California is a land of entrepreneurs and is home to a huge number of startup companies in places like Silicon Valley and San Francisco. If you're hoping to figure out how to start a small business there, you'll need to understand the steps involved to maximize your chances of success.
This guide will explain what you need to know about starting a small business in the Golden State, including how to make a business plan, secure funding, grow your team, and more.
- You should create a business plan as the first step to starting a business in California.
- Some California businesses must register with the state.
- You will need to open a business bank account.
- Hiring the right people and building your team is crucial to success, but bill AB5 could make it complicated to hire contractors.
How to start a business in California
If you're trying to figure out how to make money, owning your own business isn't a bad option.
That's especially true if you live in California, which is considered a major destination for startups. In fact, a 2021 Crunchbase study revealed businesses in this state received $135.1 billion in venture capital over the prior year.
This amounts to $3,417 per capita based on the state's population. Only Massachusetts received a higher amount per capita.
But, while a lot of successful businesses are born in the Golden State (including big-name businesses like Apple, Intel, and Mattel), figuring out how to start a new business of your own takes some effort. Here are the 10 key steps you'll need to take in order to make it happen.
1. Decide on a business idea
California had a GDP of $3.701 trillion as of the fourth quarter of 2022, which is as impressive as it sounds. The Golden State is actually one of the largest economies in the world, surpassing entire countries, including the United Kingdom, and coming in behind only the U.S., China, Japan, and Germany in terms of gross domestic product.
Obviously, there is plenty of opportunity – but also ample competition – in the Golden State. As a result, you'll need to come up with a top-notch business idea. While the state is well known for being a haven for technology companies and the entertainment industry, plenty of other businesses do well in CA too. In fact, the state's largest industries also include agriculture, travel and tourism, health care, and construction.
To decide on what type of business you'd like to start, think about your talents as well as what untapped markets there are. Doing some market research to see where there is a demand to be filled could be invaluable, as you can identify a niche where you can offer a unique product or service.
2. Develop a business plan
A business plan is crucial to help take your idea from theory to reality. The U.S. Small Business Administration (SBA) suggests writing either a detailed plan or a lean startup business plan depending on what works for you.
Whichever option you pick, it should include details like:
- What your company will do and what its mission and philosophy are
- What market you are trying to tap into and who makes up that market, including customers and competitors
- How your company will be structured and led
- The kinds of products or services that your company will offer
- The methods by which you'll market the company and sell your wares
- How and when you'll hopefully become profitable
If you plan to seek funding for your company, you'll need a detailed plan including a funding request.
The California Office of the Small Business Advocate has resources to help you find a local Center where you can get help from an advisor in writing a business plan for your company.
3. Decide on a business structure
You can structure your business in different ways in California. Here are some examples.
No special documentation is required to get started as a sole proprietorship, and you and your business are one and the same in the eyes of the law – both for tax purposes and when determining liability.
You'll need to draft a partnership agreement to start a business co-owned with others. Partnerships are pass-throughs, which means profits and losses are declared by individual owners on their tax returns. If the partnership is a general partnership, all partners share liability. If it's a limited partnership, the general partner(s) have unlimited liability and the other partners have limited liability.
Limited liability companies
A limited liability company (LLC) is a pass-through, so profits and losses are declared by owners and not by the business itself. The company exists as a separate entity from the owners so owners are protected from liability. LLCs are required to file Articles of Organization, but overall, paperwork is simpler than with corporations. There are, however, more restrictions.
Corporations are entirely separate legal entities, so there's strong liability protection for owners and their personal assets. C corps pay taxes on profits (and owners do as well on distributions from the company, so there's a chance of double taxation). There are essentially no ownership restrictions. Many large companies are C corps, but there is a lot of paperwork. Corporations are required to file Articles of Incorporation as well.
You can elect S corp status when starting a corporation. You will still have a lot of paperwork, but S corps are pass-through entities, so the corporation doesn't pay taxes or declare losses – owners do. There are more ownership restrictions than C corps.
You will need to file business entity paperwork with the state of California to form an LLC or corporation. You can find the required documents on the website of the California Secretary of State. You’ll also need to pay a filing fee.
TipLLCs and corporations will require you to choose a registered agent. This person receives legal and tax correspondence on behalf of your company. You can do this yourself or work with a registered agent service for a fee.
4. Register your business name
LLCs and Corporations must have unique names in California. You can conduct a name search at bizfile online using its free business search option.
While you are in the process of forming your corporation or LLC, you can choose to reserve your chosen name with the Secretary of State. You may reserve the name for up to 60 days and can renew your reservation but not for consecutive periods (at least a day must pass in between). Bizfile offers the ability to register your company name online.
If you’re using a business name other than your own as a sole proprietorship or partnership, you’ll need to file a Fictitious Business Name Statement in your county. These are sometimes referred to as DBAs (“doing business as”). LLCs and corporations will need to register a fictitious name if they’re using a name that’s different from the one you originally registered with.
TipAs you choose a business name, consider what domain names are available as well.
5. Get licenses, permits, and insurance
In some cases, you will need a special license or permit to operate the type of business you are interested in opening. You can find out if you will need one by using the CalGold Business Permit system to determine the requirements you must meet.
Either the state or your local government may require a license or special permits. For example, if you wanted to start a car wash in Alameda County, CA, you might need a special industrial wastewater discharge permit, and you would need to obtain a Car Washing & Polishing Registration Certificate after registering with the Labor Commissioner's Office.
In addition to required licenses and permits, getting insurance is also important. Insurance protects against something going wrong, such as a customer falling while at your store. There is a variety of business insurances you may need. For example, liability insurance will pay if someone is hurt by the company and business interruption insurance will provide income if a covered cause forces you to shut your business down.
6. Register for taxes
If your business must pay separate income taxes or if you have employees (even if you don’t have to file separate state or federal taxes), you must get a federal Employer Identification Number from the IRS. You can apply for one online by providing basic business details.
You may also need to complete additional registration with the state depending on the kind of business you are operating. For example, if you are hiring employees, you have to register with the California Employment Development Department to ensure employee taxes are properly withheld from paychecks. Employer Services online makes registering simple.
Some local governments require additional registrations. For example, in Alameda County, companies must obtain a Business License – Business Tax Certificate to do business within the city limits.
7. Open a business bank account
You should have a dedicated bank account for your business to keep company funds separate from your personal ones. This is especially essential if your company is a separate legal entity from you. You can find a California bank insured by the Federal Deposit Insurance Corporation by using the FDIC's BankFind tool.
As your business grows, remember the FDIC provides insurance against losing money in case of bank collapse, but you are generally given protection for only $250,000 per account per entity. Many businesses have more money in their accounts than that, so if your account balance is very large, there is some risk of loss in case of bank failure.
8. Secure funding
Your business will most likely need money to get up and running. Here are a number of different options for funding it.
- Self-funding: If you have the money, you can pay for startup costs yourself. This means you get to keep all profits and don't have to answer to anyone, but you also take all the risk.
- Small business loans: These are available from private lenders, including some lenders that offer loans guaranteed by the SBA that can be easier to qualify for.
- Grants: Grants are funds from governments or organizations that don't require you to repay the sum of money you obtained.
- Crowdfunding: This involves asking many people to pool together to fund your startup. There are sites such as Kickstarter that help you do that. However, you may need to promise something to those who help fund the business.
- Investors: Venture capitalists and other investors provide funding to startups, typically in exchange for an ownership share.
Some resources in California can help you secure funding, including the California Infrastructure and Economic Development Bank, which offers a loan-guarantee program to make qualifying for financing easier. Seven FDIC-insured partners in CA offer processing for loans guaranteed by the Infrastructure and Economic Development Bank.
California Capital Access Programs (CalCAP) also incentivize lenders to make loans to more startup businesses. There are five active programs, including those targeted at small business owners and companies requiring collateral support.
TipBusiness credit cards can help with cash flow, and some of the best ones provide travel or cashback rewards. Compare credit cards to find the best one.
9. Build your team
As your business gets started, you may find you can't do it alone. This could necessitate hiring.
If you are building a team, it's important to follow California's rules on minimum wage, workers' compensation insurance coverage, paid leave, and even required posters that must be displayed in-office. The California Department of Industrial Relations has a detailed list of mandates.
You will also have to decide whether to hire workers as employees, which means they get benefits and you are responsible for covering part of their Social Security taxes, or as freelancers or independent contractors.
California bill AB5 restricts who can be treated as an independent contractor in California, so be sure you are following the rules. Workers can be classified as independent contractors only if they pass the ABC test, which means they are free from control in how they work; they are doing work outside the company's normal scope of business; and they are customarily engaged in an independently established occupation.
You will likely also need a payroll company to handle things like withholding required state and local taxes and processing employee checks. You can find online and local payroll processors.
10. Start marketing your business
Finally, you will need to market your California business. There are many different ways to do that, including traditional (and expensive) options like TV commercials or modern new options like making a video and hoping it goes viral.
As you decide how best to market your business, consider who your customer base is and how you can best demonstrate your ability to meet their needs.
How much does it cost to start a small business in California?
The cost of starting a business in California depends on many things, including the business type. If you are a sole proprietor who simply starts selling products or services, your costs might largely be limited to the price of the products you're selling and your time.
In some situations, though, you will need to file forms with the Secretary of State, and this could involve paying a fee. Entity name reservation for a corporation costs $10, for example.
How much does it cost to register a business name in California?
You can temporarily reserve a name for 60 calendar days in California for an online processing fee of $10. You can renew your registration but not consecutively; at least one day must pass. You would typically register and reserve a name as you go through the process of starting a corporation or LLC and submitting the required paperwork for the entity to be formed.
What is the difference between a sole proprietorship and an LLC?
A sole proprietorship is not a separate legal entity. The business and owner are not treated as independent. The sole proprietor pays taxes on all profits from the company and can claim allowable losses if the company loses money. The sole proprietor is also 100% liable if there's an issue with the business such as unpaid debt or a lawsuit.
An LLC, on the other hand, creates a separate legal entity for the company. The separate entity can provide liability protection for owners. LLCs are pass-through businesses, though, which means profits and losses are still declared on the owner's tax returns.
What are the annual filing requirements for a California business?
Annual filing requirements depend on the kind of California business you are operating. For example, LLCs doing business in California must pay an annual $800 tax which can be paid online or mailed to the franchise board.
You can visit the Franchise Tax Board to find out the specifics of what forms you must file and what costs you must pay annually when you start a business in California.
How long does it take to register a business in California?
Registering a business can take varying lengths of time depending on what step of the process you are involved in. Name registrations are being processed virtually immediately as of May 4, 2023, as are most other filings. However, you can check the specifics of how long it will take for your forms to be reviewed by visiting the Office of the Secretary of State.
California can be a great place to start a business, but the costs of living are high, and there are some restrictive rules on working with contractors. Just be aware that there are both upsides and downsides to starting a small business in California, so weigh your choice carefully (after considering your business plan) to decide whether becoming an entrepreneur in the Golden State is right for you.
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