California is the state with the largest economy in the U.S., with a GDP of approximately $3.18 Trillion (14.6% of the total U.S. economy). In 2020, California was also home to 872,641 new business formations according to the US Census Bureau. Although California does have higher costs to doing business than other states, it is still a great place to start a business. In this guide, we’ll go over the 12 steps you need to start a business in California.
- Research and Plan your Business
- Choose a Business Structure
- Choose your Business Name
- Register your Business
- Get an EIN
- Complete California State Tax Registrations
- Apply for California Business Licenses and Permits
- Open a Business Bank Account
- Set Up Credit Card Processing
- Establish an Accounting System
- Get Business Insurance
- Hire Employees and Set Up Payroll
|Doing Business in California
Key Business Stats
|California New Business Formation|
|New Business Formation Rank||2|
|Businesses Formed in 2020||872,641
(19.14% vs 2019)
|New Business Formation Per Capita Rank||26|
|New Businesses Formed Per 1,000 Population 2020||22.09|
|Business Formation Statistics generated using data from US Census Bureau|
|Cost of Doing Business in California|
|LLC Formation Cost||$90|
|Corporation Formation Cost||$100|
|DBA Filing Cost||$10-$66 (varies by county – avg. $35)|
1. Research and Plan your Business
The first step to starting a business in California is to research your business idea and develop an initial business plan. Before taking any initial action, you’ll want to do some due diligence. Understanding what it will take for your business to succeed starts with preliminary market research and competitive analysis. Your research should give you answers to who the target customers will be for your product or services, who your competitors will be, and how you will offer a unique or different solution than them.
Once you have some preliminary research completed, you’ll want to use this to create a business plan. Writing a business plan is a vital step as it will help you navigate the initial stages of launching and growing your business. While you may think that you know the business you want to start so well that you don’t need a business plan, that is likely a big mistake. In a study done by the Harvard Business Review, entrepreneurs who created a formal business plan were 16% more likely to succeed than their counterparts who did not make a plan.
With this in mind, your business plan doesn’t need to be a 5,000-page dissertation. A lean startup business plan with as little as 1-3 pages can still provide great value. Your business plan will provide a general roadmap for your business and answer some essential questions such as:
- What need(s) are you addressing
- What will make your business different
- Who is the target audience
- How will your business make money
- How will you promote your business
- What do you need to get started
Recommended: How to Write a Successful Business Plan
2. Choose a Business Structure
Next, you will need to choose the business structure you’ll operate as. The legal structure you choose to run your California business as will impact your personal liability risk, tax status, and ability to raise outside investment. The four most common types of business structures are:
Limited Liability Company (LLC)
LLCs are the most common type of formal business structure. They are recognized as a separate entity from their owners. Because of this, they provide limited personal liability protection for its owners (known as members). This protection prevents the owner(s) personal assets from being at risk if the business is sued or has outstanding business debts. LLCs also have preferred pass-through taxation by default and have the flexibility to elect for C-Corporation or S-Corporation taxation. As a result, LLCs have become a go-to choice for many small business owners.
Corporations are a formal business structure that is a separate legal entity from their owners, known as shareholders. The shareholders of a Corporation are issued stock that is proportional to their ownership interest. While the liability protections provided by Corporation are more significant than other entities, Corporations are subject to higher overall taxation by default. Under their standard C-Corporation tax status, Corporations are subject to “double-taxation” as they must first pay tax on their profits at the corporate tax rate, after which they can distribute earnings to shareholders.
Sole proprietorships are the most basic business structure for single-owner businesses in California. Starting as a sole proprietor is simple and requires no formal registration outside of any necessary business licenses and permits. While they are cheap and easy to start, sole proprietorships are not recognized as separate from their owner. For this reason, a sole proprietor has unlimited personal liability risk, meaning that their personal assets can be used to cover business debts and lawsuits.
General partnerships are the simplest structure for businesses with two or more owners. Partnerships are pass-through taxation entities, meaning they do not pay taxes directly; instead, they pass any profits (or losses) through to owners who pay taxes on their personal return. Similar to a sole proprietorship, general partnerships are an informal business structure, so they are not recognized as separate entities from their owners. Due to this, general partners have unlimited personal liability for their own actions and all of the business partners. The unlimited liability general partnerships are subject to can make them riskier.
For a more comprehensive breakdown of each of the four entities and how to choose between them, check out our detailed guide on the types of business structures.
3. Choose your Business Name
Next, you’ll want to develop a name for your business. Your business name can have a considerable impact on your business as it can impact your reputation and be crucial to marketing your business once established. If you’re struggling to come up with a business name, keep in mind the three fundamental principles to a great business name:
- Creates an Identity
- Memorable and Easy to Recall
- Easy to Search and Find
For a detailed deep dive into creating a great business name, check out our guide, how to come up with a business name.
4. Register your Business
Now that you have determined the business structure you’ll use and your business name, it’s time to make things official and register your business in California. The process of how to register a business name in California is different depending on your business structure.
Form an LLC in California
To form an LLC in California you’ll need to file Articles of Organization with the California Secretary of State. The Articles of Organization filing fee in California is $70.
Before completing your LLC filing, you’ll need to ensure that your desired name is not in use by completing a California business name availability search. Once you verify that your name is available, you can file the Articles of Organization. In the Articles of Organization filing, you’ll need to include the LLC’s legal name, address, the owner(s) contact information, and designate a California registered agent. While not legally required, you will also want to create an operating agreement to establish the basic rules of how your LLC will function, list ownership percentages, and detail voting rights.
For a step-by-step guide, check out How to Start an LLC in California, where we go over all the information required to complete your Articles of Organization filing correctly.
Form a Corporation in California
Corporations are formed in California by filing Articles of Incorporation with California Secretary of State. California charges $100 to file Articles of Incorporation. You will also need to appoint a registered agent to receive service of process documents. You will also want to create a corporate bylaws document to establish its internal operational rules.
For more information on the incorporation process, see our detailed guide, How to Form a Corporation in California.
Register a Sole Proprietorship in California
To start a sole proprietorship in California, there are no formal filings required at the state level. However, if you plan to do business under a name different from or that does not include your name, you’ll need to get a California Fictitious Business Name.
If you’re looking for more detailed information, check out our guide, How to Start a Sole Proprietorship in California.
Register a Partnership in California
If you start as a general partnership in California, you don’t need to file any official documents to start your business. While not legally required, it’s best practice to create a partnership agreement document. A partnership agreement helps establish the rules for how decision-making will work, which can help if disputes arise between partners. If the partnership does business under a name that does not include the partners’ last names, a Fictitious Business Name filing will need to be completed.
For a more information, see How to Start a Partnership in California for a step-by-step guide to starting a general partnership in California.
5. Get an EIN
Once you have taken the steps to legally form or establish your business, you want to get an EIN. An EIN (an acronym for Employer ID Number) is an IRS identification number for tax filing and employment purposes. You can think of an EIN as the business equivalent of a social security number. Any business formed as a Corporation, Partnership, or multi-member LLC (LLC with two or more owners) is required to obtain an EIN. Even if your business is not required to get an EIN, it’s highly recommended that you apply for one. EINs are required for many business filings and can be used in place of providing your SSN, which can help protect against identity theft.
You can apply for an EIN directly with the IRS for free using the Online EIN Assistant.
6. Complete California State Tax Registrations
To ensure that you are compliant with California laws, you’ll need to complete your state-level tax registrations. The registrations that you’ll need to complete will vary depending on the nature of your business. However, generally, most businesses need to consider registering for California sales tax and employer taxes.
- If you sell physical goods, you will likely need to register for California sales tax. If you have a tax nexus in California you’ll need to collect and remit sales tax to the California Department of Tax and Fee Administration (CDTFA).
- If you hire employees, you’ll also need to register for California Employment Development Department (EDD) employment tax.
7. Apply for California Business Licenses and Permits
In California, all businesses must obtain a general business license from California Secretary of State to conduct business. Depending on your business’s nature, you may also need to register for business licenses or permits with your county and/or city. Some common types of business licenses and permits include:
- Building Permit – A building permit is often required if you are involved in construction or renovating property.
- Signage Permit – Many cities or counties require you to obtain a permit to put up signs outside your business.
- Professional Licensing – If you work in a regulated industry, you may be required to obtain a specialized professional license. Businesses like barbers, cosmetologists, insurance brokers, pest control, physical therapists, interior designers, beauty salons, daycares, bars, plumbers, and electricians are often required to obtain a professional license.
8. Open a Business Bank Account
It’s essential to separate your business transactions and personal transactions to protect your personal assets. Mixing your personal and business banking activity is known as “co-mingling funds” and can cause your business severe problems.
Not only does this make bookeeping and accounting much harder, but it can also result in losing your limited liability status if you’re an LLC or Corporation. If you mix your personal and business funds, you can put yourself at serious legal risk if your business is sued by piercing the corporate veil. By opening a dedicated business bank account and use it strictly for business activity, you can avoid these risks.
To learn more about opening a business bank account, visit our detailed how-to guide. Our guide goes over how to choose a bank account provider and the documents you’ll need to open your account.
9. Set Up Credit Card Processing
For most businesses, it’s vital to accept credit card and debit card payments. Credit and debit cards now represent around 60% of all transactions over $10. As a result, accepting card payments is basically a requirement to stay competitive in the modern business environment.
For more information, see How to Accept Credit Card Payments.
10. Establish an Accounting System
Setting up an accounting system allows a business to track business expenditures and create reports to gain insight into your business’ performance. By establishing an accounting system, you can quickly and easily create budgets, manage cash flow and generate the required financial reports to know how your business is doing.
For a more in-depth breakdown, visit our Small Business Accounting 101 guide. Covered in the guide are the steps to do small business accounting, including how to choose between cash basis and accrual basis accounting methods.
11. Get Business Insurance
One of the most overlooked aspects of starting a new business in California is obtaining business insurance. Having the proper business insurance coverage helps to mitigate your risk so that you’re covered in the event of an accident, natural disaster, or lawsuit.
In our Small Business Insurance Guide, we go over the six types of business insurance so that you can make sure you’re covered.
12. Hire Employees and Set Up Payroll
If you want help running your business, you’ll want to consider hiring employees and setting up a payroll. Employers are responsible for reporting new hires and verifying their employment status. To hire employees in California you’ll need to register for unemployment insurance with California Employment Development Department (EDD).