Starting a business is one of the most exciting ventures you can pursue, but it isn’t easy. If you’re looking for a state with plenty of people and talent, there are few better choices than California. With more than 39 million residents, some of the most well-known startup hotbeds in the country (including Silicon Valley), and metropolitan areas like LA, San Diego, Sacramento, Oakland, and San Jose, the options for entrepreneurs are practically limitless. California isn’t just for multi-million-dollar tech juggernauts, either. In fact, there are more than 4 million small businesses in the state, representing a whopping 99.8 percent of all businesses. Nearly half the California workforce, more than 7 million people, work for small businesses, and thanks in part to the rich entrepreneurial community, economic growth in California is a relatively high 3.4 percent. The cost of living is higher in the major cities, but you can find reasonable housing and livable areas as well.
- Forming a Business in California
- Federal Tax ID (EIN) Number Obtainment
- California State Tax ID Number
- How Do You Get a Tax ID Number in California?
Step one is choosing your business type. These are some of your best options:
- Sole proprietorships and partnerships. Sole proprietorships and partnerships are the simplest businesses to create, but the flip side is that they don’t offer much (if any) liability protection. You’ll be responsible for any debts or legal responsibilities on behalf of the business. You’ll also pay taxes as an individual on any money you make in the business- the only difference with partnerships is the number of people in the business.
- Limited liability companies (LLCs). LLCs are a bit more complicated. These businesses are treated as separate entities from a legal perspective, so they require extra work to set up. In California, LLCs are subject to an $800 annual baseline tax, which may increase if you meet certain conditions, such as if your gross revenues exceed $250,000. The taxation rules in California are somewhat complex, so it’s best to consult with a tax professional before pursuing this option. The main advantage of Limited Liability Companies or LLCs is that they afford you liability protection.
- Corporations. Corporations are the most complex business type, since they have the power to raise funds by issuing public shares in the company. They’re required to file annual reports, and like LLCs, are treated as distinct legal entities. Any eligible income made in corporations is subject to an 8.84 percent corporate tax rate, which is high compared to other states. One of the biggest advantages of corporations, other than the fact that they allow you to issue public shares, is their high degree of liability protection for owners.
Some companies benefit more from one business structure or another, but there’s no single “best” structure to choose in California. It’s also possible to change your business structure at some point in your business’s development, but it’s much easier to pick the “right” option from the outset.
When you’re ready to make your business official, you’ll need to register it with the federal government, and get your hands on a federal tax ID number. Also known as an employer identification number (EIN), this number will serve as a unique signature for your business; it’s what you’ll use to keep track of your income and taxes. You’ll also need it if you plan to hire employees, open a business bank account, or build any kind of business credit.
The registration process can take a while, so if you’re in a hurry to start your business, the best path forward is to use a third party federal tax ID obtainment service. With just a few pieces of information about you and your business, you can get your federal tax ID in just a few hours.
If you plan on selling taxable goods and services in the state of California, or if you’ll owe excise taxes (which are associated with specific products, like alcohol or tobacco products), you’ll need a California state tax ID in addition to your federal tax ID. This number works similarly, and the process to get one is fairly similar, but you need both (and will use them in different applications) if you want to start a business.
California doesn’t make things easy on business owners trying to get the right licenses, permits, and professional certifications. It offers a searchable database of licenses and permits you may need at the state level, but it’s not always straightforward to find the information you need. You should also be aware that some cities and districts have their own rules for licenses and permits, so it’s important to contact your local Chamber of Commerce to see what other documents and certifications your business may be responsible for. If you have a solid idea, and a decent business plan in place, the last piece of the puzzle is creating your business officially and start generating revenue right away.