How to Start a Small Business in California

To start a small business in California, you write a one-page plan, pick a legal structure (usually an LLC or S-corp), register with the California Secretary of State, get a federal EIN from the IRS, register for a seller's permit with the CDTFA if you sell taxable goods, secure any city and county business licenses, open a business bank account, and line up funding to cover startup costs and the first few months of operating expenses. California layers state, county, and city requirements on top of the federal basics, so the practical difference between here and most states is the number of registrations and the cost of compliance — not the core sequence. Below is the exact order we see work, plus a funding framework built from how lenders and revenue-based marketplaces actually underwrite a California startup.

The 8 Steps to Launch, In Order

Sequence matters in California because several steps depend on the one before it. Do them out of order and you end up refiling or paying twice.

1. Validate and write a one-page plan. Who buys, what they pay, what it costs you to deliver, and how many sales cover your fixed costs. You do not need a 40-page document; you need a break-even number.
2. Choose a legal structure. Sole proprietor and general partnership are cheapest but expose your personal assets. Most owners with real liability or revenue form an LLC; those planning to pay themselves a salary and take profit distributions look at an S-corp election. Talk to a CPA before electing S-corp.
3. Register the entity with the California Secretary of State. File Articles of Organization (LLC) or Incorporation (corporation), name a registered agent, and file your initial Statement of Information within 90 days.
4. Get a federal EIN from the IRS. Free, same-day online. You need it to open a bank account, hire, and file taxes.
5. Register for state tax accounts. A seller's permit with the CDTFA if you sell taxable goods; an employer payroll account with the EDD if you'll have employees.
6. Get local licenses and permits. Nearly every California city requires a business license or business tax certificate. Add zoning, health, or professional permits depending on your trade — a food truck, a salon, and a contractor each face different boards.
7. Open a business bank account and set up bookkeeping. Keep business and personal money strictly separate; commingling weakens liability protection and wrecks your ability to get funded later.
8. Fund the launch and the runway. Cover one-time startup costs plus enough operating cash to reach the point where revenue carries the business. This is where most first-year failures actually happen — undercapitalization, not a bad idea.

For a deeper walkthrough of the money side, see our small business funding guide.

What It Actually Costs to Start (Example Budget)

California startup costs vary widely by industry, but the categories are predictable. The table below is a realistic-example budget for a small service or light-retail business in a mid-sized California city. Treat every figure as illustrative, not a quote — your city fees, lease, and equipment will differ.

The one-time filing costs are small. The real capital need is almost always equipment, inventory, and the operating reserve — the money that keeps the lights on while revenue ramps.

How to Fund a California Startup

Funding options split by how much history you have. Understanding which bucket you're in saves weeks of dead-end applications.

• Personal savings and owner capital. The most common source and the one every lender wants to see. Skin in the game strengthens every later application.
• Friends, family, and grants. Real but limited. California grant programs exist but are competitive and slow; don't build a launch timeline around them.
• Conventional term loans and SBA loans. Best pricing, but most require 1-2 years of tax returns, strong personal credit, and often collateral. A day-one startup rarely qualifies. Revisit these once you have a track record.
• Business credit cards and lines of credit. Useful for smaller, revolving needs if your personal credit is decent.
• Revenue-based funding / MCA marketplace. Once you're generating consistent deposits, this is the fastest route to working capital. Approval leans on your bank statements and monthly revenue rather than credit score. FICO in the 500s is often workable, minimums typically start around $10,000, and funding commonly lands in 24-48 hours. It is not for a pre-revenue idea — you need real sales flowing through a business account first.

No legitimate funder can promise approval. Anyone using the word "guaranteed" is a warning sign, not a good deal.

Decision Framework: When Revenue-Based Funding Fits

We underwrite these deals daily. Here's the honest read on when a revenue-based advance is the right tool and when it isn't.

It works best when:

• You're already open and depositing steady revenue into a business bank account (usually 3+ months of statements).
• You need capital fast for a revenue-producing purpose — inventory ahead of a busy season, equipment that lets you take more jobs, or bridging a payroll gap while receivables come in.
• Your credit isn't strong enough yet for a bank or SBA loan, but your cash flow is real.
• The cost of waiting (a lost contract, empty shelves) is greater than the cost of the capital.

Avoid it when:

• You have no revenue yet — this is not launch capital for an idea.
• The money would fund fixed overhead with no clear path to more sales; flexible repayment still draws on your daily or weekly deposits.
• You qualify for a bank or SBA loan and can wait for it — cheaper capital beats faster capital when time allows.
• Your margins are thin enough that any additional cash-flow commitment would put the business underwater.

The core test: will this capital generate more cash than it costs to service, and can your deposits comfortably absorb the repayment rhythm?

California-Specific Compliance You Can't Skip

These are the items that trip up new California owners because they don't exist, or are lighter, in other states.

• The $800 franchise tax. LLCs and corporations owe it to the FTB annually regardless of profit. Newer relief rules have shifted over time, so confirm the current first-year treatment with a CPA — but plan to pay it.
• Statement of Information. Due shortly after formation and then on a recurring cycle (annually for corporations, every two years for LLCs). Miss it and you risk suspension.
• Local business tax. Cities like Los Angeles, San Francisco, and San Diego each run their own business tax regimes. Register with the city you operate in, not just the state.
• Sales tax discipline. Sales tax you collect through your seller's permit is held in trust for the state. Never treat it as revenue or spend it — CDTFA audits are unforgiving.
• Worker classification. California's ABC test (AB 5) makes it hard to classify workers as contractors. Misclassification penalties are steep; when in doubt, treat them as employees and register with the EDD.

Common Mistakes First-Year Owners Make

• Undercapitalizing the runway. Owners fund the launch but not the months before revenue stabilizes. Build a real operating reserve.
• Commingling funds. Running personal and business money through one account destroys liability protection and makes you unfundable — lenders can't read your cash flow.
• Chasing bank loans too early. Spending weeks applying for term loans you can't yet qualify for, when the real gap is short-term working capital against existing sales.
• Ignoring the $800 tax. Getting surprised by the franchise tax bill in a lean first year.
• Taking on funding without a use-of-funds plan. The best-underwritten deals name exactly what the capital buys and how it pays for itself.