Startup Advice

Starting a Business in California? Here’s Everything You Need to Know!

Article Summary

This article prepares you to start a business in California. From choosing a business structure and creating a business plan to naming and locating your business, finding loans, and making sure you’re ready to deal with the tax collector, this article covers what you must know before starting a California business.

If you want to join the 3.7 million small businesses the SBA said accounted for 99.2% of California businesses; there are some hoops you will have to jump through first. Sure, starting a business in California 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, this article explains how you get your business started in “The Golden State,” whether it’s a one-person operation running out of your home or a larger operation in a leased office.

Prepare a business plan

Step 1 for forming your business entity is to draft a business plan that outlines your California business in its entirety. It will serve as an important document for external stakeholders and help you think through your business idea thoroughly.

Details to Include

According to the U.S. Small Business Administration (SBA), a business plan should include the following:

  • Executive summary
  • Company description and overview of business idea
  • Market analysis
  • Organization and management overview
  • Service or product line decisions
  • Marketing and sales
  • Funding options and request
  • Financial projections
  • Appendix
  • Differentiating factors

Learn how to write your business plan from the SBA. 

Choose a business structure

There are also several options for how your business can be legally organized (LLC, corporation, etc.). Deborah Sweeney, CEO of MyCorporation.com, helps small businesses, many of which are in California, choose a business structure and file with the proper entities.

“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] to 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 to register your business in California.

Corporation

A corporation in California is typically a legal entity that is separate from its owners (unlike an LLC).

Key highlights:

  • 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, a California corporation, you will need to file the Articles of Incorporation with the Secretary of State’s office.

Before applying, you’ll also want to understand the two types of corporations that for-profit businesses may choose from under United States federal income tax law: C corporations and S corporations.

While a C Corporation is not a likely structure for you, we’ll delve deeper to understand the S corp.

S corporation

S corporations elect to pass corporate income, losses, deductions, and credit through to their shareholders for federal tax purposes resembling that of a partnership. Therefore, income is taxed at the shareholder level and not at the corporate level.

Payments to S shareholders by the corporation are distributed tax-free to the extent that the distributed earnings were not previously taxed. Also, certain corporate penalty taxes (e.g., accumulated earnings tax, personal holding company tax) and the alternative minimum tax do not apply to an S corporation.

In order to make an election to be treated as an S corporation, the following requirements must be met by your business entity:

  1. Must be an eligible business entity (a domestic corporation or a limited liability company that has elected to be taxed as a corporation).
  2. Must have only one class of stock.
  3. Must not have more than 100 shareholders.

Limited liability company (LLC)

A limited liability company (LLC) in California is a hybrid business structure that combines elements of a corporate structure and a general partnership structure.

Key highlights:

  • Limits the personal liability of owners
  • Domestic LLCs can be managed by multiple managers or members
  • It can be categorized as a partnership (if there is more than one owner) or a corporation for taxes
  • Your LLC will be 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 taxes)
  • 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 and rules

To form an LLC, you will need to file the LLC Articles of Organization with the California Secretary of State’s office. Your LLC members must also enter into a verbal or written agreement; written is recommended.

Aside from an LLC, some other popular business structures include:

General partnership

Similar to an LLC, a general partnership in California involves two or more people who are engaged in a small business to earn a profit.

Key highlights:

  • 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.

Limited partnership

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 that it is for businesses licensed to practice in the fields of architecture, law, or accountancy, as well as for land surveyors and engineers until 2019 (according to Senate Bill 284). Furthermore, liability protection is limited for all partners.

Key highlights:

  • 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 rules

You must file an Application to Register a limited liability partnership with the Secretary of State’s office.

Sole proprietorship

A sole proprietorship allows an individual to operate a business. It is the simplest and most common type of business entity in the state. It is an unincorporated business owned and run by one individual with no distinction between the business and you, the owner.

You are entitled to all profits and are responsible for all your business’s debts, losses, and liabilities.

Key highlights:

  • Solely liable for the small 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 (varies by state).

There are no filing requirements for this type of business entity, but you will need to pay careful attention to the implications for your taxes.

Taxes and a sole proprietorship

Because you and your small business are one and the same, the business itself is not taxed separately — the sole proprietorship income is your personal income.

You report income and/or losses and expenses from your sole proprietorship with a Schedule C and the standard Form 1040 tax form from the IRS. The “bottom-line amount” from Schedule C transfers to your personal tax return. As always, when questions about your taxes arise, be sure to consult a CPA or tax professional.

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 a sole proprietorship or LLC may have an easier startup, a simple management structure, are inexpensive to start and offer pass-through taxation.”

Consult with a professional

It’s advised by the U.S. Small Business Administration (SBA) that you consult with a private tax and legal adviser in your state when making your choice to register your business because your decision will affect your legal rights and have federal, state, and county tax consequences.

Do it yourself

Note that once you have decided on an LLC in California or any other business structure, you can purchase the required forms here to register your business or can create your own from another source that is compliant with the statutes.

Choose a business name and email service

It’s helpful to choose a business name that catches the attention of your target audience. You will want to make sure that your name of choice is available by searching the California Secretary of State’s business entity database.

After reviewing the California Secretary of State website, choose an email service and create a business email address. Doing this at the start of your business formation allows you to use a professional email address on all of your formation documents, forms, and online inquiries that you do as you take the steps below.

A professional email address will also help you establish credibility with customers, some of whom you acquire as you make contacts when starting up your business.

Apply for an EIN Number from the Internal Revenue Service

Employer Identification Numbers (EIN’s) are issued by the Internal Revenue Service for the purpose of tax administration, banking, payroll, etc. You can easily apply for an EIN under your business name on the IRS website. It takes just a few minutes to receive a reply and the official EIN letter.

You will need to include your legal business name and the type of business on the application. Upon completing the application process, a PDF of the letter with your EIN will be displayed.

Be sure to keep this letter in a safe place, and retain a digital and hard copy. This EIN essentially acts as your company’s identifying number; it’s similar to how you use your social security number to identify yourself.

File tax and employer identification documents

Next, you’ll need to determine your tax obligations, what’s required for California state tax reporting, and what rights you have as a taxpayer. The California Franchise Tax Board handles state income tax and business taxes. Specific forms will be used depending on how your LLC, corporation, or other business structure is classified for tax purposes. Additionally, if you plan to have employees, you will need to register with the California Employment Development Department (EDD) for employer withholding taxes.

Nicholas Friedman, CEO and co-founder of the award-winning franchise College Hunks Hauling Junk, 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.”

Additionally, if you plan to have employees, you will need to register with the California Employment Development Department (EDD) for employer withholding taxes.

Below is a list of some agencies, article, and website links that can help you understand those implications for your new business:

File necessary licenses or permits with the California Secretary of State and local entities

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 and permits 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 seller’s 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 licenses and permits are required for your type of business, you can find out on the CalGold website.

Additionally, you can refer to the latest report from California’s Department of Consumer Affairs, which lists licensing and enforcement summaries.

Open a California business 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 a business bank account (and potentially a business credit card) solely for your business transactions.

Some of the documents needed to open a business bank account and business credit card include:
  1. Social security number or employer identification number (EIN)
  2. Personal identification, such as a passport or California driver’s license
  3. Business license with the business name and the owner’s name(s)
  4. Certificate of assumed business name/DBA
  5. Partnership agreement with the names of the business and its partners (if you start a business with multiple owners)
  6. Organizing documents filed with the state, copies of any business licenses

An assumed business name, or DBA, is a name other than your proper legal business entity name that you formally get permission from the state to use when conducting business. You may also see it referred to as a fictitious business name (which must be filed as a Fictitious Business Name Statement in the county clerk’s office).

Once your business bank account is up and running, you’ll likely be able to manage most financial affairs online (and earn a little interest along the way), which can save time and resources as you start a business.

Purchase a domain name and create a website

Two of the business topics that founders of California business entities often neglect in the start-up process are purchasing a domain name and creating a website.

Domain names are different than your business name — it is essentially your website equivalent of a physical address. Whether you are a freelance wedding photographer, own a general contracting business, or have another type of small business in California, a great website and domain name are essential for your company’s success.

Pick a location

You also will need to find the right location for your California business and complete paperwork with your county clerk.

Consider your target market

Ajay Prasad, founder and president of GMR Transcription 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.”

He gave some 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.”

Prepare to finance your business

How do you fund all the costs to start your California 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 these options aren’t viable, here are our top recommendations for borrowing from a lending company for your California business.

Personal loans

Personal loans are a great place to start your search for financing when starting a business in California.

While it was harder to secure a personal loan through a bank in the past, now there are many online lenders such as ProsperSoFiAvant, 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) to start a business in California. 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.

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.”

Business loans

SBA programs are also an option for financing and starting a business in California. The SBA has set guidelines for various loan 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 and credit profile. The programs include:

  • The 7(a) loan program can be used for starting a business in California or assisting in growing an existing California business.
  • Microloans 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.”

Read more on how to decide between business and personal loans.

Obtain business insurance

Business insurance can protect California small business owners against losses incurred during the running of your business — for example, if a customer or employee makes a claim against you, or if your equipment is damaged.

Types of Business Insurance

Some different types of business insurance that you may need to be aware of and research further are:

  • Public liability insurance
  • Employers’ liability insurance
  • Product liability insurance
  • Professional indemnity insurance
  • Business interruption insurance

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 and formalize your business idea
  • Choose your business structure
  • Choose a business email service
  • Apply for an EIN from the IRS
  • File tax and employer identification documents
  • File necessary permits and licenses
  • Open a bank account
  • Purchase a domain name and create a website
  • Pick a location
  • Choose your financing strategy
  • Obtain business insurance

Once you take care of these initial steps, you will be ready to start implementing your business plan in California.

Key steps to opening a business in California

  • Choose a business structure and prepare a business plan.
  • File required tax documents and licenses/permits.
  • Pick name and location for your business.
  • Open a business bank account and, if needed, apply for a loan.
  • Register a domain name and get your business on the Web.

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 small business development resources, mentorship, and workshops to help business owners. If you’re a veteran, you’ll find this veterans-focused article very helpful. And, if you’re planning to look into starting a food truck business, SuperMoney has an article on that, too.

By following these steps and heeding the advice shared by business owners who have been through the process, you will be well on your way to opening up your business in California.