While Forbes ranks California among the ten worst states in the United States for business costs and regulatory environment and the Tax Foundation rates the California's tax structure as the third worst, California remains one of the best places in the country to start a business regardless. Companies in California remain some of the top-performing in technology, health care, consumer staples, specialty pharmaceuticals, biotechnology, and energy, making California the seventh largest economy in the world. Startups in particular are successful here with the top three best-thriving startup communities located in the state. Small businesses launch successfully in California every day—many of which later develop into some of the top companies in the state.
If you want to learn the basics of how to start a business in California, schedule a free consultation with a Priori corporate or startup lawyer today.
Preparing for Your New Business in California
The most important thing you can do to ensure a successful startup is to create a strong foundation for your new business. This requires clear elements put in place before you ever sell a product or conduct business.
Creating a Business Plan
All companies start as an idea—and a successful business requires a well-developed business plan. A business plan helps you determine how you will overcome the challenges you’ll experience along the way and what you need to sustain success. Some basic issues you must include in any business plan are the “big idea” behind your business, target market research, strategies for market penetration and growth, and estimated costs and sources of funding.
Acquiring Financing and a Location
After you have a well-developed business plan, you need funding to make it a reality—a challenge for many startup founders. You can use your business plan to solicit an investment of capital from outside sources, such as venture capital investors, angel investors, crowdsourcing, small business loans, and even grants. In California, you can also apply for a guaranteed small business loan through California’s guaranteed loan fund—something that makes it much easier for less wealthy and minority founders. Even crowdfunding has become a normal way for small businesses in California to get their start.
Filing a Fictitious Business Name Statement
Every company in California must have a registered business name that has been publicly announced. To do this, you can file a fictitious name statement with the county government where your business is headquartered. Usually, this will cost a small fee to cover the name announcement being run in local newspapers to fulfill announcement criteria.
Simply having a name doesn’t separate your business liability from your personal liability, however. If you want to protect your assets and reap the other benefits of creating a separate legal entity for your company, such as clear structure and ownership, you must incorporate. There are several ways companies commonly choose to incorporate in California:
- Corporations. Corporations are the structure most people think of when they imagine large public companies, but this structure is just as useful for small businesses. Corporations are individual tax entities with limited personal liability—and they are the most likely to get venture capital if this is something you plan to seek for your startup later. To incorporate, file Articles of Incorporation with the California Secretary of State.
- LLCs. LLCs are much more flexible corporate structures that corporations, and they are typically taxed as pass-through entities with no set operational requirements. LLCs are popular for small business owners looking for operational and legal flexibility. To incorporate, file an Articles of Organization with the California Secretary of State.
- Partnerships. Unlike corporations and LLCs, your liability is not totally limited in a partnership. These structures are also not incorporated at the state level. Instead, you simply must file a Partnership Agreement with your county clerk’s office.
Other Key Legal Issues for New Businesses in California
After your company has legal recognition in California, you will be responsible for all other legal issues related to its start, including taxes, licensing, and permits.
To pay your business taxes, you’ll need proper federal and state tax IDs. First, you must register for an Employer Identification Number (EIN) or Federal Tax Identification Number with the IRS to pay federal taxes. At the state level, you also use your EIN to report taxes with the California Board of Equalization. You can also find out what taxes you owe and pay them with the California Employment Development Department. Often, the taxes your company will owe will include corporate, payroll, income, and sales tax, as well as many other local and state takes relevant to your industry.
Licenses, Permits, and Zoning Clearances
In order to operate legally in California, your company must have all requisite licenses, permits, zoning clearances, and other permissions filed locally and at the state level before beginning operations. In order to determine which may apply to your industry and company, you can check with the California Governor’s Office of Business and Economic Development using CalGold. This service is not comprehensive, however, so it may also help to speak with a Priori licensing attorney or check with your local business licensing offices.
Every small business with at least eight employees needs to be covered by workers’ compensation and unemployment insurance in California through a private company or the fund run by the California Department of Industrial Relations. In addition, every company must independently purchase other kinds of insurance as relevant. Depending on your company’s size and legal structure, this may include disability, health insurance, and others.
Insurance requirements of small businesses are not limited to employees either. While not required at the state level, some municipalities in California require commercial liability insurance or real estate rental or owner’s insurance—and other small business owners simply may see the value in investing in such insurance. To find out exactly which types of insurance are required, as well as which simply are smart investments, check local requirements and ask a local California insurance lawyer.
What other legal issues do I need to worry about when I’m starting a business in California?
Unfortunately, there are too many legal issues to detail here. Starting a business involves a number of legal, financial, and strategic issues. The best way to know the specific legal issues facing your unique business is to speak with an experienced California startup lawyer.
Is California a good place for a startup?
California has long been recognized as the top location for tech startups. San Jose, San Francisco, San Diego, Los Angeles, and San Bernardino have produced more successful startups than any other area in the world. In fact, Silicon Valley offers you the easiest access a thriving startup ecosystem, where you’ll have easy access to funding, collaboration, and seasoned startup advice. While there is no single location that can guarantee your startups success, the environment in Silicon Valley and California as a whole creates all the perfect conditions to give your startup the best chance possible. Experts (even if they might be biased) like Paul Graham, the co-founder of Y Combinator, agree, “Silicon Valley is the best place to start a company.”