If you are planning on selling new cars or used cars for profit in the state of California, you will need to obtain a dealer license from the DMV. Applicants will need to follow an extensive process of training and business documentation in order to meet all of the California DMV’s requirements to become a licensed car dealer. It is essential to be fully immersed in all the requirements to obtain a dealer’s license so you can confidently and adequately serve your future customers. In this step-by-step guide, we will help you understand the entire process of becoming a licensed dealer in the state of California.
What is a Car Dealer’s License?
Any individual or business entity who sells an automobile with intent to profit must file an application for a dealer license to the California Department of Motor Vehicles. This license allows for businesses dealing in the commercial sales of cars to operate legally inside the respective state they are licensed in. As an auto dealer, it is important to follow state regulations in order to avoid hefty fines or possible jail time if caught operating without a dealer license.
The Different Types of Dealer Licenses
The type of dealer license you apply for will depend on what kind of auto dealer you intend to become. While there are some similarities between these licenses, there are important differences to keep in mind. Each license requires its own unique set of documentation when submitting a new application.
Here are the dealer licenses available in California:
- Wholesale dealer
This license is exclusively for auto dealers who sell cars to other licensed dealers, authorized dismantlers, or at auctions. Sellers to consumers would need a different type of dealer license.
- Used dealer
Sellers of only used vehicles to the general public will need to apply for the used dealer license. California state laws require used dealers and wholesale dealers to “complete a dealer education program, pass a written exam administered by DMV prior to completion of the dealer application, and complete a continuing education program of at least four hours every two years” (CVC §11704.5). Used dealers have wholesale privileges as well.
- New dealer
To be able to sell new cars in California, you will need a new dealer license. New dealers need franchise approval before obtaining a dealer license. To open a franchise dealership, substantial dealership management experience and capital is usually required. When selling both new and used cars, only the new dealer license is required.
- Autobroker’s Endorsement
In order to broker a transaction between a buyer and a dealer, one must have an auto broker’s endorsement added to their dealer’s license. State law also requires strict documentation of information regarding the transaction and depositing of purchase funds into a trust account. An autobroker’s endorsement is only given to used and new retail dealers.
Steps To Take To Get Your Dealers License
Now that you know what type of dealer license you need, the next part of the process is establishing your business so that it meets all the requirements for a California dealer license. These steps take careful planning, as there are many details involved. Keep in mind that depending on the type of dealer license you need, there will be different costs associated when applying. Due to the lower cost in bond required to purchase, wholesaler licenses can cost as low as $1,400.
Pass the Dealer Pre-License Training Class
Applicants for a retail or wholesale dealer’s license must take a pre-license training class that has been officially approved by the California DMV. Programs are to last six hours. Regardless of the type of license you are applying for, one class covers every dealer type. You can take a DMV approved Pre-License class here at Redline Dealer Education.
Once the class is completed, attendees will receive a certificate of completion that needs to be attached to the application. The final step of training is to pass a 40-question exam that is taken in person at the DMV. You will have 3 attempts to get a passing score of at least 70%. After you pass the test, you will receive a certificate and the pre-license training is complete.
Setting Up Your Business Structure
Before starting the dealer license process, the first step is to register as a business entity with the state of California. It’s necessary to determine what type of business structure you will be operating under as a motor vehicle dealer. If you are unsure of what structure type to use, it is best to seek the advice of legal counsel.
Apply as a corporation
A corporation exists as a separate entity from the owners. The DMV must be shown information of the operating officers at the dealership location.
Apply as a limited liability company (LLC)
An LLC is similar to a corporation, but the owners have more flexibility in management. Being established as an LLC is typically preferred by smaller businesses who want less formality in structure.
Apply as a partnership
This is a simple structure for two or more individuals to own a business together. Partnerships have the advantage of paying lower taxes compared to corporations or limited liability companies.
Apply as an individual
Otherwise known as a sole-proprietorship, this business structure retains control under one single owner. An individual is not required to register as a business entity, unlike all of the other structure types. However, they are required to pass a background check in order to have their application accepted.
Set Up Place of Business and Dealer Location
New, used, and wholesale auto dealers must operate their dealership at a physical location that is designated for business and meets all other property requirements, including an office, direct access for consumers to enter the building, and a display area large enough to fit vehicles that they are licensed to sell. The location must also be given zoning approval with the city a dealership will operate in.
Brokers and Wholesale dealers are not required to have a display lot, and they may use a home office. With exception to wholesale dealers, any signage on display must be permanent in nature and made to endure wear from weather effects.
Whether the auto dealer is continuously using the lot as a principal location, or it is remaining occupied at regular periods, a lease agreement is necessary to establish an address for the business. An important detail to include in your application is a picture of the dealership and office. For a retail dealer’s license, a photograph of the office, display sign, and display area must be attached to the license application. A wholesale only dealer just needs a picture of the office and location. Don’t forget that the DMV requires pictures to be signed and dated.
Apply For a City License
Depending on where you are located in California, a city license may be required to operate as a business. Otherwise known as a Business License or a Business Tax Certificate, this can be obtained at the local city hall of the business location.
Apply for a fictitious business name
If a car dealership is not operating under the actual name of the owner, the business is required to obtain a Fictitious Name Statement from the city or county it is operating in. This part of the process can be completed at a local county recorder’s office at a set fee. Though naming conventions may seem like a minor detail, this is a required step in the application process and must not be overlooked.
Register Your Dealership With The IRS
Another business requirement is registering with the IRS. This is a critical step, as it allows sellers to hire employees at the dealership by receiving an Employer Identification Number (EIN). This part of the process is free of charge, and can be completed on the IRS website.
Apply for a Business Bank Account
The DMV of California requirements informs auto dealers that they must open a new bank account in the specific name of the dealership, and all relevant business details need to be included. Here are some popular banks that provide services for auto dealers in California.
A leader in digital banking, Axos provides terms of up to 96 months and financing between $10,000 and $100,000.
With locations across the US and California, US bank has a vast network of resources to help run your business and remain competitive in your market.
In order to complete the criminal background check that is a legal requirement for all vehicle industry professionals applying for an occupational license, a Live scan fingerprint must be collected from the dealer owner. Government agencies, such as the Department of Justice, are sent the fingerprint for various legal checks, and are able to complete the process within three days.
Obtain a Motor Vehicle Dealer Bond
A California Motor Vehicle Dealer bond could be described as an insurance policy for the consumer, and also an important requirement for every type of car dealer applying for a dealer license. An owner can obtain a bond by seeking out a surety company that specializes in providing bonds for auto dealers. You can get a free quote for an auto dealer bond at Bond911.
Different dealer licenses require different bond amounts. Wholesale-only dealers need a bond of $10,000, while new and used dealers will need $50,000 for their bond. In the instance of a retail customer submitting a claim of being defrauded by your dealership, a court deciding in favor of the customer can order payment of $50,000 maximum.
Register With the Department of Tax and Fee Administration
Being able to collect sales tax is made possible by getting a California Department of Tax and Fee Administration (CDTFA) Resale Permit. The role of the CDTFA is to regulate active businesses in the state of California that are engaged in selling retail products. As an auto dealer, sales tax needs to be collected on each vehicle sold to the public.
Complete the Used Dealer Application Form
Now that you have all of the required material to send to the California DMV, you will need to download the application document from the DMV website. The used dealer application form can be completed online DMV Dealer Application.
Arrange a Site Visit with the DMV Inspector
Whether you have your own car dealership, or if a dealership is owned by a corporation, they must all be approved under the same inspection process. Your ability to comply with every DMV display requirement is crucial in this step.
The DMV inspector will visit the premises and make a thorough review of your dealership. Key items the inspector will look for include:
- A main business office, with no building structures that are mobile or temporary in nature.
- Display area is of proper size and exclusively used for the dealer’s display purposes only. Under this requirement, the display lot cannot double as a parking lot for patrons.
- All records are present and business permits are displayed.
- Signs are inspected to be sturdy enough for withstanding weather.
Once the inspection is complete and your dealership is approved, the inspector will give you a temporary dealer license.
Submitting The California Dealer’s License Application
The California DMV has implemented a new process where applicants can easily see their application status and schedule an inspection online.
The DMV inspector will be there to meet you, and at that time, you can schedule a location inspection. In some cases, it may take up to 120 days to finish processing your application while completing a criminal background check.
How Long Will The Dealers License Be Valid?
A California auto dealer’s license is valid for one year from the date of issuance. Licensees need to submit a renewal application, and it is recommended to do so after receiving a 90-day notice of expiration from the DMV.
Every two years you will need to take continuing education classes in order to renew the dealer’s license after your second year. For an easily accessible online course approved by the DMV, Redline Education has a great continuing education course you can take for just $45.
Getting Insurance (Recommended)
Although insurance is not a requirement to obtain for California auto dealers, it is a good idea to get sufficient dealer insurance for your business. Owners of dealerships will find that keeping their inventory is expensive, especially compared to other industries. On a regular basis, you can count on the possibility of something going wrong. A good insurance policy can protect you from this.
In some cases, the firm providing your surety bond can also provide dealer insurance. If not, they can refer you to a reputable business.
With every component coming together, the dealer license journey is tedious in nature and takes careful planning. However, establishing a legitimate California dealership is essential to having a successful car dealer business. From determining your license type and passing the pre-license training class, to fulfilling all business requirements and application details, you will be ready when it comes time for renewal of your dealer’s license.
Whether you need to take a pre-license training course, or have to take the continuing education class – Redline Dealer Education is a top choice amongst dealers for DMV-approved training. Providing education for over 10 years, Redline Education is a trusted partner of the DMV and will provide you all the resources necessary for success. Find out more about Redline’s dealer education here.