Starting a business can be overwhelming. There are so many steps to take and so much information to learn that it stops many people from ever trying. Here, we will break down the steps and tell you everything you need to know about starting a business in California.
Step 1: Choose a Business Idea
The first step in starting a business in California is having a good business idea. Maybe you already have an idea picked out, or maybe you are still deciding on one. Regardless, you can check out our library of business ideas to get detailed industry information, trends, costs to start, tips, and lots more.
Step 2: Write a Business Plan
Once a solid business idea is in place, it’s time to start working on the business plan.
Many people only consider writing a business plan because the bank asks for one to get funding. While that’s a valid reason, more importantly writing a business plan gets the ideas out of the entrepreneur’s head and helps to create a roadmap for where they want the business to go. Just as most builders wouldn’t build a house without blueprints, an entrepreneur shouldn’t build a business without a business plan.
The thought of writing a business plan is overwhelming, so here are some resources to help in getting started.
Related: How to write a business plan
Step 3: Select a Business Entity
The next step in starting a business in California is selecting the type of business entity.
The business entity is sometimes referred to as a business structure or legal structure, which refers to how a business is legally organized. There are four primary business entities: sole proprietorship, partnership, corporation, and Limited Liability Company (LLC). A brief description of each is below.
A Sole Proprietorship is an individual that decides to go into business. This is the easiest and least expensive of the four entities to set up as there is no state filing. The ease of startup is a big selling point, however, a major downside to the sole proprietorship is that the owner is personally responsible for all debts and actions of the company. If the business is sued, the owner’s personal assets are potentially at risk. Another potential downside is the owner will pay self-employment tax on all business profits and may be more costly than some of the other entities.
Related: What is a sole proprietorship?
General Partnerships consist of two or more people conducting a business together. Like the sole proprietorship, there is no formal state filing. Also, like the sole proprietorship, the partnership has unlimited liability. If the partnership were to be sued, the partner’s personal assets are equally at risk. The partnership itself does not pay tax from business income. Instead, profits and losses are passed through to the owner’s personal tax return. This income is subject to self-employment tax.
Related: What is a partnership?
A Corporation is a business structure that is a separate entity from the individual. While corporations are more expensive and difficult to form than sole proprietorships and partnerships, the major advantage is that the corporation provides personal liability protection for the owners, should the corporation be sued. The downside is the compliance requirements and administrative burdens of annual meetings for directors and shareholders, taking minutes at the meetings, issuing stock certificates, and more.
There are multiple ways a corporation can elect to be taxed, which include the C-corporation and S-corporation. Electing how the entity should be taxed is complicated, so be sure to talk with your CPA as there is the potential of double taxation where profits and dividends are both taxed. Also, there is no self-employment tax with a corporation, as income to the owner(s) will come from either a salary or dividends, which may be beneficial.
Related: What is a corporation?
The Limited Liability Company (LLC) is a popular business entity choice because it provides the liability protection of a corporation with the ease of operation of the sole proprietorship. The Limited Liability Company does not have the many burdens like the corporation and has the greatest tax flexibility of the four entities. Income can be taxed as a pass-through entity like the sole proprietor or partnership or as a corporation.
Related: How to form an LLC in California
Forming a corporation or LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.
Some popular formation services include:
IncFile - Great service and free registered agent the first year.
Northwest - Privacy-Focused: Free registered agent and private business address for 1 year!
ZenBusiness - Easy to use and free registered agent for 1 year!
Step 4: Register a Business Name
After deciding on the business entity, the next step in starting a business in California is to register the business name.
Registering a California Fictitious Business Name for Sole Proprietorships & General Partnerships
If you are a sole proprietorship or general partnership in California and doing business under your full first and last name, John Smith, for example, there is no filing, but if the business will operate under a trade name/business name like John Smith’s Handyman Service, Mr. Handyman, etc, you will need to file a Fictitious Business Name Filing, commonly known as a DBA (Doing Business As). The Fictitious Business Name Statement is filed with the county clerk’s office in the county where the business is located.
Registering a California Business Name for a Corporation or LLC
Corporations and LLCs have to pick a name at the time of filing for the entity and each corporation/LLC has to be uniquely named.
Legally Protect Your Business Name
A trademark can legally stop others from using names, slogans, or logos. The U.S. Patent & Trademark Office (USPTO) manages the registration of trademarks.
Before settling on a name, you will want to first check and make sure the name you want to use isn’t already registered to another business.
You can also register to keep others from using the name of your business, product, or service.
Related: How to do a trademark search
Step 5: Get an EIN
The Employer Identification Number or EIN (sometimes referred to as the Federal Employer Identification Number, FEIN, or federal tax ID number) is a nine-digit tax identification number issued by the Internal Revenue Service (IRS). This number identifies a business operating in the U.S and is used for paying payroll taxes, filing tax returns, and more. Much like what a social security number is to a person, the EIN is similar to a social security number for a business. While most businesses will need to get an EIN, some do not.
Partnerships, corporations, and most LLCs OR sole proprietorships with employees MUST register for an EIN.
Sole proprietorships or a single-member LLC with no employees is NOT required to get an EIN. In these instances, the owner’s social security number is used to identify the business.
Filing the EIN can be done online through the IRS website, which only a few minutes and the number is available immediately. Alternatively, an EIN can be registered by mail or fax by submitting IRS Form SS-4.
Step 6: Open a Business Bank Account
Keeping your business and personal finances in separate business bank and credit card accounts makes it easier to track the income and expenses of the business. Every bank is different, but in general, they will request:
Sole proprietorship & partnership – Trade Name Certificate, EIN or SSN and owner(s) drivers license
Corporation – Articles of Incorporation, bylaws, Certificate of Good Standing, EIN, and owner(s) drivers license
LLC – Articles of Organization, Operating Agreement, Certificate of Good Standing, EIN and owner(s) drivers license
Step 7: Apply for Business Licenses & Permits
Certain licenses and permits will be needed to operate a business in California and the ones needed will vary on the business’s activities and location. Some common registrations include:
Business Licenses – There is no general state of California business license, however, many cities require a business license in order to operate.
Sellers Permit – Most businesses will need to register for a Seller’s Permit with the California Department of Tax & Fee Administration.
Professional Licensing – Some services such as auto repair shops, cosmetologists, and pest control require licensing in California. While this isn’t a license on the business, licensing is required to operate.
Step 8: Find Financing
Obtaining the funds to start a small business is a challenging process for many.
Not only are there unfamiliar terms like collateral, equity, assets, liabilities, and others, but there are several sources of funding with different rules, processes, and costs.
From conventional bank loans to Small Business Administration (SBA) loan guarantees, to investors, grants, and many others, it can be difficult to wade through what is available and best for your business.
Step 9: Hire Employees
Hiring employees is a complex and often overwhelming process for a new small business owner as there are multiple agencies to register with and labor laws to understand.
Employers are responsible for reporting new hires, verifying employees are eligible to work in the U.S., income tax withholding, unemployment taxes, and payroll withholding taxes including Social Security, and Medicare.
Step 10: Obtain Business Insurance
Business insurance is never at the top of anyone’s list of things they want to do when starting their business, however business insurance may be critical to protecting your business.
Most types of business insurance are optional, except for workers’ compensation insurance in most states. Some states will also require professional liability insurance for businesses offering certain services and commercial auto insurance.
Even if insurance isn’t required and there is a fire, theft, or personal injury lawsuit, the business owner may have to pay out-of-pocket for damages and legal fees. Home-based businesses and side-businesses may want to consider business insurance too as personal home and vehicle policies may not cover in the event of a business loss.
Related: Types of insurance your business may need
Step 11: Set up an Accounting System
Setting up an accounting system for your business is one of the most important things you can do for your company to ensure long-term success.
There is just one problem – you’re not a numbers person.
Just thinking about financial statements, debits and credits, and accounting software makes your head hurt.
Staying on top of finances not only keeps the business out of trouble with the IRS but can be used to track and monitor trends in the business and maximize profits.
Related: Setting up accounting for a business
Fortunately, understanding the numbers doesn’t mean getting a finance degree. Tracking a business’s financials can be done in a number of different ways:
- Pen and paper - Low expense, but difficult to track.
- Spreadsheet - Low expense, but easy to make errors.
- Accounting software - Medium expense, but owner typically inputs expenses. Some great accounting software programs include Freshbooks or Wave Accounting.
- Hire a bookkeeper - Higher expense, though very affordable at $100-$200 per month in most cases. A dedicated bookkeeper will probably save money because, in addition to handling all of the bookkeeping (so you can focus on the business), they also provide personalized tax advice and ensure the business is in compliance.
Find bookkeepers in your local area or use a service like 800Accountant.
Common questions when starting a business
What type of business should I start in California?
With so many great businesses to choose from, it can be hard to narrow down what the right business is for you. While there are a lot of factors that go into picking the right business, here are the top 10 most popular types of businesses to start in California:
– Food truck
– Home inspection
– Home health care
Is an LLC better than a sole proprietorship?
Choosing the business entity is a very difficult decision and we get a lot of questions about whether the sole proprietorship or Limited Liability Company is the best option. The benefits are different for each business owner, but here are a few things to consider when considering the two.
The sole proprietorship is a popular business entity and has advantages such as ease of setting up, fewer administrative requirements, and lower cost than the Limited Liability Company. The biggest downside of the sole proprietorship is that the owner’s personal finances and the finances of the business are tied together. This means if the business is sued or the business can’t pay its debts, the owner is personally responsible.
The LLC is a legal entity that separates the assets of the business and its owners. If the business is sued, the owners are typically not personally liable. Another significant advantage of the LLC comes from its tax flexibility. Once the LLC is profitable enough, it can provide distributions to the owners which are taxed much less than the self-employment taxes of the sole proprietorship.
What are the steps to starting an LLC in California?
There are three main steps to starting an LLC in California. These include:
1. Making sure the LLC name is available
2. Appointing a Registered Agent
3. Filing the Articles of Organization
There are a few more details to consider depending on the business. Learn more about starting an LLC in California.
How much does it cost to start an LLC in California?
The cost to start an LLC in California is $150 to file the Articles of Organization with the California Secretary of State.
What licenses do I need to start a business in California?
There isn’t a general business license required by the state, however, there are potentially several different licenses and permits a business will need to obtain before starting.
How much does it cost to start a business in California?
The cost to start a business in California is going to vary significantly depending on what the business does and where it’s located. Below is a list of the estimated costs for some of the more common licenses and registrations a business will need:
– Business Entity Formation – $0 – $70
– Business License – $0 – $500
– Employer Identification Number (EIN) – $0
– Seller’s Permit – $0