You’re about to embark on a long and exciting journey, one full of hard work and rewards: starting a new business. With wide eyes and big dreams, you’re about to enter the world of business ownership.
But beyond the initial thrill of the startup decision, there’s a lot to consider. In fact, if you’ve never done it before, starting a business can seem like an intimidating mountain of work. Out of all your responsibilities and tasks, you might not even know where to start.
But have no fear. The good news is that once you have everything planned out and understand the process, the formation process is smooth sailing. And this is your go-to guide.
Everything you’ve been wondering about, everything you need to do, every question you have – it’s all right here. By the time you’re through these 16 steps, you’ll be a bonafide business owner who’s prepared for sustained success.
1) Write a Business Plan
Jumping into this endeavor without goals, directives, or a sense of direction can lead to a scattered, unproductive business.
A business plan lays the groundwork for your future success. It helps you analyze key elements of your business and forge pathways to achieve your goals. Here are a few things you should consider including in your business plan:
- Executive Summary (a separate document that gives a complete overview of your business’ purpose, plans, goals, competition, opportunities, etc.)
- Company description
- Market Analysis (opportunities, competition, etc.)
- Managerial or organizational structure
- Products and/or services
- Marketing strategies
- Funding goals
- Financial projections
Business plans aren’t just great for internal operations, but they give your business legitimacy in front of potential investors, customers, partners, and more. Need help? Check out this guide from the U.S. Small Business Administration.
2) Decide on a Business Name
You might’ve come up with the perfect name right away. If so, consider yourself lucky. Sometimes, deciding on a business can be difficult, requiring brainstorming meetings and late-night rap sessions. That’s because your name is your business’ identity and reputation. It should be something that’s unique and memorable but also defines your business purpose.
There are particular naming guidelines your business will need to follow depending on its business type. LLCs, for example, must end with “Limited Liability Company,” “L.L.C.,” or “LLC.” But more importantly, you can’t choose a name that someone else has already claimed. If there’s already an existing business using your desired name, it’s back to the drawing board.
Perform a name search by submitting a Name Availability Inquiry Letter to the California Secretary of State’s office. They will let you know if your name is in use or not. If it’s free, go ahead and make it yours by filing a name reservation or using it on your Articles of Organization.
3) Decide on a Legal Structure
There are only a few types of business structures, but each one dictates some important parts of how your business will run.
The most popular types are the sole proprietorship, general partnership, limited liability company (LLC), S corporation, and C corporation. Most small businesses go with the LLC because of its unique blend of flexibility and personal asset protection.
However, you shouldn’t make this decision without reading up on all of your options. We’ve done plenty of research on each business type and developed side-by-side comparisons. Check out our LLC vs. Corporation and LLC vs. Sole Proprietorship comparison guides for a closer look.
4) Choose an Agent for Service of Process
The Secretary of State needs a point of contact for your business, someone who will be available at your registered office address during typical business hours – 9am to 5pm.
This person is called an agent for service of process, and they serve as an intermediary with the state, receiving all of your company’s important legal communications and relaying them on to you. The agent for service of process ensures that no important state documents, deadlines, or payments fall through the cracks, so you’ll want to choose a person or company you trust.
You can choose either an individual or a business entity as your agent for service of process in California, but they must:
- Be an individual California resident or a corporation authorized to do business in the state.
- Have a physical address in California (P.O. boxes not allowed).
- Have a mailing address in California.
- Not be the LLC itself. A California LLC cannot be its own agent, but one of its members or managers can assume the role.
If you’re going with an individual, it’s often wise to choose someone who thoroughly understands the state’s compliance and tax requirements, like an attorney. Or, it can be good to appoint a person who’s already intimately familiar with your business, like one of its members or managers. But these aren’t your only options – there are a ton more! Family members, friends, and business acquaintances are also viable options.
Or, you can choose a registered agent service instead. These companies take care of all your service of process responsibilities, and some will even handle your business formation and annual reporting as well.
Important: You must continuously maintain an agent for service of process on file with the Secretary of State. If your agent resigns or you appoint a new one, you’ll need to notify them by filing the appropriate documents.
5) Register Your Business
This is the big one, the step that officially creates your business. No matter which business type you choose, you’ll need to submit formation documents to register it with the Secretary of State.
LLCs: You can’t get your LLC off the ground without first filing the Articles of Organization, the form that officially puts your business information on the books. Consider this California LLC filing your springboard into California’s business landscape – you can’t do much without it. You can find it online or as a hard copy. Online and mailed submissions cost $70, but hand-delivered forms cost an extra $15.
Corporations: Registering a corporation follows some of the same procedures, although it uses a different form: the Articles of Incorporation.
Sole Proprietorship/General Partnership: There are no official forms or fees to register as a sole proprietor or general partnership. Simply start doing business and that’s it! While this is obviously faster and easier, we recommend incorporating your business because of the personal asset protection LLCs and corporations provide.
Foreign Entities: Foreign LLCs are ones that are already established in another state and expanding to California. Sound like you? If so, don’t worry about the Articles of Organization or Articles of Incorporation. Instead, your go-to form is the Application to Register, which will foreign qualify your business in California. Don’t attempt to do business before foreign qualifying, or the state might hit you with some severe penalties.
6) Get an EIN
The Employer Identification Number (EIN) is your ticket to doing state and federal taxes. It’s a nine-digit number, much like a Social Security Number, that identifies your business on tax documents.
If you’re forming an LLC, it will be considered a “pass-through” entity, so the business itself won’t pay federal income taxes. Instead, you and the other members will report income and losses on your personal tax returns.
But this doesn’t mean you can go without an EIN. If your LLC pays any type of business taxes – like Sales, Use, or Unemployment Taxes – or hires employees, you’ll need to get one.
Unsure if you need one? The IRS provides a useful “Do I need an EIN?” link on this page, where you can also apply for an EIN. If you go through the online application process, you’ll receive your number immediately.
Otherwise, you can submit a Form SS-4 by fax to (855) 641-6935 or by mail to :
Internal Revenue Service Operation
Attn: EIN Operation
Cincinnati, OH 45999
7) Open a Business Bank Account
LLC and corporation owners are required to keep their personal and business finances completely separate, or they risk losing their personal asset protection. To do so, you’ll need a business bank account.
The good news is that opening a business bank account is pretty simple. Just pay a visit to your bank’s local branch and sit down with one of the bankers there. You will need to present your formation documents, an EIN number, and some personal information. Then, you can direct all of your business income and expenses to that account instead of a personal one.
It doesn’t really matter which bank you choose, whether it’s a national giant like Chase or Bank of America or a small, local bank. However, it’s usually easiest to go with the one where you have existing accounts.
8) Handle Any Tax Obligations
Ah, taxes. They’re always part of the picture, especially when you run a business.
Familiarizing yourself with your business’ tax requirements will help you establish a solid financial plan going forward. LLCs don’t need to file a corporate tax return and pay federal income taxes, so you’ll handle these taxes as part of your personal return.
Corporations, on the other hand, will need to file a Corporate Income Tax Return, while sole proprietorships/general partnerships will need to pay self-employment taxes.
There are a few other taxes your business may owe in California, depending on your circumstances:
Franchise Tax: Every business operating in California must pay an annual tax of $800 for the privilege of doing business in the state by filing Form 3522. Plus, if your LLC’s income is greater than $250,000, it will need to pay an additional fee ($900-$11,790). Along with this payment, your LLC will need to file Form 568.
Sales and Use Taxes: Any business that sells merchandise in California is subject to Sales and Use Taxes. The tax rates change from year to year and are different for each county, but you can find them all here.
State Payroll Taxes: Businesses that hire employees may need to pay payroll taxes, which includes the Unemployment Insurance Tax, Employment Training Tax, State Disability Insurance Tax, and California Personal Income Tax.
Have additional questions? Visit the California Tax Service Center website for more information.
9) Find an Accountant
Sometimes it’s easier to hand off your financial responsibilities to a professional. Not only will an accountant ensures that your taxes are filed and paid correctly, but they might also find a few ways to save your business money.
Bookkeeping and tax procedures are time-consuming and require some specialized knowledge. Balance sheets, financial reports, cash flow, audits, and much more – an accountant can ensure that your company operates smoothly and streamlines its expenses.
This can be expensive depending on the complexity of your finances, but the benefits an accountant offers can be well worth it.
10) Create an Operating Agreement
An operating agreement constructs a framework of procedures and standards for your business. This is where you can lay out processes for member conduct, asset allocation, compensation policies, voting procedures, dissolution, and much more.
California is one of the few states that requires its LLCs to create an operating agreement. This agreement, however, can either be written or oral, as long as the company’s members agree to it. This set of procedures gives your business legitimacy in front of courts, banks, government agencies, and more. Plus, it can be useful in protecting your LLC during legal disputes.
You can either draft one yourself using an online template, or you can hire an attorney or an incorporation service to take care of it for you.
Once you’ve drafted your agreement, it must be approved by each of your LLC’s members, then filed with the rest of your business documents. You do not need to submit it to the Secretary of State.
11) Acquire the Necessary Licenses
After filing your formation documents, your business is legitimate, but it might still need specific licenses before opening its doors in California. This depends entirely on your business type and purpose, but there are three main state licenses you should know:
Professional/Occupational Licenses: Certain occupations and business purposes must obtain a license from their respective boards before operating in California. Restaurants, for example, must acquire a license from the Department of Health before serving food and beverages. If you’re unsure which licenses your business might need, search for your business type and location on the CalGold website.
Local Licenses: Your specific city, county, or municipality might have its own licensure requirements. Take a look at your local government’s website to find out.
12) Consider Business Insurance
Even though it’s not pleasant to consider, there’s always a chance that unforeseen events might take a toll on your assets.
While forming an LLC or corporation offers some personal asset protection, additional business insurance can also protect your business assets in cases of lawsuits, damages, etc. You can acquire insurance for your business products, vehicles, specific occupations and much more.
If you hire employees, you’ll also need to get workers’ compensation insurance. SBA.gov has a useful guide for determining which forms of insurance your new business might need.
13) Build a Website
Your company’s digital presence is just as important as its physical one. Like it or not, most potential customers will find your business online, and if you don’t exist online, you’re missing out.
But don’t worry, you don’t need to be an HTML or web design expert to build a website. Sites like WordPress and Squarespace make it easy to construct an elegant and responsive website, no coding necessary. But if you’re not comfortable or confident doing it on your own, you can always hire a professional web designer to take care of it for you.
14) Launch Social Media Accounts
Making your mark on the digital landscape doesn’t start and end with your website. Most successful businesses also have a robust social media presence on multiple platforms. Facebook, Twitter, and Instagram are all great ways to connect organically with potential customers and develop your brand voice.
Just don’t forget to publish consistent social media content, or you’ll have trouble building a base of followers.
15) Understand Ongoing California Requirements
After you’ve launched your business, things will likely be moving at 100 miles per hour as you evolve and grow. But in all of the excitement, you can’t forget your state’s ongoing compliance requirements. Every state has its own annual or biennial business requirements.
To keep your business in good standing, you must submit a Statement of Information every other year. This helps the state maintain your most recent business information. If you originally formed your business during an even-numbered year, you must file during every subsequent even-numbered year. And if you formed it during an odd-numbered year, you’ll need to file during every odd year. Each Statement of Information costs $20 and is due by the last day of your business’ anniversary month (the month in which it was formed).
Don’t forget that you also need to pay the $800 Franchise Tax every year too!
16) Check Out California Small Business Resources
You’re not on this journey alone. There are plenty of free resources available to make starting and growing your business a smoother, easier process.
SBA.gov contains a wealth of useful information, resources, and tips for California-based small business owners. They have a page dedicated to each of California’s SBA district offices, including Sacramento, San Francisco, Fresno, Los Angeles, and Orange County. On these pages, you’ll find info on events, consulting, news, loans, and much more, so you can take on your new business endeavor with confidence and the support you need to long-term success.