How to Start a Business
Starting a business in California takes 7 steps:
- Choose a name for your business
- Choose the right type of business entity
- Register your business with the California Secretary of State
- Get your EIN Number (Federal Tax ID Number)
- Open a business bank account
- Get any necessary business licenses or permits
- Register for taxes
Choose a name for your business
We recommend taking some time to choose a name people will remember and associate with your business. Choose a name that rhymes, speaks about your business, is easy to pronounce, has positive connotation and is available
After you’ve thought of a few business names, you should search them on the California Business Search page to make sure they are available for use: https://businesssearch.sos.ca.gov/
Choose the right type of business entity
The most common are:
- Sole Proprietorship
- Limited Liability Company (LLC)
A Sole Proprietorship in California happens when you operate your business as yourself. There is no separate legal entity created; the law treats you and your business as one person. You are responsible and personally liable for all business activities and any wrongdoing.
A California Partnership is the same as a Sole Proprietorship, but just with 2 or more people. And like a Sole Proprietorship, a Partnership isn’t a separate legal entity and the partners are responsible and personally liable for any business activity and wrongdoing.
A California Corporation is a more complex legal structure that requires a board of directors, corporate officers, and shareholders. And while a Corporation is a separate legal entity, they don’t usually work for most small business owners because they face double taxation. Corporations are more commonly used by companies that are looking to raise capital investment, take the company public, or have large healthcare expenses (for their employees). The most common types of companies that form Corporations are high-growth technology and startup companies.
Unlike a Sole Proprietorship or Partnership, because a Corporation is a separate legal entity, it provides personal liability protection for its owners.
An LLC in California is a “hybrid” legal entity that combines the benefits of a Corporation and a Sole Proprietorship/Partnership.
A California LLC is a separate legal entity under state law and like a Corporation, it provides personal liability protection for the owners. If your LLC is sued, the owner’s personal assets – like their home, cars, and bank accounts – are protected. And like a Sole Proprietorship, an LLC has pass-through taxation (so there’s no double taxation).
A California LLC is the most popular option and a good choice for people who want to run a business for two reasons:
- Personal liability protection (your personal assets are kept safe)
- No double taxation
Unlike a Sole Proprietorship (and a Partnership), your California LLC’s assets are separate and distinct from your personal assets. In the event your LLC gets sued, your personal assets are protected.
And unlike a Corporation, your California LLC is not subject to double taxation. Instead, your LLC’s profits will “flow through” to your personal tax return.