If you want to join the 3.7 million small businesses the SBA said accounted for 99.2% of California businesses in 2016, there are some hoops you will have to jump through first. Sure, starting a business can be intimidating, but if you take it step by step, you will be up and running in no time.
Here we will break down the steps you’ll need to follow and share advice from business owners who know the ropes. From writing a business plan to getting the financing you need, here’s how you get your business started in “The Golden State.”
Prepare a business plan
First, you will need a business plan that outlines your business in its entirety. According to the U.S. Small Business Administration (SBA), it should include the following:
- Executive summary
- Company description
- Market analysis
- Organization and management
- Service or product line
- Marketing and sales
- Funding request
- Financial projections
- Differentiating factors
Choose a business structure
There are also several options for how your business can be legally organized. Deborah Sweeney, CEO of MyCorporation.com, helps small businesses, many of which are in California, with their business filings.
“To start a business in California, once you’ve created a business plan and locked down what you want to focus on in your venture, you should head to the secretary of state [or use a service to help you] incorporate or form an LLC,” Sweeney says.
A corporation and a limited liability company (LLC) are two of the most popular business structures. Here’s a quick overview of the main business structure options you can choose from.
A corporation in California is typically a legal entity that is separate from its owners.
- Limits the personal liability of owners
- The sale of stocks and bonds can generate additional capital
- Stockholders or shareholders are entitled to dividends paid by the corporation
- Taxes are levied on the shareholders and the corporation
- A minimum franchise tax is due each year
To establish this business type, you will need to file the Articles of Incorporation with the office of the California Secretary of State’s office.
Limited liability company
A limited liability company (LLC) in California is a hybrid business structure that combines elements of a corporate structure and a general partnership structure.
- Limits the personal liability of owners
- Domestic LLCs can be managed by multiple managers or members
- Can be categorized as a partnership (if there is more than one owner) or a corporation for tax purposes
- If the LLC is treated as a partnership, items of deductions, income, and credit flow through to the members, who are each responsible for paying taxes on their distributive share (aka pass-through taxation)
- If LLCs have a single owner, they are treated as a sole proprietorship or a division of the owner unless they choose to be treated as a corporation.
- LLCs are subject to an annual minimum franchise tax
To form this business type, you will file the Articles of Organization with the California Secretary of State’s office. LLC members must also enter into a verbal or written agreement; written is recommended.
Other popular business structures include:
A general partnership in California involves two or more people who are engaged in a business to earn a profit.
- All partners are jointly liable for the obligations of the partnership
- Profits are taxed as personal income for each of the partners
You are not required to register a general partnership at the state level. However, if you want to do so, you need to file a Statement of Partnership Authority form with the California Secretary of State’s office.
A limited partnership in California is similar to a general partnership except that there is at least one partner who has limited control and liability and one who has the majority of control and liability.
To form a limited partnership, you file the Certificate of Limited Partnership with the Secretary of State’s office.
Limited liability partnership
A limited liability partnership is similar to a general partnership except it is for businesses licensed to practice in the fields of architecture, law or accountancy, as well as land surveyors and engineers until 2019 (according to Senate Bill 284). Furthermore, liability protection is limited for all partners.
- Similar to a general partnership
- Liability protection is limited for all partners
- Designed for specific professional services
- Partners decide the business structure and profit/loss distribution
You must file an Application to Register a limited liability partnership with the Secretary of State’s office.
A sole proprietorship allows an individual to operate a business.
- Solely liable for the business
- Receives all of the profits and pays all of the taxes
- A Fictitious Business Name Statement must be filed with the county if a name other than the owner’s legal name is used.
You do not file any legal documents for this structure.
How do you decide between these options?
“The decision really depends on what the small-business owner is looking for as there are positives and negatives to every business structure,” Sweeney says. “For example, corporations offer liability protection, issue shares, stock options/retirement plans and only the salaries are subject to taxation, whereas LLCs have an easier startup, a simple management structure, are inexpensive to start and offer pass-through taxation.”
It’s advised by the U.S. Small Business Administration (SBA) that you consult with a private tax and legal adviser when making your choice because your decision will affect your legal rights and have tax consequences.
Once you have decided, you can purchase the required forms for the various business structures here or can create your own that are compliant with the statutes.
File tax and employer identification documents
Next, you’ll need to determine your tax obligations, what’s required for tax reporting and what rights you have as a taxpayer.
Nicholas Friedman, CEO and co-founder of the award-winning franchise College Hunks Hauling Junk, which has locations in California, says, “California’s taxes vary greatly from county to county, but they’re all pretty complex, and the state upholds a ‘nonconformity’ policy, which basically allows California to reject certain federal tax benefits.
“The challenge with this is small businesses can sometimes get caught up in the complications that are in place to catch high-income taxpayers. Unfortunately, there are few credits and exemptions available, so it’s important to budget for this. The state also has a high minimum franchise tax, which franchises may feel more keenly than corporate locations. If you are going to start or scale a business, look at tax implications.”
The following agencies can help you understand those implications on your new business:
- California Franchise Tax Board
- Employment Development Department
- State Board of Equalization
- Employer ID Numbers
File necessary licenses or permits
Next, check on the licenses and permits you need. Mark Aselstine, the founder of California business Uncorked Adventures, says there’s a need for local business licenses in most cities as well as some specialized reporting for sales tax purposes.
“Typically I’ve seen local permits listed among the last steps [recommended when starting a business], but given the constant drain on city resources here in California, I’d suggest you actually apply for your local business license, along with your sellers permit, immediately after filing your paperwork with the state,” Aselstine says. This can help ensure it all gets handled by the time you are ready to start your business.
If you aren’t sure which permits and licenses are required for your business, you can find out on the CalGold website. When you enter in your business type and location, you will be provided with an extensive list of the licenses and permits you need as well as where you can get them. It’s also a great resource for other important legal requirements you’ll need to know about such as inspections, certificates, and filings. Additionally, you can refer to the latest report from California’s Department of Consumer Affairs, which lists licensing and enforcement summaries.
Open a bank account
This is an easy one. It’s important to separate your personal and business finances, so once your business is established and registered, open up a bank account solely for your business transactions.
Pick a location
You also will need to find the right location for your business. Ajay Prasad, founder and president of GMR Transcription and GMR Web Team in Tustin, Calif., says, “Try to set up as close to your target market as possible. While you may want to make your services available ‘worldwide,’ you’ll still find that a majority of your clients/customers will be local.”
Friedman added to that point saying, “The Golden State is known for having a highly competitive real estate market with a high price point and lower availability, which can make it difficult to find an office space to set up shop on your own. I’d suggest connecting with an experienced broker, one who knows the area like the back of their hand. A broker can help you take a step back and examine the larger picture and help you find what your business needs to be located near in order to thrive.”
He gave a few examples saying, “For a moving company, it’s essential to operate in areas surrounded by residential neighborhoods. Another great example is the number of successful cafés located near Silicon Valley powerhouses as these larger companies are frequently looking to cater to their employees”.
If you’d like some help in picking a location, you can get access to location selection services for your business by contacting GO-Biz.
In the case that you are starting a business that is exclusively online, you will need to find an available and affordable domain name (your online location).
Prepare to finance your business
How do you fund all the costs to start your business? The main options include using your own resources such as your savings or 401(k), asking family and friends to invest or applying for financing from a lender. If the first two options aren’t viable, here are our top recommendations for borrowing from a lending company.
Personal loans are a great place to start your search. While it was harder to secure a personal loan through a bank in the past, now there are many online lenders such as Prosper, SoFi, Avant and Lightstream that have made borrowing much more accessible and convenient. Furthermore, there are often attractive rates and terms available because multiple lenders are competing for your business. However, the amount you can borrow and the cost of borrowing will depend on your creditworthiness, and it will vary by lender.
To find out what amount you qualify for with various lenders, check out SuperMoney’s loan offer engine. You simply answer a few questions, and it will run a soft credit check, which doesn’t hurt your credit score. Then, you can review a range of lenders you prequalify with and pick the best fit for your needs.
Home equity loans or lines of credit (LOC)
If you own a home, you can also take out a home equity loan or a home equity line-of-credit (LOC). Note the loan or credit line will be secured by your house. To go this route, you get your house appraised, find a lender with a competitive offer and then take out a loan or LOC for a percentage of the difference between what your house is worth and what you have paid.
Here’s an example, if your house is worth $300,000 and you owe $150,000, you would have $150,000 in equity. According to the Federal Trade Commission (FTC), lenders typically let you take out a loan for 85% of your total equity, so in this case, you could potentially borrow up to $127,500.
If you decide to go with a home equity loan, you would borrow the amount and repay it in installments. On the other hand, a line of credit makes the entire amount available to you, and you can use it as you wish, similar to a credit card. Weigh the pros and cons of both options here.
If you’d like to review and compare home equity lenders, head over to our Home Loans Review Page and tick the box on the left-hand menu for “home equity loans and lines of credit.”
SBA programs are also an option. The SBA has set guidelines for various loans programs, which are then offered by third-party lenders and guaranteed by the SBA. They each have specific eligibility requirements that will need to be reviewed to determine whether they are suitable for your business type. The programs include:
- The 7(a) loan program, which can be used to start a new business or assist in growing an existing one.
- Microloans, which can be used for startup costs but cannot be used to purchase real estate or pay preexisting debts.
- Real estate and equipment loans CDC/504 provides funding for expensive fixed assets like real estate and equipment.
If you’d like to know which lenders offer these loans, you can find out on our Business Loans Review Page by clicking the box in the left-hand menu for “SBA Loan.”
Start doing business in California
Now you know the main steps to starting a business in California. Here’s a quick review:
- Prepare a business plan
- Choose your business structure
- File tax and employer identification documents
- File necessary permits and licenses
- Open a bank account
- Pick a location
- Choose your financing strategy
Once you take care of these initial steps, you will be ready to start implementing your business plan. If you still need more support, “There are a handful of organizations in the state like GO-Biz, the SBA, Small Business Development Centers network or SCORE,” Friedman says, “SCORE, in particular, offers free resources, mentorship and workshops to help business owners.
“I know how it feels when you first launch your own business; you may not be willing to ask others for help because you want to do it on your own. But asking for help is OK. In fact, when you connect with associations like SCORE and other start-up owners, you’ll start to develop your own personal support network.”
By following these steps and heeding the advice shared from business owners who have been through the process, you will be well on your way to opening up your business in California.
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.