You're ready to run with a business idea that could truly take off. In the face of inspiration, it's tempting to launch a new company now and wait to make it official when you begin generating real income.
However, taking the right steps to start a business early on can possibly prevent costly, time-consuming headaches when your California company begins to grow. Fortunately, it doesn't have to be difficult for you to enter the market as a new business owner.
We've done the research for you about how to start a business in California, from getting your license to accepting online payments.
6 Steps to Start a Business in California
You can stay stress-free when starting your new California business by dividing the process into these 6 simple steps.
1. Select a Legal Structure for Your Business
This step establishes your company as a separate legal entity in California. Most new companies use one of these four common business types:
- Sole proprietorship: You're the owner and operator of your company and you don't have any employees. This structure offers the benefit of simple "pass-through" taxation, but you risk losing personal assets if someone wins a legal judgment against your business.
- Partnership: You work with at least one other person to run a business you own together. Like sole proprietorships, partnerships have pass-through taxation but lack liability protection.You can also create a limited partnership (LP) in California to eliminate your personal liability for business judgments.
- Standard corporation: While this structure protects you from personal liability, you'll be taxed at the company and shareholder levels. However, you can potentially avoid that costly issue by electing S corp taxation.
- Limited liability company (LLC): An LLC offers the protection of a corporation, but it's taxed like a sole proprietorship.
The right structure for your business depends on the type of company, your objectives, and your need for personal protection from lawsuits and financial loss. Each type of legal business entity offers separate tax treatment and liability limits, so you'll need to research your options to select the appropriate structure.
2. Choose a Name for Your Enterprise
You'll need a unique name to register your company in California. Once you make a list of ideas, you can search the U.S. Patent and Trademark Office database to see if the names are already taken. You'll also want to check registered California business names through the Secretary of State database.
Once you find a name no one else is using, you'll want to confirm the availability of the domain name. If you register the domain right away, you'll own it for as long as you keep renewing it with your provider.
To finalize your choice, you can reserve your business name through the California Secretary of State's online portal. Each name reservation lasts for 60 days, and you can renew the reservation as long as you wait at least one day after expiration. You'll also have to add the word LLC or Corporation to your business name if you selected one of those legal entities.
3. File the Proper Paperwork
California requires new business entities to submit employer identification and tax documents.
If you'll have employees, you'll have to sign up for a free Employer Identification Number (EIN) with the IRS. You'll need this nine-digit number to file taxes for your business, open a company bank account, apply for financing and pay your workers. You can request your EIN through the IRS website.
You also have to get a business license in the city where you'll operate your enterprise. You can visit the local municipal office to complete the licensing application and pay the required fee, which varies by city.
Depending on the location and industry of your business, you might also need special permits. You can get permit and licensing info from the Governor's Office of Business and Economic Development and the California Department of Consumer Affairs. These agencies have divisions for a variety of professions, such as auto repair, contracting, dentistry, medicine, real estate and many other business areas.
If you plan to sell products in California, you'll also need to obtain a vendor's license. You can get the necessary registration paperwork from the state Board of Equalization.
You might also want to buy business insurance to shield personal and company assets from lawsuits, natural disasters and other unexpected events. Most small business owners should purchase a general liability policy, but you might need additional coverage for certain industries.
4. Register Your Business with the State
Requirements for registering your new business in California vary by legal structure.
You don't need to register with the state unless you plan to use a name other than your legal name for your business. In that case, you have to file a Fictitious Business Name Statement with the county clerk where you do business in California.
This form sets you up with a legal "doing business as" name, or DBA. For example, if your name is Megan Jones but you're planning to start a bake shop called Megan's Muffins, you'll need a DBA.
The same rules for a sole proprietorship apply to a new California partnership. You don't have to create a partnership agreement, but having this legal document in place can help you resolve future disputes with your business partners. LPs must register with the Secretary of State's office.
You'll need to file Articles of Organization with the Secretary of State to start an LLC. This form includes:
- The name of your company
- The purpose of your business
- How you plan to manage the LLC
- The business address of the LLC
California also requires you to name someone as your agent for service of process, an individual or business that will accept legal documents on behalf of your LLC. You can also create an operating agreement to memorialize the key components of your company.
Corporations have a more complex legal structure with officers and directors. You and the other business owners hold "shares" that represent the percentage of the company you own.
California requires completion of Articles of Incorporation for a new corporation. You'll have to fill out:
- The name of the corporation
- The mailing address as well as the physical operating address (if they aren't the same)
- The name and address of your agent for service of process (registered agent)
- The number of corporate shares you've been authorized to issue
You can also submit a form to elect taxation as an S corporation if you want to avoid paying both corporate and individual income tax on corporate earnings. Bylaws provide an optional governance structure for your new corporation.
California has annual fee and filing requirements that business entities may need to follow to remain in good standing. You'll also need to pay taxes on the company's earnings based on the IRS requirements for your selected structure.
5. Set Up a Payment System
You'll need a way to accept customers’ payments for your products and services. Processing credit cards requires secure transmission of sensitive financial data, along with a payment gateway where customers can enter their details to make a purchase.
When you work with Pay.com, you enroll once to access our comprehensive suite of online payment solutions. You can set up a customized checkout page so your customers can pay through your website. You can also request payment directly from your clients with easy-to-use Pay Links or collect their payment details over the phone.
It’s a good idea to open a business bank account to keep company and personal funds completely separate. You may also want to get a company credit card to cover operating expenses and other costs.
6. Find a Physical Location
Unless you plan to run your business completely from a home office, you'll need to look for a location that fits your needs. Depending on the type of company, you may need a retail storefront, a warehouse, or another type of commercial or industrial space. To find the right physical location for your business, you can ask yourself these questions:
- Where do your customers live and work? Should you select a location with a healthy flow of foot traffic?
- Does the property have sufficient parking for your team members and customers? Is the space accessible for individuals who have disabilities?
- Where are competitors located relative to the property? Does the area have a need for a business like yours or can customers choose from several similar offerings in the neighborhood?
- Does the property location and zoning categorization align with your intended use?
- Does the property have the infrastructure you need to operate, including but not limited to telecommunications and HVAC service?
- Does the space fit your allocated budget? What expenses does your rent cover and what services have added costs?
Home-based businesses may require registration depending on where you live and the type of business. You can find out how to get permission to run a company out of your home from your local city hall.
The Bottom Line: Starting a Business in California
These steps can streamline the process of starting a California business. Obtaining the necessary licenses and completing the correct paperwork with the city, county and state potentially prevents unexpected issues down the road.
Even when all the legal documents for your business are in order, you'll need a way to accept payments to begin producing profits. Pay.com provides a fast, convenient way to launch your ecommerce endeavor, offering a range of payment options so you can keep up with client preferences and make it easy to purchase your products and services. Click here to get started now!