California may be well-known for its media and technology industries. But, that does not mean those are the only businesses that do well in the state. There is huge potential for different businesses that have ambitions to operate at the local, state, national, and even global levels. So if you are thinking of starting your business in California, there has never been a better time to take the plunge. Before starting, you might wonder how to start a business in California. Thus, we have come up with a quick checklist of the things you need to do to get off to a good start.
1. Decide On A Business Structure
You have three choices for the business structure. It will determine how the state government sees and taxes you.
The sole proprietorship is also known as Doing Business As (DBA) or Fictitious Name. This structure is the easiest. But it also comes with some significant financial risk. As a sole proprietor, you are personally liable for any financial event. In other words, the debt of the sole proprietorship can and will be paid from the owners’ bank account.
Personal liability means your finances are considered part of your business, and thus subject to business activity. If there is more than one owner, it is a General Partnership. But, a defining feature is that this is considered a small business.
Generally, a partnership in California is the same as a sole proprietorship. It is not a separate legal entity, and it applies personal liability. However, it does involve two or more people. All partners are responsible and liable for any activity that the business conducts. To avoid disputes, partners usually come up with a partnership agreement to help address various issues related to the business.
A corporation is a business entity that separates itself from the personal finances of the people that work for, own, and operate the company. Corporations use traditional business hierarchy. There is a board of directors, shareholders, and officers with different titles.
It is the most common way to go for larger businesses. Under this structure, there is no personal liability. For example, a corporation incurs a massive debt. The bank accounts of the owner or owners will not be touched. In California, there are also Professional Corporations for specific professions, like doctors, architects, and lawyers.
LLC stands for Limited Liability Company. It is a relatively new business structure. You can think of an LLC as a hybrid structure that takes some of the features of sole proprietorship and corporation. It is easier to apply for and be an LLC. However, like a corporation, personal finances are protected from liability.
Usually, an LLC will not offer stocks, and there are no directors, although there may be “members” who have a controlling interest in the LLC. Because of its less demanding structure, and relative ease to apply for compared to corporations, the LLC is now one of the most popular business structures in California, especially for smaller ventures of 1-5 people.
2. Create A Name
Your company name is critical for marketing, finance, and legal purposes. The first thing you should do is to make sure that your company name is unique and easy to remember. You can search online for possible conflicts. To further understand how to start a business in California, you should be aware of the restrictions when it comes to business names.
Include the correct identifier. Clarify your business structure using Corporation, Incorporated, LLC, L.L.C., Limited Liability Company, or an abbreviation.
You cannot use the words bank, trust, trustee, insurer, insurance, or other words that suggest that your business is issuing insurance policies.
Form a Professional Corporation (PC) if you are offering services that include accounting, medical practices, and other professions. You can search for a list online.
3. Register Your Business
Now is the time to get the appropriate form, fill it out, and submit it so you can get legal and financial recognition of your business as an entity. If you are interested in starting an LLC, you would seek out Form LLC-1 and fill it out with all appropriate details for submission, review, and approval.
If you wish to incorporate your business, file form ART-GS with the Corporate Division of the California Secretary of State. You should also have an organizational meeting and determine each shareholder’s percentage of ownership. Resolve all necessary tasks, including opening a company bank account, payment of pre-incorporation expenses, and the election of S Corporation status. Corporations that choose an S Corporation Status should file the IRS Form 2553.
If you want to be a DBA in California, apply with the county where you are operating. You can consult with the local county recorder to understand all the documents and forms you have to submit.
4. Get Your EIN Or FEIN
EIN stands for Employer Insurance Number, while FEIN stands for Federal Employer Identification Number. In either case, this number is the business equivalent to your social security number. Businesses need to have an EIN/FEIN included on any official legal or financial documents. For DBAs that decline to get an EIN, you are legally required to use your social security number instead, which is very unsafe for you. Meanwhile, PCs need to have an EIN because they are a corporation providing professional services. Apply for your EIN with the IRS online, or fill out Form SS-4.
5. Open A Business Account
The next step is opening an official bank account for your business. You may also include credit cards for official business purchases and transactions. As with your personal credit score, your business transactions will also create a company credit profile that may qualify you for larger loans and other financial benefits.
6. Get Your Licenses And Permits
Depending on the type of business, you may need different legal permits or licenses. This process may include serving alcohol at a location, registering for state taxes, and getting your official business license.
7. Comply With Yearly Requirements
You are now in business. Thus, you should make sure you observe your yearly obligations. DBAs must renew the business name ever five years. Corporations must file a “statement of information” every year, while LLC’s will need to file every two years.
By following these steps, you will have a much better grasp of how to start a business in California.
Business Filing Section