California needs no introduction as a global business hub. As the fifth largest economy in the world, the state has played home to multiple technology revolutions and continues to attract startups and investors from diverse foreign countries. One look at the list of companies headquartered in California—which includes tech juggernauts Apple, Alphabet, and Oracle—is enough to make any startup founder dream about starting a business in California.
But how is it actually done? And is starting a business in California really the best option for a global startup? After all, most foreign founders with hopes of attracting venture capital investment focus on starting a business in Delaware, which also carries the benefit of a business-friendly tax and corporate legal system.
In this guide, we’ll answer those questions and discuss exactly what goes into starting a business in California. Though our guide is primarily intended for foreign entrepreneurs and foreign-owned startups, the steps to incorporating in California are generally similar for startups owned by US citizens and residents.
Why should your business incorporate in California?
A lot of the startup action in the U.S. seems concentrated in California. The state is crowded with startup companies thanks to its historic association with the tech boom, and markets such as the San Francisco Bay Area are home to some of the most coveted talent in the U.S.
But the decision to incorporate your business involves more than simple geography. For example, it might not shock you to learn that many of the top venture capital firms are clustered around the Bay Area. But you might be surprised to discover that almost all of these VCs prefer to invest in companies organized as Delaware C-corps.
So, if you’re the founder of an international startup with no geographical ties to the U.S., you might want to consider the tradeoffs of incorporating in one state versus another. Generally speaking, organizing as a Delaware C-Corp is often a better option for founders who plan to attract significant venture capital, build a national or international business plan, and maybe even one day go public via an IPO.
With that said, incorporating in California can make more sense if you plan to base your business operations in the state for the foreseeable future. If this applies to you—and if you don’t need to seek VC investment right away—choosing California could be your most convenient option (and help you avoid paying taxes in two states).
What to consider before starting a business in California
If you’re reading this guide as a non-U.S. resident, chances are you’ve already thought of a business plan that involves expanding your company’s operations into new international markets. That’s great, because having an air-tight business plan is typically the first step to starting a business anywhere.
Before starting a business in California, make sure your business plan includes a justification for the expenses involved in doing so. Starting a business in California involves a number of upfront and ongoing expenses you’ll need to account for. These involve expenses for:
- Registering your California business
- Obtaining any specialty licenses and permits you might need
- Fulfilling employer obligations such as payroll taxes and workplace safety regulations
- Paying corporate taxes
Navigating all of this as a non-U.S. resident can be overwhelming. That’s why you’ll also likely want to factor in hiring a California business lawyer and tax expert as a necessary expense. These experts can help guide you through the thicket of regulations and compliance requirements. The peace of mind (not to mention the penalties they can help you avoid) is oftentimes worth the extra cost.
Finally, if you are physically moving to California to open up a business, you’ll want to ensure that you’re legally able to do so and have the appropriate visa. You may be able to obtain a Treaty Trader (E-1) or Treaty Investor (E-2) visa if you are a citizen of one of the countries with which the U.S. maintains treaties of commerce and navigation. Check the list of treaty countries as well as the qualification requirements.
10 steps to starting a business in California
Now that we’ve discussed some of the preliminary questions about starting a business in California, you’re probably wondering: How do I actually do it?
Let’s review the basic steps to starting a business in California, from choosing a business structure to opening a US business bank account.
1. Develop a plan for funding and financing your business
If you are incorporating your business in California, you will likely not be attracting serious VC money in the short term. That means you’ll likely need a plan to finance your business operations that involves one or several of the following:
- Bootstrapping the company with your own money (or money from your family and friends)
- Growing additional funding from business revenue
- Small-business loans
Be sure to think about financing before starting your business. If you plan on incorporating in the U.S. because you’re ready to attract angel and VC investors, you will likely want to turn your attention to the process of incorporating as a Delaware C-corp.
2. Choose a business entity type
Now that you’ve decided to start a business, the next crucial question is: What type of business?
There are a number of different legal business structures you can form in California. These include:
- Limited Liability Company (LLC)
- Limited Partnership (LP)
- General Partnership (GP)
- Limited Liability Partnership (LLP)
- Sole Proprietorship
These structures come with their own tax setups, director and ownership arrangements, and other obligations to consider. It’s important to note that not all of them are applicable to or appropriate for a global startup.
Two options are especially relevant options for foreign startups and entrepreneurs— corporations and Limited Liability Companies (LLCs):
- Corporation: A California corporation is a legal entity that’s separate and distinct from its shareholders, directors, and officers. A corporation has some distinct benefits. For example, its owners have limited personal liability, and it can raise additional capital through the sale of stocks or bonds. But it also has some disadvantages when it comes to corporate taxes, which are levied on both the corporation and its shareholders. Note: Most global startups that incorporate as C-corps opt to do so in Delaware, which has some advantages over California for larger companies and high-growth startups.
- Limited Liability Company (LLC): Like a corporation, an LLC offers limited liability protection. Unlike a corporation, it’s one of the simpler business structures to form. The LLC structure has some benefits that make it a good option for smaller companies that don’t require VC investment, including relatively straightforward reporting requirements.
3. Choose a business name that complies with statutory requirements
Next up is choosing a name for your business that isn’t already taken by another registered business. You can perform a basic business search on the California Secretary of State website, though this isn’t intended as a name reservation search. To search and reserve a name, you’ll need to sign up for an account or just wait until you’re ready to register your business.
Unfortunately, you can’t just name your business anything your heart desires. California maintains a Code of Regulations with rules governing the selection of business entity names. For example, if you start an LLC, you’ll need to include “Limited Liability Company”, “LLC”, or a similar identifier somewhere in the name.
Once you’ve settled on a name, you can reserve it for an online processing fee of $10. Your reservation will remain effective for 60 calendar days. It’s not necessary to reserve your name ahead of time if you’re registering your California business at the same time, so you may want to skip the processing fee.
4. Enlist a California registered agent (if necessary)
California corporations must designate a registered agent for service of process. Basically, this is a person who can accept service of process (i.e. court papers) if the business entity is ever sued.
You can enlist an outside corporation to serve as your California registered agent, though your agent doesn’t necessarily have to be someone outside your company. Oftentimes, a smaller corporation will designate one of its officers or directors to serve as the registered agent for service of process. The important thing is that the registered agent maintains a physical address in the state of California.
5. Register your business with the Secretary of State
Assuming you have all of the above in order, you should be ready to form your new business entity in California.
You can find all the forms you need on the Secretary of State website. You’ll need to pay a fee when registering your California business, which can range from $70 for an LLC to $100 for a general stock corporation.
6. Consider registering a fictitious business name
A “fictitious business name” may sound like something out of a spy novel, but it’s actually a real and important thing. If you decide to do business under a different name than the legal name you designated when incorporating, you can file a fictitious name with the county clerk or recorder in the county where your business is located.
Registering your fictitious business name is an important step that you shouldn’t overlook. If you decide to conduct business under a fictitious name that isn’t registered, any contracts or agreements you sign may not be legally enforceable.
7. Apply for an EIN
Generally speaking, every business in the U.S. needs an Employer Identification Number (EIN). Otherwise known as a Federal Tax Identification Number, this nine-digit number is used to identify your business for tax purposes.
You can apply for an EIN online via the IRS website. You’ll need the name and Taxpayer Identification Number (SSN, ITIN, or EIN) of your business’s responsible party. This can be a true principal officer, general partner, grantor, owner, or trustor.
8. Open a US business bank account
Your next should likely be to open a U.S. business bank account. Corporations and LLCs operating within the U.S. are required, by law, to maintain separate accounts for their business’s finances and their owners’ individual finances.
Historically, you might have been required to physically visit a bank branch to open a business bank account in the US. This is no longer the case, and many modern banking solutions offer accounts that can be opened and managed entirely online. Levro, for example, offers a multi-currency bank account that you can apply for online even if you don’t yet have an EIN. (You may be asked to provide your EIN verification before you can open an account.)
Levro’s U.S.-based bank accounts are designed with global startups in mind. Businesses can use our platform to buy, sell, and hold more than 30 global currencies with easy multi-currency accounting. Contact us to schedule a demo today.
9. Apply for any necessary business licenses or permits
So, you’ve successfully registered your business with the California Secretary of State and opened a U.S. bank account. You’re feeling ready to roll. But not so fast, because your business must first obtain any necessary business licenses and permits required to operate within the state of California.
Remember that business lawyer we mentioned above? This is where that person really comes in handy. Figuring out the licenses and permits you need at all levels of government can be time-consuming and stressful, but it is technically something you can do yourself via the CalGold website.
10. Understand your California tax and filing responsibilities
California businesses need to stay on top of a number of different employer requirements. Again, this is where a business lawyer can be a great asset. Some of the obligations you should be aware of, especially if you’ll be operating a business with employees, include:
- Corporate tax requirements
- Payroll tax requirements
- Wage withholding requirements
- Matching employer withholding requirements
- Employee employment eligibility requirements
- Unemployment insurance
- Workplace safety and health insurance
You’ll also need to file a Statement of Information with the Secretary of State within the first 90 days of registering your business. Depending on the type of business entity you form, you’ll need to also file a Statement of Information annually (for stock corporations and foreign corporations) or every other year (for LLCs) moving forward.
Corporations can file this statement online, while LLCs can use the Secretary of State’s E-File Statement of Information filing service.
Next steps after starting a business in California
Starting a business in California may not be the last step on your road to ultimate success. For example, if your startup later decides to court angel investors and VC firms, you may consider reincorporating in Delaware by creating a Delaware C-corp and merging your California corporation into it.
But for now, you have a business to grow—and Levro is here to help. If you want to learn more about how Levro can help you stay compliant with U.S. banking requirements and reduce the time and effort you spend on accounting for your new business, send an email to firstname.lastname@example.org today.