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California boasts the 5th largest GDP in the world, surpassing many countries while itself being only a state in the US. There is no denying the attractiveness it has for new small businesses and entrepreneurs. Standing at the top in the number of new businesses in 2019, this state is also the best place for people starting a small business in California.
Before getting into the technical step by step guide on how to start a small business in California, it is important to have a comprehensive understanding of the two structures of business allowed in California: LLC and Corporation. Should people start an LLC in California or start a corporation in California?
San Francisco, one of the busiest cities of California
Firstly, LLC stands for Limited Liability Company and just as its name suggests, the owner(s) is partly protected from debt, bankruptcy and/or other legal responsibilities. If a person invests in an LLC, any liability will be limited up to the investment amount only. Stakeholders do not have to use their private wealth as collateral to cover for the firm in any case. Additionally, LLC offers both the efficiency in tax and the flexibility in operation. By definition, it is a “passed through'' company. That means its profits and losses can be reported on the individual tax return of the owner(s) instead of the firm. Consequently, tax filing is easier done and the owner(s) can utilize this to balance their own income statement.
Members in an LLC can involve themselves in the operation personally or designate someone (can be a non-member) to handle everything. In a sense, LLC has the benefits from both a corporation and a partnership. Moreover, LLCs can be converted into a corporation later on. One IBC® highly recommends this type of company for starting a small business in California.
Unlike LLC, Corporation type allows stock offerings to share the ownership of the firm, therefore One IBC® recommends customers to start a corporation in California if they are looking for investors. It is taxed as an entirely different entity than its owner(s) thus making the filing a bit more complicated but this can help lower the total tax bill for both sides. In addition, there are two types of Corporation: C Corporation (C Corp) and S Corporation (S Corp). C Corp is the default structure and S Corp is the structure with special tax status. Their names came from the Internal Revenue Code: Subchapter C and Subchapter S. S Corp is taxed similar to LLC and has a limitation of one hundred shareholders only.
Comparatively, Corporation has unlimited lifetime while LLC has to predetermine said duration when starting a company in California. Corporations are also required to have a shareholder meeting with detailed record keeping and report each year. Any change or action regarding the company’s operation has to be done after a vote by the board of directors.
A business plan should be drafted by doing market research and writing down as much detail as possible. The risk and opportunity as well as potential customers and the competitors in the market have to be carefully studied. Owner(s) should consider questions such as: Why start a company in California? Why this industry? Who is the customer? and focus intensively on the cores of the business such as Finance, Marketing and Technology.
This is the most important part since the plan is the foundation of which every activity is going to be based on later. The structure of the company (LLC, S Corp or C Corp) is decided in this step. A solid business pPlan is also used to convince the bank or investors.
The next step is to register for the business. The first thing to start with is confirming with the local government that the company name is available. The name has to comply with local regulations and must not already be taken by other companies. It should also be the foundation of the brand and fully reflect the core value and vision. Then the company’s location should be decided based on the market research. Each city or county inside California has its own local laws which can be major advantages or disadvantages.
One IBC® is always happy to help customers with the registration documents
With all the information at the ready, the Article of Incorporation and Statement of Information should be filed to the corresponding government offices. LLC and Corporation each have different paperwork and the process requires several forms and reports to be filed along with several fees to be paid. Without prior experience or guidance, this can be quite a daunting task so consulting with One IBC®’s staff on how to start a small business in California beforehand is strongly advised.
The owner(s) has to apply for an Employer Identification Number (EIN) or an Individual Taxpayer Identification Number (ITIN) with the Internal Revenue Service (IRS). This is a crucial step to start a company in California because without it, a company cannot file their tax nor open a banking account. One IBC®’s service covers both applying for an EIN and for an ITIN.
Each city/county and industry has its own specific licence requirement. Strict banks may request for these during the application process. To know the required licenses, consult with One IBC®’s staff for professional guidance on which licenses and how to apply. The cost to obtain a Permit or License is on average a few hundred US dollars.
This process, in fact, takes much longer and requires more work to be done than any step. It may come as a surprise for many people but opening a Business Banking Account is harder than starting a company in California. Big banks usually ask for all the documents mentioned above plus some more papers. Furthermore, many banks also require the applicants to be present on site for a face to face interview.
After going through all the steps, the company is now ready to start the first contract. Non urgent extra tasks remaining are mostly internal such as drafting a bylaw, getting a lawyer or legal expert to assess the firm, etc.