How to Start a Business in California
Make sure your business is legally registered in California.
- October 22, 2019
- Starting Your Business
- 11 min read
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For all the big-name companies doing business in California like Google, Facebook and Apple, small businesses still form the backbone of the state’s economy and employment market. The 3.9 million small businesses in California comprise 99.8 percent of all businesses in the state, according to the Small Business Administration. At the same time, small businesses employ 7 million workers, equivalent to nearly half of all employees, in the state of California.
The Golden State is a hotspot for startups and small businesses of all types and industries. But the state does have many procedures, requirements and policies that can make starting a business difficult to do in California. It doesn’t matter if you’re starting a trucking company or opening a restaurant — there are certain things all businesses need to do to be legal.
If you’re thinking of starting your own business on the West Coast, it’s critical you understand what is required so you get it right the first time.
In order to help make this process easier, there are certain steps you should follow in a particular order regardless of industry.
Here’s are the steps to take to start a business in California:
It might seem obvious, but it’s so important that it can’t go without saying: The first step to starting a business in California is to create a business plan.
Business plans vary from business to business, but there are some basic aspects that people expect when reading a business plan. Some fundamental features of a business plan can include an executive summary, company description, organization and management, key partnerships, cost structure and much more. Whether you create a traditional business plan or a “lean” business plan, which is popular with startups, find out all the essentials you need to create your business plan.
Choose Your Business Structure: Incorporate or form an LLC for as low as $79
According to the IRS, there are six business structures:
- Sole proprietorship
- Corporations, also called C Corporations
- S corporations
- Limited liability companies, also called LLCs
- Non-profits, also called 501(c)(3)s
An important feature of LLCs is that they’re allowed by state statute. Thus, each state may use different regulations, you should check with your state if you are interested in forming an LLC.
Picking a business name is easier said than done. Very often legal and business problems emerge from a poorly named company, not to mention marketing problems arising from aesthetic issues. And trying to change the name of a company once it has existed for a while can be costly in terms of both time and money, like hiring a PR firm to manage the name change.
Here are some tips for picking a business name:
- First, check if your potential business names already exist in California. Search the web for your desired name, using several search engines like Google, Bing, Yahoo and DuckDuckGo. You’ll avoid possible business name conflicts early on this way. At this stage, even if you don’t plan to do business solely online, it is a good time to figure out your company’s domain name and register it.
- Second, do a trademark search with the US Patent and Trademark Office (USPTO). Make sure to also search misspellings, plurals, variations of spelling, similar-sounding words and other versions of your chosen name to be sure you’re sifting out existing business names.
- Third, search the California Secretary of State’s business entity database to make sure your proposed name isn’t already registered. Similar to searching the USPTO, be sure to search variations of spelling, plurals and misspellings as the state may reject a name that is too similar.
It’s important to note that California does have restrictions on how certain types of businesses can be named. Different business structures require certain business entity identifiers in their name. For example, if your company is a corporation, then it needs to include the correct corporate identifier, such as “Corporation,” “Incorporated” or an abbreviation. An LLC requires the term “limited liability company” spelled out or abbreviated within the business’s legal name. Other business structures have similar naming requirements, as detailed in the Secretary of State’s Business Entity Naming Regulations and Additional Statutory Requirements and Restrictions.
If your business has one name yet operates under another (for example, John Adams is a sole proprietor, but wants his business to go by “Adams Moving”), then you need to file a Fictitious Business Name Statement in the county clerk’s office for the county where your business is located. This type of registration is also called a DBA, or “doing business as.” You can file a DBA with the county through the local County Recorder, which you can easily find by searching the internet for “[your county name] county recorder.” Here’s the Los Angeles County Registrar-Recorder page, for example.
You’ll need to pick a location for your business and check local zoning regulations — even if you work from home. Look at the demographics of the cities where you will potentially open your business. The age of the population is crucial as this can significantly affect who your customers will be. A city with an aging population and a high percentage of retirees could be ideal for a startup specializing in senior care services. But it wouldn’t be very favorable to open a pub aimed at young professionals.
Economic characteristics are very important when starting a business in California and in general. You should research factors such as employment, unemployment, average income, prominent occupations and industries in prospective cities. This will impact your success from inception to business expansion. California cities can vary dramatically in their economic profile, whether it’s comparing the Bay Area to Southern California, or the coast to inland areas.
Other factors you should consider when choosing a location for your business include competition you’ll face in the market, proximity to other businesses and services, foot traffic, accessibility and parking, transportation infrastructure, ordinances, utilities and other costs, as well as the image associated with the city you’re choosing.
Each state has its own requirements for registering a business. It is important you have your business name, structure and location decided because you’ll need to include that information when you file to register your business. Here are the key requirements to register a business in California:
When forming an LLC in California, you must file articles of organization with the California Secretary of State’s office. The document you must complete and file is Form LLC-1 (Articles of Organization). In this form, you must include the LLC’s name, its purpose, how it will be managed, its address, and the name and address of the LLC’s registered agent. There’s a filing fee of $70 for this form.
Incorporating a business in California is similar to forming an LLC in California, though it requires different documentation. In order to incorporate a business, you need to file form ARTS-GS (Articles of Incorporation) with the California Secretary of State Corporation Division. There’s a filing fee of $100 for this form. S Corporations must also file IRS Form 2553, Election by a Small Business Corporation, with the IRS.
You’ll need to include information on the business name, address, purpose, number of shares the corporation is authorized to issue, and — like Articles of Organization for an LLC — the name and address of a registered agent for service of process.
When forming an LLC, corporation or limited partnership in California, you are required by law to designate a registered agent that manages the service of process for the company. Meaning, for example, if your LLC or corporation is sued, your registered agent receives the legal paperwork on the company’s behalf. There are several names for a registered agent in California, including:
- California agent for service of process
- California corporate agent
- California registered corporate agent
- California resident agent
- California statutory agent
Keep in mind, however, your LLC or corporation cannot act as its own registered agent. In addition, your registered agent must have a physical street address within the state of the business.
Related: The Best States to Start a Business
Depending on the structure of your business, you might need to obtain a federal Employer Identification Number (EIN) from the IRS. Getting an EIN is required if your business has employees or is taxed separately from you as an individual. If you do not, then an EIN might not be required, however, it often makes considerable business-sense to get one. For example, banks often require an EIN to open a bank account in the business’s name. Also, companies that you do business with often need an EIN to process payments. Even if it’s not required, getting an EIN might be in your and your business’s best interest.
Getting an EIN is required for corporations and LLCs. You can get an EIN by completing an online application via the IRS. There is no filing fee, and there are only a couple of steps. Once all validations are finished, you will receive your EIN immediately upon completion.
When you’re getting an EIN for your business, it is also a good time to learn about how your company will be taxed. If your business has employees, then you’ll not only need to apply for an EIN, but you must also register with the California Employment Development Department (EDD) for employer withholding taxes. You can do this online using the EDD’s e-Services for Business. Another tax-related issue is a seller’s permit, which you must obtain from the California Board of Equalization if your company intends to sell goods in California.
California taxes every kind of business. This includes imposing a corporate income tax that applies to corporations and other entities that are taxed as corporations, and a franchise tax that applies to corporations, LLCs and many partnerships. You can find tax forms and file them through the State of California Franchise Tax Board. They have tax forms for all types of business entities.
Here’s how different business entities are taxed, as well as how to file taxes for them in California:
- Sole proprietorships: You pay state taxes on business income as part of your personal state income tax returns. This is filed using Form 540, the California Resident Income Tax Return.
- Partnerships: Partners pay state taxes on partnership income on their personal tax returns. In California, partnerships must file Form 565, Partnership Return of Income, with the California Tax Franchise Board.
- LLCs: Members of the business pay state taxes on their share of LLC income on their personal tax returns. On top of this, LLCs themselves have to file an additional state tax form, such as Form 568, Limited Liability Company Return of Income. However, the specific form used depends on how the LLC is classified for federal tax purposes. Another key document to file is an annual statement of information for the LLC, which can be done electronically at the California Secretary of State’s website.
- Corporations: Corporations are subjected to a double tax. First, the corporation itself pays corporate income tax to California. Second, the shareholders must pay state taxes on their dividends from the corporation. To file taxes for a corporation in California, you file Form 100, California Corporation Franchise or Income Tax Return. Like LLCs, corporations must also file an annual statement of information with the California Secretary of State.
If you’re starting a business in California that will have employees, then you’ll have to pay state employer taxes. California has four state payroll taxes, according to the Employment Development Department (EDD):
- Unemployment Insurance (UI) Tax, paid by the employer
- Employment Training Tax (ETT), paid by the employer
- State Disability Insurance (SDI), paid by employees through employer withholding
- California Personal Income Tax (PIT), paid by employees through employer withholding
In order to start a business in California, every business must get a general business license from the city in which the business is located. Some cities refer to a general business license as a business tax certificate. If your business operates in multiple locations, you might need to obtain a business license from each city. When filing for a general business license, you usually have to provide the name and address of the business and owner, contact information, business type and structure, federal tax ID number, number of employees and projected annual sales.
In addition to a general business license, many businesses require other regulatory licenses and permits, covering areas such as health and safety, the environment, building and construction, and specific industries or services. There are also special professional and occupational licenses that certain businesses must obtain, such as doctors in order to practice medicine. For both regulatory and occupational business licenses, you can get assistance by visiting the CalGold website. CalGold provides you with a searchable online database of regulated professions and industries that require a special business license or business permit.
Opening business bank accounts that are separate from your personal accounts is essential for good bookkeeping. Having a designated business checking account means that all your company’s income, expenses, credit card, loan payments and other expenses are all in one place — separate from your personal transactions.
Opening a business savings account is also a sound accounting strategy, especially including an account for taxes. Thus, for small businesses, it is good to have two types of savings accounts: a general savings account for long-term savings for things like paying for new equipment and savings account for short-term savings meant for paying taxes, which should remain untouched until tax time.
Another financial account you should consider is opening a business credit card. If you have a history of using your personal credit card responsibly, then a business credit card can be a huge asset. In fact, having good credit as a small business owner enables you to tap a wider variety of funding options. Just be careful not to dig your business into debt it can’t repay.
The traditional route for funding a small business is through partners or through a Small Business Administration (SBA) loan. The issue with the former is that not every entrepreneur has access to investors, and SBA loans have extremely stringent requirements, with a tiny percentage of businesses acquiring funding this way.
However, with good credit history, you can qualify for other funding options, like a line of credit or credit card. In fact, you can liquidate certain credit cards into cash that can go directly into your business checking account. Funding your business this way is often more affordable and more convenient for many entrepreneurs starting a business in California.
These steps cover the most essential pieces you need to get in place to start a business in California. There are additional steps and procedures, however, you’ll likely have to take once your business is established.
Business insurance is one such area. If you have employees as a small business in California, you must offer workers’ compensation coverage. If your business uses company-owned cars or trucks, then you will need to get commercial auto insurance also. When it comes to workplace injuries, you should consider getting commercial liability insurance, such as general liability insurance or professional liability insurance, to provide protection against lawsuits.
Also be aware that there are many ongoing, recurring or annual costs, certifications and records that you will need to stay on top of. For example, if you have an LLC, you will need to file a state of information every two years, while with a corporation you’ll have to file one every year, both coming with a minor filing cost of $25.
As a prospective business owner, there are plenty of issues that you will deal with in your entrepreneurial journey. With this checklist, however, you will be well underway to starting to a business in California.
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