Playing softly at the background, as am putting my resources together, to write this practical guide on how to start a Business in California, is the classic ever -green song by Tupac “California Love” and the line that will never fail to get to me is, “Now let me welcome everybody to the wild, wild west; A state that’s untouchable like Elliot Ness.
Many things has changed from the first day the song was released and now, but our focus on this write up, is not about what has changed, but rather on how you can use what has changed and is still changing to educate and enlighten you on how you can start a business in California.
According to available data, California is home to more than 4 million small businesses, which employ 7.1 million people across the state. Small businesses make up 99.8% of all businesses within the state and employ 48.8% of the state’s workforce, making them a vital part of the Golden State economy.
The economy of the State of California is the largest in the United States, boasting a $3.2 trillion gross state product (GSP) as of 2019. California’s gross domestic product (GDP) grew at a rate of 3.5% through the third quarter of 2018, which outpaced the U.S. economy’s national growth rate of 3.4%. In 2019, the real GDP of California grew by about 5.3 percent compared to 2018
So trying to start a business in California, without knowing how to go about it in a state that is known for experimenting with new regulations always, can be to say the least, very daunting and frustrating.
We will therefore with the below steps, detail and highlight every process it will take for you to start a business in California, and if you have the right idea and resources, you will in no time, have your slice of the American pie.
- REGISTER YOUR BUSINESS
We will assume that you already have your business idea, but before you embark on the journey of transforming your idea to reality, it is very important to take the key step of getting your business registered. The legal structure of the business you choose will have a great impact on your operations, as each business legal structure has its own pros and cons.
There are basically four business legal structures you can choose from, which are Sole Proprietorship, Limited Liability Partnership, Limited Liability Company and Corporation. There may be schools of thoughts that advocates that there are no best type of business entity, but whatever business legal structure you want to register, will depend on the type of company you are starting and how you want to be taxed, and how much of a risk you will be exposed to, if your company gets sued in the future for instance.
It is always good to seek legal counsel when you want to register a business, so you can be advised, based on your business idea, on the best legal structure that will be best fitted for your business.
Registering your business requires that you choose a name that is not already registered as a business, all you have do is to simply contact the office of the California secretary of State and do a quick name search, so as to ascertain if the name is available, before proceeding with the registration process and it is always advised that you don’t choose a name that will be misleading to the public.
A key point to note while searching for your name availability is that your new business name will be checked against the type of business structure you are trying to register. For instance, if you want to register a Limited Liability Company, your name will be checked against already registered Limited Liability Companies.
As part of the registration process, you can either mail a name availability inquiry letter to California secretary of state or you can set up a prepay account for telephone services for your name availability search. The mail in inquiry process is free, but if you are to use the prepay account, it requires a deposit of $100 and you will then be charged $4 each time you check for name availability.
When you search for a name and it is available, you can reserve it for 60 days before registration, by filling out a reservation form, which costs $10, you can either mail back the reservation form with additional $10 handling fee or if you are using the prepay account, $10 handling fee will also be deducted from your account.
- REGISTER FOR TAXES
Every business is expected to pay taxes, so starting a business in California, entails you must be willing to pay taxes. The easy way to go about it is to register with the tax agencies of both the state and federal government. You can contact the tax agencies to find out the types of taxes you are required to pay. Depending on the type of business you are starting, there are agencies like the Franchise Tax Board, the California Tax Service Center, and the California Department of Tax and Fee Administration, which you can use to find out the type of tax your business is required to pay.
In addition to the various California State taxes you as an individual and your business have to pay, there are also federal taxes to be paid to the IRS, as well.
- OBTAIN ALL REQUIRED LICENSES/PERMITS/INSURANCE
There are different operational guidelines and requirements for all types of businesses, so depending on your type of business, you may be required to apply and obtain certain permits and licenses for your business. You can reach out to the chamber of commerce or any trade associations to find out about all required permits and licenses you will need for your type of business. You can also check out the CALGOLD website https://calgold.ca.gov or the California Business portal website https://businessportal.ca.gov/registration-permits/permits-licenses-and-certifications/ for a better understanding of all the permits and licenses you will need.
As a guide, we have listed the types of licenses and permits you will need to save you the trouble.
Tax Registration. If you will be selling goods in California, you must register with the Board of Equalisation (BOE) to obtain a seller’s permit. You can register online at the BOE website. If your business will have employees, you must register with the California Employment Development Department (EDD) for employer withholding taxes.
Employer Identification Number. If your business will hire staff, you must obtain a federal Employer Identification Number (EIN) from the IRS. You may start a business that does not need to hire staff from the beginning, but you will still need the EIN, as it will be needed to open your business bank account. You can get an EIN by completing an online application on the IRS website. There is no filing fee.
General Business License. Every California business must obtain a general business license from the city where the business is located. In the case of unincorporated sections of the state, the license is issued by the county where the business is located.
Regulatory licenses and permits. These cover areas such as health and safety, the environment, building and construction; and specific industries or services. Regulatory licenses and permits are issued by state agencies.
Insurance: A non-negotiable with regards to requirement of starting a business in California is your insurance cover. It is mandatory that you get an insurance cover for your business. The insurance needs of different types of businesses varies, so it is important that you contact an insurance broker to advise you on the types of insurance policies that your business needs.
- WRITE YOUR BUSINESS PLAN
Trying to start a business without writing a business plan is like having a very beautiful car and not putting petrol or recharging it, if it is an electric car. In other words, writing a business plan is very instrumental to the success of your business, as it serves as the compass and torch-light, helping you to navigate the dark corners of the business world.
A business plan basically captures and highlights what your business is all about, your legal structure, marketing plan, product/service of your business, your team, and your financial projections, amongst others.
The business plan though in most cases will be for your own consumption, but you need it to pitch your business idea to investors, bankers, partners, if your business will be needing external funding.
Your business plan should at least on the minimum answer these questions:
- What is your business strategy? What is your market? Your industry? Your niche?
- How will you find customers/clients/deals?
- How will you raise the money for the business?
- How much will you charge for your product/service?
- What will your start-up costs be?
- What will your ongoing expenses be?
A good and detailed business plan will therefore contain your strategy on how the business will grow over specified time, a marketing plan on how to attract future investors/customers and the executive summary of the business plan, which will capture the whole essence of your business.
But generally speaking, almost all business plans have the following elements:
- Cover or Title Page
- Plan Summary
- Operating or Management Plan
- Market Analysis
- Marketing Plan
- Human Resource Management
- Financial Data
- Owner(s)’ Experience and Expertise
- OPEN A BUSINESS BANK ACCOUNT
If you want to run a professional business, it is expected that you open a business bank account and not just use your personal bank account as your business account. Having a business bank account, aside the fact that it will help you avoid issues when it comes to filling your tax returns, having a business bank account will enable to apply for a business credit card, which can serve as a form of funding for your business.
So you can contact your local bank to find out about the different types of business accounts and choose the one that is best fitted for your business. More so, when applying for a business credit card, it is very important that you apply for one with 0% introductory APR, and also ensure that you pay off the credit card, before the expiration of the introductory APR.
So whether your interest is startup business loan, equipment financing, or a business line of credit, having a business bank account will help you build the credit score that will help you access the type of loan you will need in the future.
- SOURCE FOR FUNDS
The process of raising funds for a new business is a very tough one, particularly if the business idea is not one of those “out of this world” business ideas that will have investors falling heels over heel to be the first to buy into it. However, there are many possibilities of sourcing for funds for a new business, which however depends on the type of the business and also if the business owner have the need for raising funds.
The type and size of your business will determine how much funding you will need, as not all businesses requires the same amount of funding and equipment to start and run. So we will be looking at the various channels through which you can raise funds for your small business, as the amount you will require will be dependent on the type of business, size, and the daily operational costs of the business.
Types of funding you can use to start your small business are as follows:
- Personal savings
Some of the world’s most successful companies in most cases are self -funded at the beginning. If you don’t have a pile of cash stashed out somewhere and depending on how big your operations are or will be, chances are that you may require more funds externally.
- Friends & family
You may likely be in a position to receive some form of funding from friends and family. It is however advised that you only seek for an amount they will be willing to lose and also document everything with regards to the loan, so you don’t lose trust if the business does not go as planned.
- Business grants
Business grants are the sweetest form of money for your small business, as grants are basically free money, which you don’t have to pay back. However, the grant application requirements are very strict and not all types of businesses are eligible for grants. So do a simple search online or check with the small business association in the state to find out the various grants opportunities and the ones you qualify for. It is also advised that you seek for professional grant writers to help you write the application if you know you cannot meet up with the grant application requirements.
- Business competitions
Depending on your type of business, there are business competitions that takes place from time to time. Find out about any of them and register, who knows, you might just be able to win some money for your small business.
- Angel investors
An angel investor will be willing to invest into your business to own a percentage of it, if your type of business meets his investment interests. So give it a try.
- Venture capital
Venture capitalists are professional investors who invest significant sums of money into many companies with the aim of making a return on their overall portfolio.
There are many crowdfunding platforms where you can get a large number of people to invest in your business. You can achieve this by either offering equity or product, it all depends on your type of business and what works best for you and the crowdfunding platform.
- Business Loans
You can approach your local bank or other lending organisations and apply for a loan for your small business. Bank loans however requires collateral and the approval for the loan will be subject to the type of business, your credit history and every other criteria set up by the bank.
- Business credit cards
You may be qualified for a business credit card and use it to finance your business. It is very important to find out the terms and conditions of the credit card before applying and accepting it.
– Equipment loan
You may be able to access equipment loan for your business depending on the type of business. The good thing about equipment loan is that the equipment will serve as collateral for the loan, so depending on the type of your business, you may likely qualify to get one. So give it a try.
CHALLENGES OF STARTING A BUSINESS IN CALIFORNIA
Starting a business anywhere has its challenges, but the challenges in starting a business in California are very peculiar, and it takes a great deal of passion and determination to succeed as a business owner in the midst of the overwhelming challenges. We have therefore listed the possible challenges you will face, so as to give you a head start in figuring out how to overcome or walk your way through the challenges.
- Complex regulations
California is known for experimenting with new regulations always. The state’s willingness to rely on new regulatory measures makes compliance very tough, which can be a challenge for your businesses.
- High taxes
California is generally known as a state with relatively high taxes, as taxers are clearly higher in California compared to other states.
- Cost of living
California is a wealthy state, so the cost of goods, services and wages are higher than in many other states.
- Competitive labour market
California’s economy is doing well, and unemployment is low (4.3% as of March 2019), making the labour market highly competitive.
Coming up with a good business idea may be the easy part compared to the steps it takes to actually start a business in California. And the work doesn’t stop once your business is registered and you have your permits and licenses.
There is going to be much more you will do, even after following through with the above steps, after all, these are just the steps to take to start a business in California, making the business to succeed or fail will depend on many factors, some of which you may not have direct control over.
There will still be continuous and ongoing tasks such as marketing, hiring and firing employees, looking for or changing location, if you are operating a physical store that will require a balancing mix at all times.
We are very hopefully that the steps detailed in this practical guide, will help to get your business up and running, but how successful or otherwise the business becomes is dependent on you and other external forces.
Are you willing to follow this guide and start your own business? Are you bold enough to take that all important decision? Do you want to push it to yet another yet? The ball is in your court. Take the action now.
What are your thoughts with regards to this guide and is there any business idea you want us to write about? Let us know in the comment section.