CA LLC Formation

How Do I Open a Bank Account for My New California LLC?

Question:  I just formed a new California limited liability company.  How do I open a bank account in the name of the LLC.

Answer: You need two a minimum of items to open a bank account in the name of your new California LLC.  Give the following to the bank:

  • Required:  Copy of the Articles of Organization approved by the California Secretary of State.
  • Required:  Give the bank the LLC’s federal employer identification number (the “EIN”).  If you do not have an EIN for the LLC and your LLC is taxed as a disregarded entity (a single member LLC) and it does not have any employees you can give the bank your social security number.
  • Optional:  Some banks require a copy of the an Operating Agreement signed by all of the members of the LLC.
By | 2016-07-03T16:28:02+00:00 July 3rd, 2016|Categories: CA LLC Formation, FAQs, How Do I|0 Comments

How Do I Prove I am a Member of a California LLC?

Question:  Last year my friend and I formed a California limited liability company by filing Articles of Organization with the California Secretary of State.  He opened a bank account on which he is the sole signer.  Although both of us have been providing services on behalf of the LLC my “friend” now says that he owns 100% of the LLC.  How do I prove I own 50% of the LLC?

Answer:  Unfortunately your problem is one we hear about a lot.  It is a problem that can easily be avoided if all the members of a newly formed LLC would sign an Operating Agreement immediately after forming the LLC.  One of primary reasons to sign an Operating Agreement is because it identifies all the members and states the percentage of the LLC owned by each member.  The lack of a good Operating Agreement leads to member disputes and conflict.

The Articles of Organization of a California limited liability company does not contain the names of the members (owners) of the LLC so it is not helpful.  However, California law requires that the members of a newly formed California LLC file a Statement of Information with the California Secretary of State within 90 days of the date the LLC was formed.  If you or your friend filed this document it would be evidence that you are a member of the LLC.  Read “California LLC Statement of Information.”

If your LLC filed a partnership tax return or an S corporation tax return the names and percentage ownership of the LLC should be set forth in the tax return.  If you friend filed the tax return and didn’t give you a copy of the return your friend may not give you a copy of it now.

If you can’t resolve the situation your only recourse may be to file a lawsuit and ask the court to find that you are a member of the LLC.

By | 2016-07-03T16:52:53+00:00 April 3rd, 2016|Categories: CA LLC Formation, FAQs, How Do I, Member Disputes, Members|0 Comments

Problem if Sole Member is Not the Organizer of a CA LLC

Question:  I am to be the sole member of a new California limited liability company, but I did not sign the Articles of Organization as the organizer of the LLC.  Is that a problem?

Answer:  Maybe!  California Corporations Code Section Section 17704.01(a) states:

If a limited liability company is to have only one member upon formation, the person becomes a member as agreed by that person and the organizer of the limited liability company.

If the organizer of a single member LLC is the sole member then everything is good.  However, if the would be sole member of a single member California LLC (the “Prospective Member”) is not the organizer who signed the Articles of Organization filed with the California Secretary of State then:

  • The Prospective Member will never be a member of the LLC unless and until the Prospective Member and the organizer agree that the Prospective Member is the sole member.  The agreement should include the date the Prospective Member becomes a member and any conditions required by the organizer.
  • How does the sole member prove that the organizer agreed that he/she/it could be the member?
  • A prudent Prospective Member will obtain a written statement signed by the organizer that states that the Prospective Member is the sole member of the LLC as of a specified date.  Recommendation:  The Prospective Member must get a written statement from the organizer.  If the Prospective Member does not obtain a written statement from the organizer, how can the Prospective Member prove he/she/it is the sole member if challenged in court?

Warning to Entities and Trusts:  When a California LLC is to be owned by a sole member that is an LLC, corporation, partnership or trust most of the time the organizer is a person rather than the sole member.  To avoid the California Corporations Code Section Section 17704.01(a) problem the sole member should be the organizer that signs the Articles of Organization.  The California Secretary of State says:

  • If Form LLC-1 is signed by an entity, the person who signs on behalf of the entity should note their name and position/title and the entity name. Example: If a limited liability company (“Smith LLC”) is the organizer, the signature of the person signing on behalf of the Smith LLC should be reflected as Joe Smith, Manager of Smith LLC, Organizer.
  • If Form LLC-1 is signed by a trust, the trustee should sign as follows: ___________, trustee for ___________ trust (including the date of the trust, if applicable). Example: Mary Todd, trustee of the Lincoln Family Trust (U/T 5-1-94).

Practice Pointer:  If the organizer is not the Prospective Member the best way to solve this problem is to: (i) have a statement at the end of the LLC’s Operating Agreement that says the organizer authorizes the Prospective Member to be the sole member of the LLC as of the date the Articles of Organization were filed with the California Secretary of State, and (ii) have the organizer sign the Operating Agreement immediately under the statement.  This is something we do routinely when we know that the sole member was not the organizer.

By | 2016-12-13T21:20:06+00:00 August 2nd, 2015|Categories: CA LLC Formation, FAQs, Members|0 Comments

Must a CA LLC Formed before 2014 Amend Its Articles of Organization?

Question:  My California limited liability company was formed before January 1, 2014, the date California’s new LLC act became effective.  Do I have to amend the LLC’s Articles of Organization filed with the California Secretary of State?

Answer:  If a manager managed California LLC was formed before 2014 and its Articles of Organization do not state that the LLC is managed by a sole manager or by more than one manager, the LLC must amend its Articles of Organization and specify the type of management.  California Revised Uniform Limited Liability Company Act Section 17702.01(b)(5) states “If the limited liability company is to be manager-managed, the articles of organization shall contain a statement to that effect.”

To amend your California LLC’s Articles of Organization file one of the following documents with the California Secretary of State:

Warning:  If you want your California LLC to be manager managed the Operating Agreement must also contain certain manager managed language.  Stated another way, a California LLC is member managed unless the following two conditions are satisfied:

  1. The Articles of Organization state the the LLC is manager managed, and
  2. The Operating Agreement contains the statutorily required manager managed language.

See California RULLCA Section 17704.07(a).

By | 2015-02-16T17:13:07+00:00 January 14th, 2015|Categories: Articles of Organization, CA LLC Formation, CA LLC Statutes, FAQs, Formation Issues|0 Comments

California LLC Naming Rules

Question:  What are the rules / statutory requirements for naming a new California limited liability company?

Answer:  The name of a CA LLC:

(1) must not be a name that is “likely to mislead the public” and must be distinguishable in the records of the California Secretary of State from the name of an existing LLC or an LLC name that has been reserved by another party.  Note: Names are not considered distinguishable if the only difference is a limited liability company ending;

(2) must include the words Limited Liability Company, or the abbreviations LLC or L.L.C. The words Limited and Company may be abbreviated to Ltd. and Co., respectively;

(3) may not contain the words bank, trust, trustee, incorporated, inc., corporation, or corp.; and

(4) must not contain the words insurer or insurance company or any other words suggesting that it is in the business of issuing policies of insurance and assuming insurance risks.

If the Articles of Organization for a new LLC has a name that does not satisfy all of the above CA LLC naming requirements the California Secretary of State will reject the Articles of Organization.

See California Corporations Code Section 17701.08 and 17708.05.  An LLC name is reserved pursuant to California Corporations Code Section 17701.09 using the Secretary of State’s Name Reservation form.

California LLC or California Corporation?

Question:  Should I form a California LLC or a California corporation?

Answer:  The California limited liability company is usually a better entity than the California corporation or limited partnership.  The LLC is a hybrid of the corporation and the limited partnership.  Years ago some lawyers who understood that the corporation and the LP each had some bad characteristics created a new type of entity that took only the best characteristics of the corporation and LP and added those characteristics into the new type of entity called the limited liability company.

The California LLC has fewer formalities than the California corporation.  For example, California corporations must hold annual meetings of shareholders and and directors and the meetings should be documented with minutes.  California LLC law does not require the members or managers of a California LLC to have annual meetings.

If somebody says you should not form a California LLC because California LLCs pay more California state taxes that California LLCs disregard that statement.  Yes, there can be a difference is California state taxes paid by an entity taxed as a corporation vs. an entity taxed as a sole proprietorship or a partnership.  A California LLC can be taxed one of the following four ways for federal income tax purposes:

  • a sole proprietorship if the LLC has one owner or two owners who own their interests in the LLC as community property.
  • a partnership if the LLC has more than one owner.
  • a C corporation.
  • an S corporation if it satisfies all eligibility  requirements.

Thus, if the amount of income your entity will generate is a California state tax issue, then you can have your California LLC taxed as a C corporation or an S corporation (if eligible) to get California corporate tax treatment or as a sole proprietorship or partnership to get non-corporate California state tax treatment.

By | 2015-02-19T22:17:33+00:00 October 6th, 2014|Categories: CA LLC Formation, FAQs, LLCs & Corporations|0 Comments

New IRS Procedure to Get EIN for an LLC Owned by a Nonresident Alien

Question:  I am a not a U.S. citizen and I live outside the U.S., aka a “nonresident alien.”  I formed a limited liability company in the U.S.  How do I get a federal employer id number (EIN) for my LLC?

Answer:  You can get the EIN one of two ways:  the easy way or the not so easy way. Before January of 2014 we could get an EIN for an LLC we formed for a nonresident alien if the nonresident alien completed and signed an IRS form SS-4 that designated my legal assistant as a third party designee authorized to contact the IRS and get the EIN.  My legal assistant would call the IRS international EIN number, fax the SS-4 to the IRS agent and spend about 45 minutes on the phone, but at the end of the call the IRS would give my legal assistant the EIN.

Beginning in January of 2014, the IRS canned that procedure.  Now a company of any type owned by a nonresident alien gets an EIN for the company by one of the following two methods:

You should be able to get the EIN for the new LLC by using the IRS’
online wizard here:

Easy Way: If the nonresident alien has an IRS issued International Taxpayer Identification Number (ITIN), the nonrsident alien can obtain the EIN in a 5 – 10 minute data entry session using the IRS’ online EIN wizard.  After submitting all of the information the website will display the EIN.  Be sure to print the page with the EIN and keep it in a safe place.

Hard Way:  If the nonresident alien does not have an ITIN then he or she must complete and sign an IRS form SS-4 and fax or mail it to the IRS.  Faxing the SS-4 to the IRS is the better method because the IRS will fax the EIN to the applicant in approximately four business days vs. three to four weeks if the SS-4 is mailed to the IRS.  Prepare, sign and fax the IRS form SS-4 to the IRS at 859-669-5760.

To get a partially completed IRS form SS-4 for an LLC and my detailed instructions on how to fill out the form read my article called “How to Complete IRS Form SS-4.”  Be sure to delete all the text at the bottom of the form in the Third Party Designee Fields and insert your name, phone number and fax number at the bottom of the form.

By | 2017-10-05T10:38:16+00:00 June 5th, 2014|Categories: CA LLC Formation, FAQs, How Do I, Tax Issues|0 Comments

Do I Need to Reserve a Name for My New California LLC?

Question:  I intend to file Articles of Organization with the California Secretary of State to create a new California LLC.  Should I reserve the LLC’s name with the California Secretary of State?

Answer:  Almost always no because:

  • If the name is available for the LLC it has been available from the beginning of time up to the moment the California Secretary of State grants the reservation.
  • The fact the California Secretary of State reserves the name of a to be formed LLC does not mean the name can actually be used by the to be formed LLC.  Although nobody else can use the reserved name for a California entity while the reservation is active you won’t know if the Secretary of State will actually allow the LLC to be formed with the name until you file the Articles of Organization and the Secretary of State approves it.
  • The reservation is expires after 60 days.
  • Its a waste of $10.

If you do want to reserve a name for your new California limited liability company just follow the instructions on and file the California Secretary of State’s Name Reservation Request form.

By | 2015-02-19T20:43:40+00:00 February 25th, 2014|Categories: CA LLC Formation, FAQs|0 Comments

How Do I Reserve a Name for a to-be Formed California LLC?

Question: I plan on forming a new California limited liability company in the near future. How do I prevent somebody from taking my desired name before I form the LLC?

Answer: Reserve the desired name with the California Secretary of State. When approved, you will have the exclusive right to use the name for a California LLC for 60 days. Before filing a name reservation you must review the California Secretary of State’s  LLC name rules and then search its business search database for an existing LLC name that is the same or similar to your desired name. If you find a “good” name then file a name reservation on the CSOS’ Name Reservation Request Form.

The California Secretary of State will reject a name reservation if the name is “likely to mislead the public” or not “distinguishable” from an existing LLC name or unexpired name reservation.  The name rules are set forth in California Corporations Code Section 17701.08:

Warning:  Even if you reserve the name the California Secretary of State may reject the Articles of Organization because of the name.

Bottom line:  Review the naming rules and search your desired name on the CSOS’ business search database, but don’t waste the time or money to reserve the name unless your sole purpose is to prevent somebody else from using your desired name.

By | 2016-12-13T21:20:16+00:00 January 11th, 2014|Categories: CA LLC Formation, FAQs, How Do I|0 Comments

Why Form an LLC?

Question: I understand that if I form a limited liability company to operate my business and I am the only person who provides services on behalf of the business that I can be sued and be liable for my acts or omissions that cause harm to third parties. Instead of forming an LLC, can’t I just load up on insurance and not form an LLC to operate my business?

Answer: Yes, but it could be a costly mistake. When you operate a business, commercial insurance is always your first line of defense. Your business should never operate without appropriate insurance coverage. Consult with several experienced business insurance agents and get their advice as to the type of insurance and the coverage amounts that are appropriate for your particular business. Always buy as much insurance as you can afford of the type that is appropriate for your specific type of business.

You operate a business through a limited liability company because it is your second line of defense against things that can go wrong with the business. What if you have insurance and the insurance coverage is denied? What if a plaintiff gets a judgment that exceeds the amount of insurance coverage? If you don’t form an LLC to operate your business and a plaintiff gets a judgment that exceeds the amount of your insurance coverage against you as the owner/defendant, all of your personal assets are at risk and could be lost

Fundamental Fact of Business Life: Without an LLC to operate your business, you are 100% liable for every thing that goes wrong. Do you really want to be in that position and have all of your life savings at risk? It’s hard to predict how liability may arise, but if you operate the business through an LLC, the general rule is the owners are not liable for the debts or obligations of the LLC. Wouldn’t you rather start from the position that you are not liable for anything (except your own acts and omissions) instead of the position that you are liable for everything?

Bottom Line: I believe it is foolish to operate a business without adequate insurance coverage and without operating the business through a limited liability company or a corporation.

By | 2016-12-13T21:20:16+00:00 January 9th, 2014|Categories: Asset Protection, CA LLC Formation, FAQs, Why People Need an LLC|0 Comments

How Do I Get a Federal Employer Identification Number for an LLC?

Question: I just formed my limited liability company. I know I should get a federal employer identification number (an EIN) for the LLC to open a bank account and to give to 1099 contractors and vendors. How do I get an EIN form my LLC?

Answer: The IRS makes it very easy to get an EIN with its online wizard. In a 5 – 10 data entry session a person connected with the LLC can get the EIN by answering a series of questions posed by the IRS’ website wizard. Apply for an Employer Identification Number (EIN) Online.

By | 2016-12-13T21:20:16+00:00 January 5th, 2014|Categories: CA LLC Formation, FAQs, How Do I|0 Comments

If My New Business Will Have Start Up Losses, Should It be an LLC or an S Corporation?

Question: I am considering starting a new business and I anticipate that it will produce losses, rather than profits for the first few years. Should I form a limited liability company or an S corporation to own and operate the business?

Answer: People ask this question of me a lot, but this question mixes the type of entity formed under state law with a method of federal taxation under the Internal Revenue Code of 1986, as amended. When you are thinking of forming an entity in California to operate a business or to own investment real property, the first question is what type of entity should I form under California law? More often than not the answer is a limited liability company.

After you form your company, the next question is what is the best method of income tax for the entity? If your tax advisor says that your LLC should be taxed as an S corporation and if it is eligible for that method of tax, then all of the members of company must sign an IRS Form 2553 (see the instructions) and file it with the Internal Revenue Service before the deadline for making the S corp election.

An LLC taxed as an S corporation is a “pass through” entity (it does not pay income taxes), which means that losses are passed through to the owners who can deduct the losses on their personal income tax returns (if they have sufficient basis).  Note: An LLC that elects to be taxed as a C corporation, an S corporation, a sole proprietorship or a partnership for federal income tax purposes does not change its character. The entity always remains an LLC created under California law regardless of the method of federal income tax applicable to the entity.

Bottom line: If S corp tax treatment is important and your business is in California, form a California LLC and cause it to be taxed as an S corporation by filing an IRS form 2553 in the first 75 days after forming the LLC.

P.S.  I recommend that everybody who forms an LLC consult with a good tax advisor as soon as possible after forming the entity to obtain advice on which of the four federal income tax methods (sole proprietorship, partnership, C corporation or S corporation) is best for the limited liability company. The election to change the default method of income tax (sole proprietorship or disregarded entity for a single member LLC or partnership for a multi-member LLC) must be filed within 75 days of the date of forming the LLC for the election to be effective from the date of formation.

By | 2016-12-13T21:20:16+00:00 January 2nd, 2014|Categories: CA LLC Formation, FAQs, Tax Issues|0 Comments

How Do I Open a Bank Account for an LLC?

Question: I just formed by new California limited liability company. I now need to open a bank account in the name of the LLC. How do I open the account?

Answer: Tell the bank you want to open a bank account in the name of the LLC. Give the following to the bank officer:

  • A copy of the LLC’s Articles of Organization with either the California Secretary of State’s filed stamp.
  • A few banks also require a copy of the LLC’s Operating Agreement.  If you do not have an Operating Agreement for your California LLC you may hire us to prepare a custom Operating Agreement that complies with California’s new Revised Limited Liability Company Law effective January 1, 2014.

Most banks will allow you to open a bank account in the name of the LLC if you give the bank your social security number, but I recommend that you get an EIN for your LLC instead.  In this age of identity theft, it is better to get an EIN for the LLC so you do not have to give out your SSAN to banks or others from time to time.

By | 2014-06-04T21:51:52+00:00 January 1st, 2014|Categories: CA LLC Formation, Operating Agreements|0 Comments