Starting your own business is always exciting – it’s breathtaking prospects, new opportunities, and wide horizons. However, it’s also a big responsibility. A lot of unfamiliar tasks wait for you ahead. Thus, to avoid confusion, it’s best to divide the whole process into several stages.
We’ve prepared a list of 16 steps to open a business in California. This will help you form a new company without losing focus on anything in the process.
Create a Business Plan
So you feel motivated to start your own business, have already worked out the basic concept, and are ready to conquer the heights of business. That’s wonderful! In theory. In practice, even the most promising idea can often be completely ineffective. Therefore, before you open a business in California, you need to analyze your opportunities and answer the following questions:
- Will your product/service be in demand?
- What opportunities does the market offer?
- What are the risks and benefits of the industry?
- How financially sustainable are companies in the industry? Etc.
To answer the questions above, you need a business plan that will become the cornerstone of successful development and allow you to attract partners and investors.
The main elements your business plan should contain are as follows:
- Summary. A document that presents the company, reveals its goals, plans, opportunities, etc.;
- Description of business activity;
- Market analysis;
- Products or services;
- Marketing plan and sales strategy;
- Financial forecasts;
- Attachments (data proof).
Decide on a Business Name
Your business name is your brand’s basis, which may one day make you worldwide famous. So choose it wisely. Apart from looking good and being easy to remember, your business name must also meet legal requirements as follows:
- The name should be 100% unique.
- Identifier (for LLCs and corporations);
- Full name of the owner (for sole proprietorships and partnerships);
- No prohibited words.
Even if brainstorming and generating various business name ideas took you considerable time and effort, don’t rush to put it in your documents right away. First, you need to make sure that there are no other companies operating under your chosen name. You can do this in two ways:
- Perform a name search online;
- Check with the Secretary of State.
Note that an individual name search will not show you the whole picture. Namely, you will not be able to check if your chosen name is already reserved by some other company, which has not yet gone through the registration process.
The purpose of name reservation is to protect the name in case you are not yet ready to open your business but are already working on it. This may be the best solution if the name you came up with is free and you would like to keep it for future registration.
The reservation period is 60 days. The cost is $10.
Decide on Legal Structure
California is one of the most popular states for growing your business. It offers a wide range of different legal structures for businesses, with the following being the most popular:
- Sole proprietorship;
- General partnership;
- S Corporation;
- C Corporation.
Let’s look at each of these company types in more detail.
If you start your business without applying for business registration, the state will treat you as a sole proprietorship. However, the absence of a registration paperwork requirement does not mean there is no paperwork at all. You will still need to obtain licenses and permits, as well as file tax reports.
Individual entrepreneurs report all business losses and income on their own tax returns. They are also personally liable for business obligations and risk all of their assets in case of debt or bankruptcy.
Two or more persons who want to do business together can form a general partnership. The financial and legal responsibility in such a case is shared equally between them. Profits are taxed as personal income.
Protection of the personal assets of the participants is the main feature of a limited liability company, which distinguishes it from partnerships or sole proprietorships.
On the federal level, LLCs also do not file their own tax returns, passing-through this duty to the owners.
An independent legal entity doing business under its own name. In California, it’s customary to distinguish several basic types:
General Stock Corporation:
- No limitation on the number of shareholders;
- Shares are distributed both among members and in the public domain;
- No more than 35 shareholders;
- No public share offerings;
- Shareholders usually act as managers;
- Designed to bring together physicians, pharmacists, lawyers, accountants, etc;
- Special legal provisions.
In addition, depending on the tax status chosen, corporations are divided into:
- Does not file returns or pay taxes on its own behalf;
- Profits and losses are taxed only at the shareholder level.
- Files its own tax return with profits and losses;
- Pays tax on profits;
- Shareholders’ income is also taxed.
Thus, we have reviewed the main types of business structures. Its choice will significantly affect the future of the company and your personal financial stability, so there is no need to rush in this matter.
Carefully study the pros and cons of each option and compare them. For this, you can read our LLC vs. Corporation or LLC vs. Sole Proprietorship articles.
In case you have any questions, you can also refer to the official Secretary of State’s website to find information on the types of legal entities and forms required for them.
Choose an Agent for Service of Process
When opening a business in the State of California you will need to choose an agent for service of process by entering the agent’s information in your articles of incorporation.
An agent for service of process (or a registered agent) is an intermediary between the state and a company that receives official correspondence addressed to it. Any person who meets the following criteria can become a registered agent:
- Be a state resident, i.e. permanently reside in the state (for individuals), or have a permit to conduct commercial activities for legal entities;
- Have a physical address;
- Be accessible. The agent must be available in the registered office during all business hours in order to personally receive all papers addressed to the company.
No California LLC may be its own registered agent, though its members or managers may perform these functions.
Much of the quality of the agent’s work defines the well-being of the company, so you should take a careful approach to select a candidate.
Business owners often take on the duties of a registered agent. However, this approach has several drawbacks:
- Breach of confidentiality;
- The need to be in the office continuously during business hours;
- Risk of missing reporting deadlines due to high workloads.
Contracting with a professional organization that provides Agent for Service of Process for LLC in California will avoid these problems, but it’s always up to you.
Regardless of which option you choose, you need to make sure that the state always has your registered agent information up to date. If you appoint a new one or your agent resigns, you must notify the Secretary of State by filing the necessary documents.
Register Your Business
Depending on your business structure, the procedure for officially registering your business may be as follows:
- LLC. Filing the Articles of Organization online or sending a hard copy by mail and its subsequent processing by the Secretary of State will cost $70. There is an additional $15 fee for California LLC filing in person;
- Foreign LLC. If your company was founded in another state and has now expanded to California, the rules are slightly different. Instead of Articles of Incorporation, you have to file an Application to Register, which will allow you to foreign-qualify your business and get a permit to run business in that state;
- Sole proprietorship. No official documents or fees required;
- General partnership. No registration is required, but you can protect your name by filing a Partnership Statement (Form GP-1). The cost of approval is $70;
- Incorporation. Filing an Articles of Incorporation (form ARTS-GS, ARTS-CL, or ARTS-PC depending on the type) will cost $100. The company must also have an established board of directors and issue its first shares.
Get an EIN
An Employer Identification Number (EIN) is a unique nine-digit combination of digits assigned to each company. With an EIN, the IRS can easily identify you from other businesses.
If you are in doubt about whether you need an EIN, this page will provide detailed information on who needs it and what you may need an EIN for. This is where you can also apply for an EIN online to get it right away.
If you prefer a paper version, download Form SS-4, fill it out, and mail it to the address:
Internal Revenue Service Operation
Attn: EIN Operation
Cincinnati, OH 45999
Open Business Bank Account
To open a company in California and make it sustainable, not only do you need to register but also take care of the future. For example, the “corporate veil” that keeps LLCs and corporations running smoothly can be disrupted if your personal assets (as the LLC owner) mix up with the company’s assets. To avoid this, a clear separation must be maintained at all times.
Opening a separate bank account for a business is simple. It’s enough to choose a suitable financial institution and provide the following paperwork:
- Founding documents;
- Operating agreement (sometimes).
Handle Tax Obligations
Whether you are a foreign LLC or a sole proprietor, everyone who does business in California has to pay taxes. Their specifics are determined by the chosen business structure.
LLCs and S corporations:
- Do not file a return in their own name;
- Profits and losses are taxed at the owner level only.
- Files its own tax return;
- Pays income tax;
- Shareholders’ income is also taxed.
Individual entrepreneurs and general partnerships:
- Self-employment tax.
Based on the scope of a business, the most common types of taxes are as follows:
- Franchise Tax. Most LLCs and corporations are required to fill out Form 3522 annually – i.e., pay the franchise tax, which is $800 (at min.). This is the cost of doing business in the Golden State.
If the income exceeds $250,000, you must also pay an additional fee (Form 568).
- Sales and Use Taxes. Applies if your business involves selling, storing, consuming, or otherwise using goods. The rate depends on the county.
- Payroll taxes. When hiring employees, remember taxes on:
- Unemployment and disability insurance;
- Personal income.
If you have questions, you can visit the California Tax Service Center website or contact a lawyer.
Find an Accountant
As your business grows, the need to keep financial records can become a serious issue that is easier to entrust to a professional.
Not only will an experienced accountant help you with filing paperwork and make sure you pay your taxes properly, but also give you a few tips on how to save money.
Create an Operating Agreement
Unlike many states, California requires you to have an operating agreement. The good news is that it can be both verbal and written.
An Operating Agreement is an internal document that governs:
- Basic operating principles;
- Management structure;
- Participant responsibilities.
Note that while it’s possible to enter into an agreement verbally, it’s still much more reliable to have it on paper.
There are two options for preparing the document:
- Independently, relying on one of the one-size-fits-all online templates;
- With the help of a professional online company.
By hiring ZenBusiness or another similar service, you will receive a high-quality and elaborate agreement adapted specifically for your business. Plus, it will cost you less than attorney services.
The agreement does not need to be approved by the Secretary of State. You should simply store it with the rest of the documentation.
Acquire Necessary Licenses
The vast majority of California companies are required to have certain licenses. Their type and cost depend on your business specifics:
- General: an annual license that allows you to do business in a county or city;
- Professional applies to professionals such as therapists, construction workers, accountants, etc.;
- Health care: issued by the city or county if the business involves the sale of food products or in some way relates to the human body (barber shops, tattoo salons, etc.);
- Vendor permit: required if you plan to sell taxable goods or services;
- A permit for signage, billboards, etc.
Licenses can be provided at the following levels:
If you’re not sure about which permits you need or you want to learn more about licensing, check out CalGold, which has a lot of helpful information.
Consider Business Insurance
Every business has risks. Of course, an LLC or corporation provides owners with protection for their personal assets, but what about the company’s assets? You can take care of that with General Business Insurance or a Business Owner’s Policy. For as little as $300 a year, this will give you comprehensive protection, from liability insurance to vehicles.
If you’re not sure what form of insurance your business needs, visit SBA.gov and use a hands-on guide provided there.
Build a Website
Today, almost every company or organization has its own website, and if you want to keep up with the times, you need to take care of your business’ online presence. Not only will it raise your profile but will also attract new customers.
Fortunately, you don’t need to be fluent in HTML or have special web design skills to create a website. Services like WordPress and Squarespace allow even a beginner to design an attractive and functional website.
If you, for whatever reason, do not want to do it yourself, you can consider other options. For example, hire a professional designer or an online service (e.g. ZenBusiness or IncFile) that offers business customization services.
Launch Social Media Accounts
Having a website is an important part of building a business’s image and reputation, however, that alone is not enough. Various social media sites such as Facebook, Twitter, and Instagram are also great places to find and attract potential customers. Don’t miss out on them.
Understand Ongoing California Requirements
Launching a business is a much-anticipated and joyful event. The long preparation, company formation, and registration hassles, obtaining licenses and permits are all over. Now you can finally breathe freely and focus on what you have been working on all this time – your own business.
Yet, to make sure that your efforts were not in vain, to make your business thrive, you need to act within the law at all times. Thus, you need to keep an eye on your taxes, i.e. pay them on time and file your Statements of Information.
California Small Business Resources
If you’re looking for new ways to grow, check free resources intended to help you as an entrepreneur.
The SBA.gov website offers a wealth of information and advice for small business owners. For your convenience, the site also has separate pages on interesting business events, advice, and loans in select California counties: