Everything you need to know to launch your startup in California
It's easy to understand the allure of California for startups. Some of the world's largest businesses call the state home, and have grown there from startups to global behemoths. It's a cradle of tech innovation and an incubator for world-changing ideas. Plus, it's hard to beat the weather.
If you're planning to start a business in California, here are the details you need to know.
California for startups
California is obviously an attractive destination for startups. It's the largest state economy in the United States and the fifth largest economy in the world. With a GDP of $3 trillion and economic growth that trends above the rest of the country, there's plenty of opportunity.
California by the numbers
But with that comes a tough business environment. California has one of the nation's higher top corporate tax rates at 8.84%. It also has a stringent regulatory environment for businesses. In fact, in CNBC's annual state rankings for business, California ranks 50 out of 50 for business friendliness and the cost of doing business.
The cost of living can also be difficult for would-be entrepreneurs. CNBC ranks California 49th out of 50 for the cost of living, and six of the 10 costliest cities in America are in California (with five of those six in the San Francisco Bay area).
The upside of entrepreneurs is that California ranks first for access to capital. If you're looking for venture capital or other forms of investment for your startup, California is the place to be.
There's also something to be said for proximity to other entrepreneurial ventures. If you're a tech startup, headquartering your business in California puts you in proximity to like-minded businesses.
This proximity has massive implications. From a supply-chain perspective, you're likely to be close to companies producing complementary technology that could help power your solution. From a staffing perspective, you have access to a huge pool of talent, including from the state's tech-heavy university and community college system. From a funding perspective, your pool of investors are already focused on pouring capital into the tech industry.
Taking this into account, it's little wonder that tech companies continue to choose California, in spite of the high barriers to doing business in the state.
Planning your business
Any good business starts with an idea, however vague and abstract that idea might be. Before you begin your startup journey in earnest, though, you'll need a good business plan.
Your business plan should be your pitch to potential investors. It will cover what you plan to do, how you plan to do it and the resources you'll need. Fortunately for you, we've written an incredibly detailed guide on crafting a business plan. But here are the elements your business plan will need:
Before you begin, you'll want to determine the total addressable market. In other words, how many people have the problem your business is solving? It's worth looking at some of the growth industries in your state to determine this.
Some of the fastest-growing industries in California are:
Software as a Service (SaaS)
In terms of individual businesses, a NerdWallet analysis
found that the top 10 types of new businesses that flourish in California were:
Educational institutes such as dance schools, athletics training and private tutoring
Vocational and educational counseling
Electronics and appliance stores
NerdWallet's analysis took into account factors like revenue growth, employee growth and payroll, and regulatory burden.
If your business doesn't fit within these parameters, don't worry. If you've researched market demand for your product or service and you've found an opportunity, you can still succeed with a strong business plan.
Structuring and registering your business
Once you have a plan in place, you'll need to decide how to structure your business. We've written an in-depth general guide on business structure to help you decide what's best for you, but we'll cover a few details that are specific to California.
California offers a few different business structures, and each has their own tax responsibilities and implications. You can choose to form your business as a Limited Liability Company, a Sole Proprietorship, a Partnership or a Corporation.
Before we begin, regardless of the business structure you choose, you'll need to obtain an Employer Identification Number (EIN). If you're a single member LLC or a Sole Proprietor, you don't need an EIN. However, it's smart to register for one in case you want to hire employees in the future. Some business bank accounts also require an EIN. You can register for an EIN on the IRS website
Each city and county may also have its own licensing and permit regulations for different types of businesses. You can check the licensing and permits required by your city and county on the CalGold website
Forming a Limited Liability Company (LLC)
An LLC protects your assets in the event your company is sued or gets into financial trouble. The structure combines the taxation of a sole proprietorship or partnership with the asset protection of a corporation.
For tax purposes, it's treated as a pass-through entity, meaning the profit or loss for the LLC is reported on the individual tax return of the owner or owners (called "members" under this structure). However, in California you'll have to report LLC business income on your personal tax return, and be subject to an annual franchise tax and pay a fee on any profits above $250,000. No wonder the state ranks poorly for business friendliness.
To set up an LLC in California, you'll first need to choose a name. The name must end in one of the following:
Limited Liability Company
Next, you'll need to fill out Form LLC-1
, the Articles of Organization. This form includes information on your name, your business' name and address and whether the business will be managed by an individual, a partnership or all members.
You'll also need to nominate an agent for the LLC. This is the person nominated to receive legal papers on behalf of the LLC. This person must reside in California, and can be a manager or member of the LLC, or even someone completely unaffiliated with the LLC.
The cost to file Form LLC-1 is $70. It can be mailed or hand delivered to the Secretary of State's office.
After you've registered your LLC with Form LLC-1, you'll need to file Form LLC-12
, or the Statement of Information, within 90 days of your date of registration. You'll also need to file this form every two years thereafter. The Statement of Information includes your company's name and business address, its 12-digit Secretary of State Entity Number (which you'll receive after filing Form LLC-1), the name and address of the company's manager or managers, the name and address of the company's agent, the type of business and the name of the CEO (if you have one). The cost to file this form is $20.
From a tax standpoint, LLCs are levied an annual tax in California of $800 (even if they don't conduct business in California). This is due on the 15th day of the 4th month after you file your Articles of Organization.
LLCs that generate $250,000 or more in income are also subject to an annual fee that operates on a sliding scale based on their income. The table below breaks down the fee's tiers.
How much is my California LLC Fee?
Forming a Sole Proprietorship
Forming a Sole Proprietorship in California is simple. You don't have to file any documents with the Secretary of State. Instead, you merely have to pick a business name and you may have to register it with the county in which your business is located.
If the business name you pick is different from your legal name, you'll need to file a Fictitious Business Name Statement with your county recorder's office. You can find a full list of counties on the California State Association of Counties
As a sole proprietorship, you'll claim any business profits and losses on your personal income tax. You'll have to file both state and Federal income tax returns.
Forming a Partnership
If your startup has a co-founder or co-founders, you could form a Partnership business structure. This structure divides both the income and liabilities of a business between partners. There are two Partnership structures available in California: General and Limited.
Forming a General Partnership is similar to forming a Sole Proprietorship business. You'll choose a Partnership name. If the name differs from the surnames of the partners, you'll need to file a Fictitious Business Name Statement with the county in which your business is located.
You don't have to register your business at the state level. However, you have the option to do so. This can be helpful if you want documentation outlining each partner's authority. If you do want to register your General Partnership with the state, you'll fill out Form GP-1
. The form dictates which partners are authorized to execute real estate transfers in the name of the partnership. There's a $70 filing fee.
Taxation for General Partnerships is similar to Sole Proprietorships. Each partner must report their share of the business' profit and loss on their personal state and Federal income tax returns.
If you have a partner who wants to invest in your business but wants to limit their risk, you could form a Limited Partnership.
In a Limited Partnership, at least one person acts as a General Partner while at least one other person acts as a Limited Partner. This means their liability is limited to the amount they've invested in the business. It also means that they can't withdraw their investment without the agreement of the General Partner or Partners.
To form a Limited Partnership in California, you'll have to fill out Form LP-1, the Certificate of Limited Partnership
. There's a $70 filing fee, and the form has to be filed with the California Secretary of State's office.
Limited Partnerships, like General Partnerships, mean the General Partners must report their share of the business' profit and loss on their personal state and Federal income tax returns. Limited Partners have to report their share of profit and loss based on their investment.
In addition to this, Limited Partnerships are subject to the $800 per year franchise tax.
Forming a Corporation
A corporation is taxed as an entity, meaning its owners aren't taxed individually on the business' profits and losses. It exists as an entity separately from its owners, which protects them from liability. Corporations can also issue shares.
To form a corporation in California, you'll first choose a corporate name. The corporate name must end in:
The corporation's name exactly as it is to appear on the California Secretary of State's records
The corporation's initial physical and mailing addresses
A nominated Agent for Service of Process (to accept legal documents on behalf of the corporation)
The number of shares the corporation is authorized to issue (this number has to be at least 1)
The signatures of each incorporator
The form must be filed with the Secretary of State's office, and there's a $100 filing fee.
There are a number of other steps you should take in forming a corporation, including writing bylaws, compiling a corporate records book, appointing a corporate board and filling out an Incorporator's Statement naming this board. These are covered in detail in our guide to Structuring Your Startup
In California, Corporations are subject to the greater of either the state's 8.84% corporate tax rate on profits or the $800 annual franchise tax. This tax only applies to business conducted in California, though.
Forming a nonprofit
Forming a nonprofit in California can take a lot of time and effort, and with good reason. The state wants to ensure that companies granted nonprofit status actually fit the definition of a nonprofit.
There are a few different types of nonprofits in California, and each fulfills different functions and requires different forms. They include:
Nonprofit Public Benefit: This is a general charitable organization. Most nonprofits would fall under this category.
Nonprofit Mutual Benefit: This is a nonprofit focused on benefiting a select group of people. An example of this would be a trade union.
Nonprofit Religious: This is any religious entity.
Nonprofit Common Interest Development: This is an incredibly specific type of nonprofit relating to Common Interest Development housing such as condominiums and townhouses. It would apply to homeowners associations governing these developments.
If you're looking to form a Nonprofit Public Benefit in California, the initial steps are similar to forming other types of corporations. First, you'd choose a name. Be sure to check the California database of business names
to ensure it isn't already taken.
This can be a tricky question. Choose charitable purposes only if your nonprofit will be accepting and managing tax-deductible charitable donations.
Next you'll need to write up bylaws and a conflict of interest policy. You'll need a conflict of interest policy to receive your nonprofit status from the IRS, which you'll need for your nonprofit status from the state of California.
If you don't know how to craft a conflict of interest policy, there's a great guide here.
After this, you'll file Form 1023 with the IRS to receive 501(c)(3) status. We're warning you in advance: this one is a behemoth. Thankfully, the IRS has produced instructional videos to help you.
The Form 1023 costs $850 to file, and can take 3–4 months to process. You'll receive a Letter of Determination informing you of the outcome of your application.
Next you'll need to fill out Form CT-1, the Initial Registration Form for the Registry of Charitable Trusts
. This form is filed with the California Attorney General's Office, and needs to include copies of your bylaws and Articles of Incorporation. You should also include a copy of your Form 1023 application, as well as your Letter of Determination from the IRS. Form CT-1 costs $25 to file.
Technically, you can file Form CT-1 before Form 1023 and before you receive your Letter of Determination. However, the Attorney General's Office will need these documents before your registration is finalized, so you may want to wait.
Finally, you'll file Form 3500-A, the Submission of Exemption Request
, with the California Franchise Tax Board. This exempts you from state income taxes. You'll need to include your Letter of Determination to show you're also exempt from Federal taxes. There's no filing fee for this form.
We warned you this was complicated.
Protecting your business
In California, businesses with employees are required by law to have workers compensation insurance. If your business includes vehicles owned by the company, you'll also need commercial car insurance.
While these are the only insurance policies required by the state, you may also want to look into general liability insurance, particularly if you're a sole proprietor. You might also consider professional liability insurance.
There are plenty of great resources available to startups and small businesses in California. We've listed some links below.
The Secretary of State's website offers information on how to register your business in California.
You can find all the forms and information you need about business taxation here.
This site offers portals to county government websites with information you need on any licensing or permits your business will require.
This site offers links to any local permits or registrations your business might need.
This is a massive resource of small business news, tips and advice, market research and industry-specific links.
The US Small Business Administration offers advice, advocacy and instruction for small businesses across the country.
Our own guide to launching your startup will walk you through every step of starting a business, from concept to execution.