How to start a business in California in 8 steps
Many California residents dream of making money by doing something they love, all while having a flexible schedule and making a difference in the world. If this resonates with you, you’re likely someone who wants to start their own business. You may be full of amazing ideas—but before you hit the ground running, there are a few things to consider.
Starting a business may give you freedom in life, but you must play by the rules when building your organization. Let’s take a deep dive into each of the steps required to start a business in the State of California.
1. Think about the type of business you want to start
Entrepreneurs who want to make their mark in the business world need to start with a clear idea of precisely what type of business they’re going to run. While some facets may be easy to determine, like whether you’re going to operate online or run a brick and mortar shop, others may not be so straightforward. It’s wise to do some research and take a look at other local small businesses in your industry to see what they’ve done well and where you can learn from their challenges.
Aside from the nuts and bolts of your day-to-day operations, it’s also key to be honest with yourself if becoming a business owner is right for you. Some business structures require a lot of time to get off the ground, and if something goes wrong (we hate to say it, but in reality, something will eventually go wrong), can you handle the stress that comes with the type of business you start?
If you’re still excited about your business idea and nothing sounds more fulfilling than launching a startup, then it’s time to get into the nitty-gritty of setting up shop. While you can break down each step into smaller, more manageable tasks, it’s important to complete the process in a timely manner.
2. Set up your legal structure
Every California business is structured in one of several ways. You get to determine which fits best for your organization. Entrepreneurs can opt to set up their new business using one of these types of formats:
- Sole proprietorship: One of the more straightforward ways of structuring your new business is selecting to be a sole proprietor. As the business owner, you receive the profits from your work, but any business debt becomes your personal liability. Sole proprietorships are not incorporated and often require the least amount of paperwork. These companies do not have employees and use your unique Social Security Number to file your business taxes.
- Partnership: Should you desire to bring another person into your business venture, a partnership may be ideal for you. In this type of structure, small business owners are treated similarly as sole proprietors, where their personal assets are not subject to liability protection.
- C Corporation: Often seen as a more attractive option by investors, a C corporation is owned by shareholders rather than small business owners. C corporations are separate entities from the individuals who work there and are typically large. This type of structure requires you to develop your Articles of Incorporation and file this document with the Secretary of State. Some organizations may choose to structure their business as an S corporation, also called a small business corporation, to take advantage of specific IRS regulations.
- Limited Liability Company (LLC): A large number of California businesses are set up as LLCs. This combines the ease of a partnership or sole proprietorship with the financial protection of a corporation. Setting up an LLC involves several steps but is pretty straightforward to complete.
- Nonprofit: If your organization intends on focusing on social causes and generates income through donations, you may want to formalize your group as a nonprofit. In most cases, California nonprofits are exempt from paying income taxes.
Once you’ve determined the right structure for your business entity, it’s crucial to develop a business plan. Your business plan may vary in terms of what it includes but can be very detailed and outline aspects of your organization, including your growth strategy, marketing ideas, and more.
3. Name and register your business
Now that you’ve spent some time completing formal state requirements, it’s time to have a bit of fun. Coming up with a business name can be one of the more exciting and creative aspects of starting a business in California, but you’ll want to keep a few things in mind.
As obvious as it may seem, it’s worth mentioning that you should avoid naming your organization with the same name as another company already in business. Not only will this create confusion among customers, but you actually won’t be legally permitted to do so, as business owners are required to register their name with the California Secretary of State.
Suppose you’re starting a partnership or sole proprietorship, and you want to use a different business name than your legal name. In that case, you’ll need to complete a Fictitious Business Name Statement in your county clerk’s office. This name lets the government know that you’re using a “dba”—that is, you’re doing business as a name that’s not your legal name.
Once you’ve selected your company name, you can complete a Name Reservation Request Form and formally register your business with the state. Depending on the type of business structure you’ve selected, you may need to submit Articles of Organization or bylaws. Additional paperwork, like IRS Form 2553, may be required if you are starting an S corporation.
You’ll also want to provide your business name and business address and include the registered agent’s name (the individual responsible for receiving legal paperwork related to the organization). At this time, you’ll also want to register with the IRS and, if applicable, obtain your Employer Identification Number. This ID number will be used when you file your business taxes.
4. Apply for licenses and permits
All California businesses must apply for a business license to legally operate within the state. Resources including CalGold and the U.S. Small Business Administration website can help you determine exactly which types of permits and licenses you need before opening for business. Starting a restaurant will require you to complete different applications than running a bookstore, for example, so it’s essential to do thorough research at this point.
Keep in mind that you may also be spending a bit of money, depending on the types of licenses and permits you need. Nearly every county will charge a filing fee when applying for a business license, and you’ll also likely have to pay a franchise fee to the California Franchise Tax Board. Make sure you apply for all permits that you’ll need, and keep in mind that they do expire annually, so you’ll want to renew them as needed.
5. Choose a location
New business owners often begin with this step after seeing a great deal on a retail space close by. While it’s wise to keep an eye out for your future location, for some, signing a lease may be putting the cart before the horse just a bit.
By this point, you already know what kind of business you’ll be running, and your business plan likely details your vision for your brick and mortar space. You’ve probably fleshed out whether you only want a few employees at first and how quickly you want to grow, and you’re well aware of who your competition might be.
All of these considerations will affect where you set up shop, so it’s smart to wait until this far in the process to select your space. Some buildings may have zoning restrictions to consider as well, so acquiring your storefront or office may take some time.
6. Open a bank account and prepare for future taxes
While a sole proprietor may choose to use their personal bank account for their business needs, most other types of business structures will require a business bank account. For example, since corporations and LLCs separate revenue and debt from an owner’s personal liability, for these, you’ll need to create a new account for all business transactions. Some organizations may also choose to apply for a business credit card at this time.
By this point in the process, you’ve likely already obtained a business tax ID from the IRS and have paid certain filing fees to get the licenses and permits you need to hit the ground running. While you’re still working behind the scenes to get ready to open for business, it’s a smart idea to make sure you’re prepared when it comes time to file both your business federal tax and state taxes.
Depending on your level of comfort with accounting, you may want to think about hiring a bookkeeper or certified public accountant to help organize your inflow and outflow of money. When it comes time to file your tax returns, these professionals are well-versed in the rules and regulations that come along with running a business. Should you decide to manage your accounting in-house, it’s critical to maintain your books, at the very least, for tax purposes.
7. Purchase business insurance
Don’t overlook one of the last administrative steps involved in starting a business in California. Just like how other types of personal insurance can be critical in the event of an unforeseen circumstance, business insurance is equally as important. Depending on the industry you’re in and the structure of your business entity, you may be required to purchase one or more types of policies:
- Workers’ compensation coverage is required by the state if you have one or more employees. This policy helps to offset the costs of lost wages and medical treatment of an employee should they become sick or injured on the job.
- General liability insurance helps to protect you if someone sues your company for property damage or bodily injury. This coverage can be beneficial if your employees visit a customer’s property, like a landscaping business.
- Business interruption insurance is another option to consider as it will help cover costs should your organization be forced to temporarily close for a covered reason.
- Both business property insurance and business personal property insurance are also smart types of protection to consider. The former helps cover your building should it become destroyed or damaged, while the latter may work to cover damages to the items inside your building.
All of the insurance options listed above, except workers’ compensation, may be purchased in one policy called a Business Owner’s Policy and offers immense peace of mind should a situation occur that’s beyond your control.
8. Create a marketing plan, hire employees, and more
For some business owners, tasks like creating a marketing plan, setting an advertising budget, and more might be something they wish to tackle later on down the road. Depending on the industry you’re in, you may already have a wealth of customers who are counting down the days until you open your doors, and these items can be addressed when it makes the most sense.
Others might find that now’s as good of a time as any to develop their business website, print up business cards, and create a social media presence to generate buzz around their services. Since you’ve already made a business plan, you’ll know which of these tasks you should take on at this point.
Unless you’re running a sole proprietorship or a partnership, you’ll eventually want to hire your first employee as well. The Employment Development Department has a wealth of information that can help you hire employees, as there are specific forms to complete and several steps in the process to ensure you’re complying with state requirements.
All in all, starting a business in California certainly isn’t an easy task, but the result is well worth it. There are various resources available to help you with each step in the process, especially when acquiring small business insurance. Huckleberry is on a mission to make purchasing insurance easy—most small business owners can get a policy in minutes.