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How to Start a Business in California

Tuesday, May 16, 2023

Starting your own business can be exciting. Maybe it’s taking the skills you’ve learned throughout your career and creating your own venture, or perhaps you have a unique idea that you’ve been waiting to bring to life. No matter how you plan to start a business, there are some steps you need to take as you create your new business in California. Let’s examine the key considerations to ensure you start it properly.

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What do you need to start a California business?

To start a California business, you’ll need a few things. First, you’ll want to name your business. Then, you’ll need to create a business plan. This business plan should outline many critical aspects of your company, but we’ll discuss this in more detail later. You’ll need to decide what legal business structure your business will be. You’ll also need to file for tax and employer identification documents. Finally, you’ll need to check what licenses or permits you may need to operate your business. You can utilize the CalGOLD website to help you find permit information for your business. Let’s look at some of these steps to start a business in California.

How to choose a business name

To choose the right name for your business, you’ll want to perform some market research to see what your competitors’ names are. Then, perform a name search to see what names are out there for your kind of business.

You’ll want to find a name that accurately describes your products or services but differs from the competition. If your name is too similar, you may confuse potential customers or inadvertently give business to the competition.

According to the California Secretary of State’s website, you may adopt a business name for a corporation, a limited liability company, or a limited partnership if it is "distinguishable in the records from an existing entity of the same type of record with the California Secretary of State and may not be likely to mislead the public.”

Some businesses also elect a DBA (doing business as) name, an operating name different from your legal business name. For example, your legal business name might be Kathleen’s Cake Baking, but your DBA name may be Katie’s Cakes.

What’s a business plan?

A business plan is a document that outlines the critical elements of your business. Not only does this document keep you organized, but it’s also necessary if you’re looking to obtain outside financing like a Small Business Administration or bank loan. Whether you plan to run a more traditional business or a startup, a business plan is crucial to getting your business off the ground.

Let’s take a look at the standard sections of a business plan. Most business owners like you choose to include some combination of these sections, depending on their business entity.

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Executive summary

This section gives an overview of what the company is, including its mission and vision. This summary section should also describe your business idea, the business's goods or services, and key leadership and financial information.

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Company description

In this section, you’ll provide a detailed description of your company, including the problems your business solves. You’ll also describe your desired customers – whether consumers or businesses. Finally, here, you’ll list the competitive advantages of your company that will make it successful. Don’t be afraid to boast about your strengths here.

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Market analysis

This section should focus on the industry in which your business will operate. What are the trends and latest outlooks? How can you be successful based on these trends?

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Business structure

You’ll describe your business structure – whether you plan to incorporate as an S or C corporation, form a general or limited partnership, a sole proprietorship, or a limited liability company (LLC). You’ll also show your company's organizational structure here.

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Products or services

In this section, you’ll detail what you sell or provide for customers, including your projected pricing. You should also demonstrate the product lifecycle and share any information about protecting intellectual property.

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Marketing and sales

This section should describe your marketing plan and how you will sell your goods or services. Describe thoroughly how a sale will occur here, as it will lay the groundwork for the financial projections section later.

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Funding

If you’re seeking financing, here is where you’ll detail your requirements and what you’ll use this money for.

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Financial projections

In this section, you’ll detail your financial projections. It’s important to elaborate on why you think your business will be successful using data. Then, you’ll include projections to back up your numbers. This section is vital if you’re seeking funding.

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Appendix

You’ll include other pertinent documents in the appendix. Any supporting documentation can go in this section, from entrepreneur resumes to product information to applicable licenses.

Business structure options

Once you have a business plan in place, you’ll need to decide on your type of business. The business type you choose is important because it affects how you run your business and has implications for taxation, personal liability, and funding.

Let’s take a quick look at California's various business formation structures.

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Sole proprietorship

A sole proprietorship is for an individual person to set up and own a business. Usually, a sole proprietor business is just the individual’s name. However, suppose you want to form a sole proprietorship with a different name. In that case, you must file a Fictitious Business Name Statement with the county where you operate the principal business. An individual does not have to file any other formation documents with the California Secretary of State’s Office.

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Limited liability partnership (LLP)

This structure is for a partnership in the following fields of business: the practice of public accountancy, the practice of law, the practice of architecture, the practice of engineering or the practice of land surveying, or provides services or facilities to a California registered LLP that practices public accountancy or law, or to a foreign LLP. This type of partnership must also maintain a certain level of insurance. Registering as an LLP in California means filing an Application to Register a Limited Liability Partnership (Form LLP–1) with the California Secretary of State’s office.

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General Partnership (GP)

In a general partnership, all partners are liable jointly and severally unless agreed otherwise. Profits from a general partnership are taxed as personal income for the partners. In California, registering a GP at the state level is not required. However, the GP must file a Statement of Partnership Authority (Form GP-1) if the GP chooses to register at the state level.

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Limited Partnership (LP)

In a California limited partnership, there must be one general partner that acts as the controlling partner and one limited partner whose liability is limited to the amount of participation they have. Forming an LP in California involves registering as a business entity on the California business filing site.

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LLC

A California LLC offers liability protection similar to a corporation but it’s taxed differently. In addition to filing the necessary documents with the California Secretary of State, an operating agreement as to the LLC’s conduct of its business and affairs must be included where the LLC’s records are kept. Forming your LLC requires filing the Articles of Organization on the California business filing site. You’ll also need to file a Statement of Information.

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Corporation

This business structure allows a business to exist separately from its owners. And while that means limiting personal liability and shielding personal assets, it can mean increased taxes on the corporation and shareholders. It’s best to talk to someone in California who is knowledgeable about the different types of California corporations to help you decide if this is the proper business structure for you. To form a corporation, you must file Articles of Incorporation with the California Secretary of State and a Statement of Information.

If you choose to form an LLC or a corporation, you’ll also need to appoint an individual agent or corporate agent for service of process. Commonly known as a registered agent, this person or company will receive legal and tax documents for your company.

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Fund your business

As you decide on your business structure, you must also consider funding your new venture. There are a few different ways to fund your business.

No money

Some businesses require minimal startup costs. In these cases, you may only need money for the filing fee to register your business.

Self-funding

If you have the capital to start your business, this can be a great option because you are not financially liable to anyone else. However, it comes with many risks, as a failed venture can cost you a lot of personal capital.

Loans

Small business loans are another option for funding and are available from many banks and credit unions. As discussed, these loans rely on a sound business plan, so you’ll want to ensure you have a detailed document to share with a potential lender.

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Grants

There are also some grants available for small business owners. These can be funded by the government or through private organizations. Grants can provide the capital you need to start a business without paying it back like a loan.

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File for tax and employer identification numbers

As a new business, you have certain tax liabilities based on your organizational structure. These include both federal and state liabilities. You’ll want to apply for an employer identification number (EIN) from the Internal Revenue Service (IRS). The government uses this number to identify your business entity. You’ll also need this number to pay federal business taxes (like payroll and income taxes), hire employees, open a business bank account, and apply for necessary licensing and permits.

In addition to having a number for federal tax payments, you’ll also need to register for California local and state taxes. The California Employment Development Department can help register your business. You may also need to obtain a Use Tax Account or a Seller’s Permit. Again, depending on your business, you may be required to pay certain taxes. Check with The California Department of Taxes and Fee Administration (CDTFE) for more information on the 37 different types of taxes and fees. As always, talking to a local tax professional for more specific information about your business is best.

Get a business bank account (and credit card)

After obtaining your EIN and necessary state identifications, open a business bank account. This business account will help you keep your personal and business finances separate – and almost every business needs a business bank account. Opening one is simple – you can visit a local or national bank or open one online at various online banking institutions. Once you have a business bank account, you may apply for a business credit card. This tool can also help you keep your business and personal accounts separate while providing a way to monitor expenses.

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Obtain a business license

In addition to having a business name and tax identification information, you’ll most likely also need a business license. However, city or county officials handle California business licenses. Therefore, talk to your county clerk or city council to ensure you have the proper licensing and permits to operate your business. You can also check the CalGOLD website to help you find the correct permit information for your business.

Ensure you have business insurance

For many businesses, business insurance is a requirement for permits or licensing. Each business will have different needs based on its industry and offerings, but companies will usually need personal and professional liability insurance. Check with a local agent to ensure you have the coverage you need.

Frequently asked questions

The cost to start a business in California depends on your business type and the legal structure you're using. In 2023, the cost to file an LLC in California is $70. The filing fee to form a corporation is $100. California also requires a Statement of Information report within the first 90 days of your business being formed and annually after that. Filing a Statement of Information with the California Secretary of State costs $20. The cost for a business license is $100.

The franchise tax is a tax that is required of almost all business entities registered with the California Secretary of State. All corporations, partnerships and LLCs, regardless of profit, must pay a minimum of $800 per year. Sole proprietorships and general partnerships (who don't register with the Secretary of State) and tax-exempt nonprofits do not have to pay the annual franchise tax.

All businesses in California, with very few exceptions, are required to have a business license, even if your business is brand new, temporary, part-time or a hobby. You can contact the Business License Ordinance to request an exemption.

The permits required to start a business in California vary depending on your business type, city, and county. You should check with the Secretary of State, your local County Clerk, and the Chamber of Commerce to determine the needed permits for your business. The most common permits for California businesses are Seller's Permits, Sales & Use Tax, and Resale Certificate.

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Start a small business in California and reap the rewards

If you’re building a small business or startup get ready for an exciting journey. Understanding how to start a business in California will help put your mind at ease as you work through the process of forming a legal entity in The Golden State.

Looking for support or more information as you work toward becoming a successful California business owner? Take the Start-Up Path for Entrepreneurs. It’s an interactive resource built for budding entrepreneurs who want to create something great but need practical advice to get started building a thriving business.

The Start-Up Path isn’t just free. It’s a course full of interesting content that will walk you through each step of starting and growing a business in any state. The Start-Up Path includes planning worksheets, interactive tools and advice from real entrepreneurs who get where you’re coming from.

If you’re looking for more inspiration than step-by-step instructions, check out our Entrepreneur’s Studio podcast. We interview guests to get the been there done that advice we all need from real entrepreneurs who have accomplished great things, like pro surfer and superfood guru Laird Hamilton, Danny Meyer, founder of Shake Shack, or Alex Bradberry, founder of The Sparkle Bar.

Ready to work with a company that knows what it’s like to start a business? Heartland can help with that too.


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