Are you ready to launch your own business in California?
You're in for an exciting journey.
As of 2018, small businesses in California employ 48.8% of the employees in the state. As a business owner, you will be contributing to this thriving local economy.
To ensure that you get started on the right track, we've put together this list of the most important elements you will want to pay attention to during your first year as a business owner.
Create a Feasibility Study & Business Plan
First, it is crucial to ensure that your business is equipped for success before you jump into action. A feasibility study will help you determine whether your company has the potential to succeed in the current market. With a feasibility study, you ask yourself questions around who will buy your product and why to determine your ability to be financially successful.
Once you have completed your feasibility study, you can start working on the rest of your business plan. A plan can be as long or short as you need it to be. Therefore, these guidelines not only drive your business in the right direction; they also show any potential investors and banks that you've thought your venture through carefully. Your business plan may include:
- A description of the entity
- An operational plan
- Your market analysis
- Sales and marketing plans
- Product and service overview
- Financial projections
Choose Your Business Entity
Now it's time to choose your business entity. It's often a good idea to speak to a trusted CPA, tax advisor, or other accounting professional at this point. They can help you understand the legal and financial implications that come with each entity option. Your options include:
- Sole Proprietorship: The primary choice for many solo entrepreneurs. If you don't file to establish a formal entity with your business, you operate as a sole proprietorship.
- General Partnership (GP): A general partnership in California has two or more owners that share all the financial and legal obligations for the company.
- Domestic Limited Liability Company (LLC): A LLC protects the owners from financial and legal obligations.
- Corporations: These are legal entities that exist separate from their owners. The separation of a corporation offers personal liability protection to the business owner.
Pick a Name & Register Your Business
Choosing your company's name is a crucial part of building a brand for your enterprise. Finding the ideal name is challenging for a number of reasons. Not only do you want to choose a name that speaks to your audience, but you'll also need to check that the name you select hasn’t already been taken by another business.
When you're forming a business entity like a corporation or LLC, the business name will automatically be registered, but you may still need to purchase a copyright for that title to fully protect it from being used by another entity. During this time, it's also crucial to register your business.
For instance, to form an LLC in California you'll need to file a Form LLC-1 with the Secretary of State, and organize your LLC by holding an organizational meeting. If you want to incorporate in California, you'll need to file form ARTS-GS with the secretary of state, and hold another corporate meeting to determine how much of the company each shareholder should own. You can elect S-Corporation status through the IRS using Form 2553. Your CPA will be able to help you identify which forms to submit, and ensure that you fill them out correctly.
Get Your EIN and Business Bank Account
Now you're ready to get your Employer Identification Number (EIN). This is like a social security number to identify your company. All corporations and LLCs require an EIN, but it's optional if you’ve chosen to register as a DBA (Doing Business As) name. If you don't have an EIN as a DBA, then you'll need to use your social security number on official documents.
Aside from your EIN, it’s also important to set up your business bank account at this time. To keep your personal and company expenses separate, you'll need a business account dedicated to your company. A business bank account is also an excellent way to build a credit profile for your organization using the credit cards available to your company.
Obtain Permits and Establish Tax Accounts
Finally, most companies in California will require some county, state, or federal business license, as well as tax registration. It’s best to consult with your CPA or another trusted adviser about the permissions you may need. For instance, you might want:
- A general business license: An annual permit to operate legally in your area.
- Professional license: Some professionals, like contractors and accountants, require this license.
- Seller’s permit: Required for those selling taxable goods or services.
- Use tax account: A use tax account for those without seller’s permits and certificates of registration.
- Home occupation permit: Required for home-based businesses.
Understand Your Legal Responsibilities Before You Hire Anyone
You may be a one-person business at the moment, but if you plan to hire any workers in the future, it’s crucial that you understand your obligations and requirements under the California Employment Development Department (EDD).
The EDD defines rules for classifying your workers — as either employees or independent contractors — and governs the tax responsibilities that come with each classification. If the EDD finds that you’ve misclassified your workers, even by mistake, you can be subject to hefty fines. Before you begin hiring, take the time to understand the differences between employees and independent contractors, and how to identify which type your workers fall into. When you’re ready to make your first hire, you may want to consult with a CPA or tax attorney to ensure you’re filing your new worker correctly.
Find Your Network of Trusted Professionals
A CPA is one of the first professionals you’ll want to seek out as a new business owner, but there are other experts that are essential to have in your network as you continue to grow your business. Throughout your first year, seek out and build relationships with knowledgeable and trusted professionals in key areas of expertise — some of them may be able to help you right away, while others may become valuable relationships if you come across a business challenge in the future.
For instance, it’s wise to have a trusted tax attorney on hand should any legal tax matters arise. A tax attorney specializes in tax law, and can offer guidance and legal representation in the event of an IRS audit, California EDD audit, tax investigation, or other legal tax matter. At Milikowsky Tax Law, we have decades of experience helping California-based small business owners navigate the ins and outs of their taxes. As former business owners ourselves, we are dedicated to protecting you and your business. We’ve supported clients in reducing their risks of being audited by IRS or EDD, navigating employee misclassification audits, handling back taxes, and more.
Call our expert team if you have any questions about California tax law and how it applies to your business, or if you need assistance navigating a tax law matter.
Check out our other helpful guides for business owners:
- Mid-Year Review with Your Bookkeeper and CPA
- 4 Year End Questions to Ask Your CPA
- What To Do If You Couldn’t Pay Your Business Tax On Time
The information contained on our website and in blogs is provided for information purposes only and does not constitute legal advice.