Are you ready to start your business?
Being an entrepreneur is not for everyone. It requires a person to face uncomfortable risks, to believe in something that has never been before and struggle to make it a reality. Most importantly, it takes a continuous relentless dedication. As an employee you have a boss or owner dealing with the stress of where the next dollar will come from, how rent and labor costs will be paid for, lawsuits, injuries, the economy, the weather, pandemics, the next president and a million other things. An employee knows that at 5 p.m. they go home. They clock out. You do not clock out as an entrepreneur, your mind is constantly working and navigating all the above issues which seem to come out of nowhere. It sounds cynical, but it’s the reality of being a business owner. But that doesn’t scare you and that’s why you are here.
This is why the first question an entrepreneur should ask themselves is: “Am I ready to dedicate my time, money, and effort into this new endeavor?” It’s a good question to ask because if you’re not mentally prepared you can lose all three.
As business attorneys we have met with all types of business owners and the underlying theme among the successful ones is that successful business owners are dedicated, disciplined and take the time to protect their businesses by being aware of laws, rules and regulations. You will find some who will cut corners, enter verbal agreements, ignore rules and regulations, only to face lawsuits, fines, penalties and eventually loss of business.
Here Are The Steps Any Business Owner Should Take When Thinking About Starting A Business In California:
STEP 1: Conduct market research
Use market research to find customers
Market research will tell you if there’s an opportunity to turn your idea into a successful business. It’s a way to gather information about potential customers and businesses already operating in your area. Use that information to find a competitive advantage for your business.
Market research balances consumer behavior and economic trends to confirm and improve your business idea.
It’s crucial to understand your customer or client base from the outset. Market research lets you reduce risks even while your business is still just a flicker in your imagination.
Gather demographic information to better understand opportunities and limitations for gaining customers. This could include population data on age, wealth, family, interests, or anything else that’s relevant for your business.
Answer the following questions to get a good sense of your market:
- Demand: Is there a desire for your product or service?
- Market size:How many people would be interested in your offering?
- Economic indicators: What is the income range and employment rate?
- Location: Where do your customers live and where can your business reach?
- Market saturation:How many similar options are already available to consumers?
- Pricing:What do potential customers pay for these alternatives?
You’ll also want to keep your ear to the ground with the latest small business trends. It’s important to gain a sense of the specific market share that will impact your profits.
You can do market research using existing sources like google maps, and other market research tools that can help you find niches, or you can do the research yourself and go direct to consumers and taking your own surveys.
Existing sources can save you a lot of time and energy, but the information might not be as specific to your audience as you’d like. Use it to answer questions that are both general and quantifiable, like industry trends, demographics, and household incomes. Check online or start with our list of market research resources.
Asking consumers yourself can give you a nuanced understanding of your specific target audience. But, direct research can be time consuming and expensive. It might also give you skewed results of you are not careful. Use it to answer questions about your specific business or customers, like reactions to your logo, improvements you could make to buying experience, and where customers might go instead of your business.
Here are a few methods you can use to do direct: research
Surveys and In-depth Interviews
Use competitive analysis to find a market advantage
Competitive analysis helps you learn from businesses competing for your potential customers. This is key to defining a competitive edge that creates sustainable revenue.
Your competitive analysis should identify your competition by product line or service and market segment. Assess the following characteristics of the competitive landscape:
- Market share
- Strengths and weaknesses
- Your window of opportunity to enter the market (very important)
- The importance of your target market to your competitors
- Any barriers that may hinder you as you enter the market
- Indirect or secondary competitors who may impact your success
Several industries might be competing to serve the same market you’re targeting. Important factors to consider include level of competition, threat of new competitors or services, and the effect of suppliers and customers on price.
STEP 2: Write Your Business Plan
Your business plan is the foundation of your business. It’s a roadmap for how to structure, run, and grow your new business. You’ll use it to convince people that working with you — or investing in your company — is a keen business decision.
Business plans help you run your business
A good business plan directs you through each stage of starting and managing your business. You’ll use your business plan as a roadmap on how to structure, run, and grow your new business. It’s a way to think through the key elements of your business and give you a good perspective.
Business plans can help you get funding or bring on new business partners. Investors want to feel confident they’ll see a return on their investment. Your business plan is the tool you’ll use to convince people that working with you — or investing in your company — is a smart choice.
Pick a business plan format that works for you
There’s no right or wrong way to write a business plan. What’s important is that your plan meets your needs.
Most business plans fall into one of two common categories: traditional or lean startup.
Traditional business plans are more common, use a standard structure, and encourage you to go into detail in each section. They tend to require more work upfront and can be dozens of pages long.
Lean startup business plans are less common but still use a standard structure. They focus on summarizing only the most important points of the key elements of your plan. They can take as little as one hour to make and are typically only one page.
This type of plan is very detailed, takes more time to write, and is comprehensive. Developers, Landlord, Lenders and investors commonly request this plan.
Traditional business plan format
You might prefer a traditional business plan format if you’re very detail-oriented, want a comprehensive plan, or plan to request financing from traditional sources.
When you write your business plan, you don’t have to stick to the exact business plan outline. Instead, use the sections that make the most sense for your business and your needs. Traditional business plans use some combination of these nine sections.
Briefly tell your reader what your company is and why it will be successful. Include your mission statement, your product or service, and basic information about your company’s leadership team, employees, and location. You should also include financial information and high-level growth plans if you plan to ask for financing.
Use your company description to provide detailed information about your company. Go into detail about the problems your business solves. Be specific, and list out the consumers, organization, or businesses your company plans to serve.
Explain the competitive advantages that will make your business a success. Are there experts on your team? Have you found the perfect location for your store? Have your found a niche where there is a high demand but low supply? Your company description is the place to boast about your strengths.
You’ll need a good understanding of your industry outlook and target market. Competitive research will show you what other businesses are doing and what their strengths are. In your market research, look for trends and themes. What do successful competitors do? Why does it work? Can you do it better? Now’s the time to answer these questions. Most business owners do not do this or they do it mentally based of their experiences or word of mouth. However, conducting a substantial market analysis can protect you from pitfalls that you might encounter deep into running your business instead of at the outset.
Organization and management
Tell your reader how your company will be structured and who will run it.
Describe the legal structure of your business. State whether you have or intend to incorporate your business as a C or an S corporation, form a general or limited partnership, or if you’re a sole proprietor or limited liability company (LLC).
Use an organizational chart to lay out who’s in charge of what in your company. Show how each person’s unique experience will contribute to the success of your venture. Consider including resumes and CVs of key members of your team. In the beginning all the roles might be you. Its true that many business owners wear a lot of hats but planning the future and creating a delegation plan can help you scale your business and get the most benefit out of your business structure.
Service or product line
Describe what you sell or what service you offer. Explain how it benefits your customers and what the product lifecycle looks like. Share your plans for intellectual property, like copyright or patent filings. If you’re doing research and development for your service or product, explain it in detail.
Marketing and sales
There’s no single way to approach a marketing strategy. Your strategy should evolve and change to fit your unique needs.
Your goal in this section is to describe how you’ll attract and retain customers. You’ll also describe how a sale will actually happen. You’ll refer to this section later when you make financial projections, so make sure to thoroughly describe your complete marketing and sales strategies.
It’s a good idea to consult with marketing professionals when thinking about this topic. You will need to gain a good understanding about marketing costs as a startup cost and also what it will cost during the lifetime of your business. Depending on your budget there are many options here. Word of mouth and referrals from friends and family is a great way to start for free. However, depending on how fast you want to scale your business, you might need to put some marketing dollars to expand that reach. Include these costs in your business plan as they are a considerable expense when starting a business and should not be overlooked.
If you’re asking for funding, this is where you’ll outline your funding requirements. Your goal is to clearly explain how much funding you’ll need over the next five years and what you’ll use it for.
Specify whether you want debt or equity, the terms you’d like applied, and the length of time your request will cover. Give a detailed description of how you’ll use your funds. Specify if you need funds to buy equipment or materials, pay salaries, or cover specific bills until revenue increases. Always include a description of your future strategic financial plans, like paying off debt or selling your business.
Supplement your funding request with financial projections. Your goal is to convince the reader that your business is stable and will be a financial success.
If your business is already established, include income statements, balance sheets, and cash flow statements for the last three to five years. If you have other collateral you could put against a loan, make sure to list it now.
Provide a prospective financial outlook for the next five years. Include forecasted income statements, balance sheets, cash flow statements, and capital expenditure budgets. For the first year, be even more specific and use quarterly — or even monthly — projections. Make sure to clearly explain your projections, and match them to your funding requests.
This is a great place to use graphs and charts to tell the financial story of your business.
Use your appendix to provide supporting documents or other materials were specially requested. Common items to include are credit histories, resumes, product pictures, letters of reference, licenses, permits, patents, legal documents, and other contracts.
This type of plan is high-level focus, fast to write, and contains key elements only. Some lenders and investors may ask for more information.
Lean startup format
You might prefer a lean startup format if you want to explain or start your business quickly, your business is relatively simple, or you plan to regularly change and refine your business plan.
Lean startup formats are charts that use only a handful of elements to describe your company’s value proposition, infrastructure, customers, and finances. They’re useful for visualizing tradeoffs and fundamental facts about your company.
There are different ways to develop a lean startup template. You can search the web to find free templates to build your business plan. We discuss nine components of a model business plan here:
Note the other businesses or services you’ll work with to run your business. Think about suppliers, manufacturers, subcontractors, and similar strategic partners.
List the ways your business will gain a competitive advantage. Highlight things like selling direct to consumers, or using technology to tap into the sharing economy.
List any resource you’ll leverage to create value for your customer. Your most important assets could include staff, capital, or intellectual property. Don’t forget to leverage business resources that might be available to women, veterans, Native Americans, and HUBZone businesses.
Make a clear and compelling statement about the unique value your company brings to the market.
Describe how customers will interact with your business. Is it automated or personal? In person or online? Think through the customer experience from start to finish.
Be specific when you name your target market. Your business won’t be for everybody, so it’s important to have a clear sense of whom your business will serve.
List the most important ways you’ll talk to your customers. Most businesses use a mix of channels and optimize them over time.
Will your company focus on reducing cost or maximizing value? Define your strategy, then list the most significant costs you’ll face pursuing it.
Explain how your company will actually make money. Some examples are direct sales, memberships fees, and selling advertising space. If your company has multiple revenue streams, list them all.
STEP 3: Funding your Business
Your business plan will help you figure out how much money you’ll need to start your business. If you don’t have that amount on hand, you’ll need to either raise or borrow the capital. Fortunately, there are more ways than ever to find the capital you need.
Calculate your business startup costs before you launch
The key to a successful business is preparation. Before your business opens its doors, you’ll have bills to pay. Understanding your expenses will help you launch successfully.
Calculating startup costs helps you:
- Estimate profits
- Conduct a break-even analysis
- Secure loans
- Attract investors
- Save money with tax deductions
Identify your startup expenses
Most businesses fall into one of three categories
Brick and Mortar
START UP COSTS
Each of the above business categories will have different start up costs. Here are common startup costs you’re likely to have no matter what. Look through the following list, and make sure to add any other expenses that are unique to your business:
Estimate how much your expenses will cost
Once you have your list of expenses, you can estimate how much they’ll actually cost. This process will be different for each expense you have.
Some expenses will have well-defined costs — permits and licenses tend to have clear, published costs. You might have to estimate other costs that are less certain, like employee salaries. Look online and talk directly to mentors, vendors, and service providers to see what similar companies pay for expenses.
Add up your expenses for a full financial picture
Once you’ve identified your business expenses and how much they’ll cost, you should organize your expenses into one-time expenses and monthly expenses.
One-time expenses are the initial costs needed to start the business. Buying major equipment, hiring a logo designer, and paying for permits, licenses, and fees are generally considered to be one-time expenses. You can typically deduct one-time expenses for tax purposes, which can save you money on the amount of taxes you’ll owe. Make sure to keep track of your expenses and talk to your accountant when it’s time to file your taxes.
Monthly expenses typically include things like salaries, rent, and utility bills. You’ll want to count at least one year of monthly expenses, but counting five years is ideal.
Add up your one-time and monthly expenses to get a good picture of how much capital you’ll need and when you’ll need it.
Use your startup cost calculations to get startup funding
It’s a good idea to create a formal report of your expected startup costs.
You want it in a format that’s clear and easy to understand. Investors and lenders compare expected costs to projected revenue and determine the potential for your business to profit.
sTEP 4: Location, Location, Location
Your business location is one of the most important decisions you’ll make. You have probably even seen yourself, even on the same street intersection, that businesses on one side see more traffic than others. Whether you’re setting up a brick-and-mortar business or launching an online store, the choices you make could affect your taxes, legal requirements, and revenue.
Research the best place to locate your business
In California, you’ll need to register your business, pay taxes, and get licenses and permits in the place you choose to locate your business.
Where you locate your business depends in part on the location of your target market, business partners, and your personal preferences. In addition, you should consider the costs, benefits, and restrictions of different government agencies.
Region-specific business expenses
When you calculate your startup costs, take into account the way different expenses might cost more or less depending on your location.
Costs that can vary significantly by location include standard salaries, minimum wage laws, property values, rental rates, business insurance rates, utilities, and government licenses and fees.
Local zoning ordinances
If you buy, rent, build, or plan to work out of a physical property for your business, make sure it conforms to local zoning requirements.
Neighborhoods are generally zoned for either commercial or residential use. Zoning ordinances can restrict or entirely ban specific kinds of businesses from operating in an area. For example, there has been a growing interest in vacation rentals such as Airbnb or VBRO but many cities and Home owners associations restrict or completely ban short term rentals.
You might have fewer zoning restrictions if you base your business out of your home, but zoning ordinances can still apply even to home-based businesses.
Zoning laws are typically controlled at the local level, so check with your department of city planning, or similar office, to find out about the zoning laws in your area.
State and local taxes
Consider the tax landscape for the state, county, and city. Income tax, sales tax, property tax, and corporate taxes can vary significantly from place to place.
In fact, In California there are many cities that create tax environments that are very friendly to certain kinds of companies. That’s part of the reason why developers, tech startups, financial institutions, and manufacturing tend to concentrate in certain areas of the country.
State and local government incentives
Some state and local governments offer special tax credits for small businesses. You might also find state-specific small business loans or other financial incentives.
Incentive programs and benefits are often related to job creation, energy efficiency, urban redevelopment, and technology.
Visit local SBA Offices, Small Business Development Centers, Women’s Business Centers state and local government websites to find more information.
Federal government incentives
The federal government offers benefits to small businesses that contract with the government and are based in underutilized areas. Check into the Historically Underutilized Business Zones (HUBZone) program to see if you qualify for preferential access to federal procurement opportunities.
sTEP 5: CHOOSE A BUSINESS STUCTURE
ONE SIZE DOES NOT FIT ALL:
The legal structure you choose for your business will impact your business registration requirements, how much you pay in taxes, and your personal liability.
Your business structure affects how much you pay in taxes, your ability to raise money, the paperwork you need to file, and your personal liability.
You’ll need to choose a business structure before you register your business with the state. Most businesses will also need to get a tax ID number and file for the appropriate licenses and permits.
Our California business attorneys can help you choose a business structure carefully. While you may convert to a different business structure in the future, there may be restrictions based on your location. This could also result in tax consequences and unintended dissolution, among other complications.
Issues that may arise in family law
A sole proprietorship is easy to form and gives you complete control of your business. You're automatically considered to be a sole proprietorship if you do business activities but don't register as any other kind of business.
Sole proprietorships do not produce a separate business entity. This means your business assets and liabilities are not separate from your personal assets and liabilities. You can be held personally liable for the debts and obligations of the business. Sole proprietors are still able to get a trade name also called a DBA (doing business as) or a fictious business name. It can also be hard to raise money because you can't sell stock, and banks are hesitant to lend to sole proprietorships.
Sole proprietorships can be a good choice for low-risk businesses and owners who want to test their business idea before forming a more formal business. Speak to one of our attorneys to see if your business is a low risk business or not.
Partnerships are the simplest structure for two or more people to own a business together. There are three common kinds of partnerships: general partnerships, limited partnerships (LP) and limited liability partnerships (LLP).
General Partnerships are partnerships between two or more people. All the partners are responsible for the liabilities of the business. Technically it’s a sole proprietorship among two or more people. General Partnerships do not need to be in writing but it’s a very good idea to document the relationship between the parties. If there is no writing the California default rules governing partnerships will apply. Profits are passed through to personal tax returns.
Limited partnerships have only one general partner with unlimited liability, and all other partners have limited liability. The partners with limited liability also tend to have limited control over the company, which is documented in a partnership agreement. Profits are passed through to personal tax returns, and the general partner — the partner without limited liability — must also pay self-employment taxes.
Limited liability partnerships are similar to limited partnerships, but give limited liability to every owner. An LLP protects each partner from debts against the partnership, they won't be responsible for the actions of other partners.
Partnerships can be a good choice for businesses with multiple owners, professional groups (like attorneys), and groups who want to test their business idea before forming a more formal business.
An LLC lets you take advantage of the benefits of both the corporation and partnership business structures.
LLCs protect you from personal liability in most instances, your personal assets — like your vehicle, house, and savings accounts — won't be at risk in case your LLC faces bankruptcy or lawsuits.
Profits and losses can get passed through to your personal income without facing corporate taxes. However, members of an LLC are considered self-employed and must pay self-employment tax contributions towards Medicare and Social Security.
LLCs can have a limited life in many states. When a member joins or leaves an LLC, some states may require the LLC to be dissolved and re-formed with new membership — unless there's already an agreement in place within the LLC for buying, selling, and transferring ownership.
LLCs can be a good choice for small, medium, large- or higher-risk businesses, owners with significant personal assets they want protected, and owners who want to pay a lower tax rate than they would with a corporation.
A corporation, sometimes called a C corp, is a legal entity that's separate from its owners. Corporations can make a profit, be taxed, and can be held legally liable.
Corporations offer the strongest protection to its owners from personal liability, but the cost to form a corporation is higher than other structures. Corporations also require more extensive record-keeping, operational processes, and reporting.
Unlike sole proprietors, partnerships, and LLCs, corporations pay income tax on their profits. In some cases, corporate profits are taxed twice — first, when the company makes a profit, and again when dividends are paid to shareholders on their personal tax returns. Many would call this two levels of tax.
Corporations have a completely independent existence separate from its shareholders. If a shareholder leaves the company or sells his or her shares, the C corp can continue doing business relatively undisturbed. A C corp has its own interests separate from the shareholders because it is its own entity
Corporations have an advantage when it comes to raising capital because they can raise funds through the sale of stock, which can also be a benefit in attracting employees.
Corporations can be a good choice for medium- or higher-risk businesses, those that need to raise money, and businesses that plan to "go public" or eventually be sold.
Remember C corps only maintain limited liability status if the owners keep their money and actions separate from their personal affairs. Once a person uses a corporation for their own personal use it could be “pierced” and you can become personally liable for the corporations liabilities. Speak to one of our attorneys for more information about piercing the corporate veil.
An S corporation, sometimes called an S corp, is a special type of corporation that's designed to avoid the double taxation drawback of regular C corps. S corps allow profits, and some losses, to be passed through directly to owners' personal income without ever being subject to corporate tax rates.
Not all states tax S corps equally, but most recognize them the same way the federal government does and tax the shareholders accordingly. Some states tax S corps on profits above a specified limit and other states don't recognize the S corp election at all, simply treating the business as a C corp.
S corps are created by filing an election with the IRS to get S corp status.
There are special limits on S corps. Check the IRS website for eligibility requirements. To qualify for S corporation status, the corporation must meet the following requirements:
- Be a domestic corporation
- Have only allowable shareholders
- May be individuals, certain trusts, and estates and
- May not be partnerships, corporations or non-resident alien shareholders
- Have no more than 100 shareholders
- Have only one class of stock
- Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).
Even with S corp election you'll still have to follow the strict filing and operational processes of a C corp.
S corps also have an independent life, just like C corps. If a shareholder leaves the company or sells his or her shares, the S corp can continue doing business relatively undisturbed.
S corps can be a good choice for a businesses that would otherwise be a C corp, but meet the criteria to file as an S corp.
Nonprofit corporations are organized to do charity, education, religious, literary, or scientific work. Because their work benefits the public, nonprofits can receive tax-exempt status, meaning they don't pay state or federal income taxes on any profits it makes.
Nonprofits must file with the IRS to get tax exemption, a different process from registering with their state.
Nonprofit corporations need to follow organizational rules very similar to a regular C corp. They also need to follow special rules about what they do with any profits they earn. For example, they can't distribute profits to members or political campaigns.
Nonprofits are often called 501(c)(3) corporations — a reference to the section of the Internal Revenue Code that is most commonly used to grant tax-exempt status.
Compare business structures
Compare the general traits of these business structures, but remember that ownership rules, liability, taxes, and filing requirements for each business structure can vary by state. The following table is intended only as a guideline. Please confer with a business tax specialist to confirm your specific business needs.
Unlimited personal liability
Two or more people
Unlimited personal liability unless structured as a limited partnership
Self-employment tax (except for limited partners)
Limited liability company (LLC)
One or more people
Owners are not personally liable
Personal tax or corporate tax
Corporation – C corp
One or more people
Owners are not personally liable
Corporation – S corp
One or more people, but no more than 100, and all must be U.S. citizens
Owners are not personally liable
Corporation – B corp
One or more people
Owners are not personally liable
Corporation – Nonprofit
One or more people
Owners are not personally liable
Tax-exempt, but corporate profits can’t be distributed