Legal Requirements to Start a Business in California

This guide walks you through the essential legal requirements every California business owner should know, from choosing a business structure to registering with the right agencies, obtaining licenses, and staying compliant with employment and tax laws.

Step 1: Choose the Right Business Structure

One of the first—and most consequential—decisions you’ll make is choosing how to legally organize your business. Your structure affects everything from your personal liability and tax obligations to how you raise money and bring in partners.

The most common options in California include:

• Sole Proprietorship – Simple and inexpensive to set up, but offers no personal liability protection.
• General or Limited Partnership – Suitable for businesses with multiple owners sharing profits and responsibilities.
• Limited Liability Company (LLC) – One of the most popular choices for small businesses; offers flexibility and liability protection.
• Corporation (C-Corp or S-Corp) – Preferred by investors and ideal for businesses planning to raise capital or issue stock.

If you’re unsure which structure fits your goals, it’s worth consulting an attorney who understands how businesses are legally organized and can help you weigh the trade-offs before you commit.

Step 2: Register Your Business with the State

Once you’ve chosen a structure, you need to formally register your business with the California Secretary of State. The requirements vary by entity type:

• LLCs must file Articles of Organization (Form LLC-1) and pay a $70 filing fee.
• Both entities must also file an initial Statement of Information with the state within 90 days of formation (costing $20 to $25) to avoid an immediate $250 non-compliance penalty.
• Partnerships forming as LPs or LLPs must also file with the Secretary of State.
• Sole proprietors operating under a name other than their own must file a Fictitious Business Name (DBA) with their county.

If you’re a first-time founder or building a more complex company, working with counsel experienced in the entity formation process can help you avoid errors that cause costly delays or personal liability exposure.

Step 3: Obtain a Federal Employer Identification Number (EIN)

Most businesses—including single-member LLCs—should obtain an Employer Identification Number (EIN) from the IRS. Your EIN works like a Social Security number for your business: you’ll use it to open a business bank account, file federal taxes, hire employees, and apply for certain licenses.

You can apply for an EIN for free directly through the IRS website. The process takes only a few minutes and your number is issued immediately.

Step 4: Register with the California Department of Tax and Fee Administration

If your business sells tangible goods or certain services subject to California sales tax, you’ll need to register with the California Department of Tax and Fee Administration (CDTFA) and obtain a seller’s permit. This is required before you make your first taxable sale.

Additionally, businesses that have employees must register with the California Employment Development Department (EDD) for payroll tax purposes within 15 days of paying wages.

Step 5: Understand California’s Franchise Tax Board Requirements

California imposes an annual minimum franchise tax of $800 on most LLCs and corporations—even if you haven’t turned a profit yet. However, rules differ by entity type: newly incorporated C-Corporations and S-Corporations are automatically exempt from this $800 tax during their first taxable year. Conversely, for LLCs, LPs, and LLPs, the temporary first-year waiver (AB 85) expired on December 31, 2023. If you form an LLC today, your first $800 payment is due by the 15th day of the 4th month after registration. (An exception applies to any entity formed within the final 15 days of the tax year that conducts no business during that time).

LLCs with total annual statutory income (gross receipts reportable to California) of $250,000 or more are subject to an additional estimated LLC fee. This fee scales across tiers, ranging from $900 up to a maximum of $11,790 for entities grossing $5 million or more. Because this fee is calculated on gross revenue rather than net profit, failing to project it can severely impact a startup’s cash flow.

Step 6: Obtain the Necessary Business Licenses and Permits

California doesn’t have a single statewide general business license, but virtually every business needs some combination of local, county, and industry-specific licenses or permits. The requirements depend on your location, industry, and the nature of your activities.

Common licenses and permits you may need include:

• City or County Business License – Most municipalities require this before you can legally operate.
• Zoning and Land Use Permits – Required if you’re operating out of a physical location.
• Professional Licenses – Required for industries like law, medicine, contracting, real estate, and financial services.
• Health and Safety Permits – Required for food businesses, childcare facilities, and similar industries.
• Seller’s Permit – Required if you sell taxable goods or services (see Step 4 above).

California’s CalGOLD database is a helpful starting point, but navigating industry-specific requirements can be complex. Attorneys familiar with the full scope of commercial legal requirements can help you identify every permit your business needs to operate legally.

Step 7: Draft Key Business Agreements

If your business involves more than one owner, investor, or key employee, you need properly drafted legal agreements in place before you start operating. Skipping this step is one of the most common—and expensive—mistakes entrepreneurs make.

Partnership and Operating Agreements

If you’re forming a partnership or multi-member LLC, you need a formal agreement that outlines ownership percentages, decision-making authority, profit sharing, and what happens if a partner leaves. Firms that handle co-ownership and collaboration agreements can help ensure these documents actually protect your interests.

Shareholder Agreements

For corporations, a shareholder agreement governs how shares are transferred, how disputes are resolved, and what rights each investor holds. This is particularly important if you plan to bring in outside funding. Having equity and ownership protections clearly documented from the start can prevent major disputes later.

Startup and Founder Agreements

Early-stage companies should also put founder agreements in place covering intellectual property assignment, equity vesting schedules, and roles. An attorney with experience in early-stage company structure and documentation can make sure your foundation is solid before you bring on investors or employees.

Step 8: Understand Employment Law Obligations

California has some of the most employee-friendly labor laws in the country, and the obligations can be significant even for small businesses.

If you hire employees, you’ll need to:

• Verify eligibility to work in the U.S. using Form I-9.
• Register with the EDD and withhold state income tax and payroll taxes.
• Provide workers’ compensation insurance (required for all California employers, even for one employee).
• Comply with California’s minimum wage laws, which vary by city and county.
• Provide mandated leave, including paid sick leave under the Healthy Workplaces, Healthy Families Act.
• Display required workplace posters covering wage orders, workers’ comp, and other employee rights.

Misclassifying employees as independent contractors is also a serious risk in California, given the state’s strict ABC test under AB5. Getting this wrong can result in significant penalties.

Step 9: Protect Yourself with a Solid Contract Foundation

Every business that sells goods or services—or enters into agreements with vendors, clients, or contractors—needs solid contracts in place. A well-drafted contract defines the scope of work, payment terms, dispute resolution processes, and what happens when something goes wrong. Without one, you’re exposed to costly disputes over unfulfilled obligations that could have been avoided entirely.

Planning for Growth: M&A, Investors, and Scaling

Not every business stays small. If you’re building something with the intention to grow, bring in investors, or eventually sell, the legal decisions you make at the start matter even more.

For companies planning to raise capital, understanding the role of venture funding structures and investor rights is essential before you sign a term sheet. And as your company scales, understanding your options around business combinations and strategic acquisitions can help you make informed decisions about your exit or growth strategy.

At Omni Law P.C., we advise businesses at every stage—from first-time founders navigating registration and compliance to established companies managing complex legal structures. Our team serves clients throughout California and works with entrepreneurs and business owners across the country, including those in New York, Pennsylvania, Florida, and New Jersey, who are looking to launch or expand operations into the California market. Whether you’re just starting out or ready to scale, we’re here to help you build on a solid legal foundation.

Frequently Asked Questions

Do I need a lawyer to start a business in California?

You are not legally required to hire an attorney, but it is strongly advisable for most business types. An attorney can help you choose the right entity structure, draft key agreements, and ensure you’re compliant with California’s complex regulatory requirements—reducing your risk of costly mistakes early on.

How much does it cost to register a business in California?

Costs vary by entity type. LLCs pay a $70 state filing fee, while corporations pay $100. You must also file an initial Statement of Information ($20–$25) within 90 days. Regarding taxes, newly formed corporations are exempt from the $800 minimum franchise tax for their first taxable year, whereas new LLCs must pay the $800 tax during their first year of registration.

What is the difference between an LLC and a corporation in California?

An LLC offers more operational flexibility and pass-through taxation, meaning profits and losses flow directly to the members’ personal tax returns. A corporation is a separate tax-paying entity (unless it elects S-Corp status), provides a more formal governance structure, and is generally preferred by venture investors. The right choice depends on your goals, ownership structure, and growth plans.

Do I need a business license in California?

California does not have a single statewide general business license, but most cities and counties require you to obtain a local business license before operating. Depending on your industry, you may also need state-level professional licenses, health permits, or industry-specific certifications.

What is California’s $800 annual franchise tax?

Most LLCs and corporations doing business in California owe a minimum of $800 per year to the California Franchise Tax Board, regardless of profit. While newly incorporated C-Corps and S-Corps get a pass for their very first taxable year, LLCs must make this payment in their first year within 3.5 months of filing. For subsequent years, this tax is due annually for all entities even if you generated zero revenue.

Can I operate a business in California if I’m based in another state?

Yes, but out-of-state businesses that operate in California must register as a “foreign” entity with the California Secretary of State before conducting business in the state. This applies to businesses physically present in California or regularly transacting business here.