There are many good reasons to start a business in California. It’s rich and has a booming economy. In fact, if the Golden State was its own country, its GDP would be the world’s fifth largest. There are plentiful networking opportunities. Many companies set up seminars and other events in California. You’ll be able to not only meet potential business partners and clients but also keep abreast of industry trends. A large talent pool in the state makes it easy for you to find qualified employees or freelancers.
Even so, it will take time and hard work to set up a new business even in an ideal location. You’ll need to draw up a business plan. If you need a physical location, you’ll have to buy or lease a good spot. Other tasks include creating a website, marketing, and choosing a business structure.
Understanding the Business Structure Options
There are five main business structures to pick from. These are sole proprietorship, partnership, limited liability corporation (LLC), corporation, and S corporation.
No one structure is inherently better than all others. Each has its pros, cons, and requirements. Following are six things to keep in mind when choosing a structure. These considerations will help you find the one that will best meet your current and long-term needs.
Ownership
Who owns the business? If you’re starting a business with someone else, you can’t set up a sole proprietorship.
Industry
Nearly three-quarters of all businesses in the United States are sole proprietorships. However, it’s not the best option for businesses in many industries. Your business and personal assets aren’t separated. This means that someone who sues your business could gain access to your personal valuables. These include a house, car, personal bank account, etc.
Just about any business in any industry can be sued. As Harvard, MIT, and Parkwood Entertainment discovered, consumers can file a lawsuit against your company if your website or visual content isn’t accessible to disabled consumers. If a cybercriminal hacks your computer, clients can sue you for the exposure of their personal information. Even so, there are some types of businesses that are more likely to be sued than others. Professionals such as lawyers, accountants and real estate agents have a higher risk of lawsuits than many other professionals. Medical professionals are often sued, as are public servants. Chefs are also commonly sued.
If you set up a business in a high-risk industry, don’t set up a sole proprietorship or an unlimited liability partnership. The risk isn’t worth it, even if you have good liability insurance.
Taxes
If your business is a sole proprietorship or partnership, you’ll pay business taxes and personal taxes together. This means you can deduct up to 20% of your net business income. On the other hand, it also means your tax bill will be higher than you may have anticipated.
An LLC offers the best tax benefits. It’s flexible, which means that you can choose to be taxed on a personal level or as a corporation. You may need to hire a tax preparer to help you fill out extra forms, but the savings can be well worth it.
One of the potential tax advantages of forming a California LLC, is that you can enjoy the flexibility of choosing how your business will be taxed, while making use of the potential legal benefits of opting for an LLC as your business structure.
Financing
It’s not a bad idea to use personal savings or get a loan to finance your business. As your business grows, you can pay the money back or even take out another loan.
However, these financing options are limiting for a business owner who wants fast, exponential growth. If this is what you’re looking for, a corporation or S corporation will likely be your best bet. These business structures enable you to sell shares in your company to interested investors.
Administration and Paperwork
Sole proprietorships have the least amount of administrative paperwork. You simply start doing business. You can register if you want, but you don’t have to. It’s also pretty easy to start either a limited or unlimited liability partnership.
You’ll need to fill out some forms and pay a fee if you want to start an LLC. However, the requirements aren’t hard to meet. What’s more, you can deduct the money you pay for the LLC set-up from your taxes. On the other hand, you’ll have to handle a lot of administrative paperwork if you set up a corporation or S corporation.
Long-Term Plans
You can always change your business structure if you need to. However, it’s costly and time-consuming. It’s wise to make sure your business structure will work well for you for the foreseeable future.
If you want to sell business stock shortly after setting up your company, then a corporation or S Corp is your best bet. These structures also work best for business owners who may want to sell the new business a few years after they get it up and running. If you use any of the other three business models, you’ll have to change the model if you pass on ownership to someone else.
Now What?
Choosing the right location and structure for your business are keys to success. California has a higher tax rate than most states and a high cost of living. Its business rules and regulations are complex, ever-changing, and sometimes hard to navigate. However, the benefits of living and working in the Golden State far outweigh the disadvantages. California offers unparalleled access to networking opportunities, trained employees, a huge pool of potential customers, and more.
An LLC business structure is often the ideal set-up for new business owners in California. It’s simple to set up, as a California Registered Agent will do a lot of the paperwork for you. You can choose how you’ll file your taxes. This helps you pick the tax filing method that keeps your bill low. Additionally, the LLC structure protects your personal assets if someone sues your business. Even if you do plan on selling shares in the future, you can benefit from all that an LLC structure has to offer for the first few years, while your business is getting off the ground.
