Starting a new business is exciting, but understanding what comes next and staying on top of your “regulatory to-do list” can be challenging. Read on for a sample checklist and description of each task you should be aware of to remain in compliance with federal and state laws.
Starting a new business isn’t as simple as coming up with an idea, name, and logo. Depending on your choice of entity (sole proprietorship, limited liability company, partnership, C corporation, or S corporation), each state has different requirements to begin and continue conducting business. In this article, we focus on California’s requirements. If you are interested in setting up a business in another state, please contact our office and we will be happy to assist you.
- Draft your operating agreement – Whether or not you will be in business alone or with other partners/investors, it is important to have an operating agreement that will define and govern your business activities. This agreement must be tailored to your particular business and entity type, so it is a good idea to consult an attorney to help you draft this document. The same attorney will be a helpful resource as you navigate the law when operating your business.
- Obtain an EIN (Employer Identification Number) – An EIN is the unique identifying number (similar to an individual’s social security number) that you will use to conduct business. It is the number that will be associated with any bank accounts or credit cards that you open for the business, and it will also be used on any federal tax forms that you file. An EIN can be obtained online here or by filing Form SS-4.
- Register with the California Secretary of State (SOS) – To operate a business in California, you must register with the SOS. You will file different forms depending on your type of entity. A list of these forms can be found by visiting the Secretary of State’s website here. Once registered, the SOS will provide you with an entity number (similar to an EIN but for use in CA only). Once that number is received, you have 90 days to file a Statement of Information which outlines the entity’s address, officers/members, agent for service of process, and type of business activity the entity conducts. This statement is then filed either annually or biannually depending on the entity type.
- Apply for a Business Tax Certificate – Many cities require a business tax certificate or business license to conduct business activity. A business planning to operate in the City of San Diego can register for a Business Tax Certificate here.
- Pay any initial filing fees or estimated taxes – Business entity types, except for C corporations, are generally considered “pass-through entities.” This means that the income and deductions generated by the business are passed through to the owners who will pay the federal and state income tax associated with that business on their individual returns. Unfortunately, that doesn’t mean that the entity is exempt from all taxes. California imposes a minimum $800 franchise tax on most forms of business entities. Depending on how much income the business makes, the tax can increase significantly. Consult with your tax advisor regarding payment requirements and due dates.
- If you are going to be hiring employees, register with the Employment Development Department (EDD) – To pay employees and file payroll tax forms, you must be registered with the EDD. Depending on how many employees you have, your tax advisor may be able to help with this. Otherwise, there are numerous payroll service providers that can manage your payroll and related compliance.
- If you are going to be selling a product that will be subject to sales tax, register with the California Department of Tax and Fee Administration (CDTFA) – This is the division of the CA government where you will remit sales tax collected from customers. This is also how you will obtain a Seller’s Permit (or other licenses you may need) to conduct your business activity. Depending on your level of sales, you may be required to remit the sales tax collected annually, quarterly, or monthly. We recommend consulting with your tax advisor regarding your specific due dates.
- If you expect to acquire more than $100,000 in non-real estate business property, alert your County Assessor that you have begun conducting business – notifying the Assessor will ensure that you are sent Form 571-L to declare your assessable business property. We recommend that you contact your County Assessor to determine if there is a form to file, or if a simple letter will suffice.
- Consult with your tax advisor – Once your business is up and running, it is important to stay in frequent communication with your tax advisor regarding your business activities so that they can help you remain compliant throughout the years. Different tax forms are due at different times of the year and missing the deadlines could subject your business to hefty fines and penalties.
Starting a business can be an exciting but scary endeavor! Be sure to contact our office at (858) 558-9200 if you have any questions about the tax or financial aspects of setting up and maintaining your investment.