Starting a business in California requires careful planning and pivotal information. You should prepare a comprehensive business plan before taking any other step.
Then, conduct thorough research on what and how you’ll sell in California. Different economic zones and geographical locations in the state offer discrete advantages and costs.
Once you are done with the pre-planning phase, you can follow our step-by-step guide on how to start a business in California.
Select Entity Type
Each business structure comes with different types of registration requirements and tax implications. You can choose from one of the six commonly used entity types.
- Limited Liability Company
- Limited Partnership
- General Partnership
- Limited Liability Partnership
- Sole Proprietorship
Your entity structure choice will also depend on whether you are the sole owner of the business or starting it as a partnership.
Limited liability corporations (LLCs), C Corporations, and Sole Proprietorships are the most common choices of small business owners in California.
LLCs and C Corporation provide tax benefits to owners as well as separate the legal obligations of companies and their owners.
Consulting an attorney or a business consultant can help you decide on the right type of entity structure.
Choose a Business Name
Consider the basics of choosing a memorable and easy business name. Avoid choosing too common or vague business names to avoid any legal complications.
Conduct a business name search through online business directories and choose a unique company name to avoid copyright strikes.
Businesses in California can register a company name separate from their commonly used brand name as well. It means you can operate on a “doing business as” basis and register a company name separate from your brand name.
Your legal or registered business name must include the correct identifier like “LLC”, “Co”, “Ltd.” etc.
Like other states, California also prohibits legal names like “bank”, “Govt.”, “state” etc.
Select a Registered Agent
Businesses in California must appoint a registered agent that holds correspondence with the State offices on behalf of the company.
The main task of a registered agent is to receive legal and tax communication from state authorities in California. A registered agent can be a person, a business, an attorney, or any other stakeholder but cannot be the company itself.
You can either register yourself as a registered agent being the owner of your company or can appoint a professional service provider. Hiring external services can cost you around $300 annually.
Register Your Company
Apart from sole proprietorships, all types of businesses must register their businesses in California.
Limited liability companies (LLCs) and partnerships require an article of organization for company registration. You’ll need to file Form LLC-1 with the Secretary of State California office.
Once your LLC-1 application is accepted and approved, you’ll then need to organize an initial meeting with the organization. The LLC-1 filing fee for LLCs, LLPs, and other partnership structures is around $70.
For corporations, you must use Form ATS-GS called the article of incorporation to register your business in California. You can elect the corporation type as a “C” or “S” corporation here to file taxes with the Internal Revenue Service (IRS).
The filing fee for form ATS-GS is $30.
Get Business Permits and Licenses (if Applicable)
Some businesses in California must obtain a business license or permit to operate legally. These licenses and permits are not issued by the Secretary of State California though.
Some common forms of licenses and permits in California include:
- Zoning Permit
- Building Permit
- Fire Department Permit/Alarm Permit
- General License
- Seller’s Permit in California
- Tax Permit
- Health Permit
- Occupational Permit
Most of these permits are issued by local governing bodies in California. You can check with your local county or city administration to know the exact requirements for a business license or permit.
Large businesses operating in California may require special licenses or permits from the federal government though.
Some commonly used federal government licenses/permits include:
- Agriculture, Fish, and wildlife
- Alcoholic sales, serving, distribution, or importing
- Firearms, ammunition, and explosives
- Commercial fisheries
- Maritime transportation
- Mining and drilling
- Radio and television broadcasting
- Special Tasks to Start a Business in California
Once your business is legally registered in the State of California, you should then proceed to complete some other important tasks.
Some of these tasks are not mandatory or legal obligations for all businesses. However, these additional steps will help you start a business smoothly.
Apply for the Federal Employer Identification Number (EIN)
Sole proprietors can pay federal taxes using their social security numbers (SSNs). All other types of businesses must obtain a federal employer identification number (EIN).
You can apply for an EIN online through the Internal Revenue Service (IRS) website or download Form SS4 for registration and submit it by mail or fax as well.
Sole proprietors hiring new employees will need an EIN too. Other business types will need an EIN for purposes like opening a bank account.
Register with the EDD
You’ll need to file for payroll and unemployment taxes in California as well. Therefore, you must register the business with the Employment Development Department of California (EDD).
You’ll need the following information to register with the EDD:
- Company Account Number issued by the Secretary of State
- Employment Identification Number (EIN)
- Business type and legal name
- Once the registration process is complete, EDD will issue a state employer identification number (SEIN).
Opening a Bank Account
An important step in creating a company is to separate the business and personal financial matters. Therefore, opening a business bank account is an essential step to take at this stage.
Once you have the FEIN and SEIN, you can easily open a business account with any bank. It would fulfill a compliance condition if you registered a business as a corporation.
Annual and Ongoing Reporting Requirements
Starting a business in California means complying with ongoing regulatory requirements as well.
Here are a few steps that you’ll need to take on an ongoing basis.
- All businesses filing an article of the organization must also file an initial information report within 90 days of registration in California.
- Limited liability companies and corporations must renew their registration every two years in California by paying $300.
- Incorporated businesses must comply with accounting and taxation standards as mandated by the IRS.
- All businesses must file state and federal taxes quarterly and annually as required by law.
- Your business name registration is valid for five years in California. So, you’ll need a renewal every five years.
- Relevant business permit and licensing authorities may also require recurring fees and renewals for certain businesses in California.
Financing Your Business in California
Funding a business is possible in several ways. You can self-finance your business or seek family/friend loans.
The Small Business Administration (SBA) offers customized loans for startups and running small businesses. You can apply for an SBA loan with a business plan and complete other requirements.
Commercial bank loans for startups are often difficult. However, if you have a good business plan and a high personal credit score, you can obtain one from a commercial bank as well.
Paying Business Taxes in California
Your business will need to pay state and federal taxes on an ongoing basis. If you have a pass-through entity structure, your business income will not be taxed at the entity level.
The CDTFE manages sales taxes in California. If your business sells goods or services and is liable for sales tax, it will be charged at 7.5%.
The employment development department (EDD) manages the following state taxes in California:
- Payroll taxes
- Unemployment Insurance
- Employment Training Tax (ETT)
- State Disability Insurance (SDI)
- Personal Income Tax (PIT)
The Franchise Tax Board (FTB) manages the franchise tax in California. Your business income and estimated taxes will go to the IRS.
You can take advantage of tax incentives and credits from IRS and the state department in California.
- Work opportunity tax credit of up to $9,600 per qualified hire.
- The disabled access tax credit of up to $5,000.
An annual tax credit of $1,500 for qualified businesses for architectural and transportation tax incentives.