Starting a Business in California: The Ultimate Guide
If you had to start a business anywhere, California is a great place to do it. It has a boomin’ economy (the largest in the United States), and offers plenty of tax credits and other incentives for small business owners.
Wondering how to start a business in California? Follow these key steps:
Read on to learn everything you need to know about how to start a business in California, from brainstorming business ideas to turning your totally awesome winning idea into a reality:
- Picking an idea for your business
- Choosing a name for your business
- Creating your business plan
- Deciding the structure of your business
- Registering your business
- Applying for licenses and permits
- Insuring your business
- Hiring employees
- Setting up banking and accounting for your business
1) Pick an idea for your business in California
The first thing you need to do is whip out a pencil and a notebook (okay, the notes app on your phone is fine, too)—it’s brainstorming time! When choosing an idea for your small business, it’s important to not only consider your passions and skills, but the practical side of things, too.
For example: Have you done market research, and is there a demand for your business? How does your idea compare to the competition? Do you have the right time and resources to put into your business?
To help you get those creative juices flowing, here are some examples of California-specific business ideas:
- Grocery stores
- Marketing agencies
- Drive-in movie theaters
- Auto repair shops
- Security companies
- Hair salons
- Dog breeding
2) Choose a name for your California business
Got your business idea down? Great, now it’s time to come up with a clear and catchy business name. Keep in mind, there are some legal rules to follow, too:
- Ensure your business name hasn’t already been claimed by other businesses registered with the California Secretary of State (SOS). You can verify your name is free to claim by using the California Business Search and checking the US Patent and Trademark Office website to make sure there’s no copyright infringement. Make sure the website domain you want to use is available, too!
- Limited liability companies (LLCs) need to have some form of the word “LLC” in their names, while corporations need to have the word “corporation.”
- Your business name shouldn’t mislead the public in any way (for example, falsely insinuating that it’s affiliated with the government, insurance, or a charity if it isn’t).
- If your business is a sole proprietorship and your business name won’t include your legal name in it, you need to file a Fictitious Business Name statement. This is also the case if you wanted to use a business name other than the one on your formation documents for a corporation or LLC.
You can register your business name for up to 60 days before you officially register your business if you want to ensure it doesn’t get snatched up before then.
3) Create your business plan
Once you have a solid idea down, it’s time to craft a business plan. A business plan is essentially a roadmap that lays out how you’ll turn your business into a reality. It not only keeps you motivated and helps you set goals, it can also play a part in convincing investors to fund your business. Here are the main sections of a business plan you’ll want to include:
- Cover page: Shows basic information about your business, including its name, logo, and address.
- Executive summary: A summary of your entire business plan.
- Market opportunity: Covers what the target demographic and market is for your product or service. What problem does your business solve, and how does it stand out from the competition?
- Marketing and sales strategy: How you plan to spread the word about your product.
- Operations plan: Describe the physical logistics needed to run your business, including location, office, and/or equipment.
- People and ownership: Information about your business’s ownership, managers, board of directors, and/or employees, and what their duties are.
- Financial planning: How much funding your business needs (and where you plan to get it).
4) Decide the structure of your business in California
Let’s go over the three most popular business structures in California: sole proprietorship, limited liability company (LLC), and corporation. When deciding on a structure, think about which one will provide your small business with the most advantages, especially tax- and liability-wise.
Sole proprietorship in California
Sole proprietorships are unincorporated and owned by one person. They’re best suited for smaller businesses with no (or few) employees. Keep in mind, you are not separate from your business. So, while 100% of the profits go to you, you are also 100% responsible for your business’s liabilities.
- A great choice if you’re the only member of your business
- The simplest business structure
- Relatively easy and inexpensive
- No corporate business taxes
- Easier bookkeeping and less paperwork
- Access to small business deductions
- Since there’s no difference between you and your business, you are liable for any legal trouble and debt your business incurs
- May be more difficult to get funding, since lenders unfortunately see sole proprietorships as risky, and investors often prefer to receive equity in exchange for their money
- Selling your business in the future could be more difficult because of tax implications
- You could end up paying more in taxes
Limited liability company (LLC) in California
The LLC structure is a popular one, and for good reason—you get the liability protection of a corporation and the tax benefits of a sole proprietorship. If you're thinking of setting up an LLC in California, here are some pros and cons to consider.
- Fairly easy to maintain
- You can have as many or as few employees/staff as you want
- Less rules and regulations, especially compared to corporations
- Flexibility to choose how your business is taxed
- Pricier than a sole proprietorship to set up
- Harder to transfer ownership compared to a corporation
- May have to pay state and federal taxes
Corporation in California
Corporations are the most formal structure of the bunch. In a corporation, you and your business are totally separate—you’re a “shareholder” who owns the business.
- A good choice for larger businesses
- You and any other shareholders are not responsible for any debts or legal troubles incurred by your business
- Corporations can issue stock, making them more appealing to investors
- Easier to sell
- Stricter rules and regulations
- More expensive and difficult to set up
5) Register your business in California
This step is arguably the most exciting (and important) one, because this is when your business officially becomes real! Let’s dive into the process of registering your California business, which will depend on your business structure.
If you’re forming a sole proprietorship, you don’t need to file any formation documents with California—lucky you!
LLCs in California do need to file Articles of Organization (formation documents) with the SOS, along with an Initial Statement of Information. You’re also responsible for hiring a registered agent, which is an individual or a business responsible for collecting important legal documents on your behalf.
It’s also best practice to create an operating agreement for internal use, which clarifies ownership, formation and dissolution terms, and other important aspects of how you’ll run your business.
Corporates need to file Articles of Incorporation with the SOS, and, similarly to LLCs, file an Initial Statement of Information and hire a registered agent.
It’s mandatory for corporations to form a board of directors, a committee that supervises your corporation and helps it grow. California has specific requirements about boards of directors, including diversity requirements, so keep these in mind when selecting board members.
Another thing to prepare for is how you will issue stock and decide on share prices. It’s also best practice to create corporate bylaws, which are detailed operating rules for your corporation, used internally.
Get an Employer Identification Number (EIN)
An Employer Identification Number (EIN) is issued by the Internal Revenue Service (IRS) to identify your business. It’s used for tax purposes, but also lets you open up a business bank account, hire employees, and other important aspects of running a business.
Sole proprietorships or LLCs who opt for pass-through taxation and do not have employees don't have to register for an EIN (but it would still be helpful), but corporations and sole proprietorships and LLCs with employees do.
You can obtain an EIN through the IRS website, which is fairly quick and painless.
Register to pay business taxes in California
Another crucial step when starting your business is to register to pay business taxes in California and get informed about which taxes you’re responsible for.
Sole proprietorships pay state taxes on their business income, which gets taxed on their personal income tax returns.
Once an LLC owner decides how they want their business to be taxed, they have to file the appropriate state tax form, along with a biennial statement of information.
Shareholders of a corporation pay state taxes on their portion of the business’s income. If a shareholder also has a salary, they’ll pay state income tax on their personal state tax return. Corporations are also responsible for paying corporation taxes and filing an annual statement of information.
There are also industry-specific taxes you can learn about on the state’s website.
6) Apply for a California business license and permits
The number of business licenses you'll need in California will depend on your business type and industry. On the state-level, you’ll at least need a seller’s permit from the Board of Equalization (BOE) if you’re selling goods.
On the local level, you’ll need a general business license from whatever city you’re doing business in. We suggest doing some research and getting in touch with your local government to find out if other city-specific licenses are needed, too.
For information on industry-specific licenses and permits, you can do a quick search on the California Governor’s Office of Business and Economic Development website to see which licenses and permits your business needs on the state-level, and check out the US Small Business Administration (SBA) guide for licenses and permits on the federal-level.
You can check out the California Department of Tax and Fee Administration for more information.
It’s also important to pay attention to zoning regulations when choosing a location for your small business. Zoning laws dictate what type of businesses are allowed in certain areas, if at all, to protect residents and, sometimes, the environment. Rather than trying to get a waiver to set up shop in an area that hasn’t been approved, it’s easier to find a spot already approved for commercial activities.
There are still zoning rules and regulations to follow even if you’re running your business out of your home, so be sure to consult the terms of your lease or homeowners association rules.
7) Obtain insurance for your business in California
Regardless of business structure, you should always get insurance for your California business to protect you from any unpredictable accidents or disasters, as well as lawsuits. These are the three most common types of insurance:
- General Liability Insurance: Recommended for all businesses; it covers your small business for things like property damage, natural disasters, and injury.
- Workers’ Compensation Insurance: Mandatory for businesses with more than one employee. It covers both you and your employees if they suffer from a work-related accident or injury.
- Professional Liability Insurance: Especially important if you’re offering professional services that you could potentially be sued for.
Depending on your industry, it’s also a good idea to invest in industry-specific insurance, like machinery or automobile insurance.
8) Fund your California business
The amount of funding needed when starting a small business can really add up. Before making any decisions, add up your business costs to get an idea of how much funding you’ll need and come up with a realistic financial plan. This will give you an idea of how strictly you need to budget, and what kind of funding options are right for you.
Here are the different ways you can get funding for your California business:
- Small Business Administration (SBA) loans
- Small business grants
- Short-term loans
- Your own savings
- Help from friends and family
Once you do secure funding, whether through a loan or one of many California business grants, make sure to stick to your financial plan and spend wisely!
9) Hire employees
Once you’re ready to hire employees, you’ll need to register with the California Employment Development Department, register for employee taxes with the IRS, and report new hires to the state.
We also highly recommend using a payroll software to help you easily pay your staff (and yourself!), stay organized, and prepare for tax time.
Psst, for more information about hiring employees, check out our guide!
10) Set up banking and accounting for your business in California
Last, but certainly not least: setting up a business bank account and obtaining a business credit card is an essential step when starting a business. These help ensure your personal finances and your business finances stay separate, which is not only super important for legal reasons, but keeps you organized and makes tax filing way easier.
We suggest using free accounting software, like Wave, to make managing your finances and staying ready for tax time even easier. We know accounting isn’t everyone’s favorite part of business ownership, but setting up good accounting habits right from the start is key for money management and painless tax filing down the road.
Next steps to start a business in California
So, what happens after you’ve accomplished the steps above and officially started your small business? Besides bringing out the celebratory cake and doing a happy dance, it’s now time to spread the word about your business with some solid marketing tactics!
The first step is to determine how you want to brand yourself: what’s your brand’s personality, and what values does it stand for? Looks-wise, what is your brand’s visual identity (such as your business logo and colors)?
A website and social media are musts when advertising your business (make sure they match your brand voice and your brand colors)! You’ve probably already done some strategizing and marketing research for your business plan, but this is where it’ll all come together. You can advertise your business online (through social media posts or campaigns, YouTube videos, or paid ads), through a press release, with flyers, or any medium you can think of.
Now that you’re armed with all the information you need to start a business in California, it’s time to get out there and turn your dream into a reality!
The information and tips shared on this blog are meant to be used as learning and personal development tools as you launch, run and grow your business. While a good place to start, these articles should not take the place of personalized advice from professionals. As our lawyers would say: “All content on Wave’s blog is intended for informational purposes only. It should not be considered legal or financial advice.” Additionally, Wave is the legal copyright holder of all materials on the blog, and others cannot re-use or publish it without our written consent.