Starting a Business in California: A Step-by-Step Guide
1. Choose a Business Name and Structure
2. Create a Business Plan
3. Register Your Business
4. File Taxes
5. Obtain Any Required Business Licenses or Permits
6. Open a Business Bank Account and Explore Your Funding Options
So you’ve decided to start a business in California, congratulations! You’re probably feeling a rush of emotions, possibly including an overwhelming feeling that you don’t know exactly how to start a business in California. It’s no easy feat, but the best approach is to take it one step at a time.
There are several requirements for starting a business in California so that your company can run efficiently, and more importantly, legally. In this guide to starting a business in California, we’ll explain all the steps you’ll need to take to get your business up and running.
Step 1: Choose a Business Name and Structure
When starting a business in California, the first thing you’ll need to do (after coming up with your business idea, of course) is to choose a name for your business and decide on a business structure.
A business can fall into one of several business entity structures. Some common options are forming an LLC in California, starting a sole proprietorship, or a C-corporation. There’s no “best” type of business entity; this will depend on what type of company you’re starting in California, as well as how you want your company taxed and how much risk you want to be exposed to in the event that someone sues your company. In other words, there are serious legal and financial implications tied to this decision, so it doesn’t hurt to consult a business attorney when deciding which structure is best for your business.
You will also need to choose a business name to officially start a business in California. You may have the perfect name in mind, but before you can make it your own, you first need to check to make sure that name isn’t already in use. In California, you need to check the names for limited liability companies, limited partnerships, and corporations. For these structures, the business name must be distinguishable from names already on the record of the California Secretary of State, and in the case of LLCs and corporations, it cannot be misleading to the public.
It’s important to note that each name is only checked against the type of business you’re trying to open, so an LLC name would be checked against already established LLC names. In order to check the availability of your business name, you will need to mail a name availability inquiry letter to the California Secretary of State’s office in Sacramento. This process can be done for free. However, if you frequently check business name availability, you also have the option to set up a prepay account for a telephone service. This option requires a minimum deposit of $100, with a $4 fee for each name you search.
If the business name you want is available, you’ll then need to reserve it. You can reserve a business name for a total of 60 days and to do so, you will fill out and mail the name reservation request form, which costs $10. You also have the option of dropping off the form to the California Secretary of State’s office in Sacramento with the $10 reservation fee plus a $10 handling fee. Or, if you have the prepay telephone service, they’ll automatically charge you $10 for every name you reserve.
Step 2: Create a Business Plan
Once you’ve decided on your business name and structure, the next step in starting a business in California is to write a business plan. Just like you would draw up blueprints before building a home, a business plan creates the strong foundation from which you’ll build and grow your business.
Your business plan will include everything from the basics, including an overview of the business, what type of business it will be, whether you plan to have a physical location, etc. to the more specific, heftier details like what sort of marketing or sales you have in mind, your financial plan for running the business, and a plan for growth. Be sure to avoid common mistakes such as a lack of risk analysis and unrealistic financials.
The business plan you create can be a roadmap for you to follow as you’re developing your business. It can also be important in your efforts to get funding for your business. Whether you’re looking for a small business loan or an investor, you’ll need to provide your business plan during the application process. If you’re unsure how to get started on your business plan, there are several business plan software options to make the process as easy as possible, and the Small Business Administration also features their own business plan builder.
Step 3: Register Your Business
When starting a business in California, you will also need to register your business. The steps to register your business will vary depending on how your business is structured and what type of business it is. The California Secretary of State offers a “Forms, Samples, and Fees” section that outlines exactly what you’ll need to file and how much it will cost to officially register your business.
At this stage, you’ll also need to register as an employer with the IRS and get a federal employer identification number (EIN), also known as a business tax ID number. This is a nine-digit number assigned to your small business by the IRS and is used when filing taxes, applying for a business loan, opening a business bank account, and more.
In California, you also need to register as an employer with the Employment Development Department if you employ one or more employees.
If you plan on filing a DBA, or “doing business as,” meaning you will use a name other than the legal name you file with California, also called a fictitious name, you’ll need to file this with the county in which your business is located. Filing requirements vary by county.
Step 4: File the Appropriate Taxes
Starting a business in California also means paying taxes on that business. There are a number of agencies responsible for administering taxes on a state and federal level, as well as state agencies and programs to help you navigate the small business taxes you’re required to pay, like the Franchise Tax Board, the California Tax Service Center, and the California Department of Tax and Fee Administration.
Most businesses will likely have to pay a franchise tax for simply doing business in the state of California. Corporate income tax applies to most businesses as well in the state. Sole proprietors pay income taxes on the money they bring home as personal income. Members of an LLC have to pay income tax on that money, and the LLC has to pay a state tax as well. Shareholders in corporations have to pay taxes on the dividends they get and the corporation is also responsible for its own California corporation taxes. This is one area where your EIN comes into play, as you’ll need to file business taxes separately from your personal taxes in many cases.
In addition to the various California state taxes you as an individual and your business have to pay, there are always federal taxes to be paid to the IRS, as well.
Step 5: Obtain Any Required Business Licenses or Permits
While the Secretary of State does handle a lot of business-related forms and filings, business licensing and permits is not in the department’s wheelhouse. To obtain any necessary licenses or permits you’ll need when starting a business in California, the CalGold website hosted by the California Governor’s Office of Business and Economic Development is your go-to resource. While this site itself does not issue permits or licenses, it catalogs the appropriate agencies you’ll need to contact. First, select your city or county and your business type.
Once you input that information you’ll get a list of permits and licenses that apply to your new business and resources that are available to help you with setting up your business, plus the contact information for the agencies that oversee them.
Source: California Governor’s Office of Business and Economic Development
To look up licenses, file a complaint, or apply for your own licenses, the Department of Consumer Affairs’ BreEZe online services portal is a great resource.
Step 6: Open a Business Bank Account and Explore Your Funding Options
With your business legally ready to open for business, there’s still the question of whether you’re financially ready. Starting a business in California is not inexpensive, especially depending on the type of business you want to open.
First, you’ll want to open a business bank account and potentially get a business credit card, as well. You can read more about the best banks for small business in California here. Keeping your business finances separate from your personal finances is incredibly important. You don’t want your personal financial decisions impacting your business or your business credit score (you can check your free business credit report online). Plus, for tax purposes you want to make sure it’s clear what you spent on your business, versus personal spending.
Having a business bank account and credit card—and managing them responsibly—can help boost or establish your business credit score. Building your business credit score can also help your eligibility for certain types of small business loans. If you find you need some extra cash to get your business off the ground, there are several financing options you can explore, even as a new business.
Whether you’re looking for a startup business loan, equipment financing, or a business line of credit, exploring your financing options can help you determine exactly what’s possible when starting a business in California. Check out our complete guide to small business loans in California.
The Bottom Line
Coming up with a good business idea may be the easy part compared to the steps it takes to actually start a business in California. And the work doesn’t stop once your business is registered and you have your permits and licenses.
There’s plenty to keep doing after you take the initial steps above; after all, these are just the steps to take to start a business in California. You’ll also want to look into getting small business insurance, hiring employees, creating a marketing plan to get the word out about your new business, finding a location if you’re going to need a physical store or office, and more.