Starting a California Business: What You Need to Know

Many laws and regulations that govern California businesses do not transcend into other states. For this reason, the California business climate can be one of the most difficult locations to establish a business. Whether you are just starting out, or expanding a business, the list below provides steps one should consider prior to starting a California business:

1. Plan your Business. Preparing an effective business plan is critical to the success of your business. As a business owner or employer, it’s important to thoroughly analyze your market, industry trends, the sales volume necessary to meet business objectives, as well as consider the competition you will face within the industry.

2. Select an Appropriate Location. Business location can greatly determine the success or failure of your business. Take into consideration the pros and cons of various locations, as well as zoning law compliance in the areas of question.

3. Choose an Optimal Business Structure. Choosing the correct business structure for your business is very important, and largely determines how your business income will be taxed. Consider consulting legal counsel or a tax advisor, as selection of such often requires professional expertise. Business types within the state of California include: Corporation, Limited Liability Company, Limited Partnership, General Partnership, Limited Liability Partnership, and Sole Proprietorship.

4. Select a Business Name. An entity operating a for-profit business under a name other than the business owner’s / employer’s legal name must file a Fictitious Name Statement within the county where the business is located. Certain business types including LLC’s, LLP’s, limited partnerships, and corporations as not required to do so, as the name selection is assumed once the entity registers with the state of California.

5. Obtain Employer Identification Documents. Most businesses are required to obtain an Employer Identification Number (EIN) from the U.S. Internal Revenue Service. This documentation, otherwise known as a federal tax identification number, is used to identify a business entity.

6. Tax Preparation & Filing. California businesses are often required to obtain multiple tax identification numbers. The list below summarizes potential tax requirements, dependent on business type and industry.

• State & Federal Income Tax: All businesses, with the exception of partnerships, must file annual tax returns. Business entities are required to pay taxes throughout the course of the year as income is earned.
• Self-Employment Tax: Any sole proprietor, partnership, or limited liability company (structured as a partnership) that nets more than $400 or more during a year is required to pay Self-Employment (SE) Tax. SE tax contributes to Social Security and Medicare programs within the Federal Social Security tax system, and is a required tax for all individuals who work for themselves.
• Employment Taxes: As an employer, you are responsible for taxes on items including federal income tax withholding, federal unemployment tax, and Social Security and Medicare taxes.
• Sales and Use Tax: Obtaining a seller’s permit is required for retail industry businesses. After the permit has been obtained, businesses are required to pay sales and use tax on a monthly, quarterly, or yearly basis.
• Special Tax: The Board of Equalization (BOE) administers additional taxes upon sales and use tax. These taxes pertain to specific products or industries and may include excise taxes, fuel taxes, or environmental fees. To determine if your business is required to pay for special taxes, visit the BOE website at www.boe.ca.gov.
• Property Tax: With the exception of government property, as deemed by the California Constitution: All California business owners are required to pay property as assessed based on county location.

7. Obtain Mandatory Permits or Licenses. Most California businesses require a business license or permit in order to operate legally. Once the type of business has been determined, it’s necessary to research permit and license obligations for your business. Failure to do so could result in fines, and ultimately put your business at risk.

8. Insurance for Commercial Businesses: Although insurance is not required by state law, it’s a wise investment to consider for protection against unforeseen circumstances. Types of insurance for businesses include General Liability, Product Liability, Professional Liability, Commercial Property, and Home-based business insurance. A wide variety of options exist, so it’s important to weight the pros and cons of each, and consult with an insurance broker to determine your individual insurance needs.

9. Insurance Requirements for Employers:

• Unemployment Insurance Tax Requirements: Employers are required to pay Unemployment Insurance Taxes (UI). UI is a federal program mandated by the U.S. Department of Labor that provides temporary payments for those who become unemployed through no fault of their own. Rate schedules and amounts of taxable wages are determined annually, and employers are notified of new tax rates every December.
• Disability Insurance: Business owners who operate in California, New York, New Jersey, Hawaii, Rhode Island, or Puerto Rico are required to carry disability insurance. Disability insurance provides payment to workers unable to work due to a non-work related disability, such injury, illness, pregnancy, and so forth. The Disability Insurance Branch of California Employment Development Department (EDD) provides three insurance plans for the needs of California businesses.
• Workers’ Compensation Requirements: California law requires business owners to carry workers’ compensation insurance, regardless of whether you have employee and independent contractor workers. Make certain to research carriers, and purchase coverage from an agent authorized to write California insurance policies. If you are unable to locate a suitable coverage provider, contact the State Compensation Insurance Fund (State Fund) with your insurance coverage needs.

10. Purchase Workplace Compliance Posters. Federal and state laws require employers to post official labor and employment posters outlining rules and regulations in workplace common areas. The LaborLawCenter satisfies this requirement by offering a suite of California products for your business compliance needs. For businesses interested in maintaining worry-free compliance in 1, 2, or 3-year increments, consider The Compliance Protection Plan™, only available from the LaborLawCenter.

With the complex laws and regulations that govern the state, Californians face a myriad of important decisions when establishing a new business. It’s important to do your research, and consult expertise as necessary to fully understand how governing laws and regulations will ultimately affect your new business. As you maneuver through the complexities of starting your business, turn to The LaborLawCenter as your partner in compliance. We provide a go-to resource for all of your California business compliance needs.

The article within is meant for informational purposes, and is not designed to be an inclusive list of requirements for all business types and industries. To determine how specific law or tax codes affect your business, consult the appropriate legal or tax counsel.