Your Complete Starting a Business in California Checklist

As a California-based entrepreneur myself, I can tell you there’s nothing more exciting and unnerving than launching a business for the first time. There’s the thrill of creating your own professional destiny and being your own boss, and then worrying that you may miss something mission-critical when setting up your business. I know I would have enjoyed more of the thrills and less of the worries if I would have had a guide to follow.

So, let’s talk about that right here and now in my personal checklist for starting a business in California. It gives a great overview of all the things I wish I had known when starting out.

Before we begin, a quick disclaimer is in order: The information I’m about to share is an overview of what’s involved in starting a business in the golden state. Please realize it is not meant as legal, tax, or accounting advice. For that expertise, you should seek the services of licensed professionals who can assess your specific situation and offer recommendations.

Now, without further adieu…

1. Do a Feasibility Study

It’s important to walk before you run when starting a business. Just because a business idea sounds brilliant doesn’t mean it can become a viable business in the real world. That’s why entrepreneurs should consider crafting a feasibility plan.

A feasibility study helps to assess whether a business concept can succeed. In some ways its similar to a business plan, except that it happens earlier in the startup process and answers two primary questions:

• Will anyone buy the product or service?
• Can the business become profitable and financially sustainable?

A feasibility plan will involve researching the opportunities, strengths, weaknesses, and risks given the industry and marketplace. You can find out more about feasibility studies online.

2. Write a Business Plan

The next step after a feasibility study is writing a business plan that you can use as a blueprint for starting and running your business. Business plans can vary in length and amount of detail depending on the type of business and whether an entrepreneur intends to seek financing from banks or investors.

The elements of a business plan might include:

• Executive Summary
• Business Description
• Market Analysis
• Products and Services
• Management and Organization
• Operational Plan
• Marketing and Sales Plan
• Financial Projections
• Appendices (with supporting data)

3. Seek Funding if Needed

Often, entrepreneurs will need resources beyond their own bank account to start a business. The California Financing Coordinating Committee provides links to several business loan programs and resources on its website.

4. Select Your Business Entity Type

Before you decide which business entity is right for you, consider talking with your attorney and accounting professional to discuss the legal and tax impacts of your options. Below is a basic overview of some of the business structures recognized by the state of California.

Sole Proprietorship

• By default, a business owned by an individual (or husband and wife) will be considered a sole proprietorship if the owner doesn’t file to establish a formal business entity.
• To operate as a Sole Proprietorship, there’s no formation paperwork required by the state.
• Sole proprietors still do need to obtain the necessary licenses, permits, tax accounts, etc. to operate legally.
• Sole Proprietorships are considered the same legal and tax-paying entity as their owners. Therefore,  they receive pass-through taxation (all business income and losses get passed through to their owners’ tax returns.
• Owners are liable for any debts and legal issues of the business, which puts their personal assets at risk.

General Partnership (GP)

• A California General Partnership has two or more owners.
• Generally, the partners share liability for all legal and financial obligations of the business.
• As with a Sole Proprietorship, a General Partnership’s profits are taxed as personal income for the owners.

Limited Liability Company (LLC)

• The Limited Liability Company protects its owners’ (members) personal assets such as home, cars, retirement accounts, and other property.
• The LLC structure offers pass-through tax treatment when it comes to federal income tax.
• An LLC may have an unlimited number of eligible members.
• Instead of having shareholders, LLC members each own a percentage of the business, which is based on their contributions to the LLC.
• The LLC comes with fewer compliance formalities and paperwork than a corporation does.

C Corporation

• A C Corporation is a legal entity, separate from its owners (a.k.a shareholders or stockholders). That separation provides personal liability protection to business owners.
• A C Corporation reports its income and losses on its own tax return and pays income tax (federal and state) on its profits. You’ll often hear the term “double taxation” referring to corporations’ income tax treatment. That’s because a corporation pays taxes on its profits, and then the individual shareholders pay income tax on the dividend income they receive from the company. And that is because Corporations may not use those dividend payouts to shareholders as a deductible expense.
• C Corporations have more compliance requirements than other business entity types, which may be a drawback for some entrepreneurs. T
• The structure also offers the advantages of the opportunity to raise capital via selling stock, increased credibility, and potential tax benefits.
• S Corporations aren’t legal structures in and of themselves, but rather a tax treatment election that an LLC or C Corporation can make.
• An S Corp is not a tax-paying entity. Instead, profit and loss pass through to the owners’ individual tax returns.
• The advantages for LLCs that opt for S Corporation tax treatment is a lower self-employment tax burden for the owners.
• S Corp owners must put themselves on the company payroll and pay themselves a fair wage or salary. Then, rather than all of the business’s taxable income getting hit with Social Security and Medicare taxes, only the owners’ wages and salaries, not profits paid to owners as distributions, are subject to those taxes.
• The advantage for corporations that elect for S Corp treatment is that it eliminates “double taxation” (because the business’s income tax obligations flow through to the shareholders and aren’t taxed at the entity level). Corporations may not elect for S Corporation tax treatment if they have more than 100 shareholders.

Additional Types of Entities

• General Stock Corporation (General For-profit Corporation) – This type of corporation is the most common corporate structure. It may have an unlimited number of shareholders and can issue stock privately or become a publicly traded corporation.
• Close Corporation – A Close Corporation has Articles of Incorporation that limit its number of shareholders to no more than 35, and the corporation may not go public with its stock. Usually, a close corporation’s shareholders act as the company’s managers, giving them more control than with a general stock corporation. Also, Close Corporations don’t have as many compliance formalities as a general corporation.
• Professional Corporation – Certain types of professionals must form a Professional Corporation (PC) instead of a traditional C Corporation in California. The PC entity is used by licensed professionals including lawyers, certified public accountants, physicians, psychologists, and various other types of professionals. Professional Corporations must follow some legal regulations that differ from those that apply to traditional corporations.
• Even More Options – California recognizes other business structures, as well, including:
  • Limited Partnership
  • Limited Liability Partnership
  • Nonprofit Corporation

As you see, there are many options available. If you’d like to talk to someone about these options, our team would be happy to help answer your questions.

5. Decide on a Business Name

Choosing a business name is an integral part of creating a formidable brand. After putting time and thought into brainstorming a name that’s the right fit, it’s critical to make sure that name is available for use. CorpNet’s free corporate name search tool offers a way to find out if any other businesses have registered the name or have applied to register it.  Doing a name search can save you money and avoid hassle because if you try to register your business using a name that another company has claimed, the state will likely reject your business formation paperwork and you’ll need to start all over again.

If operating as a Sole Proprietor or General Partnership, a business will need to file for a fictitious name (also known as a doing business as or DBA) with the county if the business name won’t include the owner’s first and last name. For example, if Janelle Truskey wants to call her salon “Celestial Retreat” rather than something like “Janelle Truskey’s Salon and Spa,” she will need to file the fictitious name “Celestial Retreat.”

When forming a formal business entity like an LLC or corporation, the business name will automatically become registered (again, provided it’s available for use)—more on this below.  Before registering a business, entrepreneurs can reserve a business name for up to 60 days for a fee of $10.00.

While registering a business as an LLC, LP, LLP, or corporation will automatically protect a business name from being used by another formal entity within the state of California, a business that wants to operate nationally may wish to consider filing for federal trademark protection. A trademark is a word, phrase, symbol, or design that identifies the source of a product or service. It plays an essential part in branding because it distinguishes a company from its competitors.

With a trademark, the business name is protected in all 50 states. So, after confirming that a name is available at the state level, it’s helpful to do a trademark search to verify it’s also available to claim and use wherever the business’s products and services will be sold in the United States.

6. Designate a Registered Agent

A registered agent (also known as a resident agent or statutory agent) is a company or person authorized to accept service of process on a business’s behalf. Formal business entities must designate a registered agent with a physical presence in California.

Examples of service of process that a registered agent receives include:

• Official correspondence from the government (federal and state)
• Tax notices sent by the IRS and local tax agencies
• Notice of lawsuits
• Summons to appear in court
• Corporate filing notifications

7. Register Your Business With the State

Registering the Common Entity Types

• Form an LLC in California –  To form an LLC in California, a business must file Articles of Organization. Although not legally required by the state, an Operating Agreement is an essential document that identifies how income will be distributed among LLC members and shares other details to make sure all owners are on the same page regarding how the business should be run. Within 90 days of registering, an LLC must submit an Initial Report to the California Secretary of State. If the LLC chooses to be taxed as an S Corp, it must also file IRS Form 2553.
• Incorporate in California – Incorporating in California requires filing Articles of Incorporation (Form ARTS-GS, Form ARTS-CL, or Form ARTS-PC) with the Secretary of State office. Within 90 days of incorporating, companies must file an initial Statement of Information. Other incorporation requirements may include establishing a Board of Directors, adopting bylaws, and issuing stock certificates to shareholders. If a corporation is to be taxed as an S Corp, it must also file IRS Form 2553.
• Register a General Partnership in California –  Partners may register a General Partnership by filing a Statement of Partnership Authority (Form GP-1) with the California Secretary of State’s office. Note that this is optional. An advantage of doing so is that formally registering the company protects the business name within the state.

The Cost to Start a Business in California

From a registration and compliance standpoint, below are some of the current costs the state charges for various filings (as of this article’s date of publication):

California LLC Filing Costs:

• Articles of Organization = $75
• Statement of Information Initial Report = $20
• Statement of Information (Biannual Report) = $20
• Amended Statement = $30

California Corporation Filing Costs:

• Articles of Incorporation = $100
• Statement of Information = $25

California General Partnership Filing Costs:

• Statement of Partnership Authority = $70
• Statement of Amendment = $30

At CorpNet, we can provide you with a detailed list of pricing and assist you with preparing and submitting all of your business compliance filings.

8.  Obtain an Employer Identification Number

An Employer Identification Number (EIN) is a nine-digit number that businesses must apply for before hiring employees. LLCs and corporations are required to have an EIN. A business’s EIN (also sometimes referred to as a Federal Tax ID Number) helps establish a separation between a company and its owners.  It’s used when opening a bank account, applying for licenses and permits, filing taxes, and submitting other reports.

9. Open a Business Bank Account

To start accepting payments from customers and paying vendors, business entities need to set up a bank account exclusively for their company. Keeping a company’s funds and financial transactions independent from its owners’ finances is crucial for keeping the corporate veil (legal and financial separation) intact. Businesses that fail to maintain that separation will put owners’ personal assets at risk if ever the company falls into legal hot water or money problems.

10.  Obtain Licenses, Permits, and Accounts

Nearly all businesses in California must have some sort of federal, state, county, or local business license, permit, and sales tax registration. The requirements vary by the company’s location and type of business activity it conducts.

In California, several state and local agencies issue licenses and permits and assess taxes or fees. The CA.gov website and county and city websites are helpful resources for learning about the specific requirements or who to contact for more information. CorpNet also helps business owners work through identifying what their needs are and filing the applications to obtain them.

To get an idea of what typically applies to most companies in California, review the list below:

• General business license – An annual license issued by the city or county to allow a business to operate legally within an area.
• Professional license – Some professionals must be licensed to provide the types of services they offer. A few examples include builders or contractors, barbers, accountants, and doctors.
• Seller’s permit – Businesses that sell taxable goods or services, must obtain a seller’s permit.
• Use tax account – Businesses that aren’t required to have a seller’s permit or certificate of registration for use tax and receive $100,000 or more in gross receipts in the calendar year, and that meet several other conditions must have this in place.
• Health permit – Businesses involved in selling products that people consume (like food trucks and restaurants) or that touch the human body (such as a hair salon or tattoo parlor) need a local health permit from the city or county. They will also undergo annual inspections.
• Signage permit – Some county and city zoning laws require companies to get this type of permit before putting up signs for their businesses.
• Home occupation permit – Some jurisdictions require that home-based businesses obtain this permit. Even business owners like freelance writers that don’t have customers coming to their home may need this type of permit.

Entrepreneurs starting a cannabis business have a number of other licenses and permits to research. Check out our comprehensive guide to starting a cannabis business for more information.

CorpNet can help with your California business licenses and permits. Just reach out and let us make the process easy for you.

11. Get Your HR Responsibilities in Order

Entrepreneurs that plan to hire employees have some additional planning to do and tasks to tend to.

Common activities for hiring employees include :

• Job applications
• Job descriptions
• Employment contracts
• Workers compensation insurance
• Employee paperwork (Form W-4, Form W-2, Form I-9)
• Registering for California payroll taxes
• Set up payroll processing
• Paying employee tax withholdings
• Paying Unemployment Tax (FUTA)

California businesses that have employees must comply with all California hiring and employment laws that apply to them.

Read More About Payroll: What is Payroll?

12. Remember Business Taxes

Like elsewhere in the United States, California companies have the same federal income tax, FICA, FUTA, and self-employment tax responsibilities and rates.

• California’s current business income tax rate for corporations other than banks and financial institutions is 8.84%. The California Franchise Tax Board website lists the corporate tax rate and the individual income tax rates that apply to business owners and shareholders when their LLC or S Corp profits pass through to them.
• Most California LLCs, S Corps, and corporations also pay an annual franchise tax (a minimum of $800) for the privilege of doing business within the state.
• California businesses might also need to register with the California Department of Tax and Fee Administration (CDTFA) to pay sales and use tax. A retailer that sells tangible goods and certain services pays state sales tax. And companies that purchase products that are not subject to sales tax, and that store, use, or otherwise consume those goods in California, may need to pay use tax. Use tax can also apply to goods shipped to California from other states.

For a full list of business taxes and fees in California, I recommend visiting the CDTFA’s website.

13. Fulfill Ongoing Compliance Requirements

With any business entity, there are ongoing compliance obligations that a company must fulfill to operate legally and stay in good standing with the state. Among them might be license and permit renewals and entity-related filings required by the state. A full list of California state business compliance forms can be found on the California SOS website, and CorpNet’s free Compliance Portal can help you stay on top of important compliance deadlines.

California LLC Business Compliance Filings

• Statement of Information – Must submit Form LLC-12 within 90 days of forming the LLC and then every two years if any changes have been made to the LLC. Must also submit an Attachment to the Statement of Information (Form LLC-12A) if the LLC has two or more members or managers.
• Statement of No Change – Submitted after the initial filing and instead of the Statement of Information (when it’s due) if no changes occurred.
• Certificate of Amendment – Must submit Form LLC-2 If any changes have been made to the LLC’s Articles of Organization.

California Corporation Business Compliance Filings

• Statement of Information – Must submit Form SI-550 within 90 days of initial registration and every year after that. Must also submit an Attachment to the Statement of Information (Form SSI-550A) if the corporation has more than one director.
• Statement of No Change – Submitted after the initial filing and instead of the Statement of Information (when it’s due) if no changes occurred.
• Certificate of Amendment – Must be submitted if a corporation wishes to make changes to its Articles of Incorporation.

Get Your List Done With CorpNet’s Help

No matter what type of business you want to launch in California, my team of business compliance filing experts at CorpNet is here to help you start your company the right way. Save time, get peace of mind, and reduce legal costs by asking us to help you prepare and submit your registration paperwork and other forms to the various government and tax agencies. Contact us today to get started on your entrepreneurial journey!