Common Business Formation Mistakes in California and How to Avoid Them

Starting a business in California is exciting — but it’s also full of pitfalls. From choosing the wrong entity to missing tax deadlines, formation mistakes can cost you thousands of dollars in penalties, legal fees, and lost deductions.

At Velin & Associates, Inc., we’ve worked with clients ranging from YouTubers and TikTokers to dentists, doctors, filmmakers, and Shopify/Amazon sellers, and we’ve seen the same errors over and over again. The good news? With proper planning, these mistakes are 100% avoidable.

1. Choosing the Wrong Business Structure

California entrepreneurs often rush into forming an LLC or corporation without understanding the tax and legal implications.

• LLC: Great for liability protection, but California charges a minimum annual franchise tax of $800, even if you make no profit.
• S-Corp: Can save thousands in self-employment tax for high earners, but has strict IRS requirements.
• C-Corp: Good for investors or startups planning to scale, but creates double taxation issues.

👉 Example: A Shopify store owner making $150,000 in profit may save significantly in taxes by electing S-Corp status — but the same setup may be unnecessary for a freelance filmmaker just starting out.

2. Not Registering a DBA (Doing Business As)

If you operate under a name that isn’t your legal name or LLC name, California requires you to file a DBA (Fictitious Business Name Statement).

👉 Example: A dentist forming “Bright Smile Dental, LLC” but marketing as “Family Smiles LA” without filing a DBA risks legal and compliance issues.

3. Ignoring California’s Annual Franchise Tax

Even small businesses and single-member LLCs owe the $800 annual franchise tax to the California Franchise Tax Board (FTB). Many new entrepreneurs miss this payment, leading to penalties and suspended entities.

👉 Example: An Amazon business owner who forgets to pay may later discover their LLC has been suspended, making contracts and legal protections invalid.

4. Not Keeping Business and Personal Finances Separate

Mixing business and personal expenses is one of the fastest ways to:

• Lose liability protection (known as “piercing the corporate veil”).
• Get audited by the IRS.
• Miss out on deductions.

👉 Example: A YouTuber or TikToker who uses their personal credit card for business purchases may have trouble proving expenses in an audit.

5. Forgetting to File Required Statements and Reports

In California, corporations and LLCs must file a Statement of Information with the Secretary of State, typically every year or two. Missing these filings can lead to fines or even dissolution of your entity.

👉 Example: A medical practice that forgets to file may lose its “active” status and risk compliance with licensing boards.

6. DIY Formation Without Professional Guidance

While online formation services make it easy to file articles of incorporation, they don’t explain the tax consequences or tailor the setup to your situation.

👉 Example: A high net worth individual with multiple ventures might save significant taxes by structuring ownership across different entities. Filing online without a CPA’s guidance could cost them tens of thousands in missed savings.

7. Not Planning for Taxes From Day One

New business owners often focus on branding and clients but forget about tax planning. This leads to:

• Underpayment penalties.
• Missed estimated tax deadlines.
• Poor recordkeeping.

👉 Example: A filmmaker who books a big project but doesn’t set aside money for quarterly taxes may face a surprise $20,000 IRS bill.

How Velin & Associates, Inc. Can Help

At Velin & Associates, Inc., we help California business owners:

• Choose the right entity (LLC, S-Corp, C-Corp, partnership).
• File DBAs and maintain compliance with California laws.
• Set up bookkeeping to keep business and personal finances separate.
• Plan ahead for state and federal taxes.
• Avoid costly penalties that derail small businesses.

Whether you’re a dentist starting a new practice, a Shopify or Amazon seller launching an e-commerce store, or a creator monetizing your YouTube or TikTok channel, we’ll make sure your business is built on a strong, compliant, and tax-efficient foundation.

Final Thoughts

California is one of the best states for innovation and entrepreneurship — but also one of the most complex when it comes to business compliance. Avoiding these common mistakes can save you time, money, and stress.

Don’t risk your business future on trial and error. Work with an experienced Los Angeles CPA to set up your company the right way from day one.

For more information about our tax planning services, contact us today: visit our website.

Velin & Associates, Inc

8159 Santa Monica Blvd STE 198/200 West Hollywood, CA 90046
323-902-1000
dmitriy@losangelescpa.org