Once you’ve completed the formation of your LLC, you will face a variety of ongoing California LLC maintenance requirements.
Many LLC owners disregard these obligations, and often, to their dismay.
No matter the reason—be it ignorance or neglect—disregarding ongoing maintenance requirements will negatively affect your LLC’s ability to remain in good standing with the state and to shield you from personal liability.
Keep in mind: if you don’t comply with ongoing maintenance requirements, your California LLC will lose its status as a legal and a separate business entity and you, as the owner, will then be personally exposed to its financial liabilities.
Limited liability protection is the main reason for doing business as an LLC, therefore, you should take every necessary step to protect your LLC and keep it in good standing.
California LLC maintenance requirements are:
- Biennial Statement of Information (Form LLC-12)
- Annual Franchise Tax
Biennial Statement of information (LLC-12)
California requires all LLCs to file a Statement of Information within 90 days of filing its articles of organization. Then again every two years thereafter. The biennial Statement of Information requirement is to keep the state of California informed of any changes to your LLC. These include changes in your business address, managers, registered agent etc. You are required to file a Statement of Information every other year along with a $20 filing fee.
Failure to file your Statement of Information along with the $20 filing fee results in:
- A $250 late fee
- Penalties and monthly interest up to $696 (as long as the Statement of Information remains outstanding)
- Suspension of your California LLC
California Annual Franchise tax
The state of California requires LLC’s to pay an annual minimum tax of $800 to the California Franchise Tax Board. This is required regardless of whether or not the LLC engaged in any business that particular year. If you live in California and own an LLC in another state you are still required to pay the $800 franchise tax if you are doing business in California.
Failure to pay the annual franchise tax results in substantial penalties and interest. Furthermore, your LLC may lose its powers, rights, and can be suspended or forfeited. Also, any contracts your LLC enters into during suspension or forfeiture will be voidable at the request of any party to the contract.
Other California LLC Maintenance Requirements
It is true that California LLC’s don’t have as many ongoing maintenance obligations as California corporations. With that said, there are still certain tasks that an LLC must perform that are similar to those required by corporations. These requirements are as follows:
Pursuant to California Corporations Code §17050, LLC’s are required to have an operating agreement in place. This is true for both single-member LLC and multi-member LLC’s.
Similar to a corporation’s bylaws, your LLC’s operating agreement specifies, amongst other things:
- Who owns your LLC
- Management of your LLC (member managed or manager managed)
- Taxation of your LLC (disregarded entity, partnership, s-corp, or c-corp)
If you file your articles of organization with the California Secretary of State but fail to create an operating agreement, your LLC will be vulnerable. If you are ever sued, or subject to an IRS audit, your personal assets and the assets of your LLC will be exposed to liability.
This is because you have not specified who your company’s owners are, how your LLC operates, your preference of tax treatment, and so forth. So, in order to protect yourself from a lawsuit or IRS audit, you should prepare a comprehensive operating agreement for your LLC.
Read More: California Operating Agreement
Your Annual LLC Meeting
While there is no statutory requirement for a California LLC to hold meetings, failure to do so can result in the loss of liability protection. If your LLC’s operating agreement requires you to hold an annual meeting of your shareholders, it is important that you do so in order to be in compliance with this requirement.
Keep your Funds Separate (no commingling)
LLC’s establishes a line of separation between your business’s assets and your own personal assets. Therefore, it is important to run your LLC as a separate business entity, otherwise, you may still be exposed to personal liability.
This means documenting all of your LLC’s major activities and financial transactions. In addition, you should be sure to not commingle your LLC’s funds with your personal funds or the funds of any other businesses.
As you can see, it is extremely important that your LLC complies with all ongoing California LLC maintenance requirements. Most importantly, you need to consider, and operate, your LLC as a distinct business entity. By doing so, you can avoid unnecessary penalties, fees, suspensions and forfeitures. All while enjoying limited liability and advantageous tax treatment.
To ensure that your LLC stays compliant throughout the year, consult with a California Business Attorney. An experienced attorney will advise you and assist you in meeting your ongoing California LLC maintenance obligations.