8 Easy Steps to Form a Multi-Member LLC in California Written By Sandra McCarthy Founder, A People’s Choice No one’s an island. We all have groups of people we feel most comfortable around. Whether they’re our family, friends, or colleagues, we do all we can to care for and protect them and their interests. If you want to set up a business together with such a group, it’s time to create a multi-member LLC in California. Owning a multi-member LLC comes with its pros and cons. As a group, you have to consider if this is a step you want to take. Let’s look at what a multi-member LLC is; the costs, benefits, and drawbacks associated with them; and how to file for one in eight easy steps. Start Your Document PreparationWhat Is a Multi-Member LLC? A multi-member LLC, also known as multi-member LLC, is a limited liability company (LLC) that consists of two or more owners/members. Members can either be individuals, corporations, or other LLCs. As a legal entity, the multi-member LLC offers the possibility of a partnership alongside personal asset protection. Any limited liability company protects the company’s debts and business assets. from those of the individual owner. A multi-member LLC is the counterpart of single-member LLCs, which offer similar limited liability protection within a sole proprietorship business structure. The Benefits and Drawbacks of Multi-Member LLCs in California Any business structure has both pros and cons. When creating a multiple-member LLC in California, you’ll want to weigh both the pros and cons before you decide this is the business structure for you and your partners. Benefits of the Multi-Member LLC in California The most recognized benefit of an LLC is a business and personal liability protection, as stated above. If your business is sued, only the business’ assets are at stake. Owners’ assets or assets of separate additional businesses are considered separate entities and left out of the creditor’s hands. This liability shield extends to debts as well. However, there are other benefits to owning a multi-member LLC. Here are some notable ones: No limits on the number of members/owners Members can be businesses, individuals, and even other LLCs You can be a member as a non-US citizen You can opt to be taxed either as an S corp or C corp Drawbacks of the Multi-Member LLC in California The most notable drawback of a multi-member LLC is that, in some scenarios, all members can be labeled responsible for one member’s action. That means if one of your partners makes an illegal financial investment or fails to fulfill proper business tax requirements, you can end up with a share of the blame. Here are other drawbacks to keep in mind for this form of business: You have to register with the state of CA More paperwork ensues when you are handling your business taxes Members/owners pay self-employment tax out of their profits. That means that after the business pays taxes, each member must pay additional taxes on their taxable income as an individual. This applies to their current tax return (both their state and federal returns) if they receive a profit. Unless owners alter their tax status, they can’t work as business employees 8 Steps to Forming a Multi-Member LLC in California If you decide the pros outweigh the cons for you, you probably want to know about any registration requirements for creating a multi-member LLC in California. Luckily, the process is relatively straightforward. Here are basic steps you should follow: 1. Pick a Name for Your Multi-Member LLC The first step (and part of the fun) of forming a multi-member LLC is to choose a unique name. You can verify your chosen name’s availability in the business name database of California’s Secretary of State. Then, if the name you have chosen is available, you can file a Name Reservation Request form to reserve the name for 60 days. Make sure all business owners agree on the name before you file! According to California’s law, there are a few restrictions to keep in mind when you file your business name statement. You can look up more information on the California government website, but these are the two most important points: The name you have picked out has to end with a Limited liability company or its abbreviations—L.L.C. or LLC The business’s name should not contain words like trust, bank, trustee, corp, insurance company, insurer, or any word that hints your business is insurance-related. 2. Get an Employer Identification Number (EIN) Your business’ EIN is a unique form of identification necessary for LLC ownership. It offers your business multiple features. An EIN allows you to employ people, have a business bank account, get permits and licenses, and other business-related items. The Internal Revenue Service issues an Employer Identification Number with no cost attached. You simply have to register for one with the federal government. 3. Pick a Registered Agent In California, all multi-member LLCs must appoint a registered agent/agent of the service process through the proper documents. A registered agent is a business or person tasked with accepting service of process for the LLC. This person accepts legal documents sent to your LLC. A multi-member LLC can’t act as its own agent. Instead, a registered agent must meet certain requirements. Note that although LLCs aren’t permitted to take up the role of a registered agent, you can assign the role to a member of your company. That means you or any of your fellow LLC owners can act as the agent and complete agent services for your LLC. Your agent has to meet these minimum requirements: They have to reside in California They must have a residence address stated in the LLC’s article of organization/articles of incorporation The registered agent has to agree to the role before the designation No takers for the job? The California Secretary of State has a list of registered commercial agents that can act as your multi-member LLC’s registered agent for a fee. 4. File Your Multi-Member LLC’s Articles of Organization Filing articles of organization form LLC-1 with California’s Secretary of State is what officially forms a multi-member LLC in California. The articles of the organization must contain the LLC’s name, actual business activity/actual business function, how the owners will manage it, and the identity and address of the registered agent. In addition to what your articles of organization must contain, there are filing requirements. You can fill out the form online and officially file articles of organization by submitting, mailing, or hand-delivering the documents to California’s Secretary of State’s office. 5. File an Initial Statement of Information Filing a statement of information, Form LLC-12, is critical to forming a multi-member LLC in California. You must file your statement of information within 90 days of creating your LLC/filing your article of organization. You can file this with the state’s Secretary of State either in person, online, or via mail. While you file your statement of information, you have required a non-refundable fee of $20. There on out, you would have to file your statement of information biennially to continue to legally conduct your business affairs. 6. Decide on Your LLC Business Management Structure You can either decide to have member-based management or manager-based management. However, you must select one of the options to get started as a multi-member LLC. Here’s a basic breakdown of each structure possible based on a limited liability company agreement: Member-Based Management: An egalitarian, horizontal structure in which members make business decisions for their member-managed LLC without supervision Manager-Based Management: A manager chosen by the members runs the LLC on behalf of the other owners/members. If you choose the latter arrangement, you have to list out the manager or managers chosen in the operating agreement. Your operating agreement also has to state that your company is manager-based/managed. 7. Prepare Multi-Member LLC Operating Agreement This agreement between members of the multi-member LLC outlines each member’s duties, financial and managerial rights, and entitlements. To mention a few, this consists of: Capital accounts Profit distribution for business income Membership interest Tax liability This agreement is internal and isn’t required by the California Secretary of State. However, it provides integral rules and regulations on how to run the company/business entity. The operating agreement can be altered by the LLC’s members or managers as the business grows and changes. You can also opt for a long-form operating agreement or a short-form operating agreement depending on your specific situation. 8. Attend California Taxes and Fees In California, LLCs must pay $800 as an annual franchise tax. This fee is compulsory regardless of the state of your company. Instead of the Secretary of State’s office, you must pay your franchise taxes to California’s FTB (Franchise Tax Board.) The date for tax payment depends on when your multi-member LLC was formed and whether you opt for a calendar or fiscal year. Regardless of which year you choose, your tax payment date is on the 15th day of the fourth month of either the fiscal or calendar year. For instance, if you formed your LLC on January 1st, you would pay your tax on April 15th. If you formed your LLC on November 1st, which starts the fiscal year, you would pay your tax on February 15th. However, your tax requirements for your initial return and subsequent returns may not end there. If your LLC’s gross annual income is more than $250,000, you must make an additional payment. You may also need to file additional forms for tax installment payments and fee payments. Other taxes such as federal income taxes exist for multi-member LLCs as well. We can help you fill out your tax forms for payroll taxes, excise taxes, informational returns, member federal tax returns, and other forms of taxes when the time comes. Whatever solution you chose, be sure to keep tax records to protect your business come tax time. How Can A People’s Choice Help You with Your Multi-Member LLC in California? If you decide to form a multi-member LLC, you must do it right. However, hiring a business attorney to help with your business licensing can be costly and unnecessary. Instead, A People’s Choice is a recommended pick. As a legal document preparation service, A People’s Choice can help you with your formation documents, assist as you file articles of organization, proof your manager-managed LLC forms, and more at a very affordable fee. Our flexible form services can also help you pursue other additional requirements for your business or personal services. We are a California-based company, and we’re well-versed legal document filing experts who can help you save time and money as you start your business. To learn more about how A People’s Choice can help you, check out our services here. Start My Business By Sandra McCarthy|May 23rd, 2022|Business, California Courts|0 Comments