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Legal Considerations for Launching a Small Business in California

Contributed by: Joni Meyers

An image of the golden gate bridge in San Francisco

Understanding the legal requirements of operating a business is crucial even before its launch. Even if you have legal counsel at your side, you should know the specific laws and obligations you have to fulfill as a business owner, so you don’t accidentally break them. This knowledge will help to ensure your compliance and protect you against certain risks down the road. Read on for the important legal considerations of launching and running a small business in California:

Business Entity:

To make it official, you must first choose the correct business entity, even before picking out a name. A business entity defines the legal structure of a business which determines the legal security, liabilities, and tax obligations of the business. There are four legal structures to choose from: sole proprietorship, partnership, corporation, or limited liability company (LLC).

Sole Proprietorships

A sole proprietorship and a partnership have similar features and requirements. These are the two default legal structures for businesses. If you choose not to register as a corporation or as an LLC with the state, your business is automatically designated a sole proprietorship or a partnership, depending on the number of owners listed. The owner(s) are personally responsible for taxes and other business legal obligations.

Incorporations

If your business has plans to scale later on, it may make more sense to incorporate. Compared to a sole proprietorship or a partnership, a corporation separates the owners from the legal obligations of the business. Should the corporation be sued or fall into debt, the owners will not be obligated to settle using their personal assets.

There are two types of corporations: a C corporation doesn’t have shareholder, ownership, or financing restrictions, but its biggest disadvantage is double taxation. An S corporation, on the other hand, counts as a pass-through business, which means it is not subject to California’s income tax rate of 8.84% of the company’s net income.

Limited Liability

The final option is a limited liability company, which is a hybrid of the other business entities. An LLC enjoys limited liability just like in corporations. LLCs in California are subject to the state’s business taxes as are other business, but they are exempt from federal taxes unlike C corporations. Owners pay their own taxes either annually or quarterly using the state’s income tax rate.

Business Name:

While essential to your business’s branding, picking a name also serves legal purposes. Businesses in California need to include the appropriate legal identifier. For example, they are legally named ABC Corporation or XYZ LLC. California also requires businesses to file a fictitious business name or ‘doing business as’ (DBA). This allows your company to operate under a different name than the name legally registered with the state. For example, if your company is officially called Jane Doe Confections LLC, you can file a DBA to operate as Sugar and Spice. Before settling on a name, you need to send a name inquiry letter to the California Secretary of State’s Office to check its availability.

Business Licenses and Permits:

Business licenses, permits, zoning clearances, and other certifications vary from state to state and from industry to industry. Before launching and operating your business, you’ll need to check with the state, county, or city to learn the specific requirements. In California, businesses use the CalGold database as their main portal. CalGold will provide you with a comprehensive list of permits to apply for based on the nature and location of your business.

Using our earlier example, among the list of certifications Sugar and Spice needs to obtain are a basic business license, tax permit, seller’s permit, food vending license, and approval from the health department.

Bank Account:

Setting up a business bank account that is separate from your personal bank account is a must for any business. It makes the process of filing taxes a lot easier and improves the cash flow management of the business. Business News Daily’s business bank account checklist also highlights how it increases protection to the owners as well as its customers. It limits your liability and provides purchase protection for your customers.

However, opening a business bank account is not as easy as opening a personal one. This is due to the difficult additional requirements and paperwork that one must file. These include the articles of incorporation, business licenses and permits, DBA certificate, employer identification number, and identification documents, which, by this point, you should have already successfully obtained.

Insurance:

Getting insurance is a smart way of protecting your business from accidents and other risks that can occur at any time. But knowing what coverage to get can be tricky. The main insurance types to consider are general liability insurance, property insurance, and workers’ compensation.

General Liability

Business Property Insurance

Business property insurance helps protect your building and commercial space, equipment, tools, inventory, and even furniture. It covers damage or destruction from fire, lightning, and other natural hazards, as well as man-made damage. This type of insurance can help you recover losses resulting from theft or break-ins.

Workers’ compensation is a requirement in California. Businesses must carry coverage of this type of policy, which gives employees benefits after a work-related injury or illness. These include medical cost coverage, temporary or permanent disability benefits, and supplemental job displacement vouchers.

Regulatory Compliance:

There are also different state and federal business laws you need to know. As with licensing, these regulations depend on your type of business and specific location which you should verify with your municipality. These include employment laws, advertising and marketing laws, financial regulations, intellectual property laws, and privacy laws.

If you have staff, you need to abide by employment laws of the state. For instance, California employers are legally required to provide their staff a meal period after five consecutive hours. This relieves employees of work duties during that meal period, which is usually taken during lunch. Otherwise, employers will be penalized for not following this specific employment law.

Another example is the California Consumer Privacy Act (CCPA), a data privacy law that affects all businesses. The CCPA outlines consumers’ right to privacy with regards to their data, how it’s collected, stored, and used by businesses. As a business operating in California, you’re required to update your privacy policy and provide your customers with a ‘Do Not Sell My Personal Information’ guarantee.

There are many complexities in which the legal framework of business exists. However, doing your research and consulting with professionals make it possible to keep your business above board. Fulfilling your legal obligations is a must for safeguarding your business and yourself against various risks..

About the Author

Joni Meyers is a small business blogger. She hopes her articles operate like a business consulting practice with the goal to provide starting entrepreneurs with realistic, practical, and affordable advice. In her free time she plays online chess.

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