Before you start a business in California, you need to know five things: which legal entity fits your goals, whether your business name is available and protectable, how to properly form and register the entity, which governing and founder agreements you need, and which licenses, permits and tax registrations apply. Getting these basics right at the start helps protect your personal assets, avoid name disputes, and prevent costly cleanup when you hire, raise money or sell the business.
Starting a business is exciting, and it is tempting to skip the paperwork. But many of the legal problems that surface years later, such as founder disputes, tax surprises or a forced rebrand, trace back to decisions made in the first few weeks.
1. Choose the Right Business Entity
Your entity choice affects personal liability, taxes, fundraising and administrative burden. Common options in California include:
- Sole proprietorship or general partnership. Simple to start but offers no liability protection; owners are personally responsible for business debts.
- Limited liability company (LLC). Provides liability protection and flexible management and tax treatment. By default, an LLC is taxed as a pass-through entity, but it can elect to be taxed as a corporation.
- Corporation. A C corporation is the standard choice for startups planning to raise venture capital or issue stock options, and may offer potential benefits under the qualified small business stock rules. An S corporation election lets eligible corporations pass income through to shareholders, but limits the number and type of shareholders and permits only one class of stock.
California imposes an annual minimum franchise tax on LLCs and corporations (generally $800), and LLCs with higher gross receipts also pay an additional fee. Licensed professionals, such as attorneys and physicians, generally cannot use an LLC in California and must consider a professional corporation instead. Our article on understanding S corporations explains how S status works.
2. Choose and Clear Your Business Name
A business name builds reputation and becomes a valuable asset. Before committing to a name:
- Search the California Secretary of State’s records through its online business search to see whether an entity with the same or a confusingly similar name already exists.
- Search federal trademark records using the USPTO’s trademark search system, as well as state registrations and common-law use on the web, social media and app stores.
- Check domain availability and social media handles.
Registering an entity name with the Secretary of State does not give you trademark rights. If you operate under a name different from your legal entity name, you will generally need to file a fictitious business name statement with the county. If the name will identify your products or services across state lines, consider a federal trademark application. Our Trademarks 101 guide walks through the process.
3. Form and Register Your Entity Correctly
Formation involves several steps that are easy to miss:
- File formation documents. LLCs file Articles of Organization and corporations file Articles of Incorporation with the California Secretary of State, typically through its online filing system. If a filing is rejected, the Secretary of State will explain why, and you can correct and resubmit.
- File the initial Statement of Information. California requires a Statement of Information shortly after formation (generally within 90 days) and then periodically, listing officers, managers and addresses.
- Obtain an EIN. Apply to the IRS for an employer identification number to open bank accounts, hire employees and file taxes.
- Qualify in other states if you form outside California (for example, in Delaware) but do business here.
- Check federal reporting requirements. Federal beneficial ownership reporting rules under the Corporate Transparency Act were significantly narrowed in 2025 for U.S. companies; confirm current requirements when you form.
Keep personal and business finances strictly separate. Commingling funds and ignoring formalities can make it easier for creditors to “pierce the veil” and reach owners’ personal assets.
4. Put Governing and Founder Agreements in Writing
An LLC’s operating agreement, or a corporation’s bylaws and founder stock agreements, are the rules by which your company is run. California does not require you to file an operating agreement with the state, but having a written one is strongly recommended. Without it, default statutory rules apply, and they may not match what the owners intended.
Key issues to address include:
- Ownership percentages and capital contributions
- Management authority and voting
- Vesting of founder ownership, so a co-founder who leaves early does not keep a large stake
- Transfer restrictions and buy-sell rights on death, disability, divorce or departure
- Deadlock and dispute resolution
- Assignment of intellectual property from founders to the company
A shareholder agreement or comprehensive operating agreement can prevent many of the founder disputes that derail young companies.
5. Get Licenses, Permits and Tax Registrations
Depending on your business and location, you may need:
- A city or county business license or tax registration
- A seller’s permit from the California Department of Tax and Fee Administration if you sell tangible goods
- Registration with the Employment Development Department before hiring employees, along with workers’ compensation insurance
- Industry-specific state licenses (for example, contractors, food service, alcohol, cannabis or financial services)
- Zoning approvals or home occupation permits
Also plan for ongoing obligations such as franchise tax payments, annual filings and payroll compliance. Many new businesses benefit from setting up bookkeeping and calendaring deadlines from day one.
The Takeaway
A solid legal foundation does not have to be complicated, but it does need to be deliberate. Choosing the right entity, clearing your name, forming correctly, documenting ownership and getting the required permits can save significant time and money later. For more on building a company to raise capital, see our startup law page.
Frequently Asked Questions
Which business entity should I choose in California?
It depends on your goals. LLCs offer liability protection and flexible tax treatment, while C corporations are standard for startups planning to raise venture capital. Sole proprietorships are simple but provide no liability protection.
Does California require an LLC operating agreement?
California does not require you to file an operating agreement with the state, but a written operating agreement is strongly recommended. Without one, default statutory rules govern the company.
Does registering my business name protect it as a trademark?
No. Registering an entity or fictitious business name does not create trademark rights. Trademark protection comes from using the name for goods or services and from federal or state trademark registration.
What ongoing filings does a California LLC or corporation have?
Most must file a periodic Statement of Information with the Secretary of State and pay the annual minimum franchise tax, along with any required local business license renewals and tax filings.
How Sutter Law Can Help
Sutter Law helps entrepreneurs choose an entity, form and register their company, and prepare operating agreements, bylaws and founder documents as part of our business formation practice. Contact us for a free consultation.
This article is general information, not legal advice. Reading it does not create an attorney-client relationship.
