Guide: Starting a Business in California
Wondering how to start your own business in California? Starting a business is an ambitious endeavor, but it can be a lucrative and sustainable career for many Californians. It’s important to be prepared for this venture, and there are several steps that you need to take before starting a business in California.
Different Business Entities in California
There are several different kinds of businesses you can start in California, including an LLC, a corporation, a partnership, and a sole proprietorship.
Those learning how to start a business in California should carefully weigh their options for these types of businesses.
LLC
LLC stands for Limited Liability Company and is defined as a company structure that combines the limited liability of a corporation with the taxation of a partnership or sole proprietorship.
People who are starting an LLC in California should begin by selecting a name and filing an article of organization with the state, which is the Form LLC-1. LLCs must also appoint a registered agent, as well as preparing an operating agreement and a statement of information.
A registered agent must be an individual or a corporation authorized to do business in California. They officially receive and send papers on your behalf, including state filings. There are several available services that help entrepreneurs find a registered agent, which provide the correct forms and counsel on how to complete filing quickly and efficiently.
Operating agreements allow you to form working relationships with co-owners and can be in a verbal or a written form. This agreement outlines the ownership stipulations and operating procedures of the LLC.
Corporation
When starting a business in California that you plan to turn into a corporation, the following steps should be taken. Note that a corporation can act as a single entity by law.
Entrepreneurs starting a corporation should legally state their status through filing Articles of Incorporation with the California Secretary of State. Every corporation in California must also have a registered agent, corporate records book, and corporate bylaws that set the basic guidelines for operating their business.
All California corporations must pay California taxes to the Franchise Tax Board. An $800 minimum tax is required during the first quarter of each accounting period, whether or not the business makes money, does business, or is active. Additionally, corporations with income over certain levels may be held to more fees.
Other requirements for corporations include appointing a board of directors and issuing stock. At the first board of directors meeting, directors should adopt bylaws, set up a corporate bank, and appoint corporate officers. Minutes should be collected and signed by all directors.
Issuing stock can include paper stock certificates and is classified as a security under state security laws. However, federal law exempts private offerings, which are non-advertised sales to a limited number of people.
Partnership
A partnership is created when two people (or a group of people) agree to do business together. No formal written agreement is needed to form a partnership when starting a business in California, so no filing or registration is needed to form this kind of business. However, partnerships should follow the same filing, registration, and tax requirements necessary for any business.
Depending on the type of business you choose to start, your partnership may need to obtain licenses for business or professional purposes. California provides a database of the types of professions that require a license at CalGold, a service of the California Governor’s Office of Business and Economic Development. Entrepreneurs should also check with their city and county governments for more information on local regulations, permits, and zoning requirements.
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Sole Proprietorship
A sole proprietorship is another type of business that doesn’t require any legal documentation. Types of sole proprietorships include freelance photographers and writers, craftspeople on contract jobs, and independent contractors who aren’t on an employer’s regular payroll.
Though sole proprietorships are simple to set up, they must comply with all permit laws, local registration regulations, and business license guidelines. Additionally, sole proprietors are not legally separated from their business. This means that they must report all business income and losses on their income tax returns and are responsible for paying a self-employment tax and estimated taxes throughout the year.
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How to Start a Company in California
Regardless of the type of business you want to start, there are several steps that every entrepreneur must take to start a business in California.
Entrepreneurs should consult an advisor or professional when starting a business to help them through these steps, especially those concerning legal and financial guidelines.
Step 1: Form Your Business Idea
Every great business idea starts with solving a problem. Recognize your ideal customer and identify if your business solves a deep-rooted problem for this person: will it help them gain something? Avoid losing something? Avoid pain or discomfort?
Every entrepreneur thinks that they have an idea for the next Google, Uber, or Facebook. But before spending the time, effort, and capital necessary, objectively validate your business idea to make sure it’s a viable option for making money.
Step 2: Do Your Research
Next, create a mockup of your idea. It doesn’t have to be the completely baked version of your company–it could be a one-sentence idea that you run by people through market research tactics. An important part of this step is to get inside your customer’s head via an empathy map. Know what customers you’re trying to reach and why.
There are several tactics for performing market research, depending on your budget. Basic Internet research can be helpful for identifying other players in your industry. Field research (observations, experiments, and asking questions) can be done either in person or via online forums.
Group research, sometimes called focus groups, can be an invaluable tool for gathering customer sentiments and applying them to your new business. Ask potential customers open-ended questions about your minimum viable product and business idea, like “how do you make your buying decisions in this product category?”
Step 3: Perform a SWOT Analysis
SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. Doing an exercise to identify these areas and how they can be leveraged against each other can be extremely beneficial for your business.
To identify your strengths and weaknesses, ask yourself questions like:
- What advantages does your organization have?
- What are people in your market likely to see as weaknesses?
- What factors cause you to lose sales?
To identify opportunities and threats, ask questions such as:
- What are recent changes in social patterns, government policy, or population profiles that are related to your field?
- What interesting trends are you aware of?
- Are standards for quality or specifications for your products or services changing?
This exercise may sound simple, but it can help bridge the connection between your strengths and opportunities and your threats and weaknesses.
Step 4: Prepare a Business Plan
People wondering how to start a small business in California should always start with preparing a business plan. This document should define the business’s goals, marketing plans, products, services, industry, and operating procedures. This step will be required of all businesses that are seeking funding via loans or venture capitalists, but it is a good best practice for any person aspiring to start a company.
The Small Business Administration offers a Build Your Business Plan Guide, which helps entrepreneurs follow consistent guidelines for the necessary information needed in their plan.
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Step 5: Meet Legal Requirements
Along with the requirements listed above, businesses must select necessary business services like accountants and attorneys. Entrepreneurs should seek referrals from friends, family, and other business owners before hiring these people. People starting a business in California can also use the State Bar lawyer referral service.
Prospective business owners should also insure their business, depending on what industry they’re in. If you have employees, types of necessary insurance could include unemployment insurance and payroll tax requirements like FICA.
Another important obligation for people starting a business in California is complying with state business tax code. Prior to hiring any employees, every California business needs to invest in Workers Comp insurance, which can be done with your insurance agent or with an established state fund, which helps many low-income startups stay compliant.
The IRS also offers a helpful publication to help businesses understand the different classifications of employment status.
Step 6: Finance Your Business
All businesses require some capital to get started. After savings, equity, friends, and family, the next most common funding source for new business owners is a business loan. California maintains a Small Business Loan Guarantee Program, which provides loans to business that experience barriers to capital and allows them to build credit in order to access future loans.
Businesses should also open a business bank account, which will require a business formation date, owner names, and addresses. Businesses that are not corporations will also require a DBA (“doing business as”), which allows proprietors to do business using something besides their own personal name. They should also acquire a Dun & Bradstreet number for their business, which is used to check creditworthiness.
Step 7: Settle Logistics
Choosing the location of your business is an important consideration for any entrepreneur learning how to open a business in California. Several cities base the cost of a business on a percentage of your company’s gross revenue, so research the applicable business license cost for your intended location.
Different cities in California also give companies access to different clientele. San Francisco obviously provides access to tech and startups, San Diego is known for its engineering, and LA is famous for its entertainment.
Home-based businesses should check California zoning requirements to ensure they’re compliant. Businesses that are not home-based should lease office space. As with hiring business services, entrepreneurs should check with friends and business contacts about potential office space that’s available for rent.
Entrepreneurs should keep in mind that a commercial lease is very different from a residential lease. Renters are often responsible for maintenance and damage that occurs in the rented structure, but this can be negotiated via a company attorney.
Offices also obviously require furniture, supplies, and equipment–buy or rent this well in advance to get the best deals.
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Additional Requirements for Foreign Companies
Corporations and companies registered outside of California must register with the Secretary of State by filing the Statement and Designation by Foreign Corporation form. The filing fee is $100 and must be accompanied by a certification of good standing from the home state of the company.
If the corporation’s name is not available for use in the state, they must assume a different name that is available.
Resources for Starting a Small Business in California
The California Employment Development Department aids California business owners and employees, and provides resources for accessing claim information and managing claims.
There are also several resources for special groups trying to start a business, both nationally and in California. For veterans, California provides several programs and incentives, including counseling, access to special funding, and priority in government contract procurement. The Small Business Administration (SBA) gives veterans access to unique privileges like entrepreneurial development services and tools for finding loans and grants.
According to The Atlantic, women are underrepresented in entrepreneurship, accounting for just 29 percent of America’s business owners. To promote more women starting businesses in California, organizations like The Women’s Business Enterprise National Council (WBENC) provide resources specifically for women to help them in starting and registering a business in California. The National Association of Women Business Owners (NAWBO) also provides a community of women entrepreneurs to encourage economic development.
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