With its thriving economy, exceptional access to venture capital, and go-getting spirit that dates back to the Gold Rush, California is a land of plenty for entrepreneurs. The Golden State has a strong support system for new businesses, and there’s an array of pro-business incentives and tax credits—no wonder there are now 4.2 million small businesses in California.
When starting your business in California, the first step is defining your business plan, describing your company, conducting market research, and estimating startup costs. But a business plan is only the beginning: You need to structure your budding business for success, check all the right boxes when registering, and navigate California’s filing and tax requirements.
Sound intimidating? Not with our step-by-step guide. Here’s how to set up a California business in a compliant and cost-effective way.
1. Name your business
Even if you have a brilliant business idea, your venture won’t fly without a great name. But it’s even more important to make sure your business name complies with California regulations. Here’s what to do:
- Make sure your business name is available on California’s business name search portal.
- Ensure it meets naming criteria by consulting the California Code of Regulations.
- Run a search on the US Patent and Trademark Office to check your chosen business name hasn’t already been trademarked.
- Lock in your business name on the California Secretary of State portal for $10.
As a fast follow, you should consider registering a web domain name and social media accounts under that name, too.
In some circumstances, you also need to make a Fictitious Business Name Statement, aka defining a DBA (doing business as) name. Here’s when you need to do it:
- If you’re operating a sole proprietorship or partnership under a business name that doesn’t contain your name or one of your partner’s names (more on these business structures below).
- If your LLC, LP, or corporation operates under a name that isn’t used on the original business registration.
2. Explore your funding options
Whether you’re bootstrapping the cost of your new business or securing lenders and private investors, it’s worth looking into California’s business grants and small business loans. Read more on the California Office of Small Business Advocate’s site, but here’s a breakdown:
- California state loan programs. There are several programs aimed at overcoming the hurdles that small businesses face when securing capital. Some state loan programs are specific to getting small businesses on their feet in the aftermath of the COVID-19 pandemic. Meanwhile, California Capital Access Programs (CalCAP) give support to participating financial institutions that are extending loans to businesses with less than 500 employees.
- Federal loan programs. The Small Business Administration (SBA) offers starter loans, disaster relief, and access to business coaching; read more on California’s SBA site.
- Local grants and loans. The SBA can also advise on local grant and loan programs, some of which depend on the kind of business; find your local Small Business Center to learn more.
3. Decide on your business structure
Whether you’re launching a startup or a mom-and-pop shop, you need to consider the best structure for your business. There are six business entity types you can set up in California; sole proprietorship and limited liability companies are the most common.
Here are the basics on business formation:
What is it?
Pros and cons
Unincorporated business with a single owner
✔ There’s only one owner, but you can hire employees.
✔ All the income is considered to be the owner’s own personal income—ideal for small businesses.
✘ The responsibility for any taxes and liabilities rests on you… as do potential lawsuits and debts.
Limited liability company (LLC)
Can have a single owner or be operated by two or more people who agree to own it equally
✔ Straightforward to set up, while legitimizing your business for loans and investment.
✔ You can elect how to be taxed, and you can be taxed as a pass-through entity.
✔ Structure protects your own assets from liability.
✘ You’re subject to self-employment taxes.
✘ There’s still a risk that a judge will rule your personal assets to be linked to the business, though you can offset this by keeping your personal and business finances separate.
Limited Liability Partnership (LLP)
Specific to accountancy, law, architecture, engineering, land surveying—or provides services to any of these industries. Must have a managing partner.
✔ Each partner is only responsible for their own mistakes—you’re not liable for your partner’s negligence.
✘ In California, this structure is limited to certain professions.
Legal entity separate from the business owners, managed by shareholders who elect a board of directors to oversee operations
✔ Attractive to investors because it’s governed by more formal regulations than LLCs.
✔ Corporation bears tax and legal responsibilities.
✔ Can be structured as an S-Corp or C-Corp (more common).
✘ “Double taxation” for C-Corps—the corporation pays income taxes on its income, and shareholders also pay taxes on any dividends they receive.
A structure managed by one controlling partner (a general partner) and at least one limited partner
✔ Liability is customized to each partner, based on the control they exercise over the business.
✔ You’re only taxed once.
✘ More compliance and paperwork boxes to check, compared to General Partnerships.
✘ If you’re the general partner, you have unlimited liability for anything that goes wrong.
Where two or more people are jointly and severally liable, and profits are taxed as their personal income
✔ All partners can deduct their share of business losses on their own tax return (aka pass-through tax treatment).
✔ Less expensive and complex to set up than corporations.
✘ Partners have liability for each other’s mistakes and debts—which can affect the business’s attractiveness to investors.
4. Register your business in California
If you’re setting up a sole proprietorship, you don’t need to register with California’s Secretary of State (CSOS). But every other structure needs to register and pay a filing fee ranging from $30 to $150. Find the registration forms and costs below.
How to register
File your articles of organization (Form LLC-1) with the CSOS either online or by mail, followed by your statement of information ($20).
File Form LLP-1 with the CSOS.
File articles of incorporation with the CSOS.
File Form LP-1 with the CSOS.
File a statement of partnership authority (Form GP-1) with the CSOS.
5. Decide on a registered agent
If you’re registering a California corporation, LLC, LP, or LLP, it’s essential to assign a registered agent. This individual—you or a professional—is listed on the business’s statement of information, and accepts tax and legal documents on the business’s behalf.
If you’re a California resident, you can do it yours elf. Otherwise, a professional registered agent will cost you between $100 and $300 per year. The service you choose depends on your business needs, and prices vary according to the length of engagement and the speed of their service; for example, you’ll pay more for same-day document delivery or 24/7 customer service.
6. Apply for an Employer Identification Number
Before you can hire and pay any employees, you need to get an Employer Identification Number (EIN)—just like you do everywhere across the 50 states.
Think of it like a Social Security number: your EIN is a unique nine-digit identifier for your new company. You’ll need it to check essential boxes like applying for bank accounts or loans, and it’s also vital to pay your taxes and your employees. The IRS assigns EINs, and they’re quick and free to get via Form SS-4.
7. Get up to speed with Business Tax Credits
What’s the catch for California’s flourishing business climate? Some of the highest state taxes for businesses in the US. And these high taxes are applied with rigor: If you own businesses in other states, then California will tax your income on those, too.
Let that motivate you to reduce your tax burden. Small business owners should look into tax credits like these:
- Work Opportunity Tax Credit: Tax credit up to a maximum of $9,600 per new hire from a target group, including formerly imprisoned people (hired within one year of release), recipients of Temporary Assistance to Needy Families, and veterans who receive food stamps or who have a service-connected disability. Read more about target groups on California’s Employment Development Department website.
- Disabled Access Credit: Helps you pay for improvements to make your business more accessible to people with disabilities; up to a maximum of $5,000.
- Architectural and Transportation Tax Deduction: Annual deduction of up to $15,000 if you remove architectural or transport barriers for older people or people with disabilities.
8. Stay on top of filing requirements and taxes
To stay in good standing with the state of California, you need to regularly file documents with the state government, including the Statement of Information (annual filing for a corporation, and every two years for a California LLC). This statement sets out basic information about your business, including:
- What your business does
- The business’s location and contact information
- Your registered agent
- The business’s officers and directors
- Executives’ contact information
Learn more about the filing window on the CSOS site.
- Sole proprietorship: File income on your individual income tax return—learn how to file here.
- LLC: Annual taxes are due until you cancel the LLC—get rates and fees here.
- Partnerships: Limited and general partnerships are taxed as pass-through entities. You need to submit Form 565 to the IRS to report any ownership interest in other partnerships or LLCs, and the Apportionment and Allocation of Income (Schedule R) to determine your income with a California source. Limited partnerships are subject to an annual tax of $800, but general partnerships don’t have to pay this. Learn more here.
9. Find a payroll solution
If you’re hiring employees or contractors in California, there’s a lot to think about. First, you need to ensure you’re classifying them correctly to avoid being hit with a fine. You also need to be mindful of overtime regulations and entitlements; for example, employees are owed 1.5 times their regular hourly wage if they work more than eight hours per day or 40 hours per week. And remember that California has a higher minimum wage than the federal rate—$15.50 per hour as of January 1, 2023—though some cities and counties in California have higher rates.
You also need payroll software to ensure your employees and contractors are paid accurately and on time. A solution like Rippling can remove the tedious manual work of running payroll—as well as help keep you compliant with overtime laws. With Rippling Time & Attendance, you can automatically track employees’ hours and set up notifications for when an employee is approaching overtime. Approved hours will sync seamlessly to payroll: just click “Submit” once, and Rippling calculates net pay and taxes in seconds.
And if you’re hiring globally, Rippling has that covered, too:
- Pay all your people—across different tax jurisdictions and even different currencies—in a single pay run.
- Include hourly and salaried employees, as well as contractors.
- Manage all of your people, systems, and data around the world in one place.
10. Support and scale your growing business with Rippling
As your business grows, you’ll need an HRIS (Human Resource Information System): a software solution to streamline tasks like recruiting, onboarding employees, running payroll, administering benefits, and much more.
The sooner you use an HRIS, the easier it is to scale—especially if you have aspirations to grow your business globally. And once you reach that stage, Rippling has everything you need to run your global workforce—in a single system.
- Hire, pay, and manage your people—whether they’re based in Los Angeles or on the other side of the world.
- Stay ahead of local, state, and federal compliance infractions—with a plan of action for each one.
- Bring all benefits—health insurance, 401(k), commuter, and more—into one system and automate the busy work, like enrolling new hires, updating deductions, and administering COBRA.
- Effortlessly keep all your recruiting data up to date—from open headcount to new hires—and automate every step of the hiring lifecycle.
- Have a single source of truth for HR analytics, policies, and more.
FAQs about setting up a business in California
Do I need a business license in California?
Yes, most businesses need a license to operate in California. The CalGold website can help you drill down to find the permit information you need—simply filter by your city or county and your business type.
Do I need a business bank account when launching a business in California?
You aren’t legally required to set up a separate business bank account, but it’s wise to set one up, along with a business credit card. Not only will this help you streamline your business and personal finances, it’ll also protect your personal assets. If you have employees, you’ll also need a business account to process payroll.
Do I need to get business insurance?
There’s no legal imperative to get business insurance in California unless you have employees. You’re required to have worker’s compensation insurance, which guarantees your employees their medical benefits and wage replacement if they get injured on the job.
But even if you’re a sole proprietor, you leave yourself open to perils without liability protection. For example, you’ll be glad to have general liability insurance if you ever face claims of personal injury related to your business operations, and if you’re unlucky enough to face an interruption to business, appropriate coverage can help you cover your costs during unexpected downtime. And if your business provides professional advice or services, professional liability insurance can safeguard you if you’re ever hit with claims of negligence.
What are California’s state payroll taxes?
There are four state payroll taxes in California:
- Unemployment Insurance (UI) — employer contributions
- Employment Training Tax (ETT) — employer contributions
- State Disability Insurance (SDI) — withheld from employee wages
- Personal Income Tax (PIT) — withheld from employee wages
Read more on CA.gov’s state payroll tax overview.
Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.