Step By Step Guide to Starting a Business in California
If you want to start a business in California, you have to adhere to the many states, federal and local requirements. It may sound like a daunting task but it is not.
Listed below is a step-by-step guide to help you successfully start a business in this state.
Step 1: Choose a Business Idea
You cannot start a business without knowing what you are going to engage in. Before settling on an idea, it is important to check out the market trends, demands and supply of goods, startup costs, and other relevant information.
Additionally, when choosing a business idea, don’t dwell on the potential profit margins. Instead, look for an idea that is in line with your interest and passion. It is easier to run a business that you are not only interested in but also passionate about. You have a greater chance of success if you do this.
Step 2: Write a Business Plan
When starting a business, a business plan is important to help you get additional bank funding. However, this is not the only reason why business plans are essential.
A business plan will help provide answers to some very critical questions about your business. For instance, with a business plan, you will be able to make informed decisions about which products you are going to sell, what services you will give, and what marketing strategy you will use to boost sales.
You will also use a business plan as a compass to run your business. In the document, you will put down how you will run the business, what strategies to use, what to do in case of losses and how to price your goods and services.
A business plan will give you a cash flow prediction. This will enable you to determine just how much to invest, how to price your goods, how much to pay your employees, and how suitable your products are for that particular target market. Additionally, with a business plan, you can avoid the probable risks and mistakes that many business people make.
Step 3: Select a Business Entity
A business entity is a legal structure that enables you to conduct business. It is also referred to as an economic entity.
You may be wondering why you need a business entity. Here are a few reasons why you need a business entity.
- A business entity will determine the amount of taxes you pay
- With a business entity, you will be able to measure the performance of your business concerning cash flow and profitability
- It helps you assess easily assess the financial position of your specific business
Moving forward, there are four types of business entities.
Sometimes, this business entity is known as individual entrepreneurship or a sole trader. With this entity, you go into business as an individual. You also fully own the business. As a result, the identity of the business corresponds with you as the sole trader. There is no need for separate legal entities for the owner.
A sole proprietorship is very common among freelancers, small businesses, and also self-employed people. As is with every business, there is growth potential. What begins as a sole proprietorship may grow into a large organization with many employees.
There are some advantages of choosing a sole proprietorship for your business. These include:
- It is very easy and cheap to process
- It has fewer government regulations compared to other entities
- As an owner of a sole proprietorship, you are only taxed on your personal income.
When two or more business people come together, that business entity will be known as a general partnership. Like a sole proprietorship, a general partnership is easy and cheap to form.
At the start of the business, each partner is required to contribute something to the business. Additionally, periodically, the partners will be required to inject more funds into the business depending on how the business is performing.
A partner can contribute property, skills, human resources. It does not have to be a monetary contribution. Correspondingly, each partner shares the business profits according to how much contribution they made. Furthermore, the partners also share any losses and liabilities incurred in the business.
Advantages of general partnerships include:
- Business profits of a general partnership are not taxed. Partners file their tax returns and pay their income tax.
- Partners have a lot of control over the business and manage the business equally.
Unlike sole proprietorships and general partnerships, a corporation exists as a separate entity from the owner. The owners are known as shareholders.
A corporation is quite a complex entity. However, it is a safe business entity. The reason for this is because, in the event of a loss or any legal action, a corporation can stand on its own. The owners are protected from personal liability. A corporation can enter into litigation on its own without involving the owners.
To add to this, a corporation can conduct any legal transactions such as entering into agreements, borrowing and lending money, owning assets, hiring and firing employees. Interestingly, a corporation can also sue and be sued.
Advantages of corporations include:
- A corporation provides its owners with personal asset liability protection.
- Owners can easily access capital through publicly trading their stocks
Limited Liability Company (LLC)
If you combine a partnership and a corporation, you will get a limited liability company. That said, a Limited liability company is the most flexible business entity. It encompasses the simplicity of a sole proprietorship while retaining the liability status of a corporation.
The advantages of a limited liability company include:
- They are flexible. Since LLCs do not have their federal tax classification, they can choose a tax plan of a sole proprietorship or a general partnership.
Limited liability companies can have their disadvantages. One downside of these business entities is that as an owner of a liability company, you are required to pay self-employment taxes. Unfortunately, you will pay taxes twice since you are both the owner and the company’s employee.
The process of business entity formation may be long and complicated. It is even harder when you are forming a corporation or a Limited Liability company. Fortunately, there are entity formation services that aim to make this process less challenging. These services include ZenBusiness, IncFile, and IncAuthority.
These services are usually free during the first year. However, you will be required to pay periodic subscription fees after the first year.
Step 4: Register a Business Name
After settling on a business entity, you can now choose and register a business name. Note that every business entity has a different procedure for registering a business name.
Registering a business name in California for sole proprietorship and general partnerships, you will skip the filling process if you choose to do your business under your full official names. Nonetheless, if you choose a made-up name for your business, you will have to file a Trade name statement with the California secretary of state.
Registering a business name in California for a corporation or a Limited liability company with these entities, you have to choose a name when you form the business. The name you pick has to be unique and never used before. To ensure your name is unique, check with the California Secretary of State.
Registering your business name is not protection enough for your business. It would be best if you had legal measures put in place to protect your business name. The simplest way to do this is by using a trademark. If you choose to choose a fictitious name, remember to choose a simple name that depicts what your business is all about. Avoid hard-to-read names that may put off potential customers. Additionally, a name that is too obvious may not give your business the visibility it requires.
Step 5: Get an EIN
The next step after registering your business name is getting an Employer Identification Number (EIN). This number is also called a Federal Tax ID Number. Some people refer to it as a Federal Employer Identification Number. This number is used for tax identification and is issued by the Internal Revenue Service (IRS). The state requires every business that has employees of California to have this number.
In perspective, an EIN is the social security number of your business.
Your business needs this number because of the following reasons:
- You need an EIN to be able to file tax returns with the IRS
- If you have employees, your employees need an EIN to file their taxes. They will also need this number to set up payrolls.
- You can open a business bank account with an Employee identification number
- You can use an EIN to build and track your business credit
Step 6: Open a Business Bank Account
Whether you get into business as a sole proprietor or a corporation, it is wise to separate your finances from your business finances. Having a separate business account for your business will make it easier for you to run your business. It is also not a good image conducting huge business transactions via your account.
When you have a business account, you have the option of branding your checks and receipts with the business logo. This goes a long way in making your customers trust your business. It also helps with marketing.
When you open a business bank account, you will be required to produce certain documents. Here is a list of what will be required
- For sole proprietorships and partnerships, you will be required to bring your driver’s licenses, a trade name certificate, Employee Identification Numbers, and Social security numbers.
- For a corporation, all you need is a Certificate of Formation, Driver’s license of owners, by-laws and Certificates of Good Standing
- For a Limited liability Company, you will need a Certificate of Formation, A Certificate of Good Standing, an operating agreement, EINs, and a driver’s license.
Step 7: Apply for Business permits and Licenses
Depending on the type of business you open, you will need licenses and permits. Listed below are common registration licenses in California.
- Sales Tax License: this is also referred to as a sales tax permit. You need this permit if your business deals with selling goods and services.
- Zoning permits: You may need a zoning permit to access certain parts of California. Zoning regulations govern things such as the height of buildings, parking regulations, and placement of banners and signs.
- Business licenses: A general business permit is needed to operate a business in the state of California.
- Professional licensing: this is especially common with service providers. If you are a hairstylist, a make-up artist, a plumber or a masseuse, you will need to get a professional license.
Step 8: Financing
Finding capital to fund your business is not a walk in the park. The process is complex, with a load of rules and regulations governing money lenders.
To be safe, it is good to consult a financial advisor on the safest way to obtain funding. Some financial institutions charge exorbitant interests on loans.
A financial consultant will also explain to you terms such as equity, assets, collateral, and liabilities. Depending on the business entity that you have chosen, he will advise you on the best way to finance your business.
You can get money to jumpstart your business from the following sources:
- Personal savings
- Venture capitalists
- Bank loans
- Small Business Administration (SBA) Loans
Step 9: Hire Employees
If your business is big, you will need employees to help you with certain operations. Hiring employees can be a daunting task. As an employer, you have to register with several employment agencies.
You also need to adhere to the various labor rules and regulations.
As an employee, you are responsible for posting vacancies and interviewing prospective employees. You also must ensure that all tax-related issues regarding your employees are taken care of.
Step 10: Obtain Business Insurance
Your car is not the only thing that needs insurance. Your business does too. Businesses are unpredictable and risky. It would be best if you protect your business from potential risks.
Here are some reasons why you need business insurance cover:
- Insurance covers protect your business from loss incurred from unfortunate incidences such as fire outbreaks.
- Insurance covers protect your employees
- Having an insurance cover makes our business look reliable and enhances your credit
Step 11: Set up an Accounting System
An accounting system is essential even if your business is operating at a loss. As a business owner, you need a record of all financial transactions done in your business.
If you are not a numbers person, you can employ a certified public accountant to keep your books. Fortunately, there is various accounting software present in the market today. You can automate all accounting tasks in your business.
There are several advantages of having an accounting system for your business. Here are some benefits.
- An accounting system will save you time and money. Traditional bookkeeping is tedious and time-consuming. With an accounting system, all the transactions are automated, and you don’t have to do the recording by hand.
- An accounting system increases your financial visibility. Investors can closely follow and keep track of your company’s financial status
- An accounting system is virtually error-free. No matter how careful your accountant is, there will also be mistakes in your accounting details. Accounting systems minimize such errors.
- it is easier to manage your assets and inventory with an accounting system
An accounting system is flexible. You can monitor your business transactions from anywhere in the world without necessarily going to your business premises.