If your business operates in California, there’s a good chance you’ll be required to obtain a business license (also referred to as a “seller’s permit”) due to the state’s wide-ranging criteria.
But even if your business isn’t required to get one, it’s a good idea for most businesses to get a business license anyway. We’ll cover more on why in this article, but for now, just know that having one can increase your business’s legitimacy in the eyes of lenders. This may increase your chances of getting business loans.
What Licenses Are Required to Start a Business in California?
According to ca.gov, you must obtain a business license (seller’s permit) if your business falls under the following categories:
- Engaged in business in California
- Intends to sell or lease tangible personal property that would ordinarily be subject to sales tax if sold at retail (including wholesalers, manufactures and retailers)
- Will make sales for a temporary period, normally lasting no longer than 90 days at one or more locations (examples include fireworks booth or Christmas tree lots)
This applies to the following business types:
- Individuals (including sole proprietors)
- Husband/wife co-ownership
- Limited liability partnerships (LLPs)
- Limited liability companies (LLCs)
Veterans may qualify for special treatment, which can be found on the Veteran’s Tax Topics page.
Seller’s permits are required for business entities to collect sales tax, as decreed by the California Department of Tax and Fee Administration and the Internal Revenue Service (IRS).
To access the business license application, use the service on the application page, or reach out via the contact information and phone number provided. You can complete the whole process online. Note that you may need to submit information regarding your projected monthly sales, projected monthly taxable sales, and products you’ll be selling.
In addition to the seller’s permit, you may need to apply for additional types of general business licenses and permits, or even a local business license depending on your business type and which California counties you operate in. Each local government and county clerk has a unique set of requirements.
For example, an aquaculture business that operates in Alameda County will need an incidental take permit, commercial fishing license, and several other permits related to the environment. A child day care service operating in the same county may need a child care license. Some businesses may need a zoning or building permit, or even a health permit for their business activity. Businesses that involve alcoholic beverages can count on needing additional licenses as well.
What Are the Costs to Register a Small Business in California?
Because business licenses are given out by individual cities in California, the cost varies according to your specific situation. Generally, they won’t run more than $100. However, there may be fees associated with any additional permits your business needs. Use the CalGold site to find the licenses and permits your business needs.
In addition to a seller’s permit, California will also charge fees depending on how you incorporate your business. For example, in 2022, the LLC fee is at least $900 for incorporated businesses that make over $250,000. Corporations must pay a minimum franchise tax of $800.
Don’t forget to factor in taxes as well. In California, S Corps currently have a 1.5% tax rate, while banks and financial businesses owe 10.84%.
For more information on fees associated with your business, visit the Franchise Tax Board’s website.
What Are the Pros of Starting a Business in California?
Despite the higher taxes, California offers a couple of advantages for business owners and entrepreneurs.
First, it has the largest economy in the United States as of 2021, clocking in at over $3.3 trillion GDP. It’s also currently the state with the largest population. Its geography spans deserts (Palm Springs), beaches (San Diego), and mountains (Yosemite), and it has both politically liberal and conservative cities.
In simple terms, its advanced economic development has opportunities for all kinds of business types.
Another advantage is its attractive weather. Unlike cities like New York, California’s big cities enjoy frequent sunny weather. It also comes with easy access to beaches, making the state a popular destination for talent. This may make it easier for your business to find the employees it needs to run operations efficiently.
Warm weather can also have a positive effect on mental health, which can boost both you and your employees’ productivity and morale.
Finally, Californian businesses are some of the most entrepreneurial in the country. California is home to some of the biggest tech companies in the world, and its Silicon Valley is a beacon of innovation. Tech businesses may find it easier to network and find valuable leads, as well as collaborate with similar-minded entrepreneurs. Non-tech businesses may benefit as well. In an increasingly digital world, more aspects of business are influenced by tech every day.
Does California Require LLCs to Pay Income Taxes?
Strictly speaking, limited liability companies (LLCs) do not pay income taxes in California. However, they are required to pay an annual tax of $800, and there may also be additional fees if your business makes over $250,000. For a full list of taxes and fees, refer to the State of California’s Franchise Tax Board website.
Why a Business License is Essential for Business Loans
When it comes to business loans, there are two main benefits to having a business license.
First, some lenders may only lend to businesses that have a business license. For example, in addition to basic identifiers like a business address, tax ID number, social security number, and employer identification number (EIN), the Small Business Administration’s (SBA) 7(a) loan requires a business license or certificate of doing business as part of its application. Obtaining a license will only open up more loan opportunities, potentially leading to a healthier cash flow for your business.
Second, it can also make your business look more legitimate to potential lenders, even if having one isn’t required. Having a seller’s permit issued by the State of California can show third parties that your business is taken seriously by both the state and federal government, and may help stack the odds in your favor when it comes to getting a business loan.
Why a Business License is Essential for Business Credit
In order to build business credit, your business needs to be registered. In most cases, this requires obtaining a state license or a “doing business as” (DBA).
Building business credit can lead to new business funding opportunities, both in the form of small business loans and credit cards. The good news is that Nav can help you do all of this. Create a free account and we’ll guide you through the steps on how to establish business credit. Better yet, our platform instantly shows you which small business loans and business credit cards you’re most likely to qualify for based on your business data. Compare your best options in just a few clicks.