Start a California business with steps for structure, filings, licenses, taxes, insurance, banking, trademarks, and online setup. This article covers state rules, required documents, tax duties, and ways to reduce personal financial risk.
By Brad Nakase, Attorney
Email | Call (888) 600-8654
Have a quick question? I answered nearly 1500 FAQs.
All it takes to become a sole proprietor is to sell something. However, you’ll need to do more to meet legal standards and protect yourself from dangers. Then only you can truly earn money. This is a comprehensive guide on launching a business in California.
A sole proprietorship is the most prevalent kind of business. You automatically become a sole proprietor if you don’t register with the government of California and just start selling stuff, like improv courses or handcrafted jewelry. You possess a general partnership in this business if you have a number of partners.
In any case, you and the company are not legally distinct, thus there is no liability protection. Your own assets are at risk in the event that your company faces legal action or defaults on a loan.
Making your company an independent entity, which simply means that it is lawfully separated from the owners and has separate liabilities, is necessary if you are seeking liability protection. Only the company’s assets—not the owner’s personal funds or belongings—may be seized when a company with liability protection is sued.
Limited liability companies (LLCs) & corporations offer the most prevalent forms of limited liability protection.
An LLC offers robust insurance against liability and an adaptable business structure. LLCs are a popular alternative for owners of small businesses because they offer a variety of options for their structure, management, and taxation. You must submit documentation to the California Secretary of State to establish a California LLC.
Although corporations have better liability protection than LLCs, they must adhere to more stringent management and record-keeping regulations. A corporation’s officials are chosen by the board, which is appointed by its shareholders. Corporations typically have an easier job winning over investors because of their lengthy history and tried-and-true policies. You have to submit paperwork to the Secretary of State to establish a California corporation.
LLC with just one member: Is it possible?
Indeed! It is called a single-member LLC. It is a prevalent business structure in the country. Single-member LLCs are similar to multi-member LLCs for the most part. They differ slightly in how they report taxes & safeguard personal assets.
What about a nonprofit organization in California?
In California, you can establish a California nonprofit company if you wish to create a business for an objective other than making money, such as serving the necessities of your members, people in general, or a religious group. Mutual benefit, public benefit, & religious corporations are the three categories of nonprofit corporations recognized in California; each has its own unique Articles of Incorporation format and restrictions. A guide on how to start a business in California can be helpful to understand the intricacies.
You most likely already have a name in your mind if you’ve been thinking about your business for some time. However, you should confirm that your company name satisfies California’s regulations before submitting your papers. If you are a solo owner, you must use your own first & last name or submit a DBA to use a different company name.
You can go through the California Secretary of State’s website about the legal requirements for forming corporations and LLCs in California. Essentially, a corporation or LLC name needs to:
What about names with trademarks?
It is a good decision to inquire with the USPTO (US Patent and Trademark Office). It is to ensure that no one else has trademarked your company name. You run the risk of being sued by the company for violation if it has and you continue to utilize it.
Reserving a company name in California
You have to submit a Name Reservation Request to the California Secretary of State. You may reserve a business name for a maximum of sixty days. You will need to provide your name reservation code on the formation application once your business name has been reserved.
Note: The same filing procedure that you used to submit your name reservation must be used for the creation documents. Therefore, if you submitted the name reservation on the internet, you also need to submit your formation documentation online. The formation documentation must be mailed if the name reservation has been mailed. Most common questions new owners ask are how to start a business in California legally & efficiently.
A DBA: What is it?
Any name a company uses that isn’t the official business name is known as a DBA (doing business as name).
Your name is the legal business name if you are classified as a sole proprietor. The name listed on your formation documents is the legal business name if you are an LLC or corporation. In either case, you must file a DBA if you wish to conduct business under a name different than your legitimate company name.
DBAs are filed with the local county registrar and are referred to as FBN (fictitious business names) in California. Based on the county, the cost will change. Certain jurisdictions mandate that your fictitious business name be published in a community newspaper.
For instance, if your company is in Los Angeles County, you are required to publish a notification regarding your FBN within thirty days of submitting it. The announcement must appear in the newspaper once per week & four weeks in a row. The newspaper has to be based in Los Angeles County. It must be lawfully classified as a newspaper with broad circulation. It means it must serve the local population.
In California, you must send documentation to the Secretary of State’s office to incorporate a corporation or LLC.
You must designate a California-registered agent who will accept legal correspondence from your business before you can file. You have three options for submitting the completed form to the Secretary of State: in person, online, or by mail.
The data you enter on this application will be included in the public record. This implies that when individuals search for your company on the California Secretary of State website, the addresses and names on the application will appear. It’s important to learn how to start a business in California with proper documentation.
A registered agent
A registered agent is a person designated by a company to accept legal notices and process lawsuits on the company’s behalf. A registered agent is sometimes referred to as a representative for service of process in California. Anybody over the age of 18 may serve as your agent, but they need to have a physical location in California and be accessible to personally handle legal mail during regular business hours. You can think about employing a qualified registered agent to take on this function if you’re a business operator who works irregular hours or just can’t spend all day at your office.
How do I prevent my information from being made public?
Hiring a registered agent company that will allow you to use their company address on the public documents instead of your address whenever possible is your best option if you want to maintain your personal data private.
California corporations and LLCs must submit an initial Statement of Information document no later than ninety days after the Secretary of State accepts their formation documents. The names and contact details of your managers/members or officers/directors are sent to the state via this form. The report can be submitted in person, via mail, or online for a charge of $20.
We advise submitting your initial Statement of Information around the same time as your formation documents to ensure you don’t forget. We file the Statement of Information at the same time as we incorporate your corporation or LLC.
Additionally, corporations must submit a Statement of Information form each year to ensure that the state knows the most recent contact details for your company. A Statement of Information must be submitted by LLCs every two years. The final day of the anniversary month for your company is the deadline.
For instance, if you established a corporation in May 2022, you would have to submit your yearly Statement of Information by 31st May 2023, and an initial Statement of Information within ninety days.
In the event that you established an LLC in June 2022, you would have to submit your first Statement of Information within ninety days and your second Statement of Information by 30th June 2024.
I failed to submit a California Statement of Information: What happens?
Companies in California have a grace period of sixty days. It is following the deadline for filing a Statement of Information. You will then be assessed a $250 fee for late payment. The California Franchise Tax Board may suspend your company if you continue to neglect to file.
Public forms submitted to the California Secretary of State have been covered thus far in this guide. It’s time to arrange your internal documents. These are the records that your organization will maintain.
Even though these documents are internal, you will probably need to provide them to the bank or the IRS if you are starting a nonprofit.
The following are the main internal documents that corporations and LLCs must arrange:
Operating Agreement for California LLC
This is the rulebook for your LLC. It outlines how the limited liability company will make choices, allocate funds, oversee operations, and name officers, among other things. Every major event that your LLC is probable (or improbable) to encounter, including dissolution, is covered by your operating agreement.
It’s challenging to draft an operating agreement, and the internet is replete with shoddy templates that were copied and pasted from unknown sources. Hire the services of a credible lawyer to create a California LLC Operating Agreement template.
Corporate Bylaws of California
The internal regulations that your company will adopt and abide by are called bylaws. Among additional items, bylaws specify how your company will select officers and directors, conduct board or shareholder meetings, and deal with emergencies.
Similar to operating agreements, bylaws templates are widely available online. However, you shouldn’t just use the initial template you find because bylaws are rather serious. Get a lawyer to create a template for California corporate bylaws.
California does not offer a statewide business license. This is in contrast to certain other states. You might require a local business license, depending on where your firm is located. Additionally, a lot of sectors need extra licenses and permits. To determine what permits and licenses your company will require, utilize the CalGold search tool. Create a beginner’s checklist on how to start a business in California.
Licenses for Professional Businesses
Before they can be lawfully practiced, several occupations need authorization from a state board. Sports referees, veterinarians, and cosmetologists are just a few occupations that need a professional license in order to operate in California.
How do I obtain a California professional license?
The state board that oversees your industry is where you may submit applications for a professional license.
Local Business Permits
Additionally, you must figure out if a local company license is necessary in your county or city. Instead of a business authorization, certain jurisdictions, such as Los Angeles, San Francisco, & San Diego, need a business tax certificate. The city can impose local business taxes on your business if you register for a company tax certificate.
The office of the local government is where you may submit an application for a tax certificate or business license. For instance, San Diego companies can submit a Business Tax Request to the Office of the City Treasurer if they want to obtain a business tax certificate. Businesses with fewer than 13 employees must pay $34 to obtain the San Diego Business Tax Certificate each year. Those with 13+ employees must pay $125 (plus $5 for every new employee).
How do I obtain a business license in my area?
Every county or city in California that grants business licenses will have a different form & cost. For instance, in the city of Alameda, you apply for a business license and spend $29 in total fees ($14 online) to the City of Alameda Finance Department.
The degree of segregation between you and the business determines how much liability protection you receive from creating an LLC or corporation. You must, at the very least, establish a bank account specifically for your company. Additionally, you will have to deal with payroll if you plan to hire staff.
Bank Account for Your Business
You must register a company bank account in order to keep your personal and business expenses apart. If you don’t, the Alter Ego Rule may lead a judge to conclude that your company is not truly distinct from you, the owner. This result, also referred to as penetrating the corporate veil, occurs when a judge determines that a business is actually the owner’s alter ego rather than a distinct legal organization. You may lose the limited liability protection if this ever occurs.
As a sole proprietor, having a business bank account is also essential. Both general partnerships & sole proprietors will profit from arranging their firm finances during tax season, even though they do not have limited liability protection.
LLCs and corporations must give the bank their formation papers, operating agreement or business bylaws, EIN, and, in certain situations, a Corporate Resolution to create a Bank Account.
Configure Payroll
Payroll must be set up by companies that employ workers or independent contractors. Here’s how:
Because it’s difficult to set up payroll in California, many owners of businesses utilize software or a payroll service that will constantly withhold taxes, submit federal and state returns on the company’s behalf, and compensate employees via checks or direct deposit, subject to the employer’s desire.
Which forms must my staff members complete?
Your new hires must complete an I-9 form. It is to confirm their eligibility for employment in the United States. A W-4 is used to calculate how much you are going to withhold.
Employee vs independent contractor
A distinction between an employee and an independent contractor ought to be made. Income, social security, & Medicare taxes must be withheld and paid correctly. These taxes are paid independently by independent contractors.
An employer has no direct influence over how an independent contractor completes their work because they are self-employed. The same type of work can be done for other companies by an independent contractor, who is free to select when and how to complete the task.
In contrast, an employee completes their work whenever and however their employer specifies.
You can submit Form SS-8 to the IRS & let them make the final decision if you’re not sure.
How can I apply for a Tax Account Number for Employer Payroll?
The Employment Development Department’s website allows you to apply online for a Tax Account Number. The names and Social Security numbers of your company’s officials, partners, and/or owners, your EIN (should you have one), plus business contact details, are among the details you will need to submit. The registration process is free.
Your personal assets are protected by establishing a corporation or LLC. However, your company is responsible for paying if something catastrophic happens to it, such as a lawsuit, burglary, fire, or flood. The expenses may be partially covered by business insurance.
Which kind of business insurance is necessary? Your willingness to incur risks and the specific dangers associated with your sector will determine this. California requires certain kinds of business insurance, but whether or not you choose to get additional insurance is up to you.
Workers’ Compensation Insurance
According to California law, companies that employ one or more people must get workers’ compensation insurance. This insurance is there to pay for medical expenses, as well as disability and wage compensation in the event that one of your staff members becomes sick or injured at work. You have three options for purchasing workers’ compensation insurance. Self-insured (i.e., the employer sets aside its own funds to cover accidents), private insurance companies, & the California state fund.
Requirement of workers’ compensation insurance
Employees must have workers’ compensation insurance, while business owners are exempt from this need. It should be pointed out, though, that business-related injuries are not often covered by personal health insurance plans, so enrolling in a workers’ compensation plan may still be a good choice.
Liability Insurance
This pays for lawsuits brought against your company for injuries or property damage to third parties, such as clients or consumers. This covers verdicts, settlements, medical costs, and legal fees. Depending on the number of assets your company needs to safeguard and how often it is to be sued, you may or may not require it.
You may feel at ease forgoing liability insurance if it’s just you and the system in your basement. Perhaps you won’t. Professional, technology, commercial, residential company, and product liability insurance are examples of more specialized types that you can buy or add to in addition to general liability insurance.
Does my home-based business require business insurance?
Most likely. This is due to the fact that you cannot rely on your renters’ or homeowners’ insurance to pay for business-related losses. A home-based company insurance plan is available from the majority of insurance firms.
We’ll be truthful. Business taxes in California can be a bit of a pain. At 28%, California’s combined corporation tax rate is relatively high. Additionally, all California companies and LLCs are often required to pay the $800 minimum yearly California Franchise Tax. Additionally, you will have to pay local and federal taxes.
You must obtain an EIN (Employer Identification Number) to pay your federal taxes and take many other actions necessary to launch a business.
Do self-employed people require an EIN?
You do not legally require an EIN if you are running a one-member LLC or a sole proprietorship that doesn’t employ anybody else and does not have to file pension plan or excise reports.
You may still purchase one, though, and you most likely ought to. If not, you will have to conduct business using your very own Social Security number. In addition, opening a company bank account will probably require an EIN.
How can I obtain an EIN?
You can apply online or submit the IRS form SS-4 to obtain an EIN. It costs nothing to get an EIN.
An S-Corp: What is it?
S-Corps are taxable as pass-through businesses, just like LLCs, but they can submit documentation to the IRS to be taxed as such. Initially, registered business entities (corporations & LLCs) have a default tax status. S-Corps are exempt from the 15.3% self-employment tax. It is just like the corporations.
A C-Corp: What is it?
The standard federal tax election given to corporations is a C-corporation. Although LLCs can seek C-Corp tax status by submitting documentation to the IRS, the majority of corporations pay taxes as C-Corps. Both state and federal income taxes are filed by C-Corporations. (In California, corporations & LLCs that are subject to C-Corp tax pay a flat business tax rate of 8.84% of their taxable income.) C-Corps have the ability to distribute profits to their shareholders. They then record those gains on their individual tax returns.
State Taxes in California
The California Franchise Tax is one of the more unpleasant aspects of doing business in California. All companies, LLCs, LPs (limited partnerships), & LLPs (limited liability partnerships) operating in California are required to pay this tax. It is a minimum of $800. Your business tax categorization will determine the precise amount you must pay in franchise tax.
Fortunately, LLCs do not have to cover the California Franchise Tax in their initial tax year. Additionally, corporations are exempt if they operate for fewer than fifteen days or perform no business at all.
A yearly LLC fee, which begins at $900 and rises according to income, is required for LLCs earning more than $250,000 annually. This is on top of the yearly franchise tax.
The AMT (Alternative Minimum Tax), which is a tax on the business’s income without specific deductions & credits, is levied at the AMT rate of 6.65 on corporations and LLCs without taxable revenue.
Local Business Taxes in California
Certain California counties and cities impose an extra sales tax on top of the 6% state sales tax. At 10.5%, Santa Fe Springs features the most substantial local sales tax.
Other business taxes are also levied by some counties and towns. For instance, San Francisco recently implemented the OET (Overpaid Executive Tax), a payroll tax ranging from 0.4% to 2.4% on companies whose highest-paid CEO makes over a hundred times the median salary of their workforce.
Californians must be able to locate your company online if you want them to do so. You will require social media profiles, a website, a domain name, a company phone number, a business email, & brand protection. You don’t need to be an internet designer to have a strong online presence. You’ll need a few things.
A design, symbol, slogan, phrase, or any combination of these that solely represents a brand’s products or services is called a trademark. Only a small percentage of companies register trademarks.
The USPTO (US Patent and Trademark Office) or the State of California are the two places where you have the option to register your trademark. Registering the trademark in California is less expensive and simpler. It only provides trademark protection in California.
Not all applications for trademarks are accepted. You can only apply for a trademark once you’ve begun using it (so put it on your newly created website). The robustness of a trademark filing (and the trademark itself) depends on numerous criteria, and trademark law is complicated.
Registering a trademark
A Service Mark/Registration of Trademark form can be submitted online, by mail, or in person to the Secretary of State’s office to register a trademark in California. The cost for each type of trademark is $70. To demonstrate that you have established a relationship between the trademark and the goods you are selling, you must provide three instances of your firm using the trademark (on an online platform, a sign, etc.). A trademark must be used before it may be registered.
In California, registering a trademark just prevents its use by third parties within the state. It does not shield your trademark against usage in other countries.
Is it possible to sign up a trademark before using it?
No, but you can submit an Intent-to-Use form to the USPTO. If you’re concerned that someone else may detect your mark before you’ve had a chance to use it, this helps get your request lined up before you’ve actually used the mark.
You will eventually need to provide evidence that you are utilizing your trademark in order for it to become authorized. You can buy some time to do that with an Intent-to-Use application.
Have a quick question? We answered nearly 2000 FAQs.
See all blogs: Business | Corporate | Employment Law
Most recent blogs:
Contact our attorney.