How Do You Start a Business, and What Are the Legal Requirements?

Starting a business in California requires careful planning, legal compliance, and financial preparation. From selecting a business structure to obtaining permits, tax registration, and funding, each step is crucial for long-term success.

By Brad Nakase, Attorney

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Table of Contents

1. How to start a business in California

2. What you need to do legally to start a business

3. Is it a good idea to hire a business lawyer?

How to start a business in California

The ability to think critically, confidently, and, yes, even a little bit fearlessly is essential when starting a business. You might be wondering how you can launch your company without any capital at all. What tools are necessary? Am I receiving the most sound advice?

From coming up with a good concept for a business to building a solid strategy, forming a legal entity, establishing a bank account, and selecting accounting software, these are the fundamentals of starting a business.

Identify the perfect opportunity

Do you have any ideas for a business? The amount of time and money you can devote, as well as your level of experience, are the determining factors. A growing number of people are turning to e-commerce and remote work as a means to start their own small companies, especially in the aftermath of the COVID-19 outbreak.

Draft a company strategy

You can get ready for anything that comes up with an effective business plan. In addition, you should have one on hand to show prospective lenders and investors. Include everything from the goods or services you want to provide to the people you’ll need to staff your business to the specifics of your revenue model in this document.

Budgets, comprehensive plans for spending investor or loan funds, and accurate financial predictions are all essential. Consider the plan’s financials as an evolving document, as cash flow estimates will change as you modify anticipated revenue and expenditures.

There will be many revisions to your business plan before your concept becomes a reality, but in the end, it will help you plot a route for your company, predict any obstacles, and figure out how to conquer them. Professionals in the field, such as accountants and peers, are often in a prime position to critique your estimates for realism and identify any hidden expenses.

Decide on a company structure

Your tax liability and other personal obligations may change depending on the way your company is structured legally. A sole proprietorship and its owner are considered to be one and the same entity for legal purposes. One advantage of limited liability companies (LLCs) is the additional security for owners’ personal assets that comes from the fact that the law treats them as separate entities.

To get advice on the best business structure for your needs, consult a tax expert. As your firm expands, you have the flexibility to adjust its structure.

Obtain a federal tax identification number

In order to do things like create bank accounts, file taxes, and so on, most companies need to have an employment identification number (EIN). Obtaining an EIN has advantages even if your business does not employ anyone. The application process is quick and easy, and it won’t cost you a dime.

Get the necessary permissions and licenses

Restaurants are often required to get liquor licenses and undergo health inspections. Cosmetology licenses are required for hairstylists. It doesn’t matter what industry you’re in; certain cities demand company licenses. Additionally, you might have to approach the local authorities about requesting a zoning change if you intend to renovate the facility to sell things or provide services.

Make sure you allocate time early on to gather all the necessary licenses and permits before you open your doors. Applying for a business license is usually not something that requires legal representation, but a lawyer will help you understand the process and go over important paperwork like leases and loans prior to signing them. You might also seek guidance from local business groups such as the Chamber of Commerce, as well as from industry associations and city leaders involved in economic development.

Create a bank account for your company

An important part of managing your company’s finances is keeping them separate from your personal accounts. This is good bookkeeping practice that will help you save money when you file your taxes. It usually doesn’t cost anything to open a business bank account.

Get to know the resources available to you for funding your company

A little initial investment is required by the majority of enterprises. While certain online lenders may be willing to provide you a loan if your company has been around for a year or more, the vast majority of lenders will not touch a company that has been there for less than six months.

When looking for funding, new businesses can think about alternate solutions or seek ways to capitalize on other qualities of their company, such as having a great credit history or having collateral. Always review the loan details, including interest rates, prepayment penalties, and personal liability insurance, before committing to a loan for your company.

To launch their businesses, many people use their personal funds. Many more options exist, such as personal loans, company grants, crowdsourcing, and more. Additionally, investors may be able to get a stake in a high-growth business in exchange for a portion of the company’s stock through equity financing.

Get a credit card for your business

Using a business credit card might be a convenient way to pay invoices and buy supplies when your cash flow is uncertain. Avoid falling into a debt trap by sticking to your spending limit and paying off your bill in full every month. In addition to helping with startup funding, business credit cards facilitate the separation of personal and company funds. On top of that, you may get benefits, like cash back, for your purchases.

Your personal credit score is typically enough to get a business credit card.

Pick an appropriate accounting program

Don’t forget to maintain documents that detail your income and expenses. You can keep tabs on these figures with the use of accounting software, which can generate reports that track sales patterns; what’s more, there are even free solutions available.

You should consider hiring a bookkeeper when the company expands. Having someone on your side could make it significantly easier to apply for loans, submit your taxes, and verify that all of your documents are accurate.

Get ready to file your taxes

As a business owner, you’ll be responsible for more taxes than before. You may even have to pay taxes all year round. On the other hand, you should expect to see some new tax incentives.

If you’re self-employed and have to pay your taxes every three months, make sure to put some money away in advance.

As a small company owner, you may find the tax filing process particularly complicated. If you take the time to build rapport with a tax expert while you’re just starting out, they can serve as a reliable resource for your company as it grows.

Invest in company insurance to safeguard your assets

A business owner should get business insurance to safeguard both their company and their personal wealth. In order to protect themselves from potential lawsuits, NerdWallet suggests that all businesses have general liability insurance.

If you are setting up a display at an event or working as a subcontractor on a bigger project, you may also be required to get insurance in order to comply with the contract.

Create a profile on the web

Having a website is essential for nearly every company nowadays, particularly those who wish to sell their wares online. Get a head start on building relationships with potential clients by creating a website and social media accounts early on, even if they’re basic.

Establish a method of payment

A POS system and payment processor are necessities for every business that accepts credit and debit cards. It may be easier to make a choice as many POS system vendors also act as processing firms. Think about the processing fees, the monthly fees for the POS software, and the upfront expenses of the equipment, such as card readers or POS registers. Before deciding on a provider, it’s important to think about all of the expenses, as online payments can have greater processing costs than in-person payments.

Recruit workers

If you’re just starting out, you might not need to bring on any staff just yet. In fact, some entrepreneurs choose to keep running their businesses on their own. If you decide to bring on staff, though, you’ll likely want payroll software, workers’ compensation insurance, and other related necessities.

Raise capital to expand your company

You can begin to qualify for business loans when your company has been operating for six to twelve months. You may use financing to acquire equipment, renovate your office, or boost your inventory, among other things. It can also help you get through a sluggish season so you can be ready for higher income in the future.

What you need to do legally to start a business

1. Registering the business

Once you have chosen a business structure, you must register your company with the California State government. If you intend to run your company out of a certain site, you’ll need to secure zoning clearance in addition to registering for taxes and permits and receiving a business license.

2. Understand taxes

If you own a business in California, you have to pay taxes to the federal government and to the state. Taxes and levies of any kind fall under this category, including income taxes, payroll taxes, sales taxes (if any), and others. In order to avoid fines, it is crucial to maintain precise records and submit your taxes on time.

Companies operating in California are subject to a number of state taxes in addition to federal taxes. Taxes on income, franchises, and personal property fall within this category. There may be extra taxes or levies that are industry-specific for some businesses. Before launching your firm, be sure you have researched and understood these prerequisites.

3. Responsibilities of the employer

If you are an employer and your company has workers, you will be subject to extra legal requirements. Among these obligations is the guarantee of a safe and healthy workplace, compliance with all applicable labor laws and regulations, and the acquisition of workers’ compensation insurance.

4. Trademarks and intellectual property

You should always take precautions to safeguard your company’s trademarks and intellectual property as a business owner. To protect your original ideas, goods, and services, you need register for copyrights, trademarks, and patents. Also, you should look into any brands or intellectual property that are already out there that might be in conflict with yours.

5. Agreements and contracts

Any company worth its salt knows the importance of having solid contracts and agreements in place to govern interactions with clients, suppliers, business associates, and workers. Your company may avoid problems with the law and misunderstandings by having sound contracts ready.

6. Compliance

If you want to start a business in California, you need to make sure you follow all the rules and regulations, both federal and state. This involves following all applicable industry-specific rules and regulations, such as those pertaining to health and safety, labor, and consumer protection. There may be consequences, including legal action, for those who do not comply.

7. Business insurance

Having business insurance may shield your company from financial ruin in the event of a lawsuit, damaged property, or other liability claim. If you want your company to be adequately covered, you need to do your homework and get the right insurance.

8. Funding and financing

Before you start your business, do you have the necessary funds? Options here can include crowdsourcing, loans, grants, or individual investments. Do your homework and figure out how various funding options could affect the day-to-day running and expansion of your company.

9. Local permits and regulations

You might also have to get certain licenses and follow local rules, depending on where your company is located. For example, zoning clearance, construction permissions, or permits from the health department might fall under this category. Before launching your company, be sure you have researched and understood these prerequisites.

Is it a good idea to hire a business lawyer?

While you could certainly do your own research and handle some of these legal requirements, it would be wise to consult a business lawyer to ensure all your bases are covered and to avoid any unnecessary expenses. This is how:

Advice from an Expert: A business lawyer can assess your unique circumstances and offer advice based on years of experience to help you make smart choices.
Assurance of Compliance: Attorneys will make sure your company follows all the rules and regulations, lowering the likelihood of any legal trouble.
Reviewing and Drafting Contracts: With their help, you may create and evaluate agreements and contracts that safeguard your interests.
Intellectual Property Protection: By filing trademarks, copyrights, and patents, attorneys can help protect your intellectual property.
Resolution of Disputes: If there are legal disputes, a business lawyer can look out for your best interests and help settle them.
Company Forms: Whether you’re looking for a limited liability company, a corporation, or a partnership, they can help you choose the right business structure.

Have a quick question? We answered nearly 2000 FAQs.

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