Starting a new business is an exciting journey, but it comes with various legal requirements. Here’s a detailed checklist of the essential legal steps you need to take to get your business up and running in the Golden State.
Choose a Business Structure
Decide on the legal structure of your business. The structure you choose will affect your taxes, liability, and other aspects of your business. Common options include:
- Sole Proprietorship: This is the simplest form of business structure, where the business is owned and run by one person. There’s no distinction between the owner and the business, meaning personal assets are at risk if the business incurs debt.
- Partnership: This involves two or more people sharing ownership. There are several types of partnerships, including general partnerships, limited partnerships, and limited liability partnerships. Each has different levels of liability and management responsibilities.
- Corporation (C Corp or S Corp): Corporations are independent legal entities separate from their owners. They offer personal liability protection but are subject to more regulations and tax requirements. S Corps allow profits, and some losses, to be passed directly to owners’ personal income without being subject to corporate tax rates.
- Limited Liability Company (LLC): An LLC offers liability protection similar to a corporation but with fewer formalities. Profits and losses can be passed through to your personal income without facing corporate taxes.
Register Your Business Name
Your business name is crucial for branding and legal purposes:
- Fictitious Business Name (FBN): If you’re operating under a name different from your legal name (or your corporation/LLC’s legal name), you need to file a DBA (Doing Business As) with your county clerk’s office. This process involves submitting a form and paying a fee.
- Check Name Availability: Ensure your chosen business name is available by checking the California Secretary of State’s business name database. This prevents legal issues and ensures your brand is unique.
Obtain an Employer Identification Number (EIN)
An EIN is like a Social Security number for your business:
- EIN: This number is required if you plan to hire employees, open a business bank account, or file business taxes. You can apply for an EIN online through the IRS website. It’s free and you’ll get it immediately upon completion of the application.
Register with the California Secretary of State
Depending on your business structure, you may need to file formation documents with the California Secretary of State:
- Corporations: File Articles of Incorporation, which outline basic information about your business, including its name, purpose, and type of stock.
- LLCs: File Articles of Organization to officially form your LLC. This document includes your LLC’s name, address, and details about its management structure.
- Partnerships: File a Statement of Partnership Authority, if required, to establish your partnership’s legitimacy.
Obtain Necessary Permits and Licenses
You’ll need various permits and licenses to operate legally:
- Business License: Most cities and counties in California require a general business license. Check with your local city or county government office to determine the specific requirements.
- Special Permits: Depending on your industry, you might need additional permits (e.g., health permits for food businesses, zoning permits for physical locations). Contact relevant state or local agencies to find out which permits apply to your business.
Register for State Taxes
Ensure compliance with California tax regulations:
- Sales Tax Permit: If you sell tangible goods, you need to register with the California Department of Tax and Fee Administration (CDTFA) to collect sales tax.
- Employment Taxes: If you have employees, register with the Employment Development Department (EDD) for state payroll taxes. This includes withholding taxes, unemployment insurance, and disability insurance.
Comply with Employment Laws
If you plan to hire employees, you must comply with both federal and state employment laws:
- Employee Handbook: Develop an employee handbook that outlines company policies, procedures, and expectations. This helps ensure all employees are aware of their rights and responsibilities.
- Worker’s Compensation Insurance: California law requires businesses with employees to carry worker’s compensation insurance to cover medical expenses and lost wages for employees injured on the job.
- Employee Eligibility Verification: Complete Form I-9 for each employee to verify their eligibility to work in the United States. You also need to report new hires to the California New Employee Registry.
Create an Operating Agreement or Bylaws
Draft foundational documents to govern your business’s operations:
- Operating Agreement: For LLCs, an operating agreement outlines the management structure, roles, and responsibilities of members. While not required by law, it’s highly recommended to avoid disputes.
- Bylaws: For corporations, bylaws detail the rules and procedures for managing the company, including how meetings are conducted, how officers are elected, and how records are maintained.
Open a Business Bank Account
Separating your personal and business finances is crucial:
- Business Bank Account: Open a dedicated account for your business transactions. This helps with tax filing, financial management, and building business credit. You’ll need your EIN, business formation documents, and ownership agreements to open the account.
Get Business Insurance
Protect your business with appropriate insurance coverage:
- General Liability Insurance: Covers accidents, injuries, and claims of negligence. It’s essential for protecting your business from significant financial losses.
- Professional Liability Insurance: Also known as errors and omissions insurance, this covers legal costs if your business is sued for negligence or mistakes in professional services.
- Property Insurance: Protects your business’s physical assets, such as equipment and inventory, from damage or theft.
- Worker’s Compensation Insurance: Required if you have employees, it covers medical expenses and lost wages for employees injured on the job.
Conclusion: Plan, Prepare, and Protect
Starting a business in California involves several important legal steps. By carefully planning and ensuring compliance with these requirements, you can set your business up for success and avoid potential legal pitfalls. Don’t hesitate to consult with legal and financial professionals to ensure you’re fully prepared for this exciting venture.
Here’s to your successful business journey in California!
