UNITED STATES—Creating a business in California is an opportunity to provide products and services that customers crave.
Too many small-business owners, however, do not take the time to plan carefully how the business will be structured. Following the steps below helps you build a business that’s built to last. If you are unaware of how to form an LLC in California, then consider checking out startmyllc website.
Create a Business Plan
A business plan is an important initial step for developing your company.
Why create a business plan? It’s a powerful process that helps you identify why your business exists and for whom, what it provides and what the market, competition and opportunity are.
Business plans help you provide clarity – to yourself, to advisors and, perhaps most importantly, to investors and lenders. Banks and investors will closely scrutinize your business plan before committing resources to your company.
A business plan helps you identify what resources are needed to meet your goals, develop a timeline for profitability and goal-attainment, and helps you identify and track progress.
Here are the key steps to take when building your business plan.
- Executive Summary
The executive summary is a high-level synopsis of the key parts of your plan. It’s a way for readers to quickly gain a summary of the salient points and highlights.
While it may seem counterintuitive to do so, it often makes sense to write the executive summary last. That way, you can extract the key information from other sections of the plan to create a succinct version for use in the summary.
- Business Description
The business plan should provide a detailed description of what your business is and what it does. This is where you detail what products or services you offer and your desired customer base. This section also outlines in which industry your company operates, the trends in that industry and who the major competitors are.
- Market Analysis and Strategy
The market analysis and strategy section helps you define your target audience for the goods or services your business will provide. This section also estimates how your provided goods and services will perform within the market.
Among the considerations to include in this section are:
- Pain points and needs your target customers have
- How your product or service addresses those needs or challenges customers have
- Your target audience’s demographic composition
- Where the target audience is located
- How your target audience spends its time, such as frequenting certain locations or using certain social media platforms
- Competitive Landscape
Who are your competitors? This section provides specifics about who your competitors are and their strengths and weaknesses. This section also articulates how your company compares to those strengths and weaknesses.
It will also illustrate any advantages that competitors hold in the marketplace. One key to this section is to identify your competitive advantage. These differentiators will help set your business apart. It’s also important to identify any risks to entering the marketplace.
- Products and Services
This section provides additional details about the products and services your company provides, expanding upon what is in the executive summary. This expansion should include how your products are made or sourced and how much it will cost to create them. If your business provides services, what are they, how are they delivered and by whom?
- Marketing and Sales
How will you market the products and services your company offers to its customers? Each business needs a strategy for which marketing and sales channels it will use to get the word out. Will you use traditional media such as TV, radio and billboards? Will you focus on social media and email marketing campaigns?
This section should also demonstrate how you will price your company’s products and services and, if known, how those prices differ from your competitors.
Differentiation is critical in marketing and sales. How will you distinguish your offerings from those of your competitors? What will be your company’s unique selling proposal? What will you do to get your products and services in front of your target audience?
- Organizational Structure
How will your business be structured, organized and managed? Your business should outline who your leadership are and their backgrounds. Detail what their qualifications are and their roles within your business. This section can also detail your formal business structure.
- Operating Plan
How will your company run? Where will it be located? This section details projections on employee numbers, where it will operate and other details about the day-to-day operations.
- Financial Projections and Needs
How much cash flow will you need to operate? This section details your revenue projections and how much startup capital and funding you will need to succeed. This section will provide your financial statements, analysis and cash flow projections.
Collectively, the business plan will become a powerful document that may be revised and refined as your company evolves.
Business Entity Type
Determining your company’s business structure is a critical decision. There can be financial and tax benefits to the business entity type you choose. Here is a look at the most common business structures.
Sole Proprietorship
A sole proprietorship is the simplest type of business entity. In a sole proprietorship you are the only owner. As a sole business owner and operator, you take on all the financial responsibility and legal liability for the company.
A sole proprietorship requires no formal paperwork or filing. It is the de factor business entity type when you start selling goods or services. From a tax perspective, you merely enter in the profits or losses on your personal tax return.
Limited Liability Company
A limited liability company (LLC) provides considerable tax advantages for owners. The LLC is a separate legal entity from its owner. Profits flow through the company to the owners who can then declare the income on their personal tax returns. This process avoids double-taxation.
Most liability is limited, providing members and managers with considerable legal protection. The LLC is a popular entity type for small businesses.
With an LLC, unlike with other business entities, offers flexibility in how the company runs. You can customize how the company operates, and use different legal documents to develop the structure and details of how the business operates, the roles of members and managers and how disagreements are handled.
Setting-up an LLC involves a lot of moving parts such as registering your name, hiring a registered agent and preparing your filings but there are services that can help with this by automating the set-up process.
Partnerships
Partnerships fall under two headings – General Partnerships and Limited Partnerships.
A general partnership is similar to a sole proprietorship in that it is established automatically and usually does not require a formal registration process with the state. All the founders are liable personally for any legal actions against the company. In addition, profits are reported on personal tax forms.
Limited partnerships are different. Some founders may haver personal liability but limited partners have little to no liability. This structure allows founders to bring on investors without giving up control of the business. A limited partnership does need to be filed with the state.
Corporations
There are two common types of corporation business entities – the C corporation and the S corporation.
The C corporation is a legal entity that is independent of its founders. The business is the liable party in any legal action, while founders and owners remain legally separate.
When you file your business as a C corporation, you need to abide by additional governance structures, such as having company bylaws and having a board that meets regularly. Taxes occur twice. The business itself is taxed and personal earnings derived from dividends are also taxed.
If founders are looking to pass on a company to heirs, the C corporation is a good model to use.
The S corporation has the same personal-liability safeguards as a C corporation but are not doubly taxed. However, S corporations can only have 100 shareholders, which can limit company growth.
Nonprofit Organization
A nonprofit organization has a unique mission that that affords it special status with the IRS and state revenue agencies. Hospitals, colleges and universities and social service agencies are among the most common businesses classified as nonprofits.
Running a nonprofit does not mean you cannot earn money. However, nonprofit status requires bylaws, a board and certain restrictions on the kinds of business activities you can pursue.
Register Your Company
Whether your company is an LLC, partnership or corporation, you will need to register it with the state of California. Here are the key steps:
Business Entity Filing
You will need to file with the California Secretary of State’s office. The documents required vary based on the type of business you operate as. An LLC, for example, will need to file a name registration ($10), Articles of Organization ($70 fee). It will also need to file a Statement of Information ($20) within 90 days of the initial registration and every two years following. Additional filings are required if the business organization is amended ($30), articles of organization are restated ($30), corrected are needed ($30), your registered agent changes ($50) or the company dissolves.
Obtain Necessary Business Licenses
You will need to obtain a business license to operate in California. If you are engaged in business in the state, intend to sell or lease tangible personal property or will make sales temporarily, you will need a seller’s permit.
If you have more than $100,000 in gross receipts in a year, you will need to obtain a use tax permit. Both are available via the state Department of Tax and Fee Administration.
Based on the type of business you operate, you may need additional state, federal or local licenses and permits to operate.
Understand Tax Considerations
As a business, you will be required to pay various federal and state taxes, including sales and use taxes and payroll taxes. In addition, you may need to pay local or city taxes, depending on where your business is located.
Open Business Bank Account
Holding a separate bank account from your personal finances is an important consideration. You do not want to co-mingle personal and professional expenses. Keeping these finances separate makes it easier to create financial documents for the business and protect personal assets in case of a lawsuit.
Secure Funding
Whether it’s from a bank or other financial institution, or from investors, you likely will need some additional capital to get your business off the ground. Having the other details – a business plan, business entity type and licenses and permits secured – will position your company favorably with different funders.
Conclusion
Starting a business in California is an exciting venture. It’s important when creating your business that you follow the guidelines established here to help you define how your business is structured and operated.
Running a business takes tremendous work and initiative. With the right foundation in place, you can focus on growing your business and creating a successful company.
