HOW DO I FORM MY SMALL BUSINESS IN CALIFORNIA?

tytanium | 04.26.22

When opening a new business, it is important to make sure you have all necessary registrations and licenses. Here is a simple overview of the steps you will take when opening your small business in California.

1. Choose your business structure/make a business plan

You can structure simply as a sole proprietorship. This means that you alone run your business and there is no formal business structure or entity (such as a corporation, Limited Liability Company “LLC”, etc.) in place. This is the simplest way to proceed (and avoids the necessity of registering with the California Secretary of State), though you should discuss with an attorney the legal risks of this route. A more formal structure, such as a limited liability company or corporation, requires adherence to structural rules but also provides the business owner with liability protection in the event the company is sued. Certain businesses must form as professional corporations (often those medically-related). The California Secretary of State has a helpful explanation of various business structures here: https://www.sos.ca.gov/business-programs/business-entities/starting-business/types 

The Small Business Association website also has helpful resources here: https://www.sba.gov/business-guide 

2. Choose your business name

You want a name that is memorable, unique, and legal. There are restrictions on using certain words or labels in business names. For example, you generally cannot give a business the name “Accountant” or “Corporation” if you do not hold the corresponding license or business structure. 

Similarly, you cannot use a name that is in use by another business or trademarked. You can conduct a search online with the US Patent and Trademark Office and run a Google search to make sure your chosen name is available. 

If you are forming under one name but doing business under another, you will need to register that you are “Doing Business As” or “DBA” with your County and/or the California Secretary of State. 

3. Register with the California Secretary of State or the County

If you are forming an LLC or corporation, you will need to draft Articles of Incorporation (for a corporation) or Articles of Organization (for an LLC) and file them with the California Secretary of State. This is also the time to draft your basic business governance documents – an operating agreement, bylaws, etc. – and hold an initial meeting to elect officers and directors. A Statement of Information must be filed with the Secretary of State. 

A sole proprietorship does not need to be registered with the Secretary of State, but must register with the County in which the business operates. 

During this stage, you will want to designate an agent for service of process. This is a name and address where legal documents may be served. This information will be made available to the public, and it will be important that the person you designate diligently monitors mailings at the designated address.

4. Taxes!

Obtain your Federal EIN, if needed. This is a like a social security number for your business. Every corporation and LLC needs one. A sole proprietorship needs one if it has any employees. You can obtain this by applying online at the IRS website.

If you are any form of entity other than a sole proprietorship, you will also need to register with the California Franchise Tax Board. There is an annual minimum tax requirement for all registered businesses. 

You should also register with the California Employment Development Department if you have employees: https://edd.ca.gov/en/Payroll_Taxes/Am_I_Required_to_Register_as_an_Employer 

5. Set up your finances

You will typically be required to submit proof of proper business registration and your EIN prior to opening a bank account or credit card account. You should be prepared to designate an approved signatory on the account and may want to require dual signatures for withdrawals. 

For online bank account or credit card monitoring, be cautious about who has access to your funds. There is always a risk of theft if too many hands have access to business funds. 

Also, under some circumstances, a creditor of your business may be allowed to pierce the corporate veil and seek money from you individually (even if you have a corporation or LLC in place) if you have commingled personal and business funds. So, keep the business accounts separate from your personal accounts. It may be a good idea to hire an accountant or bookkeeper to handle your business finances.

6. Do you need any business licenses?

Double check if you need any special licenses, permits, or the like, to operate. You may need to be licensed or registered or hold certain types of insurance to practice some trades. Here are some helpful resources to check: https://www.calgold.ca.gov/ and https://www.dca.ca.gov/ 

7. Insurance

You should also arrange a meeting with an insurance expert to ask about insurance coverage that is required/available for your type of business. If you have employees, for example, there are insurance policies available to protect you against Labor Code violation claims. Your premises may need general liability coverage, and you may need workers’ compensation coverage, etc.

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