California Business Formation: A Comprehensive Guide for Emerging Entrepreneurs

Posted by Tom McKeever | Jul 03, 2024 | 0 Comments

California has long been the place where the best and brightest come to build businesses that change the world. From Steve Jobs, to Elon Musk, countless entrepreneurs have made their fame and fortune in the Golden state. Money follows innovation, which has made California the place to go for those with the next big thing in mind. 

While California business formation can seem like an intimidating process, at Silicon Valley Technology Law Advisors, we know exactly what it takes to launch a new company in California. 

We're here to help guide you on the right path with our comprehensive guide for emerging entrepreneurs. In this blog, we'll discuss the different business types in California, the pros and cons of each, and provide a step by step guide to business formation. 

Let's begin!

What is Business Formation?

In California, business formation refers to the legal process involved in establishing a new business entity. Business formation includes all the details needed for a new company to be recognized as a legitimate business. 

Business formation includes details like selecting a business structure, filing the necessary paperwork with the state, and obtaining any licenses or permits needed to conduct business legally. 

The business formation process also includes tax registration on both the state and federal level, as well as setting up a business bank account to keep personal and business finances separate. 

Because there are so many different California business regulations and laws, it is highly advisable to seek professional legal advice to ensure your business formation is on the right track.

An Overview of Business Types in California

The first pivotal step in business formation is deciding what form your new business will take. The choice you make will have a significant impact on taxation, legal obligations, and the ability to raise funds or borrow loans. 

Here is a brief overview of the available business types in California:

Sole Proprietorship

The simplest form of business type in California is the sole proprietorship. As the name suggests, it is intended for individuals owning or operating a small business such as freelancers, independent contractors, and consultants. Small retailers and online businesses can also use a sole proprietorship structure. 


Sole proprietorship is the easiest type of business formation to set up in California. It typically requires no formal paperwork, and is the default business structure if no formal business formation is made. 

Sole proprietorships don't pay taxes directly. Instead, business income is reported directly on the personal tax return of the sole proprietor. The sole proprietor retains all business decision making abilities. 


Sole proprietorships assume full liability for any and all business debts and obligations. This means that if your business incurs debts that it cannot pay back, your personal assets can be seized by creditors. 

Sole proprietors also must pay a self-employment tax, to cover both social security and Medicare. As an employee of a company, your employer pays half of this tax. Sole proprietors must pay the full combined rate of 15.3%.

Another drawback of the sole proprietorship structure is that banks and investors often shy away from loaning money or investing in an organization without limited liability protection. 


Partnerships are a type of business formation wherein two or more people agree to co-own and operate a business together for profit. Partnerships may take one of two forms, General Partnership or Limited Partnership. 

General Partnership

General partnership is the most basic form of partnership, requiring only a written agreement wherein all partners take an equal stake in management, profit and loss. All partners share unlimited liability for all debts, even if the debt was entered into by only one partner. With regards to taxation, profits and losses follow “pass through” taxation, and are reported on each partner's personal tax return. 


Extremely easy to form, partners share in the profits. 


Due to unlimited liability, all partners share the same amount of financial and personal risk. It can be difficult to raise money due to unlimited liability. Disagreements between partners are not easily solved.

Limited Partnership

Limited partnerships have two types of partners. There must be at least one General Partner, who manages the business and assumes unlimited liability. Other partners are Limited Partners, contributing capital, but do not assume unlimited liability. 


Limited Partners have limited risk, and are easier to attract. 


California business regulations include more filing requirements for Limited Partnerships. Limited Partners have little control over business decisions. 


Corporations are the most complex structures in California business formation, but offer the most benefits for companies poised for extensive growth. 

Corporations are recognized as separate legal entities from their ownership or shareholders. Because they are legally recognized entities, the owners assume limited liability. Corporations can raise funds by selling shares (stock), which also serves to keep ownership separate from management. 

C Corps

C Corps feature a board of directors who are elected by the shareholders the board oversees the management and appoints officers to run the corporation day to day. 


Shareholders assume limited liability, protecting their personal assets. Corporations can easily raise funding through sales of stock. Corporations can exist beyond change of ownership. Considered the most investible business type if you want to attract institutional investors. C Corporations are also eligible for the Qualified Small Business Exemption from the federal government.


C Corps must pay a corporate tax on profits, and shareholders must pay taxes again on dividends they receive from the corporation this is known as double taxation. 

Corporations are also subject to more extensive California business laws and regulations. 

Shareholders of S Corps can avoid double taxation by passing through the profits and losses onto their personal tax returns by filing an S election with the IRS; however a corporation that makes an S electon can only have one class of shares..  

Limited Liability Corporations (LLCs)

Of the available business types in California, Limited Liability Corporations (LLCs) offer a mix of  the benefits of corporations and partnerships. LLCs are often a great choice for small to midsize businesses, freelancers, and independent contractors. 


Owners of an LLC receive limited liability protection, keeping their personal assets separate and distinct from those of the corporation.

LLCs use pass through taxation, with profits and losses reported on the member's personal income tax returns. 


LLCs may be viewed by institutional investors as being less established, and therefore may find it harder to raise funding.  

Carefully drawn operating agreements are often necessary to avoid disagreements about how profits will be shared and how the LLC is operated and other complexities.

Ultimately, the choice of business formation must be carefully considered based on the type and size of the business being created. Choosing the wrong business form can set you back significantly. Always consult with a qualified legal advisor before making such a significant foundational decision. 

California Business Formation in 5 Steps

Now that we have a better understanding of the available business types in California, we present to you a simple 5 step guide to launching your business. 

  1. Selecting the Right Structure - The most important early decision you make will be choosing your business structure. Retaining a trusted legal advisor to help you consider all options and make the right choice is essential.

  2. Choosing the Perfect Name - If choosing the right structure is the most important choice you'll face early on, selecting the right name is the 2nd most important. Not only should the name reflect your business identity, it also must be unique and ideally memorable in some way. 

  3. Formally Register the Business - You must file all the relevant paperwork required by California with the Secretary of State, the Franchise Tax Board and the IRS.

  4. Obtain Licenses and Permits - The permits and licenses required by California business regulations vary depending on the industry and type of business.

  5. Understand Tax Requirements And Benefits - The business  type you choose will determine your tax requirements, both at the state and federal levels. Understanding your taxation obligations is critical to your long term success. 

Considering California Business Formation? Get Trusted Legal Advice from SVT

When it's time to formalize your business, don't make the mistake of trying to go it alone. You need help from a proven industry expert. 

At SVT, we've been on the inside of the Silicon Valley tech scene for over 25 years. We've helped launch businesses of all sizes with fully customized strategic planning that leverages our extensive experience in the heart of the nation's startup capital. 

We can help you determine the right business formation type for you, and ensure that your formation complies with California business laws and regulations. 

When you're ready to make your business dream a reality, Contact SVT for a free consultation and let us set your business up for success.

About the Author

Tom McKeever

Leverage Tom's deep technology law experience and solid business judgment to your unfair advantage.


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