As a California-based entrepreneur myself, I can tell you there’s nothing more exciting—and unnerving—than launching a business for the first time. There’s the thrill of creating your own professional destiny and being your own boss…and then the worry that you may miss something mission-critical when setting up your business. If you have a guide to starting a business in California checklist to follow, you can enjoy more of the thrills and less of the worries as you embark on your entrepreneurial adventure.
So, let’s talk about that right here and now!
Before we begin, a quick disclaimer is in order: The information I’m about to share is an overview of what’s involved in starting a business in the golden state. Please realize it is not meant as legal, tax, or accounting advice. For that expertise, you should seek the services of licensed professionals who can assess your specific situation and offer recommendations.
Now, without further adieu…
A Checklist for Starting a Business in California
1. Do a Feasibility Study.
It’s important to walk before you run when starting a business. Just because a business idea sounds brilliant doesn’t mean it can become a viable business in the real world. That’s why entrepreneurs should consider crafting a feasibility plan.
A feasibility study helps to assess whether a business concept can succeed. In some ways its similar to a business plan, except that it happens earlier in the startup process and answers two primary questions:
Will anyone buy the product or service?Can the business become profitable and be financially sustainable?A feasibility plan will involve researching the opportunities, strengths, weaknesses, and risks given the industry and marketplace. You can find out more about feasibility studies online. A few resources I believe you’ll find helpful include:
2. Write a Business Plan.
Next step after a feasibility study is writing a business plan that you can use as a blueprint for starting and running your business. Business plans can vary in length and amount of detail depending on the type of business and whether an entrepreneur intends to seek financing from banks or investors. The elements of a business plan might include:
Executive SummaryBusiness DescriptionMarket AnalysisProducts and Services Management and OrganizationOperational PlanMarketing and Sales PlanFinancial ProjectionsAppendices (with supporting data)A few resources where you can learn more about writing a business plan or find templates include:
3. Seek Funding if Needed.
Often, entrepreneurs will need resources beyond their own bank account to a business. The California Financing Coordinating Committee provides links to several business loan programs and resources on its website.
4. Select Your Business Entity Type.
Before you decide which business entity is right for you, consider talking with your attorney and accounting professional to discuss the legal and tax impacts of your options.
Here’s a basic overview of some of the business structures recognized by the state of California:
Sole Proprietorship
By default, a business owned by an individual (or husband and wife) will be considered a sole proprietorship if the owner doesn’t file to establish a formal business entity. To operate as a sole proprietorship, there’s no formation paperwork required by the state. However, sole proprietors still do need to obtain the necessary licenses, permits, tax accounts, etc. to operate legally. Sole proprietorships are considered the same legal and tax-paying entity as their owners. Therefore, they receive pass-through taxation (all business income and losses get passed through to their owners’ tax returns. Also, owners are liable for any debts and legal issues of the business, which puts their personal assets at risk.
GP (General Partnership)
A California GP has two or more owners. Generally, the partners share liability for all legal and financial obligations of the business. As with a sole proprietorship, a GP’s profits are taxed as personal income for the owners.
Domestic LLC (Limited Liability Company)
The Limited Liability Company protects its owners’ (members’) personal assets such as home, cars, retirement accounts and other property. The LLC structure offers pass-through tax treatment when it comes to federal income tax. An LLC may have an unlimited number of eligible members. Instead of having shareholders, LLC members each own a percentage of the business, which is based on their contributions to the LLC. The LLC comes with fewer compliance formalities and paperwork than a corporation does.
Corporations
A corporation is a legal entity, separate from its owners (a.k.a shareholders or stockholders). That separation provides personal liability protection to the business owners. A corporation reports its income and losses on its own tax return and pays income tax (federal and state) on its profits. You’ll often hear the term “double taxation” referring to corporations’ income tax treatment. That’s because a corporation pays taxes on its profits, and then the individual shareholders pay income tax on the dividend income they receive from the company. (And corporations may not use those dividend payouts to shareholders as a deductible expense). Corporations have more compliance requirements than other business entity types, which may be a drawback for some entrepreneurs. However, the structure also offers the advantages of the opportunity to raise capital via selling stock, increased credibility, potential tax benefits.
Several types of corporations in California include:
S Corporation
S Corporations aren’t legal structures in and of themselves, but rather a tax treatment election that an LLC or C Corporation can make. An S Corp is not a tax-paying entity. Instead, profit and loss pass through to the owners’ individual tax returns.
Advantages for LLCs that opt for S Corporation tax treatment is a lower self-employment tax burden for the owners. S Corp owners must put themselves on the company payroll and pay themselves a fair wage or salary. Then, rather than all of the business’s taxable income getting hit with Social Security and Medicare taxes, only the owners’ wages and salaries, not profits paid to owners as distributions, are subject to those taxes.
The advantage for corporations that elect for S Corp treatment is that it eliminates “double taxation” (because the business’s income tax obligations flow through to the shareholders and aren’t taxed at the entity level). Corporations may not elect for S Corporation tax treatment if they have more than 100 shareholders.
California recognizes other business structures, as well, including
Limited PartnershipLimited Liability PartnershipNon-profit Corporation5. Decide on a Business Name.
Choosing a business name is an integral part of creating a formidable brand. After putting time and thought into brainstorming a name that’s the right fit, it’s critical to make sure that name is available for use. CorpNet’s free name search tool offers a way to find out if any other businesses have registered the name or have applied to register it. Doing a name search can save you money and avoid hassle because if you try to register your business using a name that another company has claimed, the state will likely reject your business formation paperwork and you’ll need to start all over again.
If operating as a sole proprietor or general partnership, a business will need to file for a fictitious name (also known as a “doing business as” or “DBA”) with the county if the business name won’t include the owner’s first and last name. For example, if Janelle Truskey wants to call her salon “Celestial Retreat” rather than something like “Janelle Truskey’s Salon and Spa,” she will need to file the fictitious name “Celestial Retreat.”
When forming a formal business entity (like an LLC or corporation), the business name will automatically become registered (again, provided it’s available for use)—more on this below. Before registering a business, entrepreneurs can reserve a business name for up to 60 days for a fee of $10.00.
While registering a business as an LLC, LP, LLP, or corporation will automatically protect a business name from being used by another formal entity within the state of California, a business that wants to operate nationally may wish to consider filing for federal trademark protection. A trademark is a word, phrase, symbol, or design that identifies the source of a product or service. It plays an essential part in branding because it distinguishes a company from its competitors.
With a trademark, the business name is protected in all 50 states. So, after confirming that a name is available at the state level, it’s helpful to do a trademark search to verify it’s also available to claim and use wherever the business’s products and services will be sold in the United States.
6. Get a Registered Agent.
A registered agent (also known as a “resident agent” or “statutory agent”) is a company or person authorized to accept service of process on a business’s behalf. Formal business entities must designate a registered agent with a physical presence in California.
Examples of “service of process” that a registered agent receives include:
Official correspondence from the government (federal and state)Tax notices sent by the IRS and local tax agenciesNotice of lawsuitsSummons to appear in courtCorporate filing notifications7. Register Your Business With the California Secretary of State Office.
Form an LLC in California
To form an LLC, a business must file Articles of Organization. Although not legally required by the state, an Operating Agreement is an essential document that identifies how income will be distributed among LLC members and shares other details to make sure all owners are on the same page regarding how the business should be run. Within 90 days of registering, an LLC must submit an Initial Report to the California Secretary of State.
If the LLC chooses to be taxed as an S Corp, it must also file IRS Form 2553.
Incorporate in California
Incorporating in California requires filing Articles of Incorporation (Form ARTS-GS, Form ARTS-CL, or Form ARTS-PC) with the Secretary of State office. Within 90 days of incorporating, companies must file an initial Statement of Information. Other incorporation requirements may include establishing a Board of Directors, adopting bylaws, and issuing stock certificates to shareholders.
If a corporation is to be taxed as an S Corp, it must also file IRS Form 2553.
Register a General Partnership in California
Partners may register a General Partnership by filing a Statement of Partnership Authority (Form GP-1) with the California Secretary of State’s office. Note that this is optional. An advantage of doing so is that formally registering the company protects the business name within the state.
8. Obtain an EIN.
An EIN (Employer Identification Number) is a nine-digit number that businesses must apply for before hiring employees. LLCs and corporations are required to have an EIN. A business’s EIN (also sometimes referred to as a Federal Tax ID Number) helps establish separation between a company and its owners. It’s used when opening a bank account, applying for licenses and permits, filing taxes, and submitting other reports.
The IRS issues EINs at no charge, and CorpNet can facilitate getting an EIN for your business.
9. Open a Business Bank Account.
To start accepting payments from customers and paying vendors, business entities need to set up a bank account exclusively for their company. Keeping a company’s funds and financial transactions independent from its owners’ finances is crucial for keeping the “corporate veil” (legal and financial separation) intact. Businesses that fail to maintain that separation will put owners’ personal assets at risk if ever the company falls into legal hot water or money problems.
10. Obtain Any Necessary Licenses and Permits and Establish Tax Accounts.
Nearly all businesses in California must have some sort of federal, state, county, or local business license, permit, and tax registration. The requirements vary by the company’s location and type of business activity it conducts.
In California, several state and local agencies issue licenses and permits and assess taxes or fees. The CA.gov website and county and city websites are helpful resources for learning about the specific requirements or who to contact for more information. CorpNet also helps business owners work through identifying what their needs are and filing the applications to obtain them.
To get an idea of what typically applies to most companies in California, review the list below:
General business license – An annual license issued by the city or county to allow a business to operate legally within an area.Professional license – Some professionals must be licensed to provide the types of services they offer. A few examples include builders or contractors, barbers, accountants, and doctors. Seller’s permit – Businesses that sell taxable goods or services, must obtain this permit. Use tax account – Businesses that aren’t required to have a seller’s permit or certificate of registration for use tax and that receive $100,000 or more in gross receipts in the calendar year, and that meet several other conditions must have this in place. Health permit – Businesses involved in selling products that people consume (like food trucks and restaurants) or that touch the human body (such as a hair salon or tattoo parlor) need a local health permit from the city or county. They will also undergo annual inspections.Signage permit – Some county and city zoning laws require companies to get this type of permit before putting up signs for their businesses. Home occupation permit – Some jurisdictions require that home-based businesses obtain this permit. Even business owners like freelance writers that don’t have customers coming to their home may need this type of permit.Entrepreneurs starting a cannabis business have a number of other licenses and permits to research. Check out our comprehensive guide to starting a cannabis business for more information.
11. Get Your Human Resources Responsibilities in Order.
Entrepreneurs that plan to hire employees have some additional planning to do and tasks to tend to. For example:
Job applicationsJob descriptionsEmployment contractsWorkers compensation insuranceEmployee paperwork (Form W-4, Form W-2, Form I-9)Payroll processingEmployee tax withholdingsUnemployment Tax (FUTA)California businesses that have employees must comply with all hiring and employment laws that apply to them.
12. Fulfill All Ongoing Compliance Requirements.
With any business entity, there are ongoing compliance obligations that a company must fulfill to operate legally and stay in good standing with the state. Among them might be license and permit renewals and entity-related filings required by the state. A full list of California state business compliance forms can be found on the California SOS website, and CorpNet’s B.I.Z. (Business Information Zone) online portal can help you stay on top of important compliance deadlines.
Several of the ongoing filing requirements by business entity type include:
California LLC Business Compliance Filings
Statement of Information – Must submit Form LLC-12 within 90 days of forming the LLC and then every two years if any changes have been made to the LLC. Must also submit an Attachment to Statement of Information (Form LLC-12A) if the LLC has two or more members or managers. Statement of No Change – Submitted after the initial filing and instead of the Statement of Information (when it’s due) if no changes occurred.Certificate of Amendment – Must submit Form LLC-2 If any changes have been made to the LLC’s Articles of OrganizationCalifornia Corporation Business Compliance Filings
Statement of Information – Must submit Form SI-550 within 90 days of initial registration and every year after that. Must also submit an Attachment to Statement of Information (Form SSI-550A) if the corporation has more than one director.Statement of No Change – Submitted after the initial filing and instead of the Statement of Information (when it’s due) if no changes occurred.Certificate of Amendment – Must be submitted if a corporation wishes to make changes to its Articles of Incorporation.How Much Does It Cost to Start a Business in California?
From a registration and compliance standpoint, below are some of the current costs the state charges for various filings (as of this article’s date of publication):
California LLC Filing Costs
Articles of Organization (with certified copy)– $75.00Statement of Information Initial Report – $20.00Statement of Information – Biannual Report – $20.00 (The state charges no fee for submitting a Statement of Information to update an entity’s record in between filing periods.)Statement of No Change – $20.00Certificate of Amendment – $30.00California Corporation Filing Costs
Articles of Incorporation (with certified copy)– $105.00Statement of Information – $25.00Statement of Information (Biannual Report) – $25Statement of No Change – $25.00Certificate of Amendment – $30.00California General Partnership Filing Costs
Statement of Partnership Authority – $70At CorpNet, we can provide you with pricing and assist you with preparing and submitting all of your business compliance filings.
Business Taxes in California
Like elsewhere in the U.S., California companies have the same federal income tax, FICA, FUTA, and self-employment tax responsibilities and rates.
California’s current business income tax rate for corporations other than banks and financial institutions is 8.84 percent. The California Franchise Tax Board website lists the corporate tax rate and the individual income tax rates that apply to business owners and shareholders when their LLC or S Corp profits pass through to them.
Most California LLCs, S Corps, and corporations also pay an annual franchise tax (a minimum of $800) for the privilege of doing business within the state.
California businesses might also need to register with the California Department of Tax and Fee Administration (CDTFA) to pay sales and use tax. A retailer that sells tangible goods and certain services pays state sales tax. And companies that purchase products that are not subject to sales tax, and that store, use, or otherwise consume those goods in California, may need to pay use tax. Use tax can also apply to goods shipped to California from other states.
For a full list of business taxes and fees in California, I recommend visiting the CDTFA’s website.
Start Checking Off Your Starting a Business in California Checklist With CorpNet’s Help
No matter what type of business you want to launch in California, my team of business compliance filing experts at CorpNet is here to help you start your company the right way. Save time, get peace of mind, and reduce legal costs by asking us to help you prepare and submit your registration paperwork and other forms to the various government and tax agencies you need to answer to. Contact us today to get started on your entrepreneurial journey!