Business Law in California: A Complete Guide

Starting and running a business in California means navigating one of the most active — and most heavily regulated — commercial environments in the country. From choosing an entity and filing with the Secretary of State, to drafting enforceable contracts, to resolving disputes and eventually selling, California has its own statutes, agencies, and deadlines that differ in important ways from federal default rules. This guide explains, in plain English, how California business law works: forming and maintaining a business entity, the rules that govern business contracts, what happens when commercial relationships break down, and how ownership changes hands when a business is bought or sold.

This guide provides general information about California law and is not legal advice. Business law is fact-specific, statutes and tax figures change, and the right answer for your situation depends on details that only a professional can assess. For advice you can rely on, consult an attorney licensed by the State Bar of California.

California business law at a glance

Choosing a business structure in California

The first major decision for any California business is its legal form. The structure determines who is liable for the business's debts, how it is taxed, what paperwork it must file, and how easily ownership can change. The most common options are the sole proprietorship, the general partnership, the limited liability company (LLC), and the corporation (including the S-corporation tax election and the professional corporation for licensed professionals).

A sole proprietorship requires no state formation filing, but it offers no liability shield — the owner is personally responsible for every business debt. A general partnership is similar: two or more people doing business together, each personally liable, governed in California by the Uniform Partnership Act of 1994 (Corp. Code § 16100 et seq.). An LLC combines liability protection with flexible, pass-through taxation and is governed by the California Revised Uniform Limited Liability Company Act (Corp. Code § 17701.01 et seq.). A corporation, governed by the General Corporation Law (Corp. Code § 100 et seq.), offers the strongest liability separation and is usually preferred by businesses that plan to raise outside investment or issue stock.

For a step-by-step walk through one of the most common choices, see our guide to forming an LLC in California.

The right choice depends on several practical factors. If liability protection is the priority, an LLC or corporation is usually necessary, because a sole proprietorship or general partnership exposes the owners' homes, savings, and other personal assets to business creditors and lawsuits. If the plan is to raise venture capital or issue stock options to employees, a California corporation — often taxed as a C-corporation — is typically expected by investors. If the goal is simplicity and pass-through taxation for a small operating business, an LLC is frequently the best fit. And many owners layer an S-corporation tax election on top of an LLC or corporation to manage self-employment taxes once the business is profitable. None of these forms is universally "best"; the answer turns on liability tolerance, tax planning, growth plans, and the number and type of owners. Because changing structure later can trigger tax and legal costs, it is worth choosing carefully at the outset, ideally with a California attorney or tax advisor.

It helps to think through a few concrete scenarios. A freelance graphic designer working alone, with little risk of being sued and modest income, may reasonably start as a sole proprietor and form an LLC later as the practice grows. A two-person contracting business that sends crews onto job sites, by contrast, faces real injury and property-damage exposure and usually wants an LLC or corporation from day one, plus liability insurance. A software startup that intends to raise a seed round and grant equity to early engineers will almost always incorporate as a C-corporation, because professional investors expect stock, a board, and a familiar capitalization structure. And an established family business with several owners and significant real estate may prefer a corporation or a multi-member LLC with a detailed governing agreement that controls how interests pass between generations. The common thread is that entity choice is really a bundle of decisions about liability, taxes, governance, and exit — not a single checkbox — and the best form is the one that fits all four at once.

Professional practices. Licensed professionals in California face special rules. Certain professions — including law, medicine, dentistry, accounting, and architecture — generally cannot render their professional services through an ordinary LLC and must instead use a professional corporation organized under the Moscone-Knox Professional Corporation Act (Corp. Code § 13400 et seq.) or another permitted form, with ownership often restricted to licensees in the same field. A professional weighing entity choice should confirm the requirements of their specific licensing board before filing, because using the wrong structure can create both regulatory and tax problems.

Doing business under a different name. Whatever structure you choose, if you operate under a name other than your own legal name or the exact registered name of your entity, California's fictitious business name law (Bus. & Prof. Code § 17900 et seq.) generally requires you to file a "doing business as" (DBA) statement with the county and publish it in a local newspaper. This is a county-level filing, separate from any Secretary of State registration, and it is commonly required before a bank will open an account in the business name.

Registering with the California Secretary of State

LLCs, corporations, limited partnerships, and limited liability partnerships all come into legal existence by filing with the California Secretary of State. An LLC files Articles of Organization (Form LLC-1) for a $70 fee; a corporation files Articles of Incorporation. Filings are submitted online through the Secretary of State's bizfile system.

After formation, California requires an ongoing Statement of Information that keeps the entity's address, agent, and management information current. An LLC files Form LLC-12 within 90 days of formation and then every two years; a corporation files Form SI-550 within 90 days and then every year. Missing this filing can lead to penalties and, eventually, suspension of the entity by the Secretary of State and the FTB.

Every California entity must also name an agent for service of process — the person or company authorized to receive legal documents on the entity's behalf. The agent must have a physical California street address; a post office box is not acceptable. Keeping the agent information current is important, because if a lawsuit is served on an outdated agent, the business may not learn of it in time to respond, and a default judgment can follow.

If your business was formed in another U.S. state but operates in California, it must register as a foreign entity with the California Secretary of State and qualify to do business here. An out-of-state company that does business in California without registering can lose access to California courts to enforce its contracts and may owe back taxes and penalties, so businesses expanding into California should register before they begin operating.

The mechanics of formation are straightforward but worth getting right. Before filing, confirm that the proposed name is distinguishable from existing entities on the Secretary of State's records and includes any designator the entity type requires — "LLC" for a limited liability company, for instance. You can reserve a name in advance if you are not ready to file. After the formation document is accepted, the entity should obtain a federal Employer Identification Number from the IRS, open a dedicated business bank account, and adopt its internal governing document (an operating agreement for an LLC, or bylaws and organizational resolutions for a corporation). Skipping these housekeeping steps is one of the most common ways owners unintentionally weaken the liability protection the entity is supposed to provide.

The $800 minimum franchise tax

One California feature that surprises many new owners is the $800 annual minimum franchise tax paid to the Franchise Tax Board. Nearly every LLC, corporation, limited partnership, and LLP that is organized in California, registered to do business here, or actually doing business here owes at least $800 per year, even if the business has no profit.

An earlier law (AB 85) waived the $800 tax for the first taxable year of entities formed between January 1, 2021 and December 31, 2023. That first-year waiver has expired. Entities formed on or after January 1, 2024 — including those formed in 2026 — generally owe the $800 minimum franchise tax for their first taxable year. On top of the $800, LLCs with higher California gross receipts owe an additional tiered fee that can reach $11,790 at the highest income tier. The mechanics are covered in detail in our LLC formation guide.

The $800 minimum is owed even by businesses that make no money, which is why some very small or inactive ventures choose to operate as sole proprietorships (which do not pay the entity-level tax) or to formally dissolve an entity they no longer use. An entity that simply stops filing without dissolving continues to accrue the $800 each year and can be suspended, leaving the owners with a growing tax bill and a company that cannot legally do business. If a business is winding down, completing a proper dissolution with both the Secretary of State and the FTB is the way to stop the annual tax from accruing.

Suspension is a more serious consequence than many owners realize. A California entity that is suspended by the FTB or the Secretary of State loses the legal capacity to prosecute or defend a lawsuit, to enforce its contracts, and in some cases even to use its own name. Imagine a suspended LLC that needs to sue a customer who never paid a large invoice: until the LLC pays its back taxes, files its delinquent statements, and obtains a certificate of revivor, it cannot move the case forward — and if a limitations period runs out in the meantime, the claim can be lost entirely. The lesson is that the $800 tax and the periodic filings are not optional paperwork; they are the price of keeping the entity's legal powers intact. Owners who plan to keep a company should calendar these obligations, and owners who are done with a company should dissolve it deliberately rather than walking away.

Business contracts in California

Contracts are the backbone of commercial life, and California has a developed body of contract law governing how agreements form, what must be in writing, and what happens when a party fails to perform. A valid contract generally requires an offer, acceptance, consideration, parties capable of contracting, and a lawful object (see Civ. Code § 1550). Most contracts can be oral, but California's statute of frauds (Civ. Code § 1624) requires certain agreements to be in writing and signed, including agreements that by their terms cannot be performed within one year, contracts for the sale of real property, and certain loan commitments above $100,000.

California treats non-compete clauses very differently from many other jurisdictions. Under Bus. & Prof. Code § 16600, contracts that restrain a person from engaging in a lawful profession or business are void with narrow exceptions. Two 2024 laws — SB 699 (adding § 16600.5) and AB 1076 (adding § 16600.1) — strengthened that ban, making employee non-competes affirmatively unlawful and creating notice obligations and remedies. To understand drafting, breach, remedies, and limitations periods, read our guide to California business contracts.

When business relationships break down

Even well-run businesses face disputes — with partners, co-owners, customers, suppliers, or competitors. California offers several avenues for resolving them, including negotiation, mediation, arbitration, and litigation in the state's Superior Courts. Common business claims include breach of contract, breach of fiduciary duty among partners and shareholders, fraud, and unfair competition under Bus. & Prof. Code § 17200, which reaches any "unlawful, unfair or fraudulent" business practice.

Timing matters: a written-contract claim must generally be filed within four years (CCP § 337), a fraud claim within three years from discovery (CCP § 338(d)), and a UCL claim within four years (§ 17208). Our guide to business disputes and litigation in California explains these claims, the courts involved, and the alternatives to a full trial.

Intellectual property and trade secrets

Because California does not enforce most non-competes, businesses here protect their competitive edge primarily through trade secret law and through patents, trademarks, and copyrights. California adopted the Uniform Trade Secrets Act (Civ. Code § 3426 et seq.), which lets a business sue when a former employee or competitor misappropriates confidential information — customer lists, formulas, source code, and similar assets — that derives value from not being generally known and is the subject of reasonable efforts to keep it secret. Trademarks and patents are governed by federal law, with state trademark registration also available through the Secretary of State.

Permits, licenses, and local registration

Forming a state entity is only one layer of compliance. Most California businesses also need to register and obtain permits at other levels of government. At the local level, cities and counties typically require a business license or tax registration certificate simply to operate within their boundaries, and zoning rules may restrict where certain businesses can be located. At the state level, businesses that sell tangible goods generally need a seller's permit from the California Department of Tax and Fee Administration so they can collect and remit sales tax, and many occupations — contractors, cosmetologists, auto repair shops, restaurants, real estate brokers, cannabis operators, and others — require an industry-specific license from a dedicated California board or agency. Operating without a required license can lead to fines, an inability to enforce contracts in some regulated fields, and in serious cases criminal exposure, so confirming the full set of permits before opening is an essential early step.

Employment, licensing, and regulatory obligations

California businesses with employees take on a substantial set of obligations: wage-and-hour rules under the Labor Code and Industrial Welfare Commission wage orders, workers' compensation insurance, payroll tax registration with the Employment Development Department, and anti-discrimination duties under the Fair Employment and Housing Act. Many businesses also need local business licenses or tax certificates from the city or county where they operate, and regulated industries (contractors, restaurants, cannabis, professional services, and others) face additional state licensing through boards and agencies such as the Department of Tax and Fee Administration for sales-and-use tax.

Taxes for California businesses

California businesses generally interact with several tax authorities. The Franchise Tax Board administers state income and franchise taxes, including the $800 minimum and, for LLCs, the gross-receipts fee. The California Department of Tax and Fee Administration (CDTFA) administers sales and use tax. The Employment Development Department (EDD) handles payroll taxes for businesses with employees. Corporations pay the state corporate income tax, while LLCs, partnerships, and S-corporations generally pass income through to owners' personal returns — though they still owe their own entity-level California fees.

Liability protection and the corporate veil

One of the main reasons owners form an LLC or corporation is to separate personal assets from business risk. That protection is real, but it is not automatic or unconditional. California courts can "pierce the corporate veil" and hold owners personally liable when the entity is treated as the owner's alter ego — for example, when personal and business funds are commingled, the company is left without enough capital to meet foreseeable obligations, required formalities are ignored, or the entity is used to commit a fraud. To preserve the liability shield, owners should keep separate bank accounts, sign contracts in the entity's name, maintain adequate records and capitalization, observe the entity's governance rules, and avoid using company funds for personal expenses. Maintaining these habits is often the difference between a protected owner and a personally exposed one if the business is sued.

Financing and raising capital

Businesses raise money through debt (loans and lines of credit) or equity (selling ownership interests). When a California business sells equity — shares of stock or LLC membership interests — it is selling a security, and the offering must comply with federal securities law and the California Corporate Securities Law of 1968 (Corp. Code § 25000 et seq.). Many small offerings qualify for an exemption from full registration, but exemptions have conditions, and selling interests to investors without meeting them can expose the business and its principals to rescission claims and regulatory action. Owners planning to bring in outside investors should structure the raise with legal guidance rather than relying on informal arrangements.

Buying or selling a California business

When ownership of a business changes hands, the transaction can be structured as an asset sale (the buyer purchases specific assets and assumes selected liabilities) or a stock or membership-interest sale (the buyer acquires the entity itself). California layers several rules on top of the deal: the bulk sales provisions of the Commercial Code (§ 6101 et seq.) for certain inventory-heavy businesses, FTB tax-clearance procedures, escrow practices, and the narrow non-compete exception of Bus. & Prof. Code § 16601 that lets a seller of business goodwill agree not to compete. Our guide to buying and selling a business in California walks through due diligence, deal structure, and the closing process.

Partnerships and co-ownership in California

Many businesses have more than one owner, and California law imposes important duties among co-owners. In a general partnership, each partner can bind the partnership and is personally liable for partnership debts, and partners owe one another fiduciary duties of loyalty and care under the Uniform Partnership Act of 1994 (Corp. Code § 16404). In an LLC, members (or managers) owe similar duties under Corp. Code § 17704.09, and in a corporation, directors and controlling shareholders owe duties to the company and, in closely held businesses, to minority owners. Because these relationships are where many business disputes begin, the smartest step is to put a clear governing agreement in place before the business launches — a partnership agreement, an LLC operating agreement, or a shareholder agreement — that spells out ownership percentages, decision-making, distributions, and what happens when an owner wants out, dies, or becomes disabled. Buy-sell provisions, in particular, can prevent a co-owner's exit from turning into litigation.

Recordkeeping and a California compliance calendar

A California business that is formed correctly can still drift into trouble if it neglects the recurring obligations that keep it in good standing. Treating compliance as a calendar rather than a one-time event is the simplest way to avoid penalties and suspension. The exact items depend on the entity type and whether the business has employees and taxable sales, but a typical ongoing checklist looks like this:

Good internal records support every item on that list. A California entity should keep its formation documents, governing agreement, ownership ledger, minutes or written consents for major decisions, financial statements, tax filings, and key contracts organized and current. Beyond satisfying the law, these records prove the separation between the business and its owners that keeps the liability shield intact, and they make due diligence far easier if the business is ever sold or seeks financing. Setting reminders well ahead of each deadline — and confirming responsibility for each filing — turns compliance from a recurring scramble into routine maintenance.

Common business law mistakes to avoid in California

Many of the problems that bring California business owners to a lawyer are preventable. A handful of mistakes come up again and again:

• Skipping the operating or shareholder agreement. Co-owners who never document ownership percentages, decision rights, and exit terms often end up in expensive disputes when the relationship sours.
• Commingling funds. Paying personal expenses from the business account, or vice versa, invites a court to pierce the corporate veil and hold the owners personally liable.
• Ignoring the $800 tax and periodic filings. Letting the franchise tax or Statement of Information lapse leads to penalties and ultimately suspension, which can cost the entity the ability to sue or enforce contracts.
• Relying on an employee non-compete. Because California voids most non-competes under Bus. & Prof. Code § 16600, a business that depends on one for protection may have no enforceable safeguard; confidentiality agreements and trade-secret protections are the lawful alternatives.
• Handshake deals on important matters. Oral agreements are valid for many things, but the statute of frauds and the difficulty of proving terms make written contracts the safer course for anything significant.
• Operating without required licenses or permits. Missing a local business license, a seller's permit, or an industry-specific license can bring fines and, in regulated fields, an inability to enforce contracts.

None of these mistakes is exotic; they are the ordinary consequences of treating legal formalities as afterthoughts. Building good habits early — clear agreements, clean books, calendared filings, and lawful contracts — is far cheaper than untangling the problems later.

Winding down or dissolving a California business

Businesses end as well as begin, and California has specific procedures for closing one properly. A voluntary dissolution generally requires the owners to approve the wind-down, settle debts and obligations, distribute any remaining assets, and file dissolution paperwork with the Secretary of State — a Certificate of Dissolution and, for corporations, a Certificate of Election to Wind Up and Dissolve, or the corresponding LLC forms. Crucially, the business must also resolve its accounts with the Franchise Tax Board, because the $800 minimum franchise tax keeps accruing until the entity is properly dissolved or canceled. Owners who simply abandon a company without dissolving it often discover years later that the entity is suspended and carries a substantial unpaid tax balance. When owners cannot agree on whether or how to wind down, a court can order an involuntary dissolution, as discussed in our business disputes and litigation guide.

Frequently asked questions

Do I have to form an LLC or corporation to run a business in California?

No. You can operate as a sole proprietor or general partnership with no state formation filing. But those forms offer no liability protection, so the owners are personally responsible for business debts and lawsuits. Many owners form an LLC or corporation specifically to separate personal assets from business risk.

Does every California business owe the $800 franchise tax?

Most formal entities do. LLCs, corporations, limited partnerships, and LLPs that are organized, registered, or doing business in California generally owe the $800 annual minimum franchise tax, including their first year if formed in 2024 or later. Sole proprietorships and general partnerships do not pay the $800 entity-level tax, though the owners still pay personal income tax on business profits.

Can my California employer make me sign a non-compete?

An employer can present one, but in California it is generally unenforceable and, since 2024, unlawful to require or enforce. Under Bus. & Prof. Code § 16600 and the newer §§ 16600.1 and 16600.5, most employee non-competes are void. Reasonable confidentiality and trade-secret protections, by contrast, remain enforceable.

How long do I have to sue over a broken business contract?

For a written contract, generally four years from the breach under CCP § 337. For an oral contract, two years under CCP § 339. The clock can shift under the delayed-discovery rule when a breach could not reasonably have been discovered sooner, so consult an attorney promptly rather than assuming you have run out of time.

What is the difference between an asset sale and a stock sale?

In an asset sale, the buyer purchases chosen assets and typically leaves unwanted liabilities behind with the seller. In a stock or membership-interest sale, the buyer acquires the entire entity, including its liabilities. Asset sales are often favored by buyers for that reason, but the right structure depends on tax, contract-assignment, and liability considerations for both sides.

Is my business considered community property if I am married?

California is a community-property state, so a business interest acquired or built during marriage may be partly community property even if titled in one spouse's name. This can matter in divorce and estate planning. Owners sometimes address ownership through pre- or post-marital agreements; a California attorney can advise on the specifics.

Can owners be held personally liable despite forming an LLC or corporation?

Sometimes. California courts can pierce the liability shield and reach owners personally when the entity is run as an alter ego — for example, when funds are commingled, formalities are ignored, or the company is undercapitalized or used to commit fraud. Keeping business and personal finances separate, signing in the entity's name, and observing governance formalities help preserve the protection the entity is meant to provide.

Do I need a local business license in addition to forming my entity?

Usually yes. Most California cities and counties require a local business license or tax registration certificate to operate, separate from the Secretary of State formation filing. Certain industries also need state licenses through specialized boards or agencies. Check with the city or county where the business operates, and confirm any industry-specific licensing before you open.

Do I have to file a DBA if I use a brand name?

Often yes. If you operate under a name that is not your own legal name or the exact registered name of your entity, California's fictitious business name law (Bus. & Prof. Code § 17900 et seq.) generally requires a "doing business as" filing with the county and publication in a local newspaper. Banks frequently ask to see the filed DBA before opening an account in the business name, so it is worth handling early.

How do I close a California business so the $800 tax stops?

You generally must formally dissolve or cancel the entity, not just stop using it. That means the owners approve the wind-down, the business settles its debts and distributes remaining assets, and the appropriate dissolution or cancellation paperwork is filed with the Secretary of State, while the entity's accounts are resolved with the Franchise Tax Board. Until that is done, the $800 minimum franchise tax keeps accruing each year, even for an inactive company.

Find a California business attorney

Business law decisions — choosing an entity, drafting a contract, resolving a dispute, or closing a sale — carry real financial and legal consequences, and the details of California law change. Our directory lists attorneys licensed by the State Bar of California across all 58 counties. Searching is free, there is no obligation, and you can use it to find a California-licensed business lawyer who handles matters like yours and can advise on your specific situation.