Essential Legal Steps for Starting a Business in California

California, one of the most business-friendly states in the US, hosts over four million small businesses. These small enterprises constitute over 98 percent of California’s overall businesses and employ 7.2 million individuals, which comprises almost half of the state’s private-sector labor force.

The state had a gross state product (GSP) of $2.9 trillion in 2022 and an average annual employment growth rate of 0.7 percent over the past five years. These numbers highlight opportunities for entrepreneurs seeking to launch new ventures.

Are you ready to start your business journey in California? Understanding the legal steps involved is imperative. The procedures vary based on your business type and the county and city where it will operate. This article outlines the steps to ensure your new business is legally compliant.

Startup legal compliance

Business Registration

Registering your business is crucial to operate as a legal entity in California.  It helps separate your personal and business, which is vital for limiting personal liability. Proper registration also plays an immense role in establishing trust with investors, partners, and customers.

You can register your business online through Bizfile California. Another option is to register by mail or complete a paper form in person. However, the specific process and requirements of registering your business in California depend on your chosen business structure.

Select a legal structure

You must select a business structure before registering your business with the state. Several legal structures exist, each affecting your taxes, personal liability, partnerships, and registration requirements. In California, common options include the following:

  • Sole proprietorship: This is the most basic type of business structure, yet it offers no personal liability protection. You solely own the company and are responsible for its assets and liabilities.
  • Corporation: A California corporation is a separate legal entity that protects owners from personal liability. However, both corporations and shareholders are subject to taxes.
  • Limited liability company (LLC): LLC business owners aren’t liable for the company’s debt. However, unlike a corporation, the business does not file separate taxes.

Register with the California Secretary of State

Each type of legal entity requires a different registration form. The California Secretary of State’s (SoS) website has the appropriate forms available for search and download.

Suppose you choose a corporation or an LLC. You must register or incorporate it with the California SOS office. You’ll need to verify the availability of your name by conducting a business entity name search on the SOS website.

Likewise, a registered agent for your LLC in California is an essential legal requirement. Under California Corporation Code Section § 1700-1702, business entities, including all LLCs and corporations, must designate a registered agent when registering a business structure.

The only exception is when you’re establishing a sole proprietorship. Otherwise, doing business in the state without a registered agent can expose your company to fines and other penalties. This rule ensures that legal documents reach the business quickly.

Applicable Permits and Licenses

Businesses in California may need different licenses and permits depending on their business structure, industry, and location. Ensure you know which ones apply to your new business.

A business license or tax certificate is an official government document confirming a business’s legality to operate and ensuring its public safety. It’s worth noting that the state doesn’t provide a universal business operating license.

That means you must determine which licenses or permits you need at the local, state, and federal levels. The following is an example of the licenses or permits required for businesses operating in California:

  • Sales tax permit obtained from the California Department of Tax and Fee Administration (CDTFA)
  • Local business permits and licenses, such as resale certificates, occupational licenses, fire department permits, and building and zoning permits
  • Employer identification number (EIN) issued by the Internal Revenue Service (IRS)
  • A business license issued by the city where the business operates

Several other California state licenses might be necessary for running your business. If you’re uncertain, ensure to perform further research using the CalGold Permit Business System.

Business people discussing taxes
Image by on Freepik

California Tax Requirements

Every state imposes different tax obligations. Understanding and meeting them is essential to avoiding legal complexities. Almost every business operating in California is subject to at least one of the following state business taxes, and sometimes more than one:

Corporate tax

The corporate tax applies to corporations and LLCs that choose to be treated as corporations. It’s calculated based on net taxable income generated from business activity within California. The state’s corporate tax rate is a fixed 8.84 percent, exceeding the national average in the US.

Franchise tax

California’s franchise tax applies to a wide range of business structures, including corporations (both S corporations and C corporations), limited liability companies (LLCs), limited partnerships (LPs), and limited liability partnerships (LLPs).

Essentially, you will need to pay a $800 minimum franchise tax. However, your tax liability will likely increase if your corporation earns a substantial income.

Alternative minimum tax

In California, based on federal rules, a 6.65 percent alternative minimum tax (AMT) applies to C corporations and LLCs that opt to be subjected to taxes as corporations. This AMT prevents them from significantly reducing their taxable income to lower their corporate tax bill.

Business Bank Account

Separating personal and business finances is essential regardless of the type of business you establish.

That makes opening a dedicated business bank account crucial when starting a business. Suppose your business type is an LLC or corporation. Having a separate bank account is imperative to safeguard your liability protection.

Learn why it’s beneficial and what you need to consider when setting up an account for your new business.

Importance of opening a business bank account

Managing cash flow and monitoring spending are pressing challenges when running a new business. Besides simplifying those processes, your business will benefit from the following when you open a separate bank account for all its financial transactions:

  • Improves credibility as you make and receive payments
  • Builds a banking relationship, which is crucial for future financing needs
  • Streamlines payroll and expense management
  • Helps establish a credit history for your business
  • Gives you access to banking services for efficient remote financial management
  • Offers purchase protection and safeguards customer information

How to set up a bank account for your business

Your business type affects which documents are necessary when opening a business account. The requirements of every bank may also vary slightly. Consider these tips to assist you in getting started:

  • Shop around different banks to find a business account with favorable terms, low fees, and other benefits.
  • Prepare the required documentation. This may include, but is not limited to, articles of incorporation, business licenses, a doing business as (DBA) certificate, an employer identification number (EIN), and identification documents.
  • Consider features such as online banking, overdraft protection, and account fees.

Ensure Legal Compliance in Your New Business Operations

Compliance ensures the business fulfills its legal obligations. Without it, you can expose your operations to financial, legal, and reputational risks. You must understand the laws, regulations, and industry standards applicable to your startup.

Sure, this guide is an excellent starting point for launching your new business in California on the right legal footing and achieving long-term success. Still, consulting with a business lawyer is highly advisable to guide you through specific requirements and protect your business interests.