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How to Start a Business in California

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Bringing a business idea to life could be a straightforward or complex process, depending on the rules and regulations in your state. Starting a business in California comes with its own nuances, including registration requirements and potentially hefty costs.

California’s 4 million small businesses make up nearly all companies in the state, according to data from the U.S. Small Business Administration. Small businesses employ 7.1 million people in California, comprising 48.8% of the state’s private workforce.

Before beginning the process, continue reading to understand what it takes to start a business in California.

How to choose a business entity in California

Every business needs to be formed as a certain entity. The entity or structure that you choose for your business would determine the paperwork you need to file, how much you’d pay in taxes and your personal liability.

The available business entities and registration requirements in California are as follows:

  • Sole proprietorship: A sole business owner is liable for the business; no formation documents are required.
  • General partnership: Two or more owners are jointly liable for the business; registering a general partnership with the state is optional but the California Secretary of State would require a Statement of Partnership Authority.
  • Limited partnership: Provides limited liability for some owners; a Certificate of Limited Partnership must be filed with the California Secretary of State to form this type of business.
  • Limited liability partnership: Reserved for businesses in accounting, law, architecture, engineering and land surveying industries; an Application to Register a Limited Liability Partnership must be filed with the California Secretary of State.
  • Limited liability company: Protects multiple owners from personal liability; requires Articles of Organization to be filed with the California Secretary of State.
  • Corporation: Separate legal entity protecting multiple owners from personal liability; articles of incorporation must be filed with the California Secretary of State.

Your business entity would affect the taxes you owe, which we’ll discuss in a later section. You may want to consult a legal or tax advisor when choosing which entity to form.

Naming your business

If you are doing business as a sole proprietorship or partnership under a name that is different than your own name, you would need to file a Fictitious Business Name statement, also known as a Doing Business As, or DBA. The statement must be filed with the county clerk in the county where the business is located.

Corporations and LLCs may also need to file a DBA if they begin doing business under a name other than the legal name of the company. For instance, if you opened additional businesses under the corporation or LLC but use different business names, you would need to file a DBA for each of the names not listed in your original articles of incorporation or articles of organization.

The fee to file a fictitious name statement would depend on your county’s regulations. Within 30 days of filing, you must publish a notice in your county newspaper and that notice must appear in the paper for four consecutive weeks.

Business names for corporations and LLCs may not be too similar to names that are already registered in the California Secretary of State’s records. You can check records here to find out if your business name is available or reserve a business name for 60 days. To go a step further, you could search the national trademark database to ensure your proposed business name isn’t already in use.

Which California businesses need a license — and where to find one

Many businesses need professional or vocational licenses to operate in California, including architecture, cosmetology and medical businesses. The State of California Department of Consumer Affairs is home to boards and bureaus that issue industry-specific licenses. For instance, accounting businesses would need to obtain a license from the Board of Accountancy and optometrists would need a license from the Board of Optometry. Find the board that correlates with your industry here.

You may also need additional permits from your city or county, depending on your type of business. The Governor’s Office of Business and Economic Development provides a tool to look up which permits are required for major business categories in each county.

Several permits could be required for your business at the city level. For example, a beauty salon in Oakland would need a building and construction permit, business license and a public safety permit from the city of Oakland, in addition to a license from the state’s Board of Barbering and Cosmetology. A beauty salon would also have to comply with other state and county entities’ safety regulations.

Businesses in these industries would need additional federal licenses to operate:

  • Agriculture
  • Alcohol
  • Aviation
  • Firearms, ammunition and explosives
  • Fish and wildlife
  • Commercial fisheries
  • Maritime transportation
  • Mining, drilling and nuclear energy
  • Radio and television

Business licenses often come with a cost and can become a major expense. An application for a business license in Oakland has a $95 price tag, for example. And to continue the cosmetology example, a beauty salon owner would have to pay $50 to apply for a state license as well. Next, we’ll discuss other costs of opening a business in California.

Costs of starting a business in California

The costs begin adding up as soon as you register the business, as certain types of business entities come with a filing fee.

LLCs, limited partnerships and limited liability partnerships cost $90 to register, while a general corporation costs $120. However, if you mail your registration form rather than turning it in at the California Secretary of State’s office, you could waive a $15 counter fee. Also, you could deduct $5 if you do not need a certified copy of the filed form.

As mentioned earlier, the fee for filing a DBA, if applicable, and the price of specialty licenses would depend on the city and county where you do business.

State taxes

California businesses are subject to state and federal taxes. California’s business taxes earned the state a rank of 49 out of 50 on the Tax Foundation’s annual State Business Tax Climate Index. One factor that drove the state’s ranking toward the bottom is its high personal income tax rate, which tops out at 13.3%, according to the Tax Foundation. Its corporate tax rate is 8.8% — we’ll talk more about that, below.  The industry in which you operate would determine what taxes you owe, though some taxes affect more business owners than others.

California sales and use tax applies to all retail sales of goods and merchandise. The state tax rate, local tax rate and district tax rate inform the sales and use tax rate, which varies by location. The statewide sales tax rate is 7.25% and district tax rates range from 0.10% to 1.00%, although some areas have more than one district tax on sales and purchases.

California’s Business Tax and Fee Division also administers more than 30 specialty taxes, including alcoholic beverage tax, cannabis tax and diesel fuel tax. You can find specialty tax rates here.

Corporations in California are subject to state corporate taxes as well. The annual tax for corporations in California is either 8.84% of the company’s net income or $800, whichever is greater.

You could also be responsible for payroll tax, property tax and franchise tax as a business owner in California, in addition to federal income taxes, which we mentioned earlier, including employment taxes.

Statewide business financing options

California offers a number of programs to assist small businesses with funding. Check out these financing opportunities to get started:

Before opening your business: Regulations to check

California business owners have to take care of a couple more requirements before officially opening the doors.

Employer requirements

If you have employees, you would be required to withhold and send state disability insurance contributions to the Employment Development Department of California. The EDD also mandates that business owners inform employees about laws and regulations related to employment, benefits, working conditions and state disability insurance via brochure or poster.

Employers must electronically submit tax returns, wage reports and payroll tax deposits to the EDD. The EDD also collects unemployment insurance taxes from employers to fund the state’s program providing resources to people who lose their jobs.

Business insurance

California requires businesses with at least one employee to purchase workers’ compensation insurance to cover employee injuries and accidents in the workplace. Sole proprietorships may be an exception.

You could find small business insurance through a broker or agent who could create a commercial insurance package for your business. Though not required, you may want to consider purchasing general liability insurance and property insurance policies to protect your business assets.

The bottom line

Starting a business in California is similar to starting a business in any state – you must choose a business entity, register the business and obtain the right licenses to make sure you’re operating legally.

The process in California may be cumbersome, as there are a number of state boards that regulate major industries and issue multiple licenses. Fees associated with licenses and permits, as well as business registration, could make entrepreneurship seem expensive. Business taxes in California could also be a burden for entrepreneurs, as the state levies more than 30 specialty taxes on top of standard taxes like corporate tax and sales and use tax.

If you need assistance on your path to business ownership, there are several Small Business Development Centers in various regions of California, including Northern California and Central California. Other organizations, such as the California Small Business Association, also provide mentorship and guidance for up-and-coming entrepreneurs.

 

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