We’re often contacted by clients wondering how to start a small business in California. While we do serve clients in both California and Texas, today we’re going to focus on how to start a business in California — the 8th most entrepreneurial state in the entire nation.
California has many opportunities for starting a business, but given the legal complexities of business ownership, especially in the most populous U.S. state, business owners can be most successful when they start on the right track with help from an attorney.
Did you know that despite the hoops it feels like you have to jump through to open a business in this state, a vast majority of new start-ups will still be operating after five years? That’s one of the lowest failure rates in the country!
How To Start a Small Business in California
When opening a new business, it is important to make sure you have all necessary registrations and licenses for your specific type of business — if you aren’t sure what those are, contact an experienced business attorney for guidance!
Those first steps are often the hardest, and we’re here to look out for your best interests — from the earliest registrations to employee and contract legal matters whenever they arise. to make sure your business thrives.
Let’s take a look at the simple overview of the steps you will take when opening your small business in California.
1. Choose your business structure/make a business plan
In California you can choose to structure your business several different ways. Each provides different tax implications, liability protections and management or ownership arrangements:
- Sole proprietorship
- Limited liability company
- Limited liability partnership
- General partnership
- Limited partnership
- Corporation
If you intend to be the sole owner of your Californian business, you can structure it 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 start your own business in California. When you open a sole proprietorship, you may be able to avoid having to register your company with the California Secretary of State. Ask your attorney about any legal risks this simple business structure might bring forward.
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 such as many medically related businesses. This is the most complicated of the business structures mentioned above, but it can also offer you significant protection and opportunity for growth.
You can learn more about the explanation of various business structures California Secretary of State’s office. Meanwhile; you can also find resources by checking with the Small Business Association.
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. If you need help, please reach out to us.
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.
If you need help with these processes, please consult with an attorney.
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 experienced 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:
- CalGold — for finding appropriate permit information for your specific type of business.
- California Department of Consumer Affairs — to learn about licenses and regulations
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. Many types of businesses may need specialized professional liability coverage as well.
Do You Need Help Learning How to Start a Business in California?
If you really want to know how to start a small business in California, this simple guide can set you off in the right direction to find the resources you need. You may also consider pairing up with a business mentor, seeking an entrepreneurial support organization, sitting through a few webinars for entrepreneurial advice or reaching out to an experienced business attorney.
Remember though, when you are learning how to start a small business in California, make sure you take a look at your own skillset and identify your weaknesses. Then, you can decide whether you want to reach out for help or learn how to improve in that area yourself. To properly start a business, you must identify what you will need help with and what you can handle on your own.
If you need help looking over lease or construction contracts, deciding between insurance contracts, creating legal agreements between yourself and a partner or any other areas an attorney experienced with business law can be of assistance contact us today.
