There’s a reason why folks move to California to launch their startups. While it’s not the most tax-friendly state, nor the cheapest to do business in by a long shot, opportunities for entrepreneurs in the state are second-to-none, and the potential for success is unparalleled.
In the 3rd quarter of 2019, California startups nabbed 57% of venture capital funding nationwide, a whopping $15.6 billion dollars. If you have ambition, a great idea, and a vision for how to make your business a success, there’s no better climate in the U.S. to make a go of it.
California is practically a nation of its own, with a GDP of $2.94 trillion that places it fifth in the world, ahead of the U.K. and France. All that money generated in the state economy means that there’s a lot of competition between entrepreneurs for funding and space in the marketplace: for every business that experiences terrific success, five others fail.
However, that doesn’t mean that you shouldn’t try. In this guide, we’ll walk you through each step of starting a business in California, giving you the leg-up you’ll need to stand out in the state’s bustling startup scene.
California small business statistics
- In the 3rd quarter of 2019, 548 California companies collected $15.6 billion in venture capital, good for 57% of the total VC funding in the nation.
- California’s GDP of $2.94 trillion would place it fifth in the world if it were a sovereign nation, putting it ahead of France, the U.K. and India, which all have populations that dwarf California’s.
- 3.9 million small businesses operate in California, comprising 99.8% of the state’s businesses.
- 7 million people are employed by small businesses in California, accounting for 48.8% of the state’s workforce.
- 1.6 million small businesses in California are owned by minorities.
- Firms with fewer than 100 employees account for the largest share of small business employment in the state.
- Accommodation and food services is the largest small business employer industry in the state, with over 1 million employees.
Sources: Los Angeles Daily News, U.S. Bureau of Labor Statistics, Small Business Administration
Starting a business in California in 12 steps
1. Develop an idea
Every successful business starts with a good idea. Ask yourself these questions:
Determine your personal strengths and interests: developing an idea that suits your personality and positive traits will provide motivation to put in the long hours necessary in addressing the myriad challenges you’ll face in getting your business off the ground.
Figure out how to market your expertise: if your business idea is not something you totally believe in and can sell effectively, it will be much harder to succeed.
- Which product or service can your business provide that doesn’t already exist on the market?
- How does your business idea refine an existing product or service?
2. Do the research
Once you have an idea, it’s time to put it through the wringer and decide if it’s viable in the market. Conduct market research to arrive at answers to these key questions:
Coming up with satisfactory answers may require refinement, or even a total overhaul, of your original idea. Be patient: you’ll only want to proceed with the next steps after determining that a niche exists in the California market for your business idea.
- Is there a demand for your product/service in California?
- Who is your target market?
- Do existing businesses in California offer a similar product/service?
- What makes your business unique compared to the competition?
3. Draft a business plan
Now it’s time to write the blueprint of your business. A great business plan should chart the path of your company from infancy to success while being able to attract investors to provide the financing.
Your business plan ought to include the following sections:
- Executive summary – An overview of your business and why it will be successful
- Description of business – Explain the advantages of your business and the problems it solves
- Market research – Provide research on your industry, target market, and potential competitors
- Organization and staff – Detail the nuts and bolts of your business; how it’s structured and who will run it
- Product or service description – State what you are selling or offering
- Marketing plan – Explain your strategy for attracting customers
- Fundraising – The money you’ll need in the next five years to grow your business and how you’ll spend it
- Financial forecast – Data and balance sheets providing a financial forecast for your business
- Appendix – An optional section with supporting and/or requested documents like resumes, letters of reference, permits, etc.
4. Secure funding
Every business needs money to get off the ground. In fact 82% of businesses that fail do so because of a lack of cash flow, U.S. Bank found in a recent study. Your business plan should include a detailed estimate of the funds you’ll need to cover expenses for at least a year, so now it’s time to acquire the money.
If you aren’t wealthy enough to self-fund your business, you can choose from a number of other funding options. These include a loan from the U.S. Small Business Administration, taking out a loan from a commercial bank, launching an equity crowdfunding campaign, or securing funding from an angel investor or venture capitalist group active in California.
An angel investor is a wealthy individual who invests their personal finances in a startup, typically in the beginning stages, whereas a VC is a group of investors that will fund a business throughout its existence.
Which route you choose depends on the specifics of your business: angel investors typically invest smaller sums to help get a startup off the ground, while VCs invest larger sums of money in exchange for a greater say in the operations of a business. Smaller startups usually opt to pursue funding from angel investors. You can’t throw a shoe in Northern California without hitting an investor as literally thousands of angels and VC’s operate in the state.
California Angel Investors and VCs
- Band of Angels – Silicon Valley’s oldest angel investment group, launched all the way back in 1994. In their long history, Band of Angels has funded over 400 companies. Each month, members meet to consider 3 startups to fund from the 50 or more screened in the selection process.
- Tech Coast Angels – A 400+ strong group of angels operating in Southern California that has invested over $220 million in 350+ companies that have gone on to secure an additional $1.6 billion in investment capital.
- Sacramento Angels – An angel group based in the state capital that invests an average of $1 million a year in early-stage businesses. So far, the group has invested $14 million in 90 companies.
Additional Investor Resources
- AngelList: California Angel Investors – A directory of over 6000 angel investors interested in funding early-stage companies in California. Listings will tell you about each investor’s career background, along with a sum of the total investments they’ve made and their areas of special interest.
- Angel Capital Association – A directory of over 20 VC’s and angel investment groups that are members of the ACA and active in California.
5. Decide on a legal business entity
The form of business entity you choose will affect many factors going forward. There are 3 main options to decide from:
Nowadays, LLCs are the option of choice for small business owners as they are easy to manage and provide the benefits of a corporation while lacking their complex structure. Taxwise, they operate more like a sole proprietorship.
You may want to consult with an attorney to help decide which entity works best for your business.
- Sole proprietorship – The name for running a business by yourself. Legally, you and your business are one and the same, with no separate legal entity for your business. A partnership is legally identical to a sole proprietorship, except that it comprises two or more people.
- Corporation – A complex legal structure that is a separate entity (providing legal protection to owners) from the owner and comprises directors, officers, and shareholders.
- LLC – AKA “Limited Liability Company”, this is a hybrid entity between a sole proprietorship and a corporation that possesses advantages of both. An LLCs provides the liability protection of a corporation, yet isn’t subject to double taxation as the profits go through your personal tax return.
6. Register your business
Now it’s time to make your business a reality. The first step in this process, no matter which type of business entity you are forming, is to check if your desired business name is available in the California Entity Name Search. Once you’ve determined that the name you’ve chosen is original (or have come up with a new one that is), it’s time to officially register your business. This process varies depending on whether you are forming a sole proprietorship, corporation, or LLC.
For sole proprietorships
Owners are not required to file any special documents, although the California Secretary of State recommends that you file a Fictitious Business Name Statement with the county where your business is located.
For LLCs and corporations
Forming an LLC in California requires you to file the Articles of Organization while forming a corporation necessitates the Articles of Incorporation. Either document can be filed online at the California Secretary of State website. The fee to file Articles of Organization is $70, and the Articles of Incorporation fee is $100.
According to federal law, filing either document requires a business to appoint a registered agent that will receive process notifications and other government paperwork on its behalf. Yes, you can be your own registered agent, as long as you have a California address, but it is generally recommended to hire a professional if it’s your first time forming a business entity. Employing the services of a registered agent typically costs between $100 and $300 a year.
7. Acquire federal and state tax IDs
Now you should obtain a Federal Employer Identification Number (EIN), which is like a social security number for a business and allows you to open bank accounts, handle payroll, and file taxes.
For sole proprietorships, an EIN is optional, although it is required for corporations and LLC’s. You can apply online for your EIN through the IRS website, or fill out and mail this form.
Each state has its own laws and taxes regarding businesses. In California, three forms of income taxes are paid by businesses: a franchise tax, corporate tax, and alternative minimum tax. Depending on the type of business, you can expect to pay at least one of the three taxes. Visit the California Department of Tax and Fee Administration website for information on which taxes are applicable to your business.
8. Open business banking and credit accounts
Opening a bank account for your business is crucial because it allows you to separate company assets from your personal assets, and makes filing taxes a lot easier. This is a recommended step, even if you are operating a sole proprietorship.
It’s also a wise idea to obtain a credit card for your business because it will help you isolate business expenses and build up credit for your company, which may help in securing investment in later stages.
Local business banks and credit unions operating in California
9. Get the necessary licenses and permits
Depending on the type of business you are opening, you may need to apply for a number of permits and licenses to operate legally. For example, a restaurant will need a liquor license, and a pawn shop will need a reseller’s license. The paperwork may prove a hassle, but it’s a necessary ordeal that will protect you from fines, lawsuits, and other legal hazards.
Due to the state’s size and highly variable local laws regarding business licenses and permits, it can be hard to figure out which ones you’ll need. Luckily, CalGold is a convenient search tool where you write in your business type and the city or county you are based in, and the site delivers a list of the permits and licenses necessary for your business’s operation.
10. Choose a location
Whether you are running an online business or opening a restaurant, location is everything. Be aware of the demographics of the neighborhood or town that you are considering: Are the local residents likely to visit your business? Will nearby competitors take a share of your potential profits?
No matter which area of California you decide to do business in, you can expect a high cost of living and high tax rates, particularly in Silicon Valley, which has the highest housing costs in the United States. The high visibility and potential success afforded by the state certainly comes at a price.
However, there are some up-and-coming communities in California that are more affordable than others: check this article by MarketWatch for more info.
11. Get insured
No matter what type of business you form, buying insurance coverage to protect yourself in the case of property damage or legal action is a good idea. In fact, businesses with employees are required by the federal government to have two types of insurance, while others are strongly encouraged or required at the state level, depending on your business type. Consult with a licensed insurance agent to find out which types of insurance you should get.
Required forms of insurance:
- Workers’ compensation: Covers medical costs and disability benefits if an employee is injured or becomes ill on the job.
- Unemployment insurance: Provides benefits to workers after a loss of job through no personal fault.
Recommended forms of insurance:
- Professional liability insurance: Covers losses as a result of property damage, medical expenses, libel, slander, and negligence claims.
- Commercial property insurance: Covers property damage to business owned properties and possessions as a result of fire, theft, or storm.
- Disability insurance: Provides short-term benefits for employees suffering an illness or injury. Required in certain states such as California, New York, and Hawaii.
12. Develop an internet presence
Establishing an identity on the web is an important investment in a business’s future development. Here are some key steps in the process:
- Register a domain name for a company website (You can use domain.com, Bluehost, GoDaddy.com, Namecheap.com). Design the website and fill it with content.
- Create profiles on the popular social media services (Twitter, Facebook, Instagram)
- Register a Google profile for your business
- Create accounts on review sites such as Yelp, Google Reviews, and TripAdvisor
California small business resources