name of any foreign entity or LLC registered to do business in California;
- Names that either domestic LLCs or foreign LLCs have reserved through the California Secretary of State
There is an exception to this rule. A prospective LLC can obtain the consent of the existing company. If the prospective LLC obtains consent from the existing company, the California Secretary of State must still find that the use of the existing name by the prospective LLC “is not likely to mislead the public.” See Cal. Corp. Code § 17052(c)(3).
a. Keep in Mind the Importance of Selecting a Name
Keep in mind the name of the LLC is a very important decision. Many people do not give it the consideration it deserves. Federal and state laws provide protection for trademarks and tradenames. However, federal and state laws will not give protection to all trademarks and tradenames. These laws will not protect trademarks and tradenames that are considered generic or descriptive.
A generic tradename would simply identify the product or service. If I opened a restaurant, and wanted to call my restaurant Bar & Grill, LLC, I could not receive trademark protection under either federal or state law. I, also, could not open a restaurant called Rick’s Bar & Grill, LLC as this would be considered descriptive trademark.
Along with receiving little federal and state trademark protection, generic and descriptive trademarks make it difficult to establish and protect any brand. Let us return to my example of above with the restaurant. I open my Rick’s Bar & Grill, LLC. My bar and grill becomes known worldwide for having the finest food and drinks a place can offer.
My competitor, Poacher, down the street recognizes how successful my Bar & Grill has become and decides to change the name of his restaurant to Rick’s Bar & Grill as well. The consumer may not know the difference between the two establishments, because Poacher has copied everything from the items on my menu to the sign outside my restaurant. Some consumers, who would have patronized my restaurant, now eat and drink at Poacher’s restaurant. These consumers have a terrible experience at Poacher’s restaurant. The food and drinks are far from the finest a place can offer and the service is terrible. These consumers leave vowing never to return to Rick’s Bar & Grill again. My brand has now lost value, and the reputation of my business has suffered as a result. Most importantly I have no legal recourse, because my name selection used a generic and descriptive term that the law does not provide protection for.
The example above illustrates the importance of selecting a unique name. It protects the business and its products from infringers down the line and can create a unique and innovative brand that consumers will use to identify the goods or services you are offering them.
Step 2 — Preparing the Articles of Organization
The Articles of Organization (“Articles”) must contain the name of the LLC. The name must be followed by one of the following designations listed in Section 1 of this article. The California Secretary of State must approve the name of the LLC subject to the standard set above in this article.
The Articles must contain 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.” See Cal. Corp. Code § 17051(a)(2).
The Articles must list an agent for service of process. If the agent for service of process is an individual, the articles must contain both the name of the person and the person’s address. If the agent for service of process is an entity, then only the name of the entity needs to be listed.
The California Secretary of State provides fill in the blank forms that the public can use when preparing the Articles of Organization. These forms can be found on there website at the following link.
Step 3 — Filing the Articles of Organization with the California Secretary of State
You may file the LLC’s Articles once you have prepared them. An individual must file Articles with the California Secretary of State. The individual filing the Articles does not need to be a member or manager of the limited liability company. Before or after filing the Articles, the members of the company must enter into an operating agreement. See Cal. Corp. Code § 17050(a).
The operating agreement is a contract between the members, managers (if any), and the limited liability company that governs the affairs and the relationship among the parties. It is a very important document. Some important provisions every operating agreement must contain are:
- Who will be the members of the company?
- What percentage of the company will each member own?
- How will the profits and losses of the company be allocated?
- Under what conditions will a company be required to make distributions to the members?
- Who has authority to bind the company on contracts and other obligations?
There are many other examples of important provisions an operating agreement should contain. A written operating agreement provides evidence of these facts should a dispute arise between members. Without a written operating agreement, members would be forced into costly litigation to resolve these issues.
The limited liability company comes into existence the date a person files the Articles of Organization with the California Secretary of State. See Cal. Corp. Code § 17050(c).
There are two ways a person can file Articles of Organization with the California Secretary of State. The first method is through the mail. The Articles of Organization should be mailed to the following address: Secretary of State, Document Filing Unit, P.O. Box 944228, Sacramento, California 94244-2280. The California Secretary of State charges a $70 filing fee for Articles of Organization filed through the mail. The check or money order should be made payable to the California Secretary of State.
The second way to file the Articles of Organization is by hand delivery. The Articles of Organization should be hand delivered to the following address: 1500 11th Street, 3rd Floor, Sacramento, California 95814. The California Secretary of State charges a $70 filing fee for Articles of Organization filed by hand delivery, but charges a “special handling fee” of $15 in addition to the standard filing fee. Therefore, the total cost to file by hand delivery is $85. These fees need to be paid in two separate checks. You should write one check payable to the California Secretary of State for $70 and another check payable to the California Secretary of State for $15.
The Secretary of State charges a special handling fee of $15 for Articles that are hand delivered to their office. The special handling fee should be included within a separate check when filing. All checks should be made payable to the California Secretary of State.
Please note by filing the Articles of Organization with the California Secretary of State creates a new tax obligation for the newly formed California limited liability company. The minimum franchise tax payable to the state of California will be $800, but could be more depending on the limited liability company’s gross receipts. For more information on the California franchise tax see our article by clicking on this link.
Step 4 — Completing the Statement of Information Form
After completing the Articles, the newly formed Company has ninety days to file a Statement of Information with the California Secretary of State. This statement must contain the following information:
- The name of the limited liability company;
- The file number given to the limited liability company by the California Secretary of State;
- The name and address of the agent for service of process (corporate agents only need to provide their name);
- The California address where the company maintains its books and records;
- The mailing address of the limited liability company if different from the California address; and
- The limited liability company’s principal business
The California Secretary of State has a fill in the blank form to be used as the Statement of Information. The form can be found by clicking on this link. There is a $20 filing fee that must be included with the Statement of Information form. California will assess a fine of $250 for any Statement of Information filed beyond the due date. When completed the form can be mailed to the following address: California Secretary of State, Statement of Information Unit, P.O. Box 944230, Sacramento, California 94244-2300. The Statement of Information can, also, be hand delivered to the following address: 1500 11th Street, Sacramento, California 95814.
A Final Word
Creating your own business can be both exhilarating and stressful. Why not hire an expert help you through this process and reduce some stress? At KEYTLaw we have formed many companies and have a wealth of experience that you can draw from. We will set up your new California limited liability company up the right way to give you the peace of mind you need to succeed. We wish you the best of luck with your new company, and should choose KEYTLaw to help you form your company we look forward to working with you!