How to Start a Business in California: Simple Guide for Entrepreneurs

Why should you start a business in California?

California’s thriving economy, diverse market, and innovation-friendly environment have made the Golden State not only the top area for business and economic development in the U.S., but also one of the top in the world. 

California's gross domestic product (GDP) is higher than New York's, particularly booming in industries such as finance, trade, manufacturing, and information.

Small business owners make up 99.8% of business owners in the Golden State. While California offers a flourishing environment for new entrepreneurs, having a viable business idea is key to driving long-term success.

How to come up with a business idea in California

So how does one come up with a successful business idea? The trick is understanding your target audience, value proposition, and the scalability of your potential business. Start by asking yourself what skills and interests you already have and align your industry with those traits. It's equally important for your business to be personally sustainable as it is for it to be economically sustainable.

Explore your circles for market trends, gaps, and compatible demographics. Look for problems within that community and your daily life that you could solve through a new business. Is there something that you wish you had that doesn't exist yet? This doesn't have to be an entirely new idea. It could be a needed improvement on a current service or product.

Get creative and brainstorm ideas. Then, consult your community to see what resonates. Test your business ideas by asking yourself if it is a scalable business plan that can outlive a current trend or circumstance? If not, go back to the drawing board.

Don't be afraid to ask for help. The U.S. Small Business Administration offers helpful resources to conduct market research and create a successful business plan. 

Step-by-step guide to California business registration

To officially register your new business in California, file formation articles with the Secretary of State (SOS). To file this document, you need to determine your business structure, business name, registered agent, and a few other fundamental details.

Step 1. Choose a business structure

First, choose a legal structure for your business. Each structure offers various perks that may be more or less beneficial depending on your unique needs. There are four main business structures.

• Corporation: Fully separates the business entity from its owners, offering liability protection. Filing as a corporation allows your business to generate additional income by selling stocks or bonds. However, corporations generally have a more rigid management and must pay business taxes.
• Limited liability company (LLC): Also distinguishes between individual and entity, protecting your personal assets. LLCs offer a more flexible management structure and allows you to choose whether you want to file taxes as a business or "pass-through" to your individual income tax.
• Doing business as (dba): If you plan to run your company under a name different from your business name, you'll need to register a "doing business as" (DBA) name. Also known as an assumed or trade name, a DBA is a name different from your LLC's officially registered business name. Not all states require a DBA name, so check with your state.
• Nonprofit: Nonprofit organizations are dedicated to a good cause or causes rather than existing to make money for its organizers. Any income generated by a nonprofit cannot be distributed to its members, directors, or officers, and nonprofits are usually tax-exempt.

Step 2: Choose a registered agent

California law requires most business structures to designate an agent for service of process, also called a registered agent, who'll receive legal documents on their behalf. Your registered agent can be an individual who resides in California or a business entity that's received a 1505 service of process certificate.

While your business can't be its own registered agent, a member of your organization can. That said, you may prefer to hire a registered agent service, such as LegalZoom's, to perform this role for you. Not only does your registered agent need to be available during regular business hours to receive important legal documents, but also their address becomes available to the public.

Step 3: File formation paperwork

Now that you have chosen a name and registered agent, it's time to officially register your business with the state. Find formation documents for your business structure on the CA Secretary of State website. Select the form that applies to you and complete your application either online through the Bizfile portal or by filling out a paper form, which you can download from the SOS website. 

Mail paper forms to the following address:

Secretary of State

Business Programs Division

Business Entities

1500 11th St., Sacramento, CA 95814

The filing fee is $100 whether you register online or with a paper form. If you file by mail, include a check or money order payable to the Secretary of State with your application. 

What are the costs of starting a business in California and registering it there?

Common costs—such as registration fees and filing fees—will all vary depending on the location, nature, and structure of your business. 

Basic startup costs for a California LLC

• Articles of organization: $70
• Registered agent service: anywhere from $100 to $499 annually
• Statement of information: $20
• Franchise tax (typically due April 15, depending on what month your registered with the SOS): $800
• Total: $990 (not including licenses, permits, and insurance)

Basic startup costs for a California corporation

• Articles of incorporation: $100
• Registered agent service: anywhere from $100 to $300 annually
• Statement of information: $35
• Franchise tax (typically due March 15 for an S corp; April 15 for a C corp): $800 minimum
• Total: $1,035 (not including licenses, permits, and insurance)

Basic startup costs for a California nonprofit

• Articles of incorporation: $30
• Registered agent service: Anywhere from $100 to $300 annually
• Franchise tax: Apply for tax exemption
• Total: $130 (not including licenses, permits, and insurance)

Sole proprietorships and general partnerships don't file articles with the Secretary of State. If you plan to form your sole proprietorship under a different name from your legal last name, you'll also need to pay the county filing fee for a fictitious business name statement. 

California’s permits and licenses: What you need to know

Most California business entities need to apply for California permits and licenses to legally operate in the Golden State. Licenses are permits are industry-specific and unless you work with an outside service, you'll need to obtain them from the relevant institutions.

For example, the Department of Consumer Affairs issues licenses for many consumer-facing industries, such as dentists, teachers, and real estate agents. Similarly, the Department of Alcoholic Beverage Control issues alcoholic beverage licenses. Check CalGold's search tool for specific permit information based on the city or county where you plan to run your business.

The Department of Industrial Relations (DIR) also offers a helpful list of state licenses and permits based on your business activities. It's very important to obtain and renew these licenses to avoid fines or shutdowns.

Taxes for businesses in California

Another important step to get your business legally up and running is to register for state and local taxes. Sales tax, franchise tax, and payroll tax are the three main taxes that California businesses need to know. However, there are other taxes specific to certain industries.

Franchise tax

All California corporations and limited liability companies must pay an $800 franchise tax annually to legally operate in the Golden State. If your tax year starts Jan. 1, pay the State of California Franchise Tax Board by April 15 for LLCs; for S corporations, pay by March 15.

Seller's permit

Retail businesses need to obtain a seller's permit to charge sales tax on goods sold. Apply for this permit through the California Department of Tax and Fee Administration. California businesses also need to report income taxes.

Income tax

Business income tax is generally 8.84% for corporations and LLCs that file as corporations, but this differs by entity type. Businesses that file as sole proprietorships pay taxes on their individual returns, which vary by income. Use the Form 540 tax table for a general idea of how much your business might pay as an individual filer.

Payroll tax

If you plan to hire employees, register with the State of California Employment Development Department. They'll help you manage the following four state payroll taxes:

• Unemployment Insurance (UI): Employer pays from 1.5% to 6.2% per $7,000 of an employee's wages
• Employment Training Tax (ETT): Employer pays 0.1% per $7,000 of an employee's wages
• State Disability Insurance (SDI): Withheld from employee's wages at 1.2%
• Personal Income Tax (PIT): Withheld from employee's wages based on the Employee’s Withholding Allowance Certificate (DE 4)

Register with federal institutions

Once you've registered with California agencies, file the necessary paperwork with federal institutions.

Apply for an employer identification number (EIN)

The EIN is a nine-digit identification code that the Internal Revenue Service (IRS) assigns to companies for federal tax purposes. Having this number also allows you to open a business bank account, which is crucial for business structures that want to protect their limited liability status. Apply for an EIN directly through the IRS website or use LegalZoom's EIN application service.

Tips for marketing your new business in California

Starting a small business in a thriving economic hub poses its own challenges. Often, the biggest hurdle is getting your business to stand out. While you may want to reach as many people as possible, it’s best to start small by building a loyal customer base.

Start by engaging with your local community. Look for your competition and what they're doing successfully. Then, consider where the holes are in the market. Once you have a feel for what your unique business proposition is, leverage online tools such as social media and Google search engines. Use search engine optimization (SEO), targeted ads, and location tags to reach your target community.

Build local buzz by engaging with your community through local events. This could mean setting up a booth at fairs, partnering with other local businesses, or participating in charity events. If you have a green business, join local green movements and incorporate eco-conscious key words into your messaging. As you spread the word, make sure you have a user-friendly website to help guide customers to your business.    

FAQs

How much does it cost to start a business in California and register it there?

The cost of starting a business in California will vary depending on your business structure, industry, location, and operating costs. That said, the basic registration costs are as follows:

• LLC—around $1,030
• Corporation—around $1,075

Do I need a business license to start a business in California?

While there is no general business license that all California businesses need to get started, there are many industry-specific licenses and permits that will also vary depending on the location of your business.

How do I register my business with the California Secretary of State?

To register with the California Secretary of State, you first need to choose a business structure, name, and registered agent.

If you're struggling to come up with a unique business name that you love, use LegalZoom's free business name generator. Use this tool by inputting your business idea, desired tone, and location and generate an unlimited amount of business names until you find one that resonates.

Next, conduct a California business search to ensure your desired business name is unique. Then, you can file formation articles through the CA SOS's bizfile online portal or use LegalZoom's formation service to handle multiple startup steps at once.

What taxes do I need to pay as a business owner in California?

Most California businesses need to pay an $800 annual franchise tax, income tax, and payroll taxes. Payroll taxes include Unemployment Insurance (UI), Employment Training Tax (ETT), State Disability Insurance (SDI), and Personal Income Tax (PIT).

How long does it take to start a business in California?

That depends on a number of factors including how you choose to file your registration documents and what licenses or permits you need to begin operating your business. The California SOS updates their page on Current Processing Dates regularly. You can check that page for an idea of when they'll confirm your registration.