Are you ready to start a business in California? We’ve got some great news for you: there’s never been a better time to be your own boss!
We get it, though, forming a new business is pretty daunting. But, with the right strategy, and the right professionals at your side, it isn’t as hard as it seems.
Below, we cover all the steps you need to take to start your business in California. This guide will help take the mystery out of what you should expect when establishing your company and is a much-needed roadmap so you won’t feel lost along the way.
Step 1: Choose a Legal Structure for Your Business
The first thing that you need to do when establishing a business is to choose its legal structure.
When it comes to the structure of your company, you’re in control and get to choose the option that fits with you your goals. Keep in mind that there’s no legal structure that’s the best for every business. Every entity comes with its own set of pros and cons.
Smart business owners opt to go with the structure that provides them with the ideal mix of low cost, liability protection, and tax and financial benefits.
Here are your options:
Step 2: Choose a Business Name
Okay, so you’ve decided what legal structure you want to use for your business. Next up is choosing your business name. This can be fun, but it does involve a bit of work to ensure you make the right choice.
Here are the main things to consider when choosing a business name
When forming an LLC or a corporation:
- Your business name must be approved by the California Secretary of State.
- Your business name must comply with certain legal requirements. For example, if you’re setting up an LLC, you’ll need to include LLC in the name.
- The business name you choose can’t be too similar to a California LLC or corporation already on file at the Secretary of State’s office.
Click here for tips on how to perform a search to see if your preferred business name is available.
When forming a sole proprietorship or partnership:
- You have the option of just using your personal name as your business name.
- When forming a partnership, you can use the surnames of the partners.
- If you want to use a name other than your personal name, you can file a Fictitious Business Name Statement. This form is filed in the county clerk’s office of the county where your business is located. County websites will provide additional information.
Pro-tip #1: Check if your preferred business name is available by visiting the Secretary of State’s website and performing a business entity name search.
Pro-tip #2: If the name you want is available, you can reserve it for 60 days so someone else doesn’t snatch it up before you have the chance to register your business. Simply file a Name Reservation Request Form (there is a small fee).
Pro-tip #3: Want to use all or part of your business name as your website’s domain name? Smart move. But first, check that it’s available! Searching through a domain registration website, like Register or Network Solutions is a great way to start.
Need some help with choosing the best name for your LLC? Check out our Freelancer’s Guide to Naming an LLC in California.
Step 3: Establish Your Business Entity
The next step on your journey towards business ownership involves legally establishing your entity. What you’ll need to do depends on the type of business that you’re forming.
Great news! If you’re forming a sole proprietorship, you don’t need to file any documents with the California Secretary of State, or any other agency, in order to establish your business.
All you have to do is start working. You’ll also need to take personal ownership of all of your business assets because, unlike an LLC or corporation, your business isn’t a separate legal entity with its own assets.
If you want to use a name other than your personal name to identify your business, be sure to file a Fictitious Business Name Statement in the county where your principal place of business is located.
Whenever two or more people start running a business together, and they don’t form another legal entity like an LLC or a corporation, they automatically start a partnership.
Translation: no need to file anything with the government in order to establish your partnership!
Like sole proprietorships, if you want to use a business name that doesn’t include the last names of all of the partners, simply file a Fictitious Business Name Statement. Also, when working in a partnership, it’s a great idea to draft and sign a written partnership agreement. This isn’t required, though.
To form an LLC, you’ll have to file articles of organization with the California Secretary of State and pay a filing fee. Within 90 days of filing, you’ll also file a Statement of Information with the Secretary of State.
When filing your articles of organization, you must appoint an individual or a corporation to serve as your registered agent (also known as an agent for service of process).
This person or corporation is responsible for accepting legal papers on behalf of your LLC.
To learn more about registered agents and how to choose the right one for the job, check out the Freelancer’s Guide to Registered Agents.
One more thing: you aren’t legally required to draft an LLC operating agreement, but it’s a good idea to write one anyway, even if you’re operating as a single-member LLC.
This agreement establishes your LLC’s internal operating rules, and you don’t have to file it with the Secretary of State.
To discover more, you can see our Freelancer’s Guide to LLC Operating Agreements.
Just like an LLC, there are a few steps involved with setting up your corporation.
First, you need to file articles of incorporation with the California Secretary of State and pay the filing fee. Then, you’ll appoint a registered agent. And you’ll have to file a Statement of Information within 90 days of filing your articles of incorporation.
If you choose to have your corporation taxed as an S corp, you’ll need to file Form 2553 Election by a Small Business Corporation with the IRS.
Shareholders of your corporation must elect the company’s directors. If you’re the only shareholder, you’ll be the only director. Shareholders also need to hold a director’s meeting, during which the directors will adopt bylaws, designate the corporate officers, authorize the issuance of stock, and take care of other important matters.
A stock certificate should be issued to every shareholder by the corporation, and everything that the directors do should be written down in corporate minutes.
Finally, while you aren’t legally required to draft corporate bylaws, it’s smart to do so anyway. These bylaws are like an LLC’s operating agreement and dictate how your business will be run.
Step 4: Obtain Business Licenses and Permits
Wow, you’ve come really far to establish your business entity in California. But your work isn’t quite done yet.
The next step is to check if you need to obtain any business licenses or permits, as well as an EIN, to operate legally as a business. Once again, we’ll break it all down for you:
Short for Employer Identification Number, your EIN is a 9-digit number that the IRS assigns to your business. You’ll use this number for tax filing and reporting purposes, both with the IRS and the state of California.
Do you need to get an EIN?
If you form a partnership, corporation, or LLC with multiple members, the answer is yes. If you’re operating as a sole proprietor or single-member LLC (SMLLC), you can use your personal Social Security number instead, as long as you don’t have any employees.
How do you get your free EIN?
Directly from the IRS website.
Want to know more about EINs? We’ve got you covered with our Freelancer’s Guide to EIN.
Local Business License
Every business in California must obtain a general business license from the city where the company is located.
If your business is located in an unincorporated area (meaning, it doesn’t have its own municipal government), the license will be issued by your county instead.
This is usually an easy license to get, and you can probably get it all done online. All you have to do is fill out an application and pay the filing fee, which varies. Fees range from just $15 to a few hundred dollars.
For details, check your city or county government website. Get a link to the local website you need by clicking here.
Professional and Occupational Licenses, Permits, Certificates
Whether or not you need these types of licenses from a California state agency depends on the type of work that you do. To get these licenses or permits, you might even need to meet specific educational or experience requirements or pass a written exam.
California regulates more than 250 professions and occupations, from barbers to funeral directors. How can you find out if you need a license, permit, or certificate? Head to CalGold for more information.
Are you going to sell tangible goods that are subject to sales tax? If so, you’ll need to register with the California Department of Tax and Fee Administration to get your seller’s permit.
Then, you must display this permit at your place of business. Visit the DTFA website to register online.
Register with the EDD
Will your business have employees (including yourself)? If so, you’ll need to register with the California Employment Development Department (EDD) for employer withholding taxes.
Use the EDD’s e-Services for Business to register online.
Step 5: Open a Business Bank Account
Ah, so close to the final step! Once everything else is in place, it’s time to open a business bank account.
But do you really need a separate bank account for your business?
If you formed a multi-member LLC, a corporation, or a partnership, you must establish a separate bank account in the business’s name.
If you formed a single-member LLC that’s going to be taxed like a sole proprietorship, you aren’t strictly required to have a separate business bank account, but we highly recommend that you have one.
You should also know that:
Failing to set up a bank account for your LLC or corporation might make it look like your entity is a sham. This means that your limited liability protection could be undermined, and you certainly don’t want that!
When you open your business bank account, make an adequate initial investment into your new LLC or corporation by depositing money into your business’s bank account. This doesn’t have to be a large sum, but it should be an appropriate amount based on your particular business.
Then, keep enough money in the account to cover expenses by making ongoing deposits. Failing to do so can also put your limited liability protection at risk.
Want to learn more about business bank accounts? See our Freelancer’s Guide to Banking.
Step 6: Get Business Insurance
Woohoo! You’ve made it to the last step! This is the perfect time to get some business insurance that will provide much-needed coverage and peace of mind.
- Depending on the type of business that you’ll operate, California might require that you have a minimum amount of insurance.
- There are insurance policies available for every type of business, so shop around to find the right one at the right price.
- Not sure what type of insurance you should get for your business? We recommend consulting with an insurance broker who deals with companies in your niche.
Feeling Overwhelmed? Collective Can Help!
Are you looking over all of this information and thinking, “How am I possibly going to get all of this done?” We don’t blame you for feeling overwhelmed!
At Collective, we specialize in helping new business owners establish themselves so they can focus more on doing what they love and less on paperwork. We’ll help you form your business entity, as well as set up every aspect of your company, from getting your licenses to your EIN, bank account, and everything in between.
It’s exciting to think about the possibilities that come with starting a new business but don’t forget that there are a lot of steps that you need to take to do it right.
Stephen has dedicated his career as an attorney and author to writing useful, authoritative and recognized guides on taxes and business law for small businesses, entrepreneurs, independent contractors, and freelancers. He is the author of over 20 books and hundreds of articles and has been quoted in The New York Times, Wall Street Journal, Chicago Tribune, and many other publications. Among his books are Deduct It! Lower Your Small Business Taxes, Working with Independent Contractors, and Working for Yourself: Law and Taxes for Independent Contractors, Freelancers & Consultants.