How to Start a Business in California (Updated 2023)

If you want to start a business, then you'll need to take the necessary steps to launch your company. You have important decisions ahead of you, and you'll need to be aware of regulations at the federal, state, and local levels.

Here's an overview of the key steps you'll need to take to start your own business in California.

1. Choose a Business Idea

Take time to explore and research ideas for your business. At this stage, take into consideration your own interests, skills, resources, and availability. Think about the reasons why you want to form a business. You might even have an idea of what you want to do already.

You should evaluate the likelihood of success for your business based on the interests of your community, and whether your business idea will meet an unmet need. You can read our article for more tips on how to evaluate business ideas.

After you select an idea, consider drafting a business plan to determine your chances of making a profit. When you create a plan, you'll have a better idea of:

• the startup costs
• your competition, and
• strategies for making money.

Investors and lenders will want to review your business plan before providing financial assistance, and you can be prepared by drafting a plan before you start soliciting funding.

2. Decide on a Business Legal Structure

Choosing a business structure is one of the most important steps. Your business structure will determine how you manage your business and file your taxes and your personal liability for your business's debts. Oftentimes, you can start with one business structure now and convert to another one later on as your business needs change. But it's best to pick an entity structure at the start that can adapt as your business grows.

The most common legal structures for a small business are:

• sole proprietorship
• partnership
• limited liability company (LLC), and
• corporation.

There also are special versions of some of these structures, such as limited partnerships and S corporations. You might also be limited to a certain business structure based on your industry. For example, California requires—with some exceptions—anyone who provides a service that requires a license, certification, or registration (for example, lawyers, accountants, and engineers) to form a professional corporation. (Cal. Corp. Code §§ 13400 and following (2023).)

You'll want to consider which business entity structure offers the type of liability protection you want and the best tax, financing, and financial benefits for you and your business. For instance, sole proprietorships and general partnerships have few startup and ongoing requirements but owners are personally liable for the business's debts. Alternatively, LLCs and corporations have more legal requirements and costs, but owners are mostly protected from the business's creditors.

Read our article for information on how to choose the best ownership structure for your business to help you make your choice.

3. Choose a Name for Your California Business

Your business name should be unique and registrable. For LLCs and corporations, California requires you to have a business name that's distinguishable from other business names on record with the California Secretary of State (SOS). You'll need to check to see if your name is available by doing a business entity name search on the SOS website.

Reserving your business name: You can reserve an available name for 60 days by filing a Name Reservation Request. There are certain name requirements for LLCs and corporations (like including a word such as "LLC" for LLCs or "Corporation" for closely-held corporations). See our articles on how to form an LLC and corporation in California for more information. The SOS has a section on name reservations with information on naming requirements for businesses.

Filing a fictitious business name statement: Is your business a sole proprietorship or partnership that uses a business name that's different from the legal name of the business owner (for a sole proprietorship) or surnames of the individual partners (for a partnership)? If so, you have a fictitious business name (also called a "trade name" or "DBA"). You must register your name by filing a fictitious business name statement in the county clerk's office for the county where your business is located. California also requires you to publish notice of your statement in a local newspaper. (Cal. Bus. & Prof. Code §§ 17900 and following (2023).) Check county websites for more information. The California Franchise Tax Board (FTB) also has a guide to DBAs.

If you plan on doing business online, you might want to register your business name as a domain name. In addition, to avoid trademark infringement issues, you should do a federal and state trademark search to make sure the name you want to use isn't the same as or too similar to a name already in use.

Check out our section on business names for tips on how to pick the right name for your business.

4. Register Your Business Entity With California Secretary of State

How you register your business in California depends on your chosen business structure.

• Sole proprietorship: To establish a sole proprietorship in California, you don't need to file any organizational documents with the state.
• Partnership: To create a general partnership in California, you don't need to file any organizational documents with the state. Although not legally required, all partnerships should have a written partnership agreement. The partnership agreement can be very helpful if there's ever a dispute among the partners.
• Limited partnership: If you want to form a limited partnership, then you must file a certificate of limited partnership with the SOS. You should also have a written partnership agreement.
• Limited liability partnership (LLP): Only licensed lawyers, architects, and accountants can form LLPs in California. To form one, you must file an application to register an LLP with the SOS.
• LLCs: To create an LLC in California, you must file articles of organization with the SOS. You'll also need to appoint an individual agent or corporate agent for service of process in California (in other states, this is known as a "registered agent"). In addition, while not required by law, you also should prepare an operating agreement to establish the basic rules about how your LLC will operate. You don't need to file the operating agreement with the state.
• Corporations: To create a corporation in California, you must file articles of incorporation with the SOS. Although not legally required, you also should prepare bylaws to establish your corporation's internal operating rules. As is the case with operating agreements, bylaws aren't filed with the state.
• S Corporations: S corporations are tax entities, not legal entities. If you want to form an S corporation, then you must first form a regular corporation in California. After you file your articles of incorporation with the state, you must also file IRS Form 2553, Election by a Small Business Corporation, with the IRS to elect S corporation tax status.
• Professional corporations: Similar to forming a regular corporation, you'll need to file articles of incorporation for a professional corporation, a separate document.

You can find all these business formation forms on the SOS website. You can register your business online using bizfile California. You can also register by mail or in person by completing a paper form.

5. Apply for California Licenses and Permits

Almost all businesses will need to apply for at least one license, permit, or registration. You can find more detailed information in our article on California business licenses.

Tax Registration. If you'll be selling goods in California, you must register with the California Department of Tax and Fee Administration (CDTFA) to obtain a seller's permit. You can register online at the CDTFA website. If your business will have employees, you must register with the California Employment Development Department (EDD) for employer withholding taxes. You can register online using the EDD's Employer Services Online.

Employer identification number (EIN). If your business has employees or is taxed separately from you, you must obtain an EIN from the IRS. Even if you're not required to obtain an EIN, there are often business reasons for doing so. Banks often require an EIN to open an account in the business's name and other companies you do business with could require an EIN to process payments. You can get an EIN by completing an online application on the IRS website. There's no filing fee.

General Business License. Typically, you'll need to apply for a business license from the city where the business is located. In the case of unincorporated sections of the state, the license is issued by the county where the business is located. Your city might require every business to get a license or only some businesses to get a license.

Regulatory licenses and permits. These licenses cover areas such as health and safety, the environment, building and construction; and specific industries or services. Regulatory licenses and permits frequently are issued by state agencies. For step-by-step guidance about state licenses or permits you might need, check the state's CalGold website. For information about local regulatory licenses and permits, check the websites for any cities or counties where you'll do business.

Professional and occupational licenses. These licenses and certifications cover people who work in various fields. The state's Department of Consumer Affairs and the Department of Industrial Relations provide information on professional and occupational licensing.

6. Pick a Business Location and Check Zoning Regulations

You'll need to pick a location for your business and check local zoning regulations. Consider the needs of your customers, and whether you have the kind of business that could benefit from foot or highway traffic.

Before you commit to a location, take time to calculate the costs of running your business in the desired spot, including rent and utilities. Refer back to your business plan to evaluate whether you can afford your desired location during your company's early months. If you lease a commercial space, make sure you negotiate terms that'll work for your business in the long term.

It's important to verify that the spot is zoned for your type of business. You might find zoning regulations for your town or city by reviewing your local ordinances and contacting your town's zoning or planning department.

One alternative to opening your business at a new location is running your company out of your home. If you decide to run a home-based business, again check your local zoning laws. You should also review your lease (if you rent your home) and homeowners association rules (if applicable)—either of which might ban some or all home businesses.

7. Register and Report Business Taxes

California taxes every kind of business. For instance, California has a corporate income tax that applies to corporations and other entities that are taxed as corporations, and a franchise tax that applies to corporations, LLCs, and many partnerships. Businesses and owners will report and pay taxes to the FTB on designated income tax forms.

See our article on California business income tax for more information on state business taxes in California.

Sole proprietorships. Sole proprietors pay state taxes with the FTB on business income as part of their personal state income tax returns (Form 540).

Partnerships. Partners pay state taxes on partnership income on personal tax returns. In addition, California partnerships also must file Form 565, Partnership Return of Income.

LLCs. Members pay state taxes on their share of LLC income on personal tax returns. In addition, LLCs themselves have to file an additional state tax form. The specific form used will depend on how the LLC is classified for federal tax purposes. California LLCs also are required to file a biennial statement of information. You can read about California LLC biennial filing requirements for more information.

Corporations. Shareholders must pay state taxes on their dividends from the corporation. A shareholder-employee with a salary also must pay state income tax on his or her personal state tax return. Moreover, the corporation itself is subject to California corporation taxes. And, finally, corporations must file a statement of information with the SOS.

If you have employees, you must also deal with state employer taxes.

And, apart from California taxes, there are always federal income and employer taxes. Check IRS Publications 334, Tax Guide for Small Business, and 583, Taxpayers Starting a Business.

8. Obtain Insurance for Your California Business

Business insurance can protect your business and your personal assets from the fallout of unexpected disasters, such as personal injury lawsuits and natural catastrophes. An insurance agent can help you explore the different coverage options for your business, which might include general liability insurance to protect you against claims relating to bodily injury or property damage, or cyber liability insurance to cover litigation and settlement fees following a data security breach.

To learn more, see our article on what types of insurance your small business needs.

9. Open a Business Bank Account

No matter the type of business you form, you should consider opening a separate business account to make it easier to track your income and expenses. For some business types, including LLCs and corporations, a separate bank account is necessary to maintain your liability protection.

Additional Help With Starting Your California Business

The SOS has a section on starting a business. The section has information and links to resources to help small business owners. You can also find sections on frequently asked questions, filing tips, and other business resources. The SOS also provides a starting a new business in California publication and business checklist.

The California Office of the Small Business Advocate (CalOSBA) also offers information and support to small businesses. The CalOSBA has sections on starting, managing, and growing your business. You can also visit a California Small Business Development Center and explore its business services.