Starting a business in California involves more paperwork than many first-time owners expect, but the steps follow a logical order. The process looks different for a sole proprietor who wants to sell crafts under her own name than for a founder forming a limited liability company with partners, and costs and requirements are set by several agencies at once: the state, the county and the city. This checklist describes the common path in general terms. It is not legal or tax advice, and fees and rules change, so each step should be confirmed with the agency involved.
What business structures are available?
The first decision is the legal form of the business. The main choices are:
- Sole proprietorship. One person owns and runs the business, and there is no separate legal entity. It is the simplest form, with no state formation filing, but the owner is personally responsible for the business’s debts and legal claims.
- General partnership. Two or more people share ownership. It also requires no formal state filing, and each partner can be personally liable.
- Limited liability company, or LLC. The LLC is a separate legal entity that generally protects owners’ personal assets from business debts, with flexible tax treatment. It is the most popular choice for small businesses.
- Corporation. A corporation, including an S corporation election for tax purposes, is a more formal structure with directors, officers and shareholders, and is often used by businesses that plan to raise outside investment.
Each form has different tax and liability consequences, and an attorney or accountant can help choose, particularly when more than one owner is involved.
How does someone form an LLC or corporation?
Formation happens through the California Secretary of State. For an LLC, the filing is called the Articles of Organization. The business must have a name that is distinguishable from others on record, and it must designate an agent for service of legal papers, who can be an individual resident in California or a registered corporate agent. The Secretary of State’s online system, called bizfile, handles filings, and the state has been moving formation filings to online-only submission. The filing fee for an LLC has been about $70, and the Secretary of State publishes the current schedule.
After formation, the LLC must file a Statement of Information, generally within 90 days and then periodically, which lists the entity’s address, agent and managers or members. Missing the filing can lead to penalties and, eventually, loss of good standing.
What is the franchise tax?
California charges LLCs and corporations an annual minimum franchise tax of $800, which is owed even when the business has no income. LLCs with higher gross receipts also pay an additional fee scaled to income. The state has offered a first-year exemption from the minimum tax for new entities in certain years, and the rules have changed more than once, so owners must check the Franchise Tax Board’s current guidance before assuming they are exempt. Sole proprietorships and general partnerships do not pay the entity-level minimum tax, though their owners pay income tax on profits.
The tax is a major reason some founders compare structures carefully, particularly for small side businesses that earn little in the first year.
Do you need a fictitious business name?
A business that operates under a name other than the owner’s legal name, or other than the registered name of the entity, must file a fictitious business name statement, often called a DBA, short for “doing business as.” The filing is made with the county clerk in the county where the business operates, not with the state. In San Diego County, the clerk’s office handles the filing, and the statement must generally be published in a newspaper of general circulation, with the publisher filing proof with the clerk. The statement is valid for five years, and a new one is required if the name or owner changes.
The filing is not the same as trademark protection. It does not give exclusive rights to the name, and owners who care about a brand should consider a separate trademark search.
What tax and employer registrations are needed?
Several registrations follow formation, depending on what the business does:
- Employer Identification Number. The Internal Revenue Service issues an EIN, free of charge, which identifies a business for tax purposes and is needed to hire employees, open a business bank account and file certain returns. Sole proprietors without employees may use their Social Security number, but many obtain an EIN anyway.
- Seller’s permit. A business that sells tangible goods in California generally needs a seller’s permit from the California Department of Tax and Fee Administration, which allows it to collect sales tax. The rules are explained in how California sales and use tax works for sellers.
- Employer accounts. A business with employees registers with the Employment Development Department for payroll taxes and unemployment insurance, and it must carry workers’ compensation insurance.
- Industry licenses. Many fields require professional or occupational licenses, such as contractors, cosmetologists, real estate agents and food businesses, issued by state boards or local health agencies.
What does the city require?
State registration does not replace local requirements. Cities and counties require their own business registrations, and zoning rules determine where particular uses are allowed. In the City of San Diego, businesses must obtain a business tax certificate, a process explained in the San Diego business tax certificate guide. Businesses operating from a home may face additional zoning conditions, and buildings used for the public may require permits, inspections and signs approvals. Because rules differ by city, anyone planning a storefront or office should check zoning and permits before signing a lease.
What about privacy, insurance and bank accounts?
Several practical steps round out the setup. Opening a separate business bank account helps keep personal and business finances apart, which matters especially for LLCs that want to preserve liability protection. General liability insurance and, where relevant, professional liability or property coverage can protect against common risks. Businesses that collect customer data may have obligations under California’s privacy laws, discussed in your privacy rights under the CCPA and CPRA, though many small businesses fall below the thresholds that trigger them.
How much does it cost?
Costs vary widely. State filing fees for an LLC are modest compared with the annual franchise tax, and the county’s fictitious name filing and publication add more. Attorneys, accountants and online formation services charge for assistance, and licenses and permits can add up depending on the industry. A realistic budget includes formation, the first year’s taxes and fees, insurance and local registrations, with a cushion for items that vary. Owners who need financing can look at lender programs, such as the loan guarantees described in SBA 7(a) loans explained.
Where can someone get free help?
Small business development centers, including those serving San Diego County, offer free or low-cost advising on business plans, licensing and financing. The U.S. Small Business Administration and the state’s business portal provide checklists and links. Local chambers of commerce and economic development organizations often hold workshops. For a legal or tax question about a particular situation, a licensed professional is the right resource.
The order of steps can vary, but the sequence of choosing a structure, filing with the state, registering for taxes, obtaining local permits and setting up insurance and banking is a reliable guide. Starting with the right structure and keeping up with annual filings can prevent problems that are expensive to fix later.
Sources: California Secretary of State; California Franchise Tax Board; California Department of Tax and Fee Administration; Internal Revenue Service; California Employment Development Department
