If you’re not sure where to begin when starting a business in California, that’s perfectly normal. Starting a business is a complex process, so to help, we have a straightforward checklist to guide you through each step so you don’t have to figure this out by yourself. From deciding on which business structure is best, getting your licenses, and sorting out funding, we’ll help you cover your bases.
Steps To Starting A Business In California
Step 1: Choose a Business Idea
We get a lot of people who visit StartUp101.com ready to make a change in their lives by starting a business but do not know what type of business is right for them. To hopefully make this easier, we’ve gathered a list of some successful types of small businesses across the state to help spark some ideas.
- Coffee shops: With a strong coffee culture in California, coffee shops are a popular small business option. Many Californians enjoy starting their day with a great cup of coffee and a pastry.
- Food trucks: Food trucks are a popular trend in California, offering a variety of cuisine options at affordable prices. They are especially popular in busy cities like San Francisco, Los Angeles, and San Diego.
- Boutique clothing stores: California is known for its fashion-forward culture, and boutique clothing stores are a popular small business option for those looking to capitalize on this trend.
- Health food stores: With a focus on health and wellness, many Californians only shop for natural and organic foods, making health food stores a popular small business option.
- Fitness studios: With a focus on health and fitness, many Californians use fitness studios for their exercise needs. Yoga, Pilates, and CrossFit studios are particularly popular.
- Craft breweries: California has a thriving craft beer culture, and craft breweries are a popular small business option for those passionate about beer.
- Pet services: With many pet owners in California, pet services such as dog walking, pet grooming, and pet daycare are popular small business options.
- Art galleries: California has a thriving arts community, and art galleries are a popular small business option for those looking to showcase local artists.
- Event planning: With a busy social scene in California, event planning is a popular small business option for those looking to help plan and execute events such as weddings, parties, and corporate events.
If these ideas aren’t what you are looking for, or you are looking for specific information for a different industry, check out our library of business ideas to get detailed industry information, costs to start, tips, and lots more.
Step 2: Write a Business Plan
Not a requirement, unless seeking funding in most cases, writing a business plan is an important step for any small business to start right. A business plan helps to define the goals and objectives of the business, as well as provide a roadmap for how to achieve those goals. It also serves as a tool for potential investors and lenders to evaluate the viability of the business.
Writing your first business plan can be overwhelming, but it doesn’t have to be. Check out our guide on how to write a business plan to get started.
Step 3: Find the Money
Starting a business can be expensive, but there are several ways to get the money you need. From loans to Small Business Administration guarantees to crowdfunding and angel investors, there are many options available for entrepreneurs looking to start their own businesses. Here are some common funding options available in California:
- Friends and family: Friends and family that believe in you and your idea may loan or invest in your business. Be sure to write down repayment expectations, as misunderstandings about money can ruin relationships.
- Bank loans: Traditional bank loans are a common funding source for small businesses. To qualify for a bank loan, you’ll typically need a strong credit history, business plan, collateral, and personal investment of at least 15%-25% of the total startup costs.
- SBA loan guarantee: The U.S. Small Business Administration (SBA) offers loan guarantee programs to help small businesses receive financing. The SBA doesn’t provide loans directly to small businesses but guarantees a portion of the loan made by approved lenders, so the lender’s risk is lower. Some popular SBA loan programs include the 7(a) and the 504 Loan Program.
- Microloan programs: Microloans are small loans for businesses with limited capital requirements or who cannot qualify for conventional lending. These loans are typically provided by nonprofit organizations, community development financial institutions (CDFIs), and specialized microlenders. Organizations such as Valley Small Business Development Corporation, Women’s Economic Ventures, Main Street Launch, and others in the state offer microloans to small businesses.
- Investors: Another funding option is to seek investment from angel investors or venture capitalists. Angel investors are typically high-net-worth individuals who invest in startups in exchange for equity or convertible debt. Venture capitalists are investment firms that provide funding to high-potential, high-growth companies. While these investors can provide substantial funding and valuable expertise, they often require a share of ownership and control in your business. Some investor groups in California include Band of Angels, Acorn Angels, and Sand Hill Angels.
Step 4: Select a Business Structure
When starting a business, one of the first steps is to choose the right type of business structure (also referred to as a business entity). A business structure is how a business is organized to conduct business, and this decision determines how a business is taxed and its owner’s or shareholders’ liability for debts and other obligations.
The most common forms of business structures are the sole proprietorship, partnership, corporation, and Limited Liability Company (LLC). Each type has its own advantages and disadvantages, so it’s important to consider all options before deciding which one best suits your needs.
- A sole proprietorship is the simplest form of business entity and involves one individual who owns all aspects of the company and is personally liable for any debts or obligations incurred by the company. While a sole proprietor (and partnership) doesn’t register the business, a Fictitious Business Name Statement will be needed from the county clerk’s office (in the county where the business is located) if the business name will be different from the full first and last name of the small business owner.
- General partnerships are similar to a sole proprietor but involve two or more individuals who share ownership of the company and are jointly responsible for the work, profits, and any liabilities incurred by the company.
- Corporations are separate legal entities from their owners which provides a legal separation from the individuals and business. Corporations are more complex than other types of structures but offer greater protection from personal liability for shareholders as well as potential tax benefits.
- Limited Liability Companies (LLCs) combine elements from both corporations and sole proprietorships as the LLC offers limited liability protection for owners similar to corporations but have fewer formalities, such as annual meetings, board members, etc.
Related: Comparison of business entities
Forming a corporation or LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.
Some popular formation services include:
IncFile - Great service and free registered agent the first year.
Northwest - Privacy-Focused: Free registered agent and private business address for 1 year!
ZenBusiness - Easy to use and free registered agent for 1 year!
Step 5: Register the Business
With the business structure out of the way, the next step involves registering the business. Starting a new business in California requires several licenses and registrations, depending on the type of business you are starting and its location. Here are some common licenses and registrations required for a new California business:
Business licenses: There is no general state of California business license, however, many cities require a business license in order to operate, even for home-based businesses. Local licensing may be administered by city hall, city planning department, planning division, economic development department, etc.
Seller’s permit: Most businesses will need to register for a seller’s permit with the California Department of Tax & Fee Administration.
Building permit: A building permit (or home occupation permit for a home-based business) may be needed in some areas depending on local regulations.
Employer Identification Number: The Employer Identification Number or EIN (sometimes referred to as the Federal Employer Identification Number, FEIN, or federal tax ID number) is a nine-digit tax identification number that is assigned by the Internal Revenue Service (IRS). An EIN is required for certain entities (partnerships, corporations, most LLCs) or any business that has employees.
Professional licensing: Some services, such as auto repair shops, cosmetologists, and pest control, require specific licensing from the state of California.
Step 6: Open a Business Bank Account
With the business set up and registered, you will be able to open a business bank account. This step is important because it helps to separate personal and business finances, which can make it easier to manage cash flow, track expenses, and file taxes.
Opening a business bank account requires certain documents and information. Depending on the type of business, you may need to provide your Employer Identification Number (EIN), articles of incorporation (corporation), Articles of Organization (LLC), or other proof of ownership. Additionally, owners will likely need to provide personal identification such as a state ID or passport.
Step 7: Hire Employees
Some businesses will be able to skip this step initially, but if you plan to hire employees, there are certain tasks to take care of.
For starters, employers will need to first get their EIN, in addition to registering for a California Employer Account Number & Unemployment Number from the California Employment Development Department.
Employers also have a number of responsibilities, such as reporting new hires, verifying employees are eligible to work in the U.S., income tax withholding, obtaining worker’s compensation insurance, unemployment taxes, and payroll withholding taxes, including Social Security, and Medicare.
Step 8: Obtain Business Insurance
Most types of insurance are optional, however this step is recommended to protect against business risks due to accidents, property damage, or other unforeseen circumstances.
Step 9: Set up a Bookkeeping System
Another important startup step is getting a system in place to keep track of financial records, including invoices, receipts, and bank statements.
In California, businesses are required to file various tax forms and pay taxes on time to avoid penalties and interest charges. A good bookkeeping system can help keep track of income and expenses, generate financial reports, and prepare tax returns.
Having a good system also provides a clearer picture of a business’s financial health, including cash flow, revenue, expenses, and profits. This information can be used to make informed business decisions, identify areas for cost savings or revenue growth, and track progress toward financial goals.
Related: Setting up accounting for a business
This material is property of StartingYourBusiness.com
Common Questions When Starting A Business In California
Is California a good place to start a business?
California is known as a hub for innovation and entrepreneurial spirit, making it an attractive place to start a business. Here are a few reasons why California is a good place to start a business:
Access to funding: California has a robust venture capital industry, which is useful for startups seeking large amounts of funding.
Large market: California has a population of over 39 million people, making it the most populous state in the United States. This large market provides businesses with ample opportunities to grow and expand.
Diverse economy: California’s economy is diverse, with strengths in technology, agriculture, entertainment, and more. This diversity creates opportunities for businesses in a wide range of industries.
Supportive ecosystem: California has a supportive ecosystem for startups and small businesses, with resources such as accelerators, incubators, and mentorship programs.
What are the steps to starting an LLC in California?
How much does it cost to start an LLC in California?
The cost to file the Articles of Organization with the California Secretary of State, which is the paperwork to officially start an LLC in California, is $70.
Does a sole proprietor need a business license in California?
Yes, a sole proprietor in California generally needs a business license to operate legally. In California, business licenses are often issued at the city or county level, so the exact requirements can vary depending on where you plan to run your business and the products or services offered.
California Small Business Resources
There are 4.1 million small businesses in California, which is 99.8% of all businesses in the state,1 and 7.5 million people are employed by these small businesses.2 Because of the economic impact of small businesses, there are a number of small business resources to help California businesses start and grow. Some of these include:
- California Small Business Development Center Network: The CA SBDC offers small businesses and entrepreneurs confidential advising and training.
- California Franchise Tax Board: Information on tax laws for California-based small businesses.
- Governor’s Office of Business and Economic Development (GO-Biz): The CalGold site helps entrepreneurs identify state, county, and city permits and licenses required for various types of businesses.
- SCORE California: Volunteer mentors help guide and train businesses.