5 steps to start a business entity in California

This guide contains only general information.
Please note that each state may have different standards.
IB Law Firm is not responsible for the contents of the external links.
Choose the entity type
Each entity type has its advantages and disadvantages.
Sole proprietorship
A business is directly owned, managed, and controlled by an individual. There is no distinction between the business and the owner.
- No formal action is needed to start it (but licenses may be required for specific types of business activities).
- It can be started and closed at any time.
- Pass-through taxation (the net income/loss is reported directly on the owner's federal tax return).
- The owner directly controls it and makes day-to-day business decisions.

- Only one person can own a sole proprietorship.
- It is not a separate entity: the owner is personally liable for the business's debts.
- There are limited possibilities of raising investments.
General partnership
Two or more persons co-own a business, share profits and liabilities.
- It can be owned by more than one owner.
- Pass-through taxation (partners report their allocated portion of profits directly on their individual tax returns).
- Flexibility in arranging the governance, control, and relationship between partners through the partnership agreement.

- Individual partners are personally liable (jointly and severally) for the partnership's debts incurred after the partner's admission, and for the other partner's acts. Cal. Corp. Code § 16306.
- Partnership taxation rules are complex.
- Since partners have equal rights to participate in the management, it may cause conflicts. However, a clear definition of roles in the partnership agreement may help to prevent conflicts.
Limited liability partnership (LLP)
Each partner's liability is limited to the invested assets.
- Partners enjoy a "full shield" protection: they are not liable for the LLP's obligations.

- In California, LLPs can render services only through licensed professionals, such as attorneys, architects, engineers, public accountants, and land surveyors. Cal. Corp. Code § 16951.
Limited partnership (LP)
There must be at least one general partner and one limited partner in an LP. General partners are personally liable. Limited partners' liability is limited to their investments.
- A limited partner generally is not liable personally for the obligations of the partnership. Cal. Corp. Code § 15903.03. Moreover, a limited partner does not owe any fiduciary duties to the LP. Cal. Corp. Code § 15903.05.
- LP is a separate entity, and so can have a perpetual duration. Cal. Corp. Code § 15901.04.

- Limited partners, though have limited liability, also have limited control of the LP. He/she cannot act on behalf of or bind the LP. Cal. Corp. Code § 15903.02 - 15903.03.
- General partners are personally liable for the debt obligations of the LP incurred after they joined the LP. Cal. Corp. Code § 15904.04.
Limited liability company (LLC)
A combination of partnership and corporation features.
- Pass-through taxation, like a partnership (the taxation at the entity level may be avoided).
- Members are generally not liable for the LLC's obligations. Cal. Corp. Code § 17701.04.
- There is no limitation on the number of owners.
- It is simpler to operate and it does not require corporate formalities, like corporations.

- The opportunities for raising investments are limited.
Corporation (Inc., Corp.)
An incorporated business where owners are shareholders.
- It is a separate entity. Shareholders are not personally liable for the corporation's obligations (except for a limited number of situations).
- Ownership (shares of stock) can be transferred by sale or gift.
- There are more opportunities to raise investments.
- A corporation can elect to be an S-Corporation if it satisfies certain requirements (has only individual shareholders, has not more than 100 shareholders, has only one class of stock). The shareholders in S-corporation enjoy the pass-through taxation at their own individual level. An S-Corporation still has to pay the California franchise taxes.
- It is easier to raise investments through the stock sale.

- The taxation is more complex; the profits may be subject to double taxation. However, there may be an option for federal income taxation for S-corporation.
- Share sale can be restricted by shareholder agreement and applicable securities laws.
- It is more expensive to maintain and comply with laws.
- There are more formalities and paperwork concerning formation and governance.

Choose a name
Choosing a name for your business is not only about attracting customers. It is also about avoiding confusion and protecting the business from trademark infringement claims.
The name of your business (a trading name) can be different from the name of the entity. For example, ABC Inc. can do business as "XYZ plumbing."
Consider the strength of your trade name (trademark)
The stronger your trademark is, the more easily you can prevent others from using it without your permission. These are types of trademarks by their strength.

Fanciful (strong)
Fanciful marks are invented words. They only have meaning in relation to their goods or services. For example, Exxon® for petroleum or Pepsi® for soft drinks.

Arbitrary (strong)
Arbitrary marks are actual words that have no association with the underlying goods or services. For example, Apple® has been registered as a trademark for computers. However, "Apple" for fruits is not unique.

Suggestive (strong)
Suggestive trademarks are words that suggest some quality of the goods or services, but don't state that quality outright. For example, Coppertone® for sun-tanning products.

Descriptive (weak)
Descriptive trademarks merely describe some aspect of your goods or services without identifying or distinguishing the source of those goods or services. They can be registered only if the trademark gains distinctiveness through extensive use in commerce over many years.

Generic (not a trademark, not protected)
Generic terms are merely the common, everyday name for goods or services. They cannot function as trademarks, and you cannot prevent others from using the same words. For example, "Bagel Shop" for bagel bakery business.

Check the trade name (trademark) availability
Before naming your business, or product line, you need to check whether another company already has a similar name or mark. Without checking it, your customers may confuse you with the other company, or that company may claim trademark infringement against you.

You can check the availability in trademark databases (USPTO and States trademark databases, counties "doing business as" or "trading as" databases), on the Internet, in local areas, maps, yellow pages, or other databases.
Consider registering the trademark
While trademark registration is not mandatory, it can give extra protection and tools from infringement. It also gives you presumption over others in that the trademark is yours. There are different levels of registration depending on the desired scope of protection.

Common law protection (no registration)
This is the basic protection of a trademark that you can have regardless of trademark registration. You become a trademark owner as soon as you start using your trademark with your goods or services. You establish rights in your trademark by using it, but those rights are limited, and they only apply to the geographic area in which you are providing your goods or services.

State trademark registration
Registering your trademark in a particular state will give you protection in that state. However, not all states have trademark databases. To check your state, please follow this link.

Federal trademark registration
Registering your trademark with the USPTO creates rights throughout the entire United States and its territories, and includes your registration in our publicly accessible database of registered trademarks. You can use the ® symbol.

International trademark registration
You can register your trademark in multiple countries through the Madrid Protocol. While an International Registration may be issued, it remains the right of each country or contracting party designated for protection to determine whether or not protection for a mark may be granted.
Check the availability of the entity's name (if it is different from the trade name)
If you are planning to name your entity differently from the business trade name, you need to do the name availability check at the Secretary of State's website. It is important to check the entity name availability in all states where you are planning to do business.

If the chosen name is available, reserve it by filing the reservation application by mail or in person, with applicable fees. The reservation is valid for 60 days. Make sure that the name complies with the legal requirements, that is, includes certain words or abbreviations.
Check the domain name availability
If you are planning to use a website for your business and you want the domain name to match the business trademark, then you also need to check the domain availability. This practice is desirable to avoid cyber squatters who buy domain names with the intent to profit from re-selling them to trademark owners.
Form and register the company
Each business entity type has its own requirements for registration.
Sole proprietorship
No registration required.
A sole proprietorship is not a separate business entity. It does not require registration. However, you can register a fictitious trade name ("doing business as" or "trading as") at the county office where your business is located.
General partnership
Formed by the agreement between partners.
A general partnership is formed by agreement between two or more partners, which can include individuals and corporations. Cal. Corp. Code § 16202. The agreement may be written, oral, or even implied. The partnership may be formed regardless of the partners' intent to form it.

Partners may also choose to file a Statement of Partnership Authority (Form GP-1) online, by mail, or in person. A person who files a Statement of Partnership Authority must also promptly send a copy of the statement to every non-filing partner and to any other person named as a partner in the statement. Cal. Corp. Code § 16105.
Limited liability partnership (LLP)
File a statement of registration.
A limited liability partnership is formally created by filing a statement of registration (Form LLP-1) under Cal. Corp. Code § 16953. The form can be submitted online, by mail, or in person. The registration must state:

(1) the name of the LLP;
(2) address of its principal office;
(3) mailing address of its principal office (if different from the street address above);
(4) name and address of the agent for service of process;
(5) a brief description of LLP's business.

Registering an LLP does not automatically give you the license for professional practice. In California, LLPs can render services only through licensed professionals, such as attorneys, architects, engineers, public accountants, and land surveyors. Cal. Corp. Code § 16951. To obtain these licenses, each professional must complete all necessary requirements for licensing.
Limited partnership (LP)
File a certificate of limited partnership and enter into a partnership agreement.
A limited partnership is formally created by filing a certificate of limited partnership (Form LP-1) under Cal. Corp. Code § 15902.01. The form can be submitted online, by mail, or in person. The certificate must state:

(1) the name of the limited partnership;
(2) address of the initial designated officer;
(3) name and address of the agent for service of process;
(4) name and address of each general partner;
(5) mailing address of the limited partnership

Before or after the filing, the partners must enter into a partnership agreement. Cal. Corp. Code § 15902.01. The partnership agreement is the main document that governs relations among partners. Cal. Corp. Code § 15901.10. There are certain things that the partnership agreement may not alter (such as limitations on partners' powers, information rights, or duties of loyalty under Cal. Corp. Code); but there are also many things that it may define. For example, it may define appropriate remedies, liquidated damages, specific activities that do not violate the duty of loyalty, and specify the number or percentage of partners necessary to authorize specific types of transactions. Cal. Corp. Code § 15901.10.
Limited liability company (LLC)
File the articles of organization.
A limited liability company is formed by filing articles of organization with the Secretary of State. Cal. Corp. Code § 17702.01. The articles of organization must state

(1) A statement that the purpose of the limited liability company is to engage in any lawful act or activity.
(2) The name of the limited liability company, which must include certain words or abbreviations (such as "LLC" or "Ltd.").
(3) The street address of the office and the mailing address of the LLC.
(4) The name and address of the initial agent for service of process.
(5) If the LLC is to be manager-managed, the articles of organization should state so.
(6) If the LLC is to be managed by only one manager, the articles of organization shall contain a statement to that effect.

You can file the articles (Form LLC-1) online or by mail for approximately $75. Also, LLC must file a Statement of Information (Form LLC-12) within 90 days from the initial registration and every two years thereafter.

LLCs may be required to pay an $800 annual tax to the California franchise tax board.
Corporation (Inc., Corp.)
File the Articles of Incorporation.
1. Plan.
To register a corporation, you will need to decide on the number of shares and also who will be the registered agent for service of process. Consider what other provisions to include in the Articles of Incorporation (e.g., preemptive rights, stock transfer restrictions, voting rules).

2. Register in California.
File the Article of Incorporation (Form ARTS-GS) within the reservation period. This filing of the Article of Incorporation commences the corporation's existence. The Articles must be signed by the incorporator(s) and comply with all applicable legal requirements (name, number of shares, registered agent for service of process, name(s) of incorporator(s)).

3. Register in other states.
If the corporation will be conducting business in other states, it will need to register in each such state as a foreign corporation and have a registered agent for service of process.

4. Hold the meeting.
After the registration, the corporation should hold an organizational meeting or a written consent of incorporators (or directors, if they were named in the Articles) to adopt Bylaws, elect officers and directors, and make any other decisions to complete the organization of the corporation.

5. Consider a shareholder agreement.
The shareholders may also consider having a shareholder agreement to define the relationship between shareholders, address areas of potential disputes, define the rules of stock valuation, restrict the stock transfer.

6. Observe corporate formalities.
To avoid the "corporate veil piercing," shareholders and the corporation should diligently observe corporate formalities and keep their business matters separate.

7. Hold annual meetings or have a unanimous written consent.
The corporation should also hold annual shareholders' and directors' meetings with all minutes recorded, or have a unanimous written consent in lieu of a formal meeting.

8. Pay the annual $800 FTB tax.
Corporations are required to pay an $800 annual tax to the California franchise tax board.
Obtain a tax ID and licenses
Certain business activities are regulated by the federal or state governments. Before starting your business, you need to check if you are required to obtain licenses.
Employer Identification Number (EIN)
Every separate business entity must have its own tax ID. Even if you chose to do business as a sole proprietor, if you do not wish to expose your SSN, it is desirable to obtain a separate employer identification number.
Some business activities require federal or state licenses.
Federal licenses
You can find the list of federally licensed business activities on the U.S. Small Business Administration's website. For example, maritime transportation, mining and drilling, aviation, radio and television broadcasting require licenses and permits from federal agencies.

California licenses
For a California business, you can check whether you need a license at the California Department of Tax and Fee Administration. Here are examples of business activities that may require a license: selling or leasing tangible personal property, distribution of cannabis products, selling cigarettes and tobacco, selling alcohol, selling or leasing certain electronic devices, selling new tires, renting out motor vehicles, and the like.

Professional licenses
Additionally, certain professional activities require a separate license of the professional, such as CPA and attorneys. In California, LLPs can render services only through licensed professionals, such as attorneys, architects, engineers, public accountants, and land surveyors. Cal. Corp. Code § 16951.
Manage the risks
Finally, to be fully prepared to do business in California, you need to optimize legal protections for your business and manage the risks of liabilities.
The insurances type and coverage will depend on the business activities and the potential risks.
In some cases, insurance is mandatory. For example, workers' compensation is mandatory for almost all employers. If you are planning to use trucks or other vehicles, you will need to check the liability coverage requirements.

In other cases, insurance is desirable. For example, liability insurance for sole proprietors or general partners may be more desirable because they have potentially unlimited personal liability for the business's debts. Other examples of insurances are professional liability, damages to property, reputation, employer liability, and commercial liability.
Compliance check
Depending on the business activities, you will also need to conduct a compliance audit and monitoring.
Here are several examples of compliance checks.

If the business will hire employees, it is important to implement compliant wage and hour, anti-harassment, anti-discrimination, and safety policies and practices.

If the business owns or rents a building or space, it is important to make sure it is compliant with the Americans with Disabilities Act and its Standards and is safe for customers.

If the business deals with private information and stores data, it is important to check compliance with relevant privacy laws and regulations.

If the business deals with financial operations, it has to implement policies and practices compliant with state and federal financial and/or monetary regulations.

If the business is a corporation, it has to comply with the securities laws.
Other protections
If your business uses certain assets, it is important to protect them. Some protections may be forfeited if not used.
Here are several examples of other protections that you may want to consider for your business.

For trade secrets and know-how, you need to implement a trade secret culture to ensure that the information is carefully designated as secret and kept in secret.

For patentable inventions, you need to consider applying for patents.

For trademarks, it is important to monitor the market for infringements and continuously maintain the strength of the mark.

Cybersecurity. To protect the data from breaches or ransomware, make sure you have up-to-date protection and necessary policies and practices in place.
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