How to Start a Business in California
Now's a great time to start a business in California. The state is waiving business formation fees for all entity types until June 30th, 2023. And while the state does charge a hair-raising $800 yearly franchise tax for LLCs, recent legislation has exempted new LLCs from paying for their first taxable year from now until 2024. To start a business in California, all you have to do is sell something and bang, you're a sole proprietor. But to actually make money, shield yourself from risks, and meet legal requirements, you'll need to do more. Here's a complete guide to starting your business in California.
Ready to Start a Business in California?Let's Get You Started
Pick a Business Structure
Name Your Business
File Formation Paperwork
File California Statement of Information
Draft Internal Records
Get California Business Licenses
Organize Your Money
Get Business Insurance
Understand Your Tax Burden
Build Your Business Website
Apply for Trademarks
1. Pick a Business Structure
The most common business type is a sole proprietorship. If you don’t register with the state of California and simply start selling something—like handmade jewelry or improv classes—you’re a sole proprietor by default. If you have one or more partners in this business, you have a general partnership. Either way, there is no legal separation between you and the business, which means there’s no liability protection. If your business gets sued or defaults on a debt, your personal assets are on the line.
If you want liability protection, you need to make your business a separate entity, which just means that it is legally considered separate from its owners and therefore has separate liability. When a business with liability protection gets sued, only the business assets can be taken—not the owner’s personal money or possessions. The most common business entities with limited liability protection are LLCs and corporations.
California Limited Liability Company (LLC)
An LLC has a flexible business structure and strong liability protection. LLCs have multiple options for how they can be structured, managed, and taxed, so they’re a popular choice for small business owners. To start a California LLC, you need to file paperwork with the California Secretary of State.
Corporations also have great liability protection, but they need to follow stricter rules than LLCs when it comes to management and records-keeping. In a corporation, shareholders appoint a board, and the board elects officers who oversee business operations. Because of their longer history and time-tested policies, corporations often have an easier time winning over investors. To form a California corporation, you must file documents with the Secretary of State.
Can an LLC be just one person?
Yes! A one-person LLC is called a single-member LLC. Single-member LLCs are one of the most common kinds of businesses in the country. For the most part, single-member LLCs are just like multi-member LLCs, but there are some slight differences in how they file taxes and protect personal assets.
Read all about Single-Member LLCs.
What about a California nonprofit?
In California, if you want to form a corporation for a purpose other than creating profit—whether that’s to serve the general public, a religious community, or the needs of your members—you can start a California nonprofit corporation. California recognizes three types of nonprofit corporations: public benefit, mutual benefit, and religious corporations, each of which has its own Articles of Incorporation form and requirements.
Want to learn more? Check out our Nonprofit Guide.
2. Name Your Business
If you’ve been planning your business for a while, you probably already have a name in mind. But before you file your paperwork, you should make sure your business name meets California’s requirements. If you have a sole proprietorship, you’re required to operate under your own first and last name (Hannah Cho) or file a DBA if you want to use a different business name (Hannah’s Ceramics & Collectibles).
California has some legal requirements for naming LLCs and corporations, which you can read on the California Secretary of State website. Basically, an LLC or corporation name must:
- Be distinct from any other California business name.
- Include the appropriate identifier, such as “LLC” for a limited liability company or “inc.” for a corporation.
- Not be potentially misleading to the public. For example, your name can’t contain words like “fire department” or “police.”
Find out if your desired name is available in California using the California Business Search.
What about trademarked names?
It’s a good idea to check with the US Patent and Trademark Office (USPTO) to make sure your business name hasn’t been trademarked by someone else. If it has, and you use it anyway, there’s a chance that the business could come after you for infringement.
Skip ahead to learn more about trademarks.
Can I reserve a business name in California?
Yes. You can reserve a business name for up to sixty days by filing a Name Reservation Request with the California Secretary of State. If you file formation paperwork after you reserve your business name, you’ll need to include your name reservation number on the form.
Note: You must file your formation documents using the same filing method you used to file your name reservation. So if you filed your name reservation online, you must file your formation paperwork online. If you filed the name reservation by mail, you must also file the formation paperwork by mail. Also, if you have someone else file your formation paperwork—such as a professional registered agent service—they will need to include your name reservation number. Otherwise, the filing will be rejected.
What is a DBA?
A DBA (“doing business as” name) is any name used by a business that isn’t the legal business name.
If you are a sole proprietor, your legal business name is your name. If you have an LLC or corporation, your legal business name is the one written on your formation paperwork. Either way, if you want to operate under a name other than your legal business name, you need to file a DBA. In California, DBAs are called fictitious business names (FBN) and are registered with your local county clerk. The fee will vary depending on the county.
In some counties, you’re required to publish your fictitious business name in a local newspaper. For example, if your business is located in Los Angeles County, you must publish a notice of your FBN within 30 days of filing your FBN, and the notice must run in the newspaper once a week for four consecutive weeks. For LA businesses, the newspaper must be located in LA County and must be legally considered a newspaper of general circulation—meaning it’s a newspaper that caters to the general public in your local area.
Read about How to Get a DBA in California.
3. File Formation Paperwork
If you’re starting a sole proprietorship or partnership, you don’t need to file paperwork with the California Secretary of State. (However, you may need a California business license.)
In order to start an LLC or corporation in California, you need to submit a form to the Secretary of State’s office.
- If organizing a California LLC, file California Articles of Organization.
- If forming a California corporation, file California Articles of Incorporation.
Before you can file, you’ll need to appoint a California registered agent who agrees to accept your company’s legal mail. Once you’ve completed the form, you can submit it to the Secretary of State by mail, online, or in person.
Note: The information you put on this form will become part of the public record. That means that the names and addresses on the form will be visible on the California Secretary of State website when people search for your business.
What is a registered agent?
A registered agent is someone appointed by a business to accept service of process (lawsuits) and other legal notices on the business’s behalf. Your registered agent can be anyone over the age of 18, but they must have a physical address in California and be available during standard business hours to accept legal mail in person. If you’re a business owner who works nontraditional hours or just can’t hang around your office all day, you might consider hiring a professional registered agent to handle this role.
How can I keep my information off the public record?
If you want to keep your personal information out of the public eye, your best bet is to hire a registered agent service that will let you use their business address on your public documents in place of your address wherever possible. (Hint: we do that!)
Learn how to get a business address.
4. File the California Initial Statement of Information
California LLCs and corporations need to file an initial Statement of Information form within 90 days of the Secretary of State approving their formation paperwork. This form provides the state with the names and contact information for your members/managers or directors/officers. The filing fee is $20, and you can file the report online, by mail, or in person.
To make sure you don’t forget, we recommend filing your initial Statement of Information at the same time you file your formation paperwork. When we form your LLC or corporation, we file the Statement of Information at the same time.
Corporations also need to file a Statement of Information form every year, so that the state has up-to-date contact information for your business. LLCs need to file a Statement of Information every two years. The due date is the last day of the your business’s anniversary month.
For example, if you formed a corporation in May 2022, you would need to file an initial Statement of Information within 90 days and your annual Statement of Information by May 31st, 2023.
If you formed an LLC in June 2022, you’d file your initial Statement of Information within 90 days and your biennial Statement of Information by June 30th, 2024.
Read more about How to File a California Statement of Information.
What if I don’t file a California Statement of Information?
California offers a 60-day grace period after the due date for businesses to file their Statement of Information. After that, you’ll be charged a $250 late fee. If you still fail to file, the California Franchise Tax Board could suspend your business.
5. Draft Internal Records
So far in this guide, we’ve dealt with public forms that are filed with the California Secretary of State. Now, it’s time to organize your internal records. These are the documents your business will keep on record within your company.
Though these documents are internal, you’ll likely need to show them to third parties like the bank or—if you start a nonprofit—the IRS.
Here are the major internal documents you need to organize for LLCs and corporations:
California LLC Operating Agreement
This is your LLC’s rule book. It defines how your LLC will do things like make decisions, distribute money, manage operations, and appoint officers. Your operating agreement plans for every big picture scenario your LLC is likely (or unlikely) to face, including dissolution.
Drafting an operating agreement is hard, and the internet is full of shabby templates that have been copy and pasted from who knows where. So we had our attorneys draft a California LLC Operating Agreement template that you can use as a solid foundation.
California Corporate Bylaws
Bylaws are the rules your corporation will adopt and follow internally. Bylaws detail how your corporation will appoint directors and officers, hold shareholder and board meetings, and handle emergencies, among other things.
As with operating agreements, you can find plenty of bylaws templates online. But bylaws are pretty serious, so you don’t want to just use the first template you come across. Our attorneys drafted a California Corporate Bylaws template you can use to get started.
Starting a nonprofit? Learn about California nonprofit bylaws.
6. Get California Business Licenses
Unlike some other states, California doesn’t have a state-issued business license. However you may still need a local business license, depending on where your business is located. And many industries require additional licenses and permits as well. You can use the CalGold search tool to find out what licenses and permits your business will need.
Professional Business Licenses
Certain professions require a license from a state board before they can be practiced legally. Veterinarians, cosmetologists, and sports referees are just a few examples of professions that require a professional license before they can set up shop in California. You can check out the California Professional Licensure Guide for a full list.
Local Business Licenses
You should also find out if your city or county requires a local business license. Certain cities, including Los Angeles, San Francisco, and San Diego, require a business tax certificate instead of a business license. Registering for a business tax certificate allows the city to charge your company local business taxes.
You can apply for a business license or tax certificate through the office of your local government. For example, San Diego businesses can apply for a business tax certificate by submitting a Business Tax Application to the Office of the City Treasurer. The annual fee for the San Diego Business Tax Certificate is $34 for businesses with fewer than 13 employees and $125 for businesses with 13 employees (plus $5 for each additional employee).
Learn more about How to Get a Business License.
How do I get a professional license in California?
You can apply for a professional license through the state board that regulates your profession. For example, a California barber would apply for a license from the California Board of Barbering and Cosmetology.
How do I get a local business license?
Each California city or county that issues a business license will have its own form and fee. For example, in the city of Alameda, you submit your Business License Application to the City of Alemeda Finance Department and pay $29 in combined fees ($14 online).
7. Organize Your Money
The liability protection you get from forming an LLC or corporation is only as strong as the separation between you and your business. At a minimum, you’ll need to open a bank account for your business. And if you’re going to hire employees, you’ll need to tackle payroll, too.
Open a Business Bank Account
To keep your business spending separate from your personal spending, you’ll need to open a business bank account. If you don’t, a court could find that your business is not actually separate from you, the owner, under the Alter Ego Doctrine. Also known as piercing the corporate veil, this is the outcome when a judge finds that a company is not a separate entity but rather an alter ego of the owner. If this ever happens, you could lose your limited liability status.
Opening a business bank account as a sole proprietor is important, too. Though sole proprietors and general partnerships have no limited liability status to protect, both will benefit from organizing their business finances come tax season.
How do you set up a business bank account?
LLCs and corporations will need to provide the bank with their formation documents, operating agreement or corporate bylaws, EIN, and in some cases, a Corporate Resolution to Open a Bank Account or LLC Resolution to Open a Bank Account.
Do I need a business bank account to accept credit card payments?
Probably. Payment processors require you to provide them with a bank account. This is where they’ll deposit funds from transactions. Most of the time, this needs to be a business bank account.
Some payment processors may let you get away with listing a personal bank account, but it’s not a great idea. Mixing your business finances with your personal finances erodes the separation between you and your business, weakening your liability protection. It also turns tax season into a nightmare.
Learn more about Payment Processing.
Set up Payroll
Businesses that hire employees or independent contractors will need to set up payroll. Here’s how:
- get an EIN
- register for an Employer Payroll Tax Account Number
- find your Employer Unemployment Insurance (UI) Contribution Rate
- determine whether you’re hiring employees or independent contractors
- prepare the forms your employees will fill out
- choose a payroll service or software
- decide on a payroll schedule
Setting up payroll in California isn’t simple, so many business owners use a payroll service or software that will automatically withhold taxes, file state and federal returns on the business’s behalf, and pay employees through direct deposit or checks (depending on the employer’s preference).
What forms do my employees need to fill out?
Your new employees will need to fill out a W-4 to determine how much you’ll withhold and an I-9 to verify that the employee is eligible to work in the US.
What’s the difference between an independent contractor and an employee?
It’s important to understand the difference between an independent contractor and an employee. That’s because for employees, you’ll need to withhold and pay income, social security, and Medicare taxes. Independent contractors pay these taxes on their own.
An independent contractor is self-employed—how they complete their work is not directly controlled by an employer. An independent contractor may perform the same kind of work for other businesses, and can do the work when and how they choose.
An employee, on the other hand, performs their work how and when their employer chooses.
If you’re unsure, you can file Form SS-8 with the IRS and let them decide.
Learn everything you need to know about hiring independent contractors.
How do I register for an Employer Payroll Tax Account Number?
You can register for a Tax Account Number online through the Employment Development Department website. You will need to provide some information about your business, including the names and SSNs of the officers, partners, and/or owners of the business, your EIN (if you have one), and business contact information. There is no fee to register.
8. Get Business Insurance
Forming an LLC or corporation protects your personal assets. But if anything disastrous befalls your business—like a lawsuit, burglary, flood, or fire—your business is on the hook to pay. Business insurance can help cover the costs.
What kinds of business insurance do you need? It depends on the particular risks of your industry and how willing you are to take chances. Certain types of business insurance are required in California, but it’s up to you to decide if you want to buy additional insurance.
Workers’ Compensation Insurance
California law requires businesses with one or more employees to purchase workers’ compensation insurance. This insurance exists to cover medical costs and disability and wage benefits if one of your employees becomes injured or ill because of work. You can purchase workers’ compensation insurance through the California state fund or a private insurance company, or you can choose to be self-insured (meaning the business sets aside its own money to cover potential accidents).
This covers the costs of claims against your business for injuries or damages to the property of others, like clients or customers. This includes medical expenses, legal fees, settlements, and judgments. Whether or not you need it depends on whether your business is likely to be sued and how many assets your business needs to protect. If it’s just you and your computer in your basement, you might feel comfortable skipping liability insurance. Or maybe you won’t. Beyond general liability insurance, you can purchase or add on more specific types, like professional, cyber, commercial, home-based business, or product liability insurance.
Do business owners need workers' compensation insurance in California?
Workers’ compensation insurance is required for employees, but business owners aren’t required to cover themselves on the plan. However, it should be noted that personal health insurance plans don’t always cover business-related injuries, so it might be a good idea to put yourself on the workers’ compensation plan anyway.
Do I need business insurance for my home-based business?
Probably. That’s because you can’t count on your homeowners’ or renters’ insurance policy to cover damages related to your business. Most insurance companies offer a home-based business insurance plan.
9. Understand Your Tax Burden
We’ll be honest. California business taxes are a bit of a headache. California’s combined corporate tax rate is on the higher side at 28%. And all corporations and LLCs in California usually need to pay the annual California Franchise Tax, which is $800 minimum. You’ll also need to pay federal and local taxes.
- LLCs. Single-member LLC? By default, you’re taxed similar to a sole proprietor. More than one LLC owner? You’re taxed as a general partnership. Either way, your default tax status is “pass-through,” which means you don’t pay corporate taxes. Instead, your LLC’s owners report profits and losses on their personal tax returns. You’ll need to pay California income tax as well as the federal self-employment tax rate of 15.3%. An LLC can file paperwork with the IRS to be taxed as an S-Corp or C-Corp instead.
- Corporations. Corporations are taxed as C-Corps by default. This means that corporations pay the 21% federal corporate tax rate and the applicable California corporate tax rate.
To pay your federal taxes (and take a good deal of other steps required to start a business), you’ll need to get an Employer Identification Number (EIN). You can apply for one with the IRS or hire us to get one for you.
Do I need an EIN if I’m self-employed?
If you’re operating a sole proprietorship or single-member LLC that doesn’t employ anyone else and you don’t need to file excise or pension plan returns, you don’t legally need an EIN.
However, you can still get one—and you probably should. Otherwise, you’ll have to use your own social security number to do business. Plus, you’ll likely need an EIN to open a business bank account.
How do I get an EIN?
To get an EIN, you can either apply online or file form SS-4 by mail with the IRS. Getting an EIN is free.
Check out our guide to applying for an EIN.
What is an S-Corp?
An S-Corporation is a federal tax election. Registered business entities like LLCs and corporations start out with a default tax status, but can file paperwork with the IRS to be taxed as an S-Corp. Like LLCs, S-Corps are taxed as pass-through entities. Like corporations, S-Corps can make distributions that aren’t subject to the 15.3% self-employment tax.
Learn more about the S-Corp tax election.
What is a C-Corp?
A C-corporation is the default federal tax election assigned to corporations. Most corporations are taxed as C-Corps, but LLCs can also apply for C-Corp tax designation by filing paperwork with the IRS. C-corps file federal corporate income taxes and state corporate income taxes. (In California, corporations and LLCs taxed as C-corps pay a flat corporate tax rate of 8.84% of taxable income.) C-corps can pay their shareholders in distributions, and the shareholders report those profits on their personal tax returns.
Learn more about the C-corp tax election.
California State Taxes
One of the more annoying things about doing business in California is the California Franchise Tax. This tax is $800 minimum, and all LLCs, corporations, limited partnerships (LPs), and limited liability partnerships (LLPs) doing business in California need to pay it. The exact amount you pay for the Franchise Tax will depend on your business tax classification:
LLCs, LPs, and LLPs—flat fee of $800
S-corporations—1.5% of income or $800 (whichever is greater)
C-corporations—8.84% of income or $800 (whichever is greater)
The good news is that from now until December 31st, 2023, businesses are not required to pay the California Franchise Tax during their first tax year. This law was passed to reduce the burden on small businesses during the COVID-19 pandemic.
LLCs making more than $250,000 a year need to pay an annual LLC fee, which starts at $900 and increases based on income. This is in addition to the annual franchise tax.
Annual LLC Fee
$5,000,000 or more
Corporations and LLCs that do not have taxable income are subject to the Alternative Minimum Tax (AMT), which is a tax on the business’s income without certain deductions and credits, taxed at the AMT rate of 6.65.
Find out more about California Franchise Tax.
Local California Business Taxes
While the state sales tax is 6%, some California cities and counties charge an additional sales tax. Santa Fe Springs has the highest local sales tax, at 10.5%.
Certain cities and counties impose other business taxes as well. For example, San Francisco recently enacted the Overpaid Executive Tax (OET), which is a payroll tax of 0.4% to 2.4% on businesses where the highest paid executive earns over 100 times more than the median wage of employees at the business.
10. Build Your Business Website
If you want Californians to find your business, they have to be able to find you online. This means you’ll need a website, a business email account, and social media accounts. Don’t worry if you’re not especially tech-savvy—you don’t have to be a web developer or an influencer to establish a robust online presence. You’ll just need the following:
- Domain name. Your domain is the address where your website will live. You’ll want a domain name that is short, unique, local, and—most importantly—available. If your domain is trademarked, you could face legal trouble.
- Domain registrar. Once you’ve decided on a domain name, you’ll want to register it with a domain registrar. Some domains are more expensive than others. Some domain registrars also offer hosting and most will provide you with a business email that includes your domain name (“firstname.lastname@example.org”).
- SSL certificate. An SSL certificate signals to your users that your website is secure. If your website will use forms—like a sign-up form or a “contact us” form—an SSL certificate is critical. But even if you don’t you use forms, you’ll still probably want one—it allows an encrypted connection, which means your users’ data is transported securely. There are several types of SSL certificates, and you can often get one through your domain registrar.
- Site design. The easiest option is to use a free website creation tool—there are a number of free options available. Most are easy even for a newcomer to use, with styles and built in templates. For a more custom design, you can hire a web designer to work on your website, but this will be much more expensive.
11. Apply for Trademarks
A trademark is a design, symbol, word, phrase—or any combination thereof—that represents a brand’s goods or services exclusively. Only some businesses register trademarks.
You can apply to register your trademark with the State of California or federally with the U.S. Patent and Trademark Office (USPTO). Registering your trademark in California is cheaper and easier than registering with the USPTO, but doing so only protects your trademark in California.
You can only register a trademark once you’ve started using it (so slap it on that website you just made), and not all applications are approved. Trademark law is complex, and the strength of a trademark application (and the trademark itself) depends on many factors.
Our attorneys can review your application, offer advice, and prepare and submit the application for you—Check out our Trademark Service.
How do I register for a trademark in California?
You can register a trademark in California by submitting a Registration of Trademark/Service Mark form to the Secretary of State’s office online, by mail, or in person. The fee is $70 per class of trademark. You must include three examples of your business using the mark (on a website, sign, etc.) to prove that you’ve established a connection between the mark and the product you’re selling. You cannot register a trademark before you use it.
Registering a trademark in California only keeps other people from using it in California. It does not protect your trademark from being used in other jurisdictions.
Can I register a trademark before I use it?
No. But you can file an application with the USPTO under Intent-to-Use status. This gets your application in line before you’ve actually used the mark, which could be helpful if you’re worried someone else might register your mark before you’ve had a chance to use it.
For your trademark to become official, you’ll eventually need to show proof that you’re using it. An Intent-to-Use application buys you some time to do that.
Learn more about filing an Intent-to-Use Trademark.