Small businesses play a critical role in driving the US economy, with California being no exception.
Irrespective of the location, starting a business usually involves following a general process that involves several key steps.
While you can certainly act on a brilliant business idea on the fly, you have a greater chance of success if you plan carefully. Understanding the technical aspects of starting a business in the US would be best.
This article will walk you through what you need to do to start a small business in California.
Table of Contents
Create a Business Plan
Figuring out the type of business you want and researching the market takes time. However, it will help you determine if there is a demand for your product or service and help you create a solid business plan.
A business plan is your blueprint for success. It is your roadmap detailing each step of launching and operating your business. It typically includes a business summary, a detailed company description, business goals, and startup costs. It should also include market analysis supporting the viability of your business and plans for funding the business over time.
The startup statistics in California could be more encouraging. The number of companies that launched in one year is about five percent more than those that closed in the same year. They are not necessarily the same companies, but it illustrates how easily a new business can fail.
Source: Office of Advocacy
It helps to check out small business ideas for 2024, but ideas are only as good as their execution. A well-researched business plan is critical to start any business on the right foot. It is also a vital part of getting funding from investors and lenders.
Find a Location
The location of a business has traditionally been an essential part of starting one, but that is no longer the case. Nowadays, a well-designed website with the right plugins that provide a seamless customer experience is all it takes.
However, if your business requires a physical site in California, you should make sure it's done as soon as possible. Suppose you need help with finding a place for your business in California. You can check the interactive map for specific areas in California for more business information. The state's GO-Biz website also offers consultation for selecting business sites.
Source: California Prospector
Choose a Legal Entity
Many things have shifted in launching a startup anywhere in the world. However, the one thing that continues to take center stage is the structure of the business. The reason is that the business structure determines tax, liability, ownership, and other applicable obligations.
I've included below a brief description of the various legal entities available in California to determine which one works best for you. You can register your business online, in person, or by mail. However, you must register on bizfile Online to file the documents electronically.
A corporation and its owners are separate legal entities. It can be a C- or S-corporation based on Internal Revenue Tax rules, with the C-corporation being the more traditional. Corporations shield owners from personal liability for business debts and other legal obligations. For example, suppose a court orders a corporation to pay damages to a plaintiff. The plaintiff cannot go after owners' assets to satisfy that judgment.
However, C-corporations are subject to double taxation. The government levies taxes on business profits, shareholder dividends, and capital gains. S-corporations have a special tax status that allows pass-through taxation to shareholders, thus avoiding double taxation. However, the IRS places limits on S corporations, such as the number and citizenship of shareholders.
Suppose you plan to form a business with family members. In that case, you might want to consider a close corporation. Under Section 158 of the Code, you can bypass many of the formalities of a regular corporation, such as holding regular shareholder meetings. Shareholders can also serve as managers of the company. However, close corporations cannot have more than 35 shareholders, go public, and have other restrictions.
Forming any corporation in California requires filing Articles of Incorporation with the Secretary of State. You can find sample forms for download and the corresponding filing fees online.
Limited liability company
A limited liability company (LLC) protects owners of a company from personal liability like a corporation. However, it has pass-through taxation like an S-corporation without the attendant limitations. The LLC does not pay taxes, but any profits are included in the members' income taxes.
The Uniform Limited Liability Company Act in California dictates the rights, requirements, and obligations of LLCs in the state. One or more members and managers may manage a domestic LLC based on an Operating Agreement kept at the LLC's registered office.
To form an LLC in California, you must submit Articles of Organization with the Secretary of State, among other things. You may find the forms and attendant fees online for a domestic LLC.
A limited partnership in California consists of at least one general partner and one limited partner. A general partner controls what happens to the business but bears personal liability for business debts and obligations.
Section 15903.3 of the Uniform Limited Partnership Act of 2008 defines limited partners as having no control and, therefore, no liability. However, suppose the limited partner has some control or participation. In that case, their liability is limited to that amount of power or participation.
You are required to submit a Certificate of Limited Partnership to form a domestic LP in California. The form is available for download online and will require the name and office address of the proposed LP, among other things. The filing fee is currently $70.
General partnership (GP)
A general partnership (GP) involves two or more individuals or entities acting cooperatively as business owners. Owners have an equal share of rights, responsibilities, and liabilities for the business.
A GP is one of the most popular types of business structure because it is easy to set up. In California, you can register a Statement of Partnership Authority with the Secretary of State. However, it is not mandatory. Nevertheless, you should file a business name, apply for permits and licenses, and pay income taxes as individuals.
Limited liability partnership (LLP)
Despite the name, a limited liability partnership (LLC) is more like an LLC than a partnership. Like an LLC, owners of an LLP have personal liability protection from the company's debts and obligations. Taxation is also of the pass-through variety.
However, there are critical differences between an LLP and an LLC. All members of an LLP in California must be licensed professionals, specifically lawyers, architects, or accountants. Additionally, each partner will be personally liable for any debts or obligations arising from their conduct.
To form an LLP in California, you must complete and submit an Application to Register a Limited Liability Partnership. You can find all the relevant forms and fees online. LLPs must provide proof of financial security, such as liability insurance. Lawyers who successfully register an LLP must also register with the state bar. Participating in the State Bar of California's Limited Liability Partnership (LLP) program can also limit their liability.
Finally, the most popular structure for small businesses is the sole proprietorship. Like in most US states, you do not have to register a company in California if you are a sole proprietor. You might have to register the business name if it is other than your own and apply for permits when necessary. Otherwise, you can just start the business and set up automated marketing emails immediately.
However, the government considers you and your business as one entity. That means you have complete control over the profits and unlimited personal liability for taxes, debts, and obligations.
Get a Registered Agent
A registered agent is necessary if you choose the business structure of a corporation, LLC, LP, or LLP. The registered agent is for service of process, meaning they receive tax and legal communications for the business.
The agent may be a person or business entity, such as a registered agent service. The only requirement for a registered agent is to have a registered address in the state of business registration. The cost of retaining a registered agent in California ranges between $50 and $300 annually.
You must specify the chosen agent in your registration documents. You can name yourself the registered agent if you live in California, but note that you must put your address in the public record.
Additionally, carrying out the duties of an agent may be heavier than you know. It would be best to retain a professional agent to avoid maintaining records of documents and missing any critical deadlines. That way, you can occupy your time by figuring out ways to boost business growth.
If you wish to change your registered agent, update the information with the California Secretary of State. The process varies, depending on the business entity. Select the correct entity from this page to find the document you must file.
Obtain an Employer Identification Number
Any business operating in the US with full-time workers must obtain a federal employer identification number (EIN), regardless of business entity. The unique EIN is a nine-digit number the IRS assigns to monitor businesses and track tax requirements. Even if you are a sole proprietor, you must have one if you have at least one worker.
Back in the day, you needed to complete form SS-4 to apply for an EIN. However, startups now have the option to apply for it online. You can get it immediately if you are eligible for one and provide all the necessary information. You must have a valid taxpayer identification number such as an Individual Tax Identification Number, Social Security Number, or EIN. The application will also not push through if you have previously obtained a different EIN online.
Suppose you believe your business qualifies for federal tax exemption. In that case, you should not obtain an EIN until you get formal approval for your organization. You could risk a tax-exempt revocation if you fail to provide a tax return or notice for three consecutive years. Once you have legal status, you must get an EIN to file for tax-exempt status.
Suppose you operate a sole proprietorship that hires employees, an LLC, a corporation, or any partnership. In that case, you'll need to obtain a federal employer identification number (federal EIN or FEIN) for your business entity. An EIN is an exclusive nine-digit number the IRS assigns to identify and track business entities in the United States that are subject to taxation. You'll use Form SS-4 when applying for your EIN.
Register a DBA
In some situations, California requires for-profit businesses to register a fictitious business name (FBA), doing business as (DBA), or Trade Name statement. Generally, a DBA registration is necessary when the business name does not include the last name of the owners or partners. The purpose is to identify the individual doing business with the public. The requirement applies to the following entities:
- Sole proprietorships doing business without the last name of the business owner in their name
- Partnerships or associations using a business name that precludes the last name of the general partners or suggests additional owners such as “Company” and “Associates.”
- LPs, corporations, or LLCs doing business other than that stated in the Articles of Incorporation or Organization submitted to the Secretary of State.
You must file at the Registrar-Recorder or County Clerk's office of the county of the company's registered office address. The filing fees vary but range from $10 to $100. You can identify the correct agency for filing a DBA statement using the CalGOLD Permit Assistance Tool.
The business must file a DBA or FBN statement within 40 days after starting the business. After filing the DBA statement, you have 30 days to publish a statement of the fact in a county general circulation newspaper. You must do this for four successive weeks, at the end of which, you have 30 days to submit an affidavit of publication to the county clerk.
Aside from regulatory compliance, establishing your DBA is necessary for brand building. It will become the cornerstone of your digital marketing strategies once you launch your business.
Understand Your Tax Obligations
All businesses in California are subject to federal and state taxes, so you should know what you owe. If nothing else, you want to make sure you don’t make any mistakes that will land you in tax trouble.
You can find a breakdown of all the taxes that apply to your business on the California Tax Service Center page. You can also find more information and resources on the California Department of Taxes and Fee Administration (CDTFA) page. Below are some taxes that apply to specific business entities:
Minimum Franchise Tax
All California corporations, including most LLCs, must pay a minimum franchise tax of $800 yearly, whether it is active or not. The tax is payable until the state dissolves the corporation or LLC officially. However, corporations and LLCs registered between January 2021 and January 2024 do not have to pay the first year.
Also, LLCs earning over $250,000 pay more than $800, depending on the income range. LLCs must pay the fee on the 15th of the 6th month of the taxable year.
Sales and Use Tax
California businesses that sell goods and services must collect sales and use taxes from their clients. The CDTFA provides the breakdown of the rate, jurisdiction, purpose, and legal authority.
The tax rate in California is 7.25 percent, but it varies by city and county. You can find the applicable sales and use taxes by location as of July 1, 2023, online. In most cases, the appropriate rates are equal to or greater than the state tax rate.
Businesses operating in California that sell goods and services must collect appropriate taxes from customers based on the sale's location. The statewide tax rate is currently 7.25 percent. The CDTFE offers a breakdown of California sales and tax rates by county and city.
Employers in California must collect four types of payroll taxes and pay them to the state. Employers pay two and withhold two from the worker's wages. These are the following taxes:
- Unemployment insurance – New employers must pay unemployment insurance, currently 3.4 percent of the first $7,000 of an employee's wages, with a maximum of $434 annually per employee for the first three years
- Employment training tax (ETT) – Employers pay 0.1 percent of up to $7,000 of the employee's wages annually
- State disability insurance (SDI) – With some exceptions, employers must withhold 1.1 percent of the employee's wages for 2024 (no maximum withholding amount) and deposit it periodically.
- Personal income tax (PIT) – Employers must estimate and withhold the tax payments for each employee based on one of two withholding methods
Depending on the nature of the business, you must get the relevant permits and licenses before you start your operations. It may refer to federal, state, local, and regional requirements. The CalGold Permit Assistance Tool can help you identify the applications you must make to specific agencies.
Other tools and resources are also available online. For example, it provides a comprehensive guide for seller permits for businesses that sell or lease tangible personal property such as furniture, equipment, or machinery.
Set Up Funding
Money begets money, so you must have enough funding to keep your for-profit business going. Even startups that require little to no investment upfront still have overhead. Many sole proprietorships bootstrap funding, but at some point, you might want to apply for a personal loan. For partnerships, LLCs, and corporations, a business loan may be more appropriate.
In any case, you must separate your personal and business accounts to avoid trouble later, especially with the tax people. Suppose you are bootstrapping your business. In that case, transfer personal funds to a business account that you will use for everything related to your company.
Many small business owners, especially sole proprietors, see no reason to set up a business account. They are personally liable for all the company's debts, taxes, and obligations anyway, so it makes no difference. Additionally, business accounts typically have higher maintaining balances and fees, so keeping everything in a personal basket makes sense.
However, failing to separate personal and business finances can severely limit your ability to evaluate the success of your business. From an accounting perspective, it's messy, which might lead to stakeholder misunderstandings. That can also prevent you from attracting investors because your financial records do not paint a clear picture.
Furthermore, setting up and maintaining a business account will make opening a credit line with your bank easier. The facility can be a backup plan when you have temporary cashflow problems or an investment opportunity with high returns. Depending on several factors, including your credit history and the account age, many banks will grant small businesses a credit line of $500,000.
Starting a small business anywhere requires significant investment in time and thought. The state of California provides information and support online for every step of the process to make it easier. Depending on the nature and structure of your business, you can launch your new company within minutes of filing the correct documents. However, the same principles for success apply to all startups anywhere: plan carefully, do your research, and know your rights and obligations.
Frequently Asked Questions
What are the steps for registering a business in California?
You can register a business (other than a sole proprietorship) with the California Secretary of State online, by mail, or in person. In any case, you need to do the following:
- Choose a legal entity (corporation, limited liability company, limited partnership, general partnership, limited liability partnership) and submit the required documents.
- Reserve a business name (corporation, limited liability company, limited partnership).
- Get a registered agent.
- Obtain an employer identification number.
- Register a doing business as (DBA) name – includes sole proprietorships that do not include the owner name.
Do you need a registered agent to start a small business in California?
You must appoint and retain a registered agent (except sole proprietorships) to start a business in California. Section 1700-1702 of the California Corporations Code (Code) specifies this requirement. You could be your own registered agent in California for your business, provided you put it on the record. Choosing your business name must also conform to specific criteria.
Does California offer incentives to small business owners?
California offers new business employers with tax incentives to encourage economic development. Qualifying for one or more of the following programs can significantly reduce your costs:
- Work Opportunity Tax Credit – The credit applies to employers who hire employees in a targeted group on or before December 1, 2025, to incentivize diversity in the workplace; eligible business can reduce their taxes by as much as $9,600 per new qualified hire
- Disabled Access Credit – Non-refundable annual credit of up to $5,000 that applies to businesses earning $1 million or less with 30 employees or less that incur eligible access expenses for disabled persons within the taxable year
- Barrier Removal Tax Deduction: Tax deduction of $15,000 annually for qualified expenses for businesses that remove architectural and transport barriers to the elderly and persons with disabilities