Starting a business in California is an exciting and rewarding experience.

You have the ability to be your own boss, set your own schedule, and make a living doing what you love.

However, entrepreneurship also comes with a lot of challenges.

Many entrepreneurs fail before they launch their business by not knowing how to correctly set up their business.

Combining the most common challenges faced by entrepreneurs with the best practical advice from a business lawyer’s perspective, here is 5 easy steps to open a business in California...

1. Choose the Correct Business Type
2. Have a Business Lawyer Register Your Business with the Secretary of State
3. Have a Business Lawyer Draft Your Operating Agreement or Bylaw
4. Apply for an EIN from the IRS
5. Apply for Business Licenses & Permits

Let's get started...

 

Step 1: Choose the Correct Business Type

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The most important steps in getting your business off the ground is choosing the right business type.

By carefully choosing the right business type, you can reduce your personal liability, minimize taxes, and ensure that your business is being financed and conducted efficiently.

So it's very important to determine which business structure is best suited for your specific situation.

A business lawyer can help you choose the right business structure by raising all the necessary considerations, and also by relieving the burden of organizing, drafting, and filing the proper documents with the state.

There are generally 5 main business types to choose from...

Sole Proprietorship

Sole proprietorship is the simplest business structure and not a legal entity.

It’s the easiest type of business to form – no state filing is required to form a sole proprietorship. However, this structure does not offer any personal liability protection.

Partnership

Partnership is when two or more persons engage in a business. A formal, written Partnership Agreement that lays out all the partners’ rights and responsibili­ties is completely necessary for partnerships.

A written Partnership Agreement that lays out all of the partners’ rights and responsibilities is highly recommended as oral partnership agreements are easy ways to set yourself for disputes in the future.

Partnership Agreements details the responsibilities of the partners and how the profits and losses are allocated, along with many other important clauses. A contract lawyer can help you draft a Partnership Agreement between you and your partner.

LLC (Most Recommended)

Limited Liability Company (LLC) is the most common and best business structure for most small businesses because LLC offers personal liability protection.

Having an LLC establishes your business as a separate legal entity — meaning members are not personally responsible for business debts and liabilities. In other words, if someone sues your business or if your business is liable to debtors, then your personal possessions, such as car or home, can’t be touched by creditors.

Also, unlike Corporations, LLCs enjoy pass-through taxation — meaning all the profits and losses are “passed through” the business to each members of the LLC. Members report their share of the LLC’s profits and losses on their individual tax returns, and any tax due is paid at the individual level.

The first thing most businesses do is form an LLC and as a business lawyer, I highly recommend having a registered LLC before you start your business.

C-Corporation

Corporation is also an independent legal entity, separate from the people who own, control, and manage it. Corporations can enter into contracts, incur debts, and pay taxes apart from its owners.

In other words, the Corporation itself, not the shareholders who own it, is held legally liability for the actions and debs the business incurs.

However, Corporations are more complex than other business structures because they tend to have costly administrative fees and complex tax and legal requirements. Because of these issues, Corporations are generally suggested for more serious companies.

C-Corporation is typically not suggested for most businesses to avoid double taxation. Ask me if you have any questions about this.

S-Corporation (Recommended, Most Tax-Friendly)

S-Corporation is a special type of corporation created through an IRS tax election. An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S-Corporation.

What makes the S-Corporation different from a traditional corporation (C-Corporation) is that profits and losses can pass through to your personal tax return. Consequently, the business is not taxed itself. Only the shareholders are taxed.

S-Corporation offers the best of both worlds: personal limited liability protection along with the tax benefits of an LLC.

S-Corporation is recommended for most businesses as well.

 
Can't decide on which business structure is right for you?

A business lawyer can help you choose the right business structure and relieve the administrative burden of registering, organizing, and forming your proper business structure with state and federal authorities.

For more details on how to decide which business structure is right for your business, please scroll down and review the bottom half of this page...

 

Step 2: Have a Business Lawyer Register Your Business with the Secretary of State

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Once you decide which business type is right for you, you must register your LLC or S-Corporation with the Secretary of State.

But first, you need to determine which state you should form your business in.

Unless you have a compelling reason otherwise, it's generally best for businesses to incorporate in the state in which it will principally be doing business.

There are some tax and organizational advantages to registering in certain states, however. Delaware, Nevada, and recently Wyoming are the most popular for out-of-state corporate registration.

Consult with me if you are not sure in which state you should form your business.

In most cases, I suggest to form your business in your home state. For example, if you will be doing business in California, then you should form your business in California.

However, if you are a non-U.S. resident, then I would suggest forming your business in Delaware.

Delaware offers many clear advantages for businesses such as easier and faster processing for forming LLCs and Corporations. That's why Delaware is the most popular state to incorporate for non-U.S. residents.

After you have decided which state you will be forming your LLC or S-Corporation, you will need a Registered Agent in that state.

Registered Agent is an individual or organization who resides in your state of formation who accepts important legal documents on behalf of your company.

Registered Agent must have a physical address (P.O. box is not accepted), and must be available at that address during normal business hours.

If you need a California Registered Agent, see here. If you need a Delaware Registered Agent, see here

Once you have a Registered Agent in your desired state, you will need to hire a business lawyer to form your LLC or Corporation.

A business lawyer can help you choose the right business structure and relieve the stress of correctly forming your LLC or S-Corporation by drafting, organizing, and forming your proper business structure with the Secretary of State.

 

Step 3: Have a Business Lawyer Draft Your Operating Agreement or Bylaw

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Operating Agreement is necessary for LLCs which is an agreement between the members that establishes the management and operations of the LLC. This is a necessary legal document for your LLC to get personal liability protection.

Bylaws is necessary for Corporations which is a corporate document that set out the basic rules for operating your corporation.

Bylaws is not filed with the state and your corporation is not legally required to have corporate Bylaws, but you should have Bylaws because it establish your corporation's operating rules, and help show banks, creditors, IRS, and others that your corporation is legitimate.

LLCs are very flexible in nature and the Operating Agreement defines each member's rights, powers, and entitlements. Operating Agreement includes capital accounts, membership interest, distributions of profit and allocated tax responsibility, etc.

This internal document is an agreement set by the members that contains provisions for important items and rules that run the company. Operating agreements can be changed at any time by the company members or managers.

While you can find templates of Operating Agreements online, these templates do not reflect any specific agreements that you have with your partners and may often be missing sections that will act as great protection for you long term.

Most template Operating Agreements are really not comprehensive. If you have partners, you want something that is customized to your business and your needs because this document can be very crucial in case one of the partners wants to sell his or her shares or dies. This document will also come in handy if you have disputes with your partners.

If you're starting a business, I draft Operating Agreements and make sure that they are customized to exactly what you need and I also ensure that you understand this agreement.

Contact me to have me draft your Operating Agreement for your LLC or Bylaw for your Corporation.

 

Step 4: Apply for an EIN from the IRS

Employer Identification Number (EIN), also known as a Tax ID, is a number assigned by the IRS to identify a business.

EIN is used for a number of business needs including: starting a business, opening a bank account, complying with the IRS, applying for business permits, and filing taxes.

If you have a U.S. Social Security Number (SSN), you can apply for your EIN online here.

However, if you do not have a U.S. Social Security Number (SSN), you can have a business lawyer act as a third-party designee to apply for your EIN on your behalf. The business lawyer will complete Application for EIN and receive your EIN on your behalf.

See here for more information about how to apply for EIN without SSN.

 

Step 5: Apply for Business Licenses & Permits

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Before you open your doors for business, you also need to apply and get the necessary licenses and permits you need to operate your business.

Virtually every business needs some form of license or permit to operate legally.

These may include business licenses, seller’s permit, or a zoning permit, among many others.

Licenses and permits vary by the type of business you operate and where your business is located.

Every business needs a basic operating license or permit – even if you’re home-based.

The best source for finding what licenses and permits you need for your business is SBA’s Business Licenses & Permits.

You need to search and apply for both federal, state, and local licenses and permits to make sure you’re operating legally.

You also need to register for state and local tax purposes. State taxes include income tax, sales tax, and unemployment insurance tax (for employers only), while local authorities such as your city or county government oversee business property tax, permits, and licenses.

To register your business with your state tax agency and understand what you need to do based on your business type, visit your state website.

To register your business with your city or county tax department, visit your city or county website.

If you plan to sell products and you are required to collect sales tax, you’ll need a Sales Tax Permit or Vendor’s License from your state or local government, or both. Some states don’t have sales tax, so be sure to check your state website if you are not sure.

Information regarding how to obtain a Business License in Los Angeles can be found on City of Los Angeles’ Office of Finance website here

Applying for business licenses and permits is a crucial step in setting up your business. If you have any questions about this, you can ask a business lawyer to help you with this step.

 

Step 6: File a DBA (Optional)

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You need to file a "Doing Business As" (DBA), also known as a Fictitious Business Name, if you're creating a business that is different from the officially registered name of your LLC or Corporation or from your personal name.

When you form a business, the legal name of the business defaults to the name of the LLC or Corporation or person or entity that owns the business, unless you choose to rename it and register it as a DBA name.

For example, Bob Smith sets up a dry cleaning business. Rather than operate under his own name, Bob instead chooses to name his business: “Bob Smith Dry Cleaning”. This name is considered an assumed name and Bob will need to register a DBA.

The legal name of your business is required on all government forms and applications, including your application for employer tax IDs, licenses and permits.

If you’re operating under your own name or the legal name of your LLC or corporation, then you can skip this step.

How to File a DBA On Your Own

Filing your DBA is done either with your county clerk’s office or with your state government, depending on where your business is located. There are a few states that do not require the registering of DBA.

In Google, type your county or state’s name along with the words, “doing business as” or “fictitious business name.”

For example, if you want to file a DBA in Los Angeles, you would search the terms, “Los Angeles doing business as.” Typically the first search result that comes up in your search result will help you file your DBA.

Every county, city, and state has their own specific procedure for filing a DBA so be sure to Google the right terms to find the right steps in filing your DBA in your jurisdiction.

How to File a DBA in Los Angeles

If you are opening up a business in Los Angeles, you need to visit the Los Angeles County Registrar-Recorder website and click on “Online Business Filing & Registration System.” On this page, choose that you will be filing “In-Person.” 

Through a series of steps, you will be choosing your business name and making sure that your company name is available. Note that if you are incorporating in California, you do not have to include the suffix Corporation, Corp., or Incorporated after your business name. 

Once the online application for a Fictitious Business Name is completed and submitted online, you will be issued a confirmation number to take to any Los Angeles County Registrar Recorder County Clerk's Office to pay $26 dollars and complete the business filing process. 

After you make your payment for the application of a Fictitious Business Name, you will be required to publish a copy of the statement of your new business in a newspaper of general circulation in the county in which the principal place of business is located within 30 days. 

Most Registrar offices will have representatives standing outside of the office who can help you with this process for approximately $40 dollars. You can always shop around to find more cost-efficient services for legal publication.

 

Sam Mollaei, Esq., Business Lawyer

Sam Mollaei, Esq., Business Lawyer

Do You Want to Start a Business? 

I help entrepreneurs start their business by forming LLC or S-Corporations, drafting Operating Agreements, helping applying for an EIN, and answering your business questions.

► For a free consultation, contact me at sam@mollaeilaw.com or call at (818) 925-0002


Types of Businesses (Explained Thoroughly)

By carefully choosing the right business entity, you can reduce exposures to liabilities, minimize taxes, and ensure that your business is being financed and conducted efficiently.

The most important considerations in the choice of business entity will depend on the degree to which the business person's personal assets are protected from liabilities of the business, maximizing tax benefits, avoiding double taxation, and start up costs, among others. 

Mollaei Law can help set up your business based on your needs and interests by creating a Sole Proprietorship, Partnership, Limited Liability Company (LLC), C-Corporation, S-Corporation, Professional Corporation, Limited Liability Partnership, and Non-Profit Organization.

By forming a LLC or Corporation, you may be able to protect yourself from debt or liability.

Learn more in depth about your business options below:

 

Sole Proprietorship

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A sole proprietorship is a business owned and run by one person. It is the simplest and most common structure to start a business.

You are entitled to all profits and are responsible for all your business’s debts, losses and liabilities. The owner has unlimited liability for the losses of the business, thereby putting all of the owner's personal assets at risk.

A sole proprietorship requires no governmental filing except a fictitious business name statement. The owner reports the income and expenses on a schedule to his or her own personal income tax return. 

 

Partnership

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A partnership is a business carried on by at least two persons. A partnership is generally treated as a distinct legal entity separate from its partners.

A key attraction of a partnership is that it pays no income tax as income or losses flow through to each partner and are reported on the partner's individual tax return. Each partner contributes to all aspects of the business, including money, property, labor or skill. In return, each partner shares in the profits and losses of the business.

Thus, there's no liability protection for any of the partners as each partner is jointly and severally liable for any liabilities. 

A partnership requires a written partnership agreement. The partners may dictate both the terms of how a partnership is managed and how profits and losses are allocated and distributed. Mollaei Law can help you create a partnership agreement. 

A partnership may be a General Partnership, a Limited Partnership, or a Limited Liability Partnership (LLP). In a General Partnership, each partner is a general partner, each has unlimited liability for the debts of the partnership, and each has the power to incur obligations on behalf of the partnership within the scope of the partnership's business.

A Limited Partnership has one or more general partners and one or more limited partners. The limited partners' liability is limited to the amount of their capital commitment. 

 

Limited Liability Partnership (LLP)

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Limited Liability Partnerships is a business with more than one owner, but unlike general partnerships, Limited Liability Partnerships offer some of their owners limited personal liability for business debts.

All of the owners of an LLP have limited personal liability for business debts. 

Limited Liability Partnerships may only be formed by licensed persons for the practices of public accountancy, law, architecture, or engineering.

Professionals often prefer LLP's to general partnerships, corporations or LLC's because they don't want to be personally liable for another partner's liabilities, especially those involving malpractice. An LLP protects each partner from debts against the partnership arising from malpractice lawsuits against another partner. 

 

Limited Liability Company (LLC)

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Slowly becoming more as a standard for companies and more popular, a Limited Liability Company (LLC) is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies (simple taxes) and operational flexibility of a partnership. 

The members or owners of an LLC have no personal liability for the obligations of the LLC. An LLC is the entity of choice for a start-up seeking to flow through losses to its investors because an LLC offers complete liability protection to all its members. 

Unlike Corporations, LLCs are not taxed as a separate business entity. Instead, all profits and losses are "passed through" the business to each member of the LLC. LLC are a common structure for real estate investments. 

Income from a LC is subject to self-employment taxes, which at this time is 15.3% (subject to change). Also, please note that the California Franchise Tax Board imposes a minimum tax of $800/year for LLC's. 

An LLC requires two principal documents:

  1. Articles of Organization (California) or Certificate of Formation (Delaware) - A document filed with the secretaty of state, which sets forth the name of the LLC, its address, its agent for service of process, the term, and whether the LLC will be governed by the members or by managers appointed by the members. 
  2. Operating Agreement - Specifies how the LLC will be governed, the financial obligations of the members, and how profits, losses, and distributions will be shared. The Operating Agreement needs to be tailored to suit the needs of each individual LLC. Mollaei Law can help tailor an Operating Agreement to match your needs. 

 

C-Corporation

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A C-Corporation is also referred as General for profit corporation. It refers to a corporation that is taxed separately from its owners.

A corporation is an independent legal entity owned by shareholders. This means that the corporation itself, not the shareholders that own it, is held legally liable for the actions and debts the business incurs.

A C-Corporation is taxed at a lower federal income tax rate than sole proprietors. Thus, business owners who plan on investing back into their business prefer the C-Corporation as a way of reducing their income tax. 

Corporations are generally suggested for established, larger companies with multiple employees. Corporations have more formalities that must be observed to obtain the liability protection desired.

C-Corporations are subject to double-taxation which means that the income of the corporation is taxed, and salaries paid to its employees are also taxes.

 

S-Corporation (Shareholder Corporation)

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All corporations are initially formed as a C-Corporation. You can elect to be taxed as a pass through entity and forming an S-Corporation by filing IRS form 2553.

The income of an S-Corporation is generally taxed to the shareholders of the corporation rather than the corporation itself -- avoiding the double taxation. However, there are a few requirements that must be met in order to form an S-Corporation:

  • Must be filed as a domestic corporation
  • No more than 100 shareholders
  • Shareholders can only be individuals, estates, exempt organizations, or certain trusts.
  • No nonresident alien shareholders
  • Must end its tax year on December 31
  • Can only have one class stock

 

Professional Corporation

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According to California Corporation Code 13400, certain professions are NOT allowed to form an LLC and must instead form a Professional Corporation, including attorneys, physicians, osteophathic physicians, dentists, pharmacists, veterinarians, architects, court reports, speech-language pathologists, audiologists, registered nurses, or optometrists.

Please note that a California Professional Corporation does not limit your liability arising from the performance of your service exposing you to possible malpractice suits.

When you are the sole owner in one of these professions, this may be the only option you have. 

 

Non-Profit Organization

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An organization that uses surplus revenues to achieve its goals rather than distributing them as profit or dividends.

If your passion is to inspire, make a difference and give back to the world, then starting a non-profit is an exciting entrepreneurial proposition.