From choosing a business location to opening a bank account. Here is a complete guide to opening a business in the State of California. Now, starting a business in California is still a good idea with the strong economy in the region as well as the 2021 budget proposal that incentivises businesses to locate in California and create job opportunities. With over 39 million residents, it boasts a healthy customer base and if those aren’t enough to sway the decision, the great sunny weather should be reason enough.
That only leaves the question of how to start a business in California, which is a lot easier than one might think.
Photo, Christin Hume.
1. Create a Concept
The first step to creating a business is to come up with a business idea. No matter the business, it needs to provide a unique idea or service that customers are in demand for.
Once the business idea or concept has been established, it is always smart to draw up a business plan. This will give an indication of how the business will be managed, who the competitors are, what the start-up cost will be and what the projected profits are.
2. Choose a Business Structure
Registering a business as a legal entity gives the business credibility with potential investors and customers. Choosing the business structure will also dictate what type of personal liability the owner will carry.
The most common business structures are:
– Sole-Proprietorship
– Partnership
– Limited Liability Company (LLC)
– Corporation
Some of these can be broken down into different versions such as the S-corporation or the Limited Partnership. An S-Corporation in California is not actually a business structure, but rather an IRS tax classification used to reduce a businesses tax burden.
3. Decide on a Business Name
The business name will largely depend on the type of business structure chosen. For LLC’s, it is a legal requirement to have “Limited Liability Company” as part of the registered business name. The name also needs to be clearly distinguishable from other registered entities and this can be verified by doing a name search through the California Secretary of State (SOS) website.
If a sole-proprietorship or partnership is chosen and the business is going to trade under a different name, a Doing Business As (DBA) must be registered. A name reservation can be filed if the business name is available, but the company registration is not ready to be filed.
Photo, Andrii Ganzevych.
4. Register the Business
Once the business is ready to be registered with the California Secretary of State, the paperwork can be filed directly with the office. It might be more productive and time-saving to make use of experts in the filing process, such as attorneys, to avoid any mistakes and delays. This is especially important if you’re considering seeking a California business loan in the future, as a well-organised registration process can positively impact your eligibility and terms for financing.
The registration process differs slightly from entity to entity. For example, registering a Corporation in California requires Articles of Corporation to be filed with the SOS. It is also necessary to appoint a registered agent. An S-Corporation would also need to file IRS form 2553 with the IRS.
5. Apply for Licenses and Permits
California requires all businesses to file for a general business license, also sometimes referred to as a business tax certificate. The requirements will depend on the city and municipality the business falls under.
An Employer Identification Number (EIN) is required if the business has any employees. It is also required by most banks to open a business bank account.
Depending on the type of business, additional permits and licenses might be required for the business to operate legally. The state website can provide details on the specific permit and licensing requirements.
6. Register for Tax
The state of California imposes tax on every type of business entity. The tax rates and how the business is taxed depend on the type of business structure registered. A detailed outline of the tax structures can be found on the California SOS website.
Apart from California state taxes, it will also be necessary to register for federal tax with the IRS.
7. Open a Business Bank Account
As mentioned earlier, most banks require an EIN in order to open a business bank account. This serves as a federal tax number and it is advised to first wait until business registration is completed before filing for an EIN.
A business bank account separating business income from personal income in order to maintain liability protections.
