California is a fantastic place to own a business. The state is an economic powerhouse, having the best overall economic climate in the nation, as well as the best access to venture funding out of any state. The state’s economy is so large that if California was a country, it would rank fifth in the world in terms of economic heft.
If you’re looking to start a small business in California, you’re not alone! The state boasts more than 4 million small businesses, as of 2019, with hundreds of thousands opening each year. More than 99.8% of all businesses in the state are considered small businesses.
But how do you start a business in California? The process will be a bit different depending on what kind of business you plan to start (LLC, corporation, sole proprietorship, etc.), but there are some basic principles to follow regardless of the business type. This guide will walk you through what you need to know!
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Decide on a business idea
First and foremost, you’ll need to decide what kind of business you want to start. Chances are you already have something in mind, but if not, here are some things to consider:
- What are you talented or naturally skilled at? Could this talent make you well suited to a certain type of business?
- What business does your community need? Have you talked to people to find out?
- What are you interested in? Can you combine any of your passions with a business idea?
- Is this going to be a full time business, or more of a side hustle?
These are questions to ask yourself when deciding on a business idea. Once you have decided, move on to the next step.
Plan your California business
Now it’s time to start planning. This means coming up with a business plan, naming your business, researching locations, and more. There’s a lot to cover here, so let’s break it down:
Select a business name
You will first need to select a name for your business, and then register it with the state (more on this below). There are some rules and restrictions that must be followed when it comes to naming your business.
The most important rule is that your business name must be distinguishable from all other businesses already registered in the state. This means that you will need to choose a unique name that is not already taken by another company. However, this rule is specific to business type; so LLC names must be unique from other LLC names, but a new LLC could potentially have a very similar name to an already registered corporation name.
To confirm availability of a CA business name, you can conduct an online business name search here.
There are other requirements to consider, as well:
- The name must be distinguishable from other CA businesses
- LLC names must contain the words “limited liability company”, or approved abbreviations like “LLC” or “L.L.C.”
- Certain words or phrases require written permission in order to use. This includes financial terms like “bank”, “trust” or “credit union”.
- Other rules apply. See the full CA business naming rules here.
Once you have found a name that you wish to register, you can move on to the next step.
Alternatively, if you are not yet ready to register your business but want to save the name, you can reserve the business name for up to 60 days. This gives you some time to think about the name before committing to it.
California Doing Business As (DBA) names
One final consideration when it comes to business names is whether or not you wish to use a trade name, otherwise known as a doing business as (DBA) name.
Basically, a trade name is a secondary name that you can register once your formal business is already formed. Trade names allow you to do business legally under this new name, allowing for some flexibility in how you brand and market your business. For more information, see this guide to DBAs from the CA Franchise Tax Board.
Register a domain name
Once you choose a name, you should immediately register a domain name for your new business. In most cases, getting a .com domain name is ideal, but there are many other extensions (.biz, .net, etc.) that are worth considering.
You can use a tool like Namechk to search for an available domain name and find a great deal on the registration cost. You may find that your desired names are taken, so you may need to get creative.
Complete market research
Once you have an idea, you’ll want to do some market research. You want to gain a better understanding of who your customers – and competitors – are. You can achieve this by conducting online research, running focus groups, sending out surveys, and more. There are also companies that can help you complete market research, for a fee.
Select a business location
Unless you plan to run a remote/virtual business, you will need to find a physical location for your company. Research commercial property in your area, and take note of typical costs. For customer-facing businesses (retail and some services), location is very important, so take your time in selecting the right area for your business.
Create a business plan
You will now need to create a detailed business plan for your new venture. This plan is helpful for your own purposes, and will also be necessary in order to obtain funding from a bank. A good business plan should contain these elements:
- Finances: How much funding does the business need to get started? How many sales does it need each month to break even on expenses?
- Product: What do you plan to sell? Is it a product or a service? What problem does your business solve, and how is it distinct from your competitors?
- Marketing: How will you drive sales? What marketing and sales efforts do you plan to employ? How much money will you set aside to fund marketing efforts?
- Staff & Partnerships: How many people will you need to hire, and what skill sets do they need to have? Will you have any partnerships or arrangements with other local businesses?
If you need help, you can find business plan templates online that will help walk you through the steps you need to take to draft a detailed business plan. If you plan to seek funding, you may also wish to call your bank to see what they require in terms of business plans.
Decide on a business structure
Before you form your business as a legal entity, you will need to decide which business structure you will use. There are a few different types of businesses, each with its own pros and cons.
Sole proprietorship
Sole props are single-person operations. Examples include freelancers, gig economy workers and consultants. A sole proprietorship business is very easy and inexpensive to form, and tax reporting is also fairly simple. As a sole proprietor, your business taxes are reported as part of your personal tax return.
The downsides to a sole prop are that you cannot hire employees, and you don’t have the legal liability shield that something like an LLC or corporation would provide. 100% of the debts and liability of a sole proprietorship go to the sole owner: you.
Partnership
A general partnership is an unincorporated business structure similar to a sole proprietorship, except with two active owners/participants. Partnerships do not have liability protection.
Limited Liability Company (LLC)
A limited liability company, or LLC, is a popular choice for business owners because it provides liability protection to the owners. It separates the business from the owners, which means the personal assets of owners will not be at risk if the company gets sued or goes into bankruptcy.
LLCs are also a bit easier to form than corporations. Even so, there is definitely more work involved with an LLC than there is with a sole proprietorship.
Corporation
A corporation is owned by its shareholders, and is a separate entity. There are a few different types of corporations (C-corp, S-corp, etc), with the main differences being the way they are treated tax-wise.
Corporations are more regulated than LLCs, which makes them more attractive to outside investors. For this reason, most large companies are corporations. The downside is that it takes more effort, and more paperwork, to form a corporation.
Nonprofit
A nonprofit is a legal entity that is set up with charitable status, meaning that its goal is not to make a profit, but rather to address a certain cause. Nonprofits are funded by donations, rather than investors, and are subject to many regulations. They are exempt from most forms of taxation, although tax returns must still be filed.
Register your business in California
The next step is to actually go through the process of registering your California business. The specific steps vary a bit, mostly depending on whether you’re forming a sole proprietorship, an LLC or a corporation.
If you want the simplest experience possible, it’s best to use a professional business formation service. These companies help walk you through the process of forming your new LLC or corporation. They charge a small amount to help, but they can save you a lot of time and hassle. Plus, using a service ensures that everything is handled efficiently and accurately.
Some great options to use include Northwest Registered Agent, ZenBusiness, and Bizee.
Whether you choose to use a service or not, the basic steps include:
- Deciding on a name for your business (see step #2 above)
- Choosing an Agent for Service of Process (also known as a Registered Agent). This agent is responsible for receiving legal documents, notice of lawsuits, etc. on behalf of your company
- Filing formation documents with the state of California
- Applying for an Employer Identification Number (EIN) from the Internal Revenue Service (IRS)
Form a business in California
You will need to work with the California Secretary of State’s office. You will need to file some paperwork with the Secretary of State regardless, although the specific forms to file will vary depending on the business structure you are forming.
Form a California sole proprietorship
The process is simple. Follow these steps:
- Apply for a local business license in your city/country – you can check CalGold for details on what permits you will need.
- You may register a Doing Business As name, if desired, but you won’t need to file much paperwork with the state.
For LLCs and corporations, the process is a bit more involved.
Form a California LLC
Follow these steps:
- Name your LLC (follow the California LLC naming rules)
- Choose a California Agent for Service of Process/Registered Agent (or use a service such as Northwest Registered Agent)
- File the LLC Articles of Organization online, and pay the $70 filing fee. The form can also be filed by mail
- Draft an LLC operating agreement
- Apply for an EIN with the IRS
Form a California corporation
Follow these steps:
- Decide which corporate tax structure you want (C corp or S corp)
- Name your new corporation (follow California Corporation naming rules)
- Hold an organizational meeting and appoint directors
- File the California corporation Articles of Incorporation and pay the $100 filing fee. This form can also be filed by mail
- Apply for an EIN with the IRS
Our picks of the best registered agent services
Apply for business licenses and permits
Registering your business and forming an LLC or corporation is an important part of starting your business – but in order to operate legally, you will likely also need to obtain certain permits and/or business licenses.
The specifics vary depending on the type of business you are running, as well as your location. For example, restaurants will need health permits, bars will need liquor licenses, and medical service providers will need various professional licenses and federal permits. You will need to research the specifics that relate to your business type.
There are different requirements at each level of government:
- Local: Cities and counties may require certain business licenses or permits. Contact your county clerk for details, or check CalGOLD.
- State: California may require certain permits or licenses. Check the CalGOLD website for guidance.
- Federal: Federal permits/licenses may be required for certain regulated industries, such as construction, medicine and legal services. Check the Small Business Administration (SBA) guide for more details.
At this time, you should also apply for an Employer Identification Number (EIN). An EIN is a federal tax ID that is required to hire employees. You can apply for an EIN online with the IRS – the application is free, and quick.
Secure funding
For most businesses, some startup funding will be necessary in order to get started. In step #2, you should have calculated your funding needs while drafting a business plan. Use this information to determine how much funding you need to raise.
For bootstrapped companies, you may be able to get by with your own personal savings, or some seed investments from friends and family. If your funding needs are small, this is likely your best route.
If your business plan indicates that substantial funding is needed, you will likely need to apply for a loan and/or a grant.
- Small business loans are offered by banks, credit unions and other lenders. They can range from as little as a few thousand to hundreds of thousands. Specifics will depend on your business, as well as your personal creditworthiness. Most small business loans are issued in a lump sum, and paid back on a monthly basis, with interest.
- Small business grants are offered by government agencies and some nonprofits. They are essentially business loans that don’t need to be paid back – but they usually have substantial fine print. It’s worth looking into, however, as there may be grants available, particularly for businesses serving an important social need, or for underprivileged entrepreneurs starting their first business.
Set up your business finances
Beyond securing funding, there are other routine tasks that you need to take care of to get your business’ finances in order. This includes:
- Opening a business checking account. You should have a separate business bank account that you use solely for business purposes. You can open this account at most banks, credit unions and financial institutions. Call ahead to see what documents will be required to open this account.
- Open a business credit card or line of credit. This is not strictly necessary, but most businesses can benefit from having a business credit card, and/or a business line of credit. This can be used for day-to-day expenses and purchases, and may also earn you some rewards.
- Set up your accounting system. As a business owner, you will need to keep very detailed records about all revenue and expenses. To do this, you’ll want to set up the proper foundation from day one. This could be investing in an account software such as QuickBooks or Xero, hiring a bookkeeper, or at the very least establishing a spreadsheet to track everything. If you do not have any accounting experience, it’s wise to hire a professional to help.
- Purchase business insurance. Most businesses should have some form of liability insurance, and potentially other forms of business insurance as well. Insurance policies can help protect your equipment and buildings from costly damage, and help shield your company from liability if a worker or customer is injured or otherwise harmed. Speak with a local business insurance provider to get started.
Create a business website
In this day and age, having a solid web presence for your business is very important. And social media profiles, while important, are no replacement for an actual website. You will want to build a professional business website that you can use to drum up business, inform your customers, and stay connected with your clientele.
The simplest way to build a website is to use a website builder from a web hosting provider. When you register a new domain name, look for a provider that also offers web hosting and a site builder, so that you can purchase everything at once and get your site set up quickly.
Our picks of the best website builders
Hire employees
Unless you plan to operate a solo business (with you as the only worker), you will likely need to hire employees. To do this, you will need an federal employer identification number (EIN), which is a free tax ID number issued by the Internal Revenue Service (IRS).
To hire employees in California, you will also need to satisfy some requirements on the state level. This includes registering for and paying employer taxes, as well as reporting new hires to the state.
Businesses must also register for tax accounts with the California Department of Tax and Fee Administration. Entrepreneurs should research tax reporting requirements for their specific business types to ensure that they are meeting all reporting requirements.
At this point, you also should look into setting up your payroll system – whether you handle it yourself, or use a payroll service.
Run and grow your business
Now it’s time to get down to business and engage with the day-to-day activities that are sure to bring your business success. This means marketing your products and services, maintaining good relationships with your return customers, and setting yourself apart from the competition.
California business FAQs
Still have questions about running a business in California? Here are some answers to frequently asked questions.
What are some business resources in California?
Business owners in California have a variety of resources at their disposal. A great place to start is the California Small Business Development Center (CASBDC). This resource provides free business advisor services, webinars and training, and many other useful resources. The California Secretary of State’s website also provides a useful database of resources for entrepreneurs in the state.
What is the minimum wage in California?
The California minimum wage is $13 or $14 per hour, depending on the size of the business. Small businesses with fewer than 25 employees can pay $13 per hour, while businesses with more than 25 employees must pay $14 per hour.
These rates are valid until the end of 2021. In 2022, minimum wage will rise to $14/$15 per hour, and again to $15 per hour (for all businesses) in 2023. Businesses can look to the California Department of Industrial Relations for details.
Additionally, keep in mind that certain cities or counties may impose their own minimum wage laws. For instance, San Francisco has a minimum wage of $16.32 per hour. Minimum wage laws can change frequently, so be sure to check the latest laws in order to ensure your business is compliant.
What business taxes does California have?
There are a variety of taxes that California businesses must pay. There is the California sales tax, currently 7.25%, as well as local city/county sales tax rates of 0.1% to 1%. Businesses selling taxable goods or services must collect this tax from customers, and pay it to the relevant state and local governments.
Additionally, many firms will be subject to corporate income tax or other business taxes. Specialty taxes may be collected for industries like alcohol and tobacco sales, or gambling. And employers in California will be responsible for paying withholding tax and unemployment taxes.
How do I dissolve an LLC or Corporation in California?
If you end up needing to close your business, you will need to dissolve it. To do this, you must close down your tax accounts with the California tax authorities, and file some paperwork. You must submit all outstanding tax returns, and close all relevant tax accounts.
Closing a business can be complex, so you may wish to hire a certified public accountant (CPA) for help with this process.
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