Costs to Start a Business in California

California Small Business Landscape

Setting up a small business in California requires navigating substantial initial costs due to several key factors. Real estate prices, particularly in cities like San Francisco, Los Angeles, and San Diego, are among the highest in the nation, making commercial lease rates a significant expense. Labor costs are also elevated, driven by the state's high minimum wage and a competitive job market. Additionally, California's regulatory environment entails various licensing fees and compliance costs that can add to the setup burden. Despite these high costs, California's vast and diverse market, coupled with its reputation for innovation and access to venture capital, presents substantial growth opportunities. Entrepreneurs can also benefit from state-sponsored programs and incentives aimed at supporting small businesses, though they must be prepared for the considerable financial investment required to establish a foothold in this dynamic economic landscape.

California State-Specific Costs

Costs associated with forming a business varies by business entity type and by state the business was formed in. We aim to cover here the basic costs specific to the state for starting a business. We also touch upon other costs in order to stay compliant and continue to doing business in the state, such as paying various state taxes or complying with local minimum wage laws when hiring in-state.

We cover in broad strokes the following costs:

Costs of Forming Business Entities in California

There are several types of business structures you can choose from when forming your business. Which is best for your business depends on a variety of factors, like ownership in the business, taxation, and more.

No State Filing: There are two types of structures which can be automatically formed without any filing with the state. Sole proprietorship and general partnership falls into this category, and they are a popular form of self-employment.

Formed or Incorporated: Three most common business entities that require some formation or incorporation with the state are corporation, limited liability partnership (LLP), and limited liability company (LLC). Each structure has its own one-time formation or set-up cost.

California Formation Costs

Across all US states, the average cost of formation is roughly $100 with some states costing as little as ~$50 to create a corporation and some as high as $500+ to form an LLC.

Here are the formation costs (up to date at the time of this writing) for three most common entity types for businesses filed with the state:

California FORMATION COSTS
ENTITY
Cost
Corporation
$105
Limited Liability Partnership
$105
Limited Liability Company
$75

California Annual Reporting Fees

In many states, business entities must file an annual report. Annual reports are short documents that provide updated information about your business, including the name and address of the business, the people who run it, and its registered agent. Keeping this information up to date ensures you stay compliant.

The most cost efficient way to report annually is to do it yourself. However, plenty of services also provide support to do this on your business' behalf. Here are the costs for annual filings for the state for the most common business entities at the time of this writing. Where costs are not flat, we provide general information on how the fee is structured.
California ANNUAL REPORTING FEES
ENTITY
Cost
Corporation
$25
Limited Liability Partnership
$25
Limited Liability Company
$800 + tiered fees

California Franchise Tax Fees

Franchise taxes are state fees that businesses pay in order to have the right to operate in those states. They are paid in addition to state and federal income taxes. Failure to file can cause a business to lose its good standing with the state, making it difficult to operate, get loans, and may cost the business clients if clients require this information.

Here are the franchise tax fees for each business entity structure in this state as of the time of this writing.  

California FRANCHISE TAX FEES
ENTITY
Cost
Corporation
$800 minimum + 8.84% of income
Limited Liability Partnership
$800 minimum + 1.5% of net income
Limited Liability Company
$800 minimum + gross receipts fee

California Business License Costs

Business licenses vary widely by state. Whereas business structures are profession agnostic, generally licenses are not. Licenses vary by which industry the business is in and therefore have immense variation.

Here we list only two primary scenarios: whether or not a license is required for a Sole Proprietorship or General Partnership, and if a general statewide license is needed to operate in the state.
California BUSINESS LICENSE COSTS
ENTITY
Cost
Sole Proprietorship
General Partnership
General State Business License

California State Income Tax

Taxes, taxes, and more taxes. Although income taxes may seem far off concern when starting a business, the truth is that not withholding enough for income taxes is a material cost to business owners. Here we briefly cover state income taxes. For a better overview of self-employment taxes, you can read more on Small Business Tax Planning.

Pass-Through Entities: Pass-through entities are boon to small business owners. A pass-through entity is a business structure where income passes directly to the owners or investors, and they report it on their personal tax returns. This allows the business to avoid paying corporate taxes, making it a more tax-efficient option for small businesses. This also makes filing taxes significantly simpler as only one return is needed.

By default, sole proprietorships, LLCs, and partnerships are considered pass-through entities. In the case of LLCs, LLCs are usually referred to as disregarded entities. However, owners can choose to get their LLC be recognized and treated differently for tax purposes with the IRS.

Corporate Income Tax:
Most states (44 out of 50) levy a corporate income tax.
C-Corps pay a C-Corp state income tax rate. If the income tax is pass-through, as with S-Corps, use your personal income tax rate.

Limited Liability Companies: For LLCs, the tax rate depends on the how you set up the LLC business structure.

  • Multi-member LLC: treated as a partnership (pass-through). Each person pays personal income tax based on their share of the LLC's income and their own personal income tax rate.
  • LLCs as S-Corps: if the LLC elects to be taxed as an S-Corp (pass-through), the LLC is taxed at the personal income tax rate.
  • LLCs as C-Corps: if the LLC elects to be taxed as a C-Corp, the LLC is taxed at the C-corp income tax rate.
California STATE INCOME TAX
ENTITY
Percentage fee
Corporate Income Tax Rate
8.84%
Personal for Pass-Through Entities
1% - 13.3%

California Sales Tax

Business owners who sell goods or services within a state are typically required to collect and remit state sales tax. Each state has different rules regarding what is taxable, so it’s crucial to understand the state’s specific requirements. Most businesses aren't at significant risk of non-compliance with sales tax until they reach the state's economic nexus threshold.

Economic nexus refers to the threshold of sales or transactions in a state that, once exceeded, obligates a business to collect sales tax, even if they don't have a physical presence there. Once a business achieves economic nexus, they must register with the state’s tax authority and start collecting sales tax on applicable sales. Failing to comply with these requirements can result in penalties and back taxes. Economic nexus is particular important when it comes to online sales for e-commerce companies.

California SALES TAX
ENTITY
Percentage fee
Economic Nexus Threshold
Sales Tax Rate
7.25%-10.25%

Cost to Hire Labor in California

If you're considering hiring employees for in-person work, then knowing your state's employment laws are important.

One important to factor is knowing the local minimum wage, which varies depending on state and sometimes even by city or county. Note that in addition to the hourly rate, employers should also consider payroll taxes, workers’ compensation insurance, and potential benefits costs.

Here we just provide a review in the table below costs specific to the state, namely the state's specific minimum wage, any applicable exceptions to the minimum wage, and recurring payroll taxes.

California WAGE LABOR COST
ENTITY
Percentage fee
Minimum Wage Per Hour
$16.00
Exceptions
State Payroll Tax

Additional Information

Additional information for starting a business in the state of California can be found at the state's SBA website or Secretary of State site.

Costs for Starting a Business in California


The idea of starting a business can be exciting, but the plethora of choices, jargon, and costs associated with the pure act of setting up a business with the state can be an unnecessarily daunting and time-consuming process.

Although this guide can't setup your business entity for you, it provides an overview so you can get a head start. We hope this article has sheds light on the essential costs involved and provides guidance on how to manage them effectively, setting you on a path towards entrepreneurial success.

DISCLAIMER: Information on this site is for educational purposes only. LeHerring LLC does not provide, legal, accounting, tax or investment advice. Although care has been taken in preparing the information provided to you, we are not responsible for any errors or omissions, and we accept no liability whatsoever for any loss or damage you may incur. Always seek financial and/or legal counsel relating to your specific circumstances as needed for any and all questions and concerns you now have or may have in the future.

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