Checklist of State Requirements This checklist summarizes the primary requirements you will need to satisfy to start a business in California whether or not you have employees. If you have employees, the following section describes additional requirements for your business. o Determine if your particular business requires a state license to operate. If in doubt, check with the California Department of Consumer Affairs or the California Trade and Commerce Agency. o Be prepared to make California estimated income tax payments – franchise tax in the case of a corporation – immediately. o Apply for a sales and use tax seller’s permit from the State Board of Equalization office nearest you. o File quarterly or more frequent sales and use tax returns, if sales or use tax must be collected, on Form BT-401 or, if eligible, on Form BT-401EZ. o File change of ownership statement with the county assessor, if your business has acquired real estate, even if you bought the stock of an incorporated business that already owned real estate in California. o File with the county clerk and publish a fictitious business name statement. Then, file an affidavit of publication with the county clerk. o File a business personal property tax statement with the county assessor, if requested, or if the cost of your business’ taxable personal property on March 1 equals or exceeds $30,000 ($100,000 after initial year). o If you acquire California real estate from a foreign person or out-of-state resident, withhold California income tax or franchise tax. o For a sole proprietorship, report any income or loss on your California personal income tax return, Form 540. o Withhold California income tax if you make total yearly payments that exceed $1,500 to a nonresident, independent contractor for services performed within the state. o For a partnership, withhold California income tax on distributions to foreign partners and to domestic (U.S.) nonresident partners. o For a partnership, file a statement of partnership in each county where the partnership owns real property. o Your partnership must file Form 565 and each partner must report his or her share of the partnership’s income or loss on Form 540. o For a limited partnership, file Certificate of Limited Partnership, Form LP-1, with the secretary of state and copies in counties where the partnership has places of business or real estate. Pay $800 annual minimum tax. o For a limited liability company, file articles of organization with the secretary of state and adopt an operating agreement. If the LLC is taxable as a partnership, pay an annual LLC tax of $800 plus applicable LLC fee, based on gross receipts, if any. Also, file LLC annual tax return Form 568. If the LLC is taxable as a corporation, file corporation franchise tax return Form 100 and pay regular corporate franchise tax, instead of the LLC tax or the LLC fee. o For a corporation, file articles of incorporation, adopt bylaws, and observe necessary corporate formalities. Also file Form 100, the franchise income tax return, annually. S corporations file Form 100S. o File annual state tax information returns, using copies of the federal Form 1099 series. Additional Requirements for Businesses with Employees Once you hire an employee to work in your business, you take on several additional responsibilities. In California, you will need to withhold and pay certain payroll taxes, obtain workers’ compensation insurance, comply with safety and health regulations, and know your rights and those of your employees under various labor laws. This section discusses these requirements in further detail and recommends publications and assistance programs offered by various agencies. Withholding Taxes Like the federal government, the state of California requires you to withhold and pay state personal income tax (PIT) on wages paid to your employees. When you hire an employee, you need him or her to complete either federal Form W-4 or state Form DE 4, Employee’s Withholding Allowance Certificate. These forms tell you the appropriate rate to withhold from his or her wages. To find out when and what forms to use to file your PIT withholdings, refer to the California Tax Withholding Summary below. For information on California’s withholding tax tables, contact the California Employment Development Department (EDD). State Disability Insurance Contributions In addition to PIT withholding, you must withhold state disability insurance (SDI) contributions from your employees’ wages. The SDI contribution rate for 1995 is 1.0% of an employee’s wages up to the first $31,767.00 paid in a calendar year,55 or a maximum SDI withholding obligation of $317.67 per year, per employee. You, as the employer, are not subject to SDI, but you are required to collect the tax from your employees. SDI contributions are paid to the state together with PIT withholdings whenever a PIT payment is required. Form DE 88 is used to make payments by all employers except those making electronic payments. As occurs almost every year, California has significantly revamped its employer withholding rules. Effective in 1995, a new quarterly payroll tax return, Form DE 6, was introduced for employers required to withhold PIT or SDI. Form DE 6 requires you to report the following items on each employee: o Name; o Social security number; o Total wages paid; and o Total California personal income tax withheld. You must continue to pay PIT on a quarterly, monthly, or more frequent basis. These payments will be reconciled at the end of the year by filing either a new annual reconciliation return, Form DE 7 for annual filers no later than January 31 of the following year, or Form DE 43 Annual Reconciliation for quarterly filers, due by February 28. Also, many employers will no longer be required to file copies of the employee wage statements (W-2 forms) with the EDD – at least in 1995. Under the new withholding deposit rules, as a California employer that is required to make federal withholding tax deposits, you must remit withheld PIT and SDI once the accumulated amount of PIT exceeds $500 – within the same number of banking days as is required for deposits of federal withholding. Starting in 1996, the $500 threshold will be adjusted annually, to an amount as low as $75 if interest rates earned on the state Pooled Investment Fund are over 9%, or remain at the current $500 level if interest rates are under 4%. The deposit threshold remains at $350, as in 1994, if you are not required to make federal withholding deposits. In this case, you must make payments by the 15th day of the month after a month in which $350 of withheld PIT has accumulated. If you make deposits averaging $20,000 or more over any one year period ending June 30th, you are required to make payment by electronic funds transfer (EFT) during the following calendar year. New employers are required to register with the EDD on Form DE 1 for commercial employers and obtain an eight-digit employer identification number. Once you have registered as an employer with the EDD, you should automatically receive an initial supply of Form DE 88 tax payment forms; however, it is your responsibility to order more DE 88 forms in time to file, before you run out of them. You will also need to obtain Form DE 1857, Notice to Employees of Unemployment Insurance and Disability Insurance. This notice must be posted if you are subject to disability and unemployment insurance taxes. Form DE 1857 is available through the California Employment Development Department. State Licenses Many businesses and professions are required to obtain licenses before engaging in business. State governments have traditionally licensed professionals, such as doctors, lawyers, and accountants. To further protect consumers, California has expanded the list to include other occupations. Licensing Agencies Most licenses are administered by the California Department of Consumer Affairs, but several important licensing departments are divisions of the California Trade and Commerce Agency. For more information, contact: California Department of California Trade and Commerce Consumer Affairs Agency 400 R Street, Suite 1080 801 K Street, Suite 1700 Sacramento, CA 95814 Sacramento, CA 95814 (916) 445-1254 (916) 322-1394 Your business may have to obtain several different licenses from various federal, state, and local government agencies. For more detailed information on licensing requirements and fees, refer to the California License Handbook, which you can obtain from this office for a fee of $20. This fee includes postage, tax, and handling. California Office of Small Business California Trade and Commerce Agency Attention: Mr. Koki Tanaka 801 K Street, Suite 1700 Sacramento, CA 95814 (916) 324-1295 FAX (916) 322-5084 You may also want to obtain the California Permit Handbook, which contains information on areas that affect your business, such as pollution control or the use of natural resources. The book, which currently costs $18, is available from: Publication Section California Department of General Services 4675 Watt Avenue P.O. Box 1015 North Highland, CA 95660 (916) 574-2256 Many local governments in California have business license taxes, many of which are taxes on gross receipts, as is the case in Los Angeles, San Francisco, Sacramento, Oakland, and Fresno. Often, the tax rate in a particular city or county will depend upon your type of business. For more information, contact your local city hall.