Setting Up a Manufacturing Relationship in California

In California, you can choose from several business structures including sole proprietorship, partnership, limited liability company (LLC), or corporation. Many manufacturing businesses opt for an LLC or corporation due to liability protection. California requires registration with the Secretary of State for LLCs and corporations, along with payment of applicable fees. You'll also need to obtain a business license from your local city or county government. Consider consulting with a business attorney to determine which structure best suits your specific manufacturing operation and tax situation.

California manufacturing businesses typically require multiple permits and licenses. These may include: a general business license from your city/county, seller's permit from the California Department of Tax and Fee Administration (if selling products), environmental permits from agencies like the Air Resources Board or Department of Toxic Substances Control (depending on your manufacturing processes), and potentially industry-specific permits. Additionally, you'll need to register with the Employment Development Department if hiring employees. Manufacturing facilities must also comply with Cal/OSHA workplace safety regulations and may require fire department inspections.

Manufacturing contracts in California should clearly define terms including product specifications, quality standards, delivery schedules, pricing, payment terms, and intellectual property ownership. Include provisions addressing confidentiality, warranties, indemnification, and dispute resolution. California law has specific requirements regarding warranties and consumer protection that may affect your agreements. Consider including choice of law and venue provisions specifying California law and courts. For international suppliers, address import regulations and tariffs. Have an attorney review all contracts before signing to ensure compliance with California law and adequate protection of your business interests.

California has some of the most employee-friendly laws in the nation. Manufacturers must comply with state-specific requirements including: higher minimum wage than federal standards, mandatory paid sick leave, meal and rest break requirements, overtime rules (including daily overtime after 8 hours), and strict worker classification rules regarding independent contractors versus employees. Manufacturing environments must comply with Cal/OSHA safety regulations, which are often stricter than federal OSHA standards. California also has extensive anti-discrimination protections and requires sexual harassment prevention training. Consider working with an employment attorney to develop compliant policies and handbooks.

California has stringent environmental regulations affecting manufacturers. Depending on your operations, you may need permits from the Air Resources Board for air emissions, the State Water Resources Control Board for water discharges, and the Department of Toxic Substances Control for hazardous waste. California's Proposition 65 requires warnings on products containing chemicals known to cause cancer or reproductive harm. The state also has specific regulations regarding electronic waste, packaging materials, and chemical reporting. Many local air quality management districts impose additional requirements. Consider conducting an environmental compliance audit and implementing an environmental management system to ensure ongoing compliance.

To protect intellectual property in California manufacturing, register trademarks with both the USPTO and California Secretary of State. Patents should be filed with the USPTO. Copyright protection exists automatically but registration provides additional benefits. For trade secrets, implement confidentiality agreements with employees and business partners, along with physical and digital security measures. California has adopted the Uniform Trade Secrets Act but has specific provisions regarding employee mobility and non-compete agreements. California generally does not enforce non-compete agreements except in limited circumstances like business sales. Consider working with an intellectual property attorney to develop a comprehensive protection strategy.

California manufacturers typically need several types of insurance: general liability (for third-party injuries/property damage), product liability (for claims related to your products), commercial property (for your facility and equipment), workers' compensation (mandatory in California for employers), business interruption (for revenue losses during downtime), and commercial auto (for company vehicles). Depending on your specific manufacturing activities, you might also need environmental liability, cyber liability, or equipment breakdown coverage. California has specific requirements for workers' compensation insurance, and failure to carry it can result in significant penalties. Work with an insurance broker experienced in manufacturing to ensure adequate coverage.

California has strict product liability laws that hold manufacturers responsible for injuries caused by defective products regardless of negligence. Liability can arise from design defects, manufacturing defects, or inadequate warnings/instructions. California has a two-year statute of limitations for personal injury claims but applies the 'discovery rule,' meaning the clock starts when the injury is discovered. The state also recognizes the 'component parts doctrine,' which may protect component manufacturers in certain circumstances. To mitigate risk, implement robust quality control processes, maintain detailed records, create comprehensive product warnings, and consider contractual protections with distributors and retailers. Product liability insurance is essential for California manufacturers.

California manufacturers face several tax obligations including state income tax (with rates among the highest in the nation), sales and use tax, property tax on equipment and facilities, and employment taxes. However, manufacturers may qualify for exemptions like the partial sales tax exemption on manufacturing equipment purchases and the California Competes Tax Credit for businesses expanding in the state. Research and development activities may qualify for state tax credits. Local jurisdictions may offer additional incentives. Manufacturing inventory is generally exempt from property tax, but equipment is taxable. Consider working with a tax professional familiar with California manufacturing to optimize your tax position and ensure compliance.