I wish to start a small software consultancy business located in
California. Initially I intend to be the sole employee of this and I
may add a few people
at a later stage.
I would like to know the first steps i.e. what I have to do inorder to
establish my small business legally for tax purposes etc.
Please do not hesitate to ask for clarifications.

This link provides some basic information on how to set up a business
in California.

http://www.ss.ca.gov/business/resources.htm

Good luck.