What are the steps to form a multi-member LLC in California?

On a high level, the steps are: (1) Choose a name, draft and file the organizational docs with the sec'ty of state(s) in which you want to domicile and/or qualify to do business (2) File with the IRS for a TIN and make the election of being taxed as either a partnership, corporation or disregarded entity (3) Create and sign an operating agreement - a written operating agreement outlining the LLC's ownership, management, and operating procedures. (4) File your beneficial ownership report with FinCEN. (5) depending on what industry you are in secure any required licenses and permits for the LLC's business activities. (6) set up the entity with the appropriate operational legal documents for doing the business they plan on doing i.e. NDAs, Consulting Agreements, Equity Compensation Plans, sales agreements etc.

Thinking of starting a business with a partner? Forming a multi-member LLC might be one of the smartest legal moves you make. It offers liability protection, tax flexibility, and control over how the company operates, without the rigid structure of a corporation. But getting it right means understanding both the benefits and the setup process. The main draw is protection. An LLC creates a legal barrier between your personal assets and the business. So if your company is sued or defaults on a loan, your house and savings are usually off-limits. Just know that this protection isn’t automatic. If you mix personal and business funds, fail to properly fund the business, or commit fraud, a court could still hold you personally liable. From a tax perspective, the setup is appealing. Multi-member LLCs are generally taxed as partnerships. That means the business itself doesn’t pay federal income tax. Instead, it files Form 1065 and issues each member a Schedule K-1 that shows their share of the profits or losses. You include that on your personal return. This approach helps you avoid the double taxation that corporations face. If the business generates strong profits, you can also consider electing S corporation status. That may help reduce self-employment taxes, though it comes with added responsibilities. Management is another area where LLCs shine. You can run the business yourselves through a member-managed structure or designate someone else to handle daily operations in a manager-managed model. For example, a small professional practice may work better with member control. In contrast, a real estate investment business with passive owners might benefit from a designated manager who handles everything day to day. You also won’t have to jump through the usual corporate hoops. LLCs aren’t required to hold annual shareholder meetings or maintain formal bylaws. Most states only ask for a simple annual or biennial report and a filing fee. Then there’s credibility. Including “LLC” in your business name shows clients, lenders, and partners that you’ve formed a recognized legal entity. Banks will usually require it to open a business account or approve financing. To form your LLC, you’ll start by filing Articles of Organization with your Secretary of State. This document covers basic information such as the business name, address, registered agent, and sometimes member or manager details. Fees vary widely but typically range from $50 to $500 depending on your state. You’ll also need an operating agreement. Some states like New York require one, but even where it’s optional, it’s strongly recommended. Many banks won’t open an account without it. More importantly, the agreement defines how your business works. It should cover ownership shares, capital contributions, how profits and losses are divided, voting rights, member roles, and what happens if someone leaves or wants to sell their share. Without it, state law will control these issues by default, which may not align with your goals. Every LLC must name a registered agent. This is the person or service that receives legal and government documents for the business. If you have a physical address in the state, you can serve as your own agent. Otherwise, hiring a registered agent service is a simple solution. You’ll also need an EIN from the IRS. Even if you don’t have employees, the IRS requires a Federal Tax ID for multi-member LLCs. You’ll use it for filing taxes, issuing K-1s, and opening financial accounts. A few important things can catch new business owners off guard. Certain states have unique requirements. New York and Arizona, for example, require you to publish a notice of formation in local newspapers. California charges an annual franchise tax of at least $800, no matter how much income your business makes. Delaware and Nevada are popular for their business-friendly laws, but they often come with higher annual fees. Checking your state’s rules ahead of time is essential. Taxes can also surprise people. Members usually pay self-employment tax on their share of the LLC’s income. That includes both the employer and employee portions of Medicare and Social Security. If your business is profitable, this can add up fast. In that case, an S corp election may reduce your tax burden. Just be aware that it requires payroll and a reasonable salary for each active owner. Finally, to keep your liability protection intact, treat the LLC as a separate entity at all times. That means using a business bank account, signing contracts in the company’s name, and documenting major decisions. If you treat the company like an extension of your personal finances, courts may too. Setting up an LLC isn’t difficult, but the details matter. The operating agreement and tax setup in particular deserve professional input. An attorney can create a customized agreement that fits your situation, and an accountant can help you choose the right tax path. Doing it right on the front end can save you from problems down the road. The business attorneys at Contracts Counsel are here to guide you through the entire LLC process so you can focus on growing your business with confidence.

You will need to file articles of organization with the Secretary of State of the state where you want to form the LLC. This is relatively easy. More importantly, because you will have 2 or more members, you should have an operating agreement. This is a contract between the members, detailing who the members are, what percentages of the LLC each member owns, how the LLC will be managed, how profits and losses will be allocated, and how distributions will be allocated. The operating agreement should also put restrictions on voluntary and involuntary (think divorce, death, bankruptcy) transfers of ownership, so that you don't suddenly end up with a new member that you don't want. The operating agreement is not filed with the state. You should have an experienced lawyer help you with the operating agreement, as it can be pretty complex.

While a written operating agreement is not legally required to form a multi-member LLC, it is absolutely a best practice to have one in place. An operating agreement is an internal document, meaning you won’t need to file it with the state, but it plays a critical role in setting clear expectations and protecting all members' interests. Without a written agreement, your LLC will default to your state’s LLC laws, which may not align with your specific business arrangement or preferences. A well-drafted operating agreement allows you to: - Clearly define ownership percentages and capital contributions. - Establish how profits and losses are allocated among members. - Outline decision-making authority and voting rights. - Set procedures for bringing in new members or handling a member’s exit. - Minimize the risk of internal disputes by having a written record of agreed-upon terms. While your verbal discussions are a great start, formalizing these details in writing ensures that everyone is on the same page and helps prevent potential conflicts down the road. If you'd like assistance drafting an operating agreement that aligns with your business needs, I’d be happy to help!

You will need to know what the equity split will be, and if it is 50/50, how will you manage tie votes. How will profits and losses be allocated? How will the LLC be managed? What happens if one of you wants to sell to a third party or leave the LLC?