From the innovative tech companies of Silicon Valley to the glamorous Hollywood Hills, California is the world’s 5th largest economy and perhaps America’s most profitable state. If you want to start a business here, there is room for you. And don’t imagine that only huge corporations can survive. According to the Federal Government’s data, there are also over 3.9 million small businesses in California, which employ almost half of the private workforce. And although the Golden State economy may get its fame from tech startups and movie studios, it’s a good place to start other businesses, too.
But is California the best state for starting and running a business?
Well, not always. While it’s true that you can find success here, California’s business environment has ups and downs, so it’s important to know what awaits you down the line in terms of taxes, maintenance, and paperwork.
What Paperwork Do You Need To Start a Business in California?
The paperwork you need to start a business in the Golden State depends on the type of business structure: Limited Liability Company (LLC), Corporation, or Nonprofit.
To form an LLC, you will need to fill in the following forms:
- Form LLC-1: Articles of Organization, which officially forms your LLC with the state
- Form LLC-12: Statement of Information (Initial report)
- Operating Agreement
- IRS Form SS-4 to obtain an employer identification number (EIN)
- Form 2553, if you desire to be taxed as an S-Corp
To form a for-profit corporation, you will need to fill in the following forms:
- Form ARTS-GS: Articles of Incorporation, which officially incorporates your business
- Form SI-200: Statement of Information
- Bylaws
- IRS Form SS-4 to obtain an EIN
- Form 2553, if you desire to be taxed as an S-Corp
To form a nonprofit corporation, you will need to fill in the following forms:
- Articles of Incorporation, which vary depending on the type of nonprofit (such as mutual benefit, public benefit, or religious)
- Form SI-100: Statement of Information
- Bylaws
- IRS Form SS-4 to obtain an EIN
- IRS Form 1023: 501(c) Tax Exempt Application
- Form FTB-3500: Exemption Application or Form FTB-3500a: Submission of Exemption Request
- Form CT-1 Charitable Registration Form to register to fundraise in California
Regardless of the type of business structure, you will be required to appoint a California registered agent. The registered agent must be available during all regular business hours to receive service of process and other legal documents on behalf of your business or nonprofit.
Depending on your business, you may need to open additional tax accounts with the State of California Employment Development Department and the California State Board of Equalization. You may also need to obtain licenses to operate, potentially at the state or local level. Finally, if you choose to register a California fictitious business name (FBN), be aware that they are generally registered with each county, and that some counties also require you to publish a notice of the name in the newspaper. There is no single list for all companies, so this is where you will have to do the most research before deciding to start a new business.
Costs of California Business Formation
The initial costs of business formation in California depend on your chosen business structure. For example, to start an LLC in California, you’ll only need $70 for the formation and $20 for the initial report, while for a corporation, you’ll have to pay $100 for incorporation and $25 for the initial report. A nonprofit costs only $20 to incorporate and $20 for the initial report, but you’ll need to pay additional IRS fees to apply for 501(c) exemption.
How Long Does It Take To Start a Business in California?
This is where things will become a bit tedious. So, while you may be excited for your new business to take off, you’ll also need to arm yourself with a lot of patience. The California Secretary of State has many requests to process, and it doesn’t exactly move fast either. Unless you are willing to pay extra for preclearance and expedite services, approval may take up to 10 business days during peak filing season. Additional registrations with the State of California Franchise Tax Board, the Employment Development Department, and the Board of Equalization can add a few more weeks to the formation process.
Starting a Business in California: Pros & Cons
California’s economic landscape favors innovation, and this state is home to many inspirational success stories. Nevertheless, it has its challenges, and it is important to be informed and know what to expect.
Pros
- Stable economic growth. California has one of the strongest economies in the US, with GDP growing by 5.3% between 2018 and 2019.
- Large talent pool. California has one of the lowest unemployment rates, and people are constantly looking for jobs here, so your ads won’t be active for long. What’s more, in industries such as tech, skilled candidates are very easy to find.
- Diverse business environment. Between Hollywood, the entertainment capital of the world, and San Francisco, the center of gravity of the tech industry, there are dozens of other industries that keep the economy running.
- California attracts millions of tourists, which is a plus for entertainment and hospitality businesses.
- Fantastic networking opportunities, which are critical for entrepreneurs and business owners throughout their careers.
- Great infrastructure. A good chunk of the public budget goes to enhancing the roads and the transportation network, which is a good thing if your business will involve a lot of traveling/employee commuting.
Cons
- Higher taxes compared to other states. California is notoriously expensive, and we’re not just talking about the high cost of living in general. Local businesses also have to pay a lot in taxes: at least $800 per year to the California Franchise Tax Board. For some small businesses, taxes are prohibitive enough to drive them out of the state (California’s tax climate is the worst in the US, after New Jersey).
- Competitive labor market. It’s easy to find skilled workers in California, but keeping them is a whole different story. Because of the sheer number of employers, your workers will constantly receive good offers from competitors, so you’ll need to boost their loyalty by offering them various perks and benefits.
- Dynamic regulatory landscape. California is one of the fastest states in making policy changes, which means that business owners have to be on their toes constantly.
The good news is that all these downsides can be managed if you choose the right type of business structure, so leave some time for market research. Each business type and each industry have its own particularities, and there are no one-size-fits-all solutions.
Harbor Compliance does not provide tax, financial, or legal advice. The use of our services does not create an attorney-client relationship. Harbor Compliance is not acting as your attorney and does not review the information you provide to us for legal accuracy or sufficiency.
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