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Start Your Business Entrepreneurs

The State of Small Business: California

The State of Small Business: California

As part of our yearlong project "The State of Small Business," Business News Daily plans to report on the small business environment in every state in America. In this installment, we asked a few of California's 3,622,304 small business owners about the challenges and opportunities of operating in their state. Here's what they had to say.

Entrepreneurs may find California's complex tax code burdensome and its government regulations prohibitive, but overall, small business is thriving in the state. With the largest population in the United States and a higher-than-average income per capita, California is home to a vast array of potential customers, many of whom are relatively wealthy. However, the spoils are not evenly distributed across the state's sprawling geography; affluence clusters in the coastal counties and those nearest to Silicon Valley and Hollywood, while the inland counties are typically home to blue-collar working families.

That hasn't slowed down the growth of small business, however. According to data compiled by the U.S. Census Bureau, small businesses contributed 6,471,608 jobs to California's economy in 2012, the most recent year for which data is available. That number represented half of all private-sector jobs and 34.8 percent of the entire labor force in December 2012. In 2014, California boasted a real gross state product of $2.3 trillion, according to the Bureau of Economic Analysis (BEA). That's almost 13 percent of the United States' total gross domestic product.

[See Business News Daily's complete coverage of the State of Small Business in the U.S.]

For many small business owners, being close to big markets is especially important. Silicon Valley, San Francisco, Hollywood and greater Los Angeles, to name a few, all offer this benefit to small business owners. Annalisa Mastroianni Johnson, owner of dessert and gourmet food purveyors Gotta Have S'More and Annie's Edibles, said being near Hollywood and Silicon Beach — the southern version of tech wonderland Silicon Valley — has played a big role in the growth of her business.

Annalisa Mastroianni Johnson Credit: Credit: B. Rodriguez Photography

About 18 years ago, when she first started, Mastroianni Johnson said her biggest clients were mostly Hollywood executives; but now, with the boom in the tech industry, more and more startups and technology companies are reaching out to Annie's Edibles to cater lunches for their employees. That new market, coupled with the rising popularity of farmer's markets, food trucks and farm-to-table enterprises, make it a great time to be involved in California's food industry, Mastroianni Johnson said.

"There was a time five or six years ago when the economy wasn't great and things were slow, so companies weren't doing those fun things for their employees," Mastroianni Johnson said. "We also didn't have a street-food culture then, but now we're beginning to with farmer's markets and food trucks … so it's just a fun segment to be in right now."

Christopher Bushong, a tax attorney and managing partner at Paretis Law, also noted the importance of the larger markets to California's small businesses. As long as those staples remain, he said, there will always be a stabilizing factor behind the economy.

"Of course, businesses will continue to thrive in a populated and relatively wealthy state like California," Bushong said. "As long as we have sunshine and powerhouses like Silicon Valley and Hollywood, people will come here and will need the goods and services that the business community provides."

Another big boost to small business is that California's economic recovery has largely outpaced that of many other states. While the state's unemployment rate is still higher than the national average, it has steadily fallen since its 2010 peak of 12.2 percent. Now, California's preliminary unemployment rate for September is 5.9 percent, according to the Bureau of Labor Statistics (BLS). That includes a growing labor force. From 2009 through 2013, California's compound annual growth rate matched the nation's, at 3 percent, according to data from the BEA, signaling healthy economic expansion.

Uncorked Ventures, an e-commerce website devoted to all things wine, began during the recession and has seen business grow as the economy continues to recover. Co-founder Mark Aselstine, who started the company with his brother-in-law, said the duo are optimistic about the small business climate in California.

"I think it definitely feels like the economy is not just expanding, but expanding rapidly," Aselstine said.

Larry Hobbs, owner of Brent-Wood Products and BowWow Dog Houses, agreed. Over the past several decades, Hobbs has watched as the industrial side of business shrunk, he said, but with a recent foray into the world of pet supplies, he's seen demand growing. Business, he said, is pretty good. 

Larry Hobbs Credit: Adrian Munguia

"A gentleman I know made a comment once saying California is the last to go down and the first to come back up," said Hobbs, who founded BowWow Dog Houses after neighbors expressed interest in one he built for his own dog. "It seems our cycle, compared to the national picture, was a little bit shorter on the downturn."

Hobbs said given the current state of the economy, he is confident and ready to expand BowWow Dog Houses from Southern California, where it is currently focused on the San Diego and Los Angeles markets, up into the northern portion of the state.

California boasted an average disposable income per capita of $42,993 in 2014, which was more than $2,000 higher than the national average, according to the BEA. That means more potential dollars in sales. And given that more than 38 million people call California home, there are plenty of customers to court. Small business owners did even better than the average California resident in 2013, the most recent year available for that data; self-employed entrepreneurs at incorporated businesses made an average income of $56,029 for the year, according to data from the U.S. Census Bureau and BEA.

Nick Vena, owner of Purchase Green, an artificial-grass company, said the relative wealth and numerous clients are key aspects to his business' success, especially because its target demographics are upper-middle-class and wealthy households.

Purchase Green staff at the company's California distribution center. Credit: Purchase Green

"Our particular product happens to be geared toward middle- or upper-income folks, and California has a good number of cities that fit that demographic," Vena said.

And Aselstine of Uncorked Ventures added that the massive population, more than 10 percent of the total U.S. population, keeps his business busy trying to meet demands for same-day deliveries in state. But that's a welcome challenge, he said.

"One good thing about California is that it's the biggest state in terms of population and purchasing power," Aselstine said. "There are certain benefits to having the largest local market."

Bushong, the tax attorney and managing partner at Paretis Law, said the chief concern that he's heard from his entrepreneurial clients regards anticipated minimum-wage hikes. These, he said, cause fears that small businesses will have to enact hiring freezes or even lay off workers.

Aselstine is just one concerned entrepreneur. He said for a seasonal business like his, a mandated increase in wages would be tough to handle without cutting costs elsewhere.

"There are new minimum-wage laws going into effect here locally, and I'm sure that will be true statewide in the next year or two," Aselstine said. "That's hard for us because we're highly seasonal. Half of our sales are between Thanksgiving and Christmas."  

Since July 1, 2014, the state minimum wage has been $9 per hour, but that increases to $10 per hour on the first day of 2016. A state Senate bill that would raise the minimum wage to $13 over a two-year period has yet to pass the state Assembly's appropriations committee, stalling after coming up on the committee's docket in late August 2015.

Entrepreneurs and tax experts say that California's complicated tax code often proves restrictive to small businesses. Between a particularly high minimum franchise tax and a "nonconformity" policy that allows the state to disregard certain federal tax benefits available to businesses, the Golden State can be aggressive in seeking state revenues.

John Gillingham, owner of Gillingham CPA, said the costs of compliance can easily get out of hand. A business's tax burden can vary widely from county to county, or even from locality to locality, he said. His advice to small business owners is to consult not just with a professional, but with a local professional who knows the nuances of the community a business is operating in.

"California taxes and fees are among the worst, and late fees are punitive and nasty," Gillingham said. "There's this web of laws to try and catch high-income taxpayers, but a lot of small businesses get caught up in this giant dragnet of compliance."

Mastroianni Johnson, owner of Annie's Edibles, said taxes in California can be daunting, especially with few opportunities for credits and exemptions. But, she added, her tax burden is just something she knows she has to budget for every year.

"I think there are certain things that can get loosened up. There are high taxes and not a lot of benefits for small businesses," she said. "But when you work in a state, you just deal with what you have to deal with."

Vena of Purchase Green said California's policies aren't always prohibitive, listing some financing options and incentives for homeowners to adopt green technologies as a boon to some businesses. There are times when state policy does present an obstacle, though, he said, adding that it's always been a mixed bag.

"California is an active state. It's active in legislation and actively involved in the business climate," Vena said. "Sometimes those decisions are good for certain businesses, and sometimes they're bad. They'll lift us up with the left hand, smack us down with the right, and lift us up with the left again."

Even if Californians are, on average, wealthier than the nation's citizens as a whole, that wealth is not equitably distributed across the state's 58 counties. The money tends to cluster around the Bay Area, near Silicon Valley, as well as in Los Angeles and the coastal counties. Other areas, like the southern "Inland Empire," are not as affluent and rely more on blue-collar, industrial jobs rather than on tech startups and movie studios.

For example, the top three counties for average per capita income in 2013 were the neighboring counties of Marin, San Francisco and San Mateo, at more than $45,000 each. In the lowest three counties — Tulare, Madera and Imperial — the average resident made less than $18,000 in 2013. The wide variation in wealth, geography and economic character throughout the state means the small business climate varies based on where an entrepreneur sets up shop.

A big concern surrounding the uneven economic power is that the so-called "tech bubble" could potentially be on the brink of bursting. With high-profile devaluations of startups like Snapchat and Dropbox, top brand investors are turning a wary eye to a once bullish market. Given the importance of Silicon Valley to the economy of central California — and, indeed, to the rest of the state — shockwaves from a nightmare scenario in the tech industry could derail the state's seemingly promising recovery.

If you're a small business owner in California looking for resources to help you move forward, here are a few organizations you might want to learn more about.

California SCORE

"People who want to grow typically know what they want but don't know how they get there or finance their growth. We get involved in those conversations." – Harper Thorpe, chair of Sacramento SCORE

SCORE offers volunteer business professionals and expert "mentors" to give counsel and guidance to entrepreneurs looking to start or expand their businesses. The services are entirely free and volunteer-driven. Here are some of the chapters in California. 

Central Valley SCORE

Bakersfield SCORE

Sacramento SCORE

Tuolumne County SCORE

Modesto-Merced SCORE

San Luis Obispo SCORE

Monterey Bay SCORE

U.S. Small Business Administration (SBA) District Offices

The U.S. SBA offers financing and grants, as well as consultations and counseling services. There are also opportunities to apply for federal government contracts through the SBA and avenues for obtaining assistance in the wake of natural disasters.

U.S. SBA for California

The Governor's Office of Business and Economic Development

Established by current Gov. Edmund J. Brown, the "GO-Biz" office, as it is called, is intended to help guide small businesses through the various regulatory processes and help entrepreneurs get started. In addition, the office offers assistance with international trade and serves as a linchpin between small businesses and additional resource outlets.

GO-Biz

California Small Business Development Centers

California hosts dozens of small business development centers. Each is dedicated to supporting the development and retention of small business, from helping entrepreneurs craft business plans to navigating the state's tax code. You can find your region's small business development center at the link below.

California SBDC Network

Adam C. Uzialko

Adam received his Bachelor's degree in Political Science and Journalism & Media Studies at Rutgers University. He worked for a local newspaper and freelanced for several publications after graduating college. He can be reached by email, or follow him on Twitter.