The state of California has many great qualities, including abundant natural beauty and nearly perfect year-round weather. However, it’s not known for being the ideal place for fledgling businesses. With its high taxes and complex regulations, California can be challenging for aspiring business owners to navigate.
While California may present some unique challenges, business success in the Golden State is still possible. Read on to learn the ins and outs of running a business in California, including what to know about taxes, permits and thriving statewide industries.
California is home to more than 4 million small businesses, which employ over 7 million people across the state. Small businesses make up 99.8 percent of all businesses in the state and employ more than 48 percent of its workforce, making these businesses a vital part of California’s economy.
The state’s unemployment rate stands at 4.6 percent, which is slightly higher than the national unemployment rate of 3.8 percent. These are the top five industries in the state:
How does this economic landscape translate to the fortunes of small businesses throughout the state? What unique challenges do California’s entrepreneurs and small business owners face despite these strong economic indicators? Business News Daily got in touch with some of the state’s entrepreneurs to find out.
Read ahead for details on the factors that affect California’s complex business landscape.
California is known for experimenting with new regulations. The state’s willingness to rely on new regulatory measures makes compliance a moving target, which can be a challenge for some businesses. The California Consumer Privacy Act of 2018, for example, was the state’s response to the European Union’s General Data Protection Regulation (GDPR) and requires businesses to take measures to protect any consumer data they collect, analyze and utilize.
“California has a complex and ever-changing regulatory landscape, and that shifting landscape can be one of the trickiest parts of owning a business in the state,” said Matt Sole, president of Anago of Northern California. “That is not to say that the regulatory environment is a negative aspect of doing business in the state; rather, it is more a cost of doing business in this great state.
“California is typically on the forefront of policy initiatives and works to ensure all Californians have the opportunity to earn a living wage, that businesses and employees operate on a fair and level playing field, and that we have a sustainable future by monitoring our natural resources and environmental impact,” Sole added.
Most business owners we spoke to view regulatory compliance as a fact of life, regardless of which state they operate in. Although California frequently creates new regulatory requirements or revises old ones, many entrepreneurs are willing to roll with the punches.
California is generally known as a state with relatively high taxes, which business owners universally recognize. While taxes vary by entity — for example, a C corp is taxed differently than a limited liability company (LLC) — the general consensus is that taxes are steeper in California than in nearby states.
“Taxation is always a contentious issue in California,” said Rodney Yo, owner of Best Online Traffic School. “I consider it an expensive place to do business.”
The state’s top corporate income tax rate is 8.84 percent, and its overall business tax climate ranks 48th in the nation. Individual taxes, which affect pass-through entities such as LLCs, are also high. The top individual income tax rate is 12.3 percent.
California businesses have sales-and-use tax levied by the state, county and municipality on transactions. If you hire employees, you will need to register for California employer taxes, which include the employee withholding tax, employment training tax, unemployment insurance tax and disability insurance. Then there’s the California franchise tax, which is due annually.
“It’s no secret that California is a higher-tax state, and that can cause some strain on businesses because, really, who enjoys paying taxes?” Sole said.
However, Sole said the tax dollars that are directed to public projects such as infrastructure maintenance and public transportation also benefit businesses that rely on regular travel, including his company.
Still, the high small business tax burden can be excessive for some companies, even to the point of driving them out of the state, according to Matthew Ross, former co-owner and chief operating officer of the Slumber Yard.
“California taxes are a big disadvantage for business owners,” Ross said. “To be quite honest, taxes are the primary reason why we decided to move our company from California to Nevada. Why pay 13 percent more in taxes when you can just live an hour away and save yourself tens to hundreds of thousands of dollars per year? It’s a no-brainer, in my opinion.”
California is a wealthy state overall, making the cost of goods, services and wages higher than in many other states. Businesses operating in California stand to make more money, but the cost of doing business is also much higher than elsewhere.
“We decided to move out of California in 2018,” Ross said. “It was simply becoming too expensive from both a tax and operational standpoint. Of course, there’s the tax issue, but in California, you also have to deal with higher wages, higher cost of living, higher commercial property rents and more.”
Per-capita personal income is significantly higher in California than in the nation at large. Californians make $77,036, on average, each year, while the average American pulls down $65,423 annually. While this means the average Californian has more to spend, it also contributes to a heightened cost of living.
Moreover, California’s income is not evenly distributed. The state has a relatively vast income disparity, which puts lower-income Californians at risk of being priced out of every market and giving them fewer disposable dollars to spend on small business goods and services.
For businesses of all sizes, the minimum wage is $15.50 and will soon increase to $16 per hour. The yearly minimum salary for exempt employees in California is twice the minimum wage for 2,080 hours per year. As the minimum wage goes up, so does the minimum for exempt employees, which currently stands at $64,480 annually.
California’s economy is doing well and unemployment is low, making the labor market highly competitive. As many small business owners told us, it is currently an employee’s market. This means that to attract and retain top talent, businesses must offer attractive compensation and employee benefits. While talent may seem freely available, businesses must consider the challenges of recruiting employees in a tough labor market when devising their compensation packages and workplace cultures.
“The market to find skilled labor is competitive,” Yo said. “It is definitely an employee’s market right now. However, it has also become easy to find talent across the world to work virtually.”
A competitive labor market means it takes more time and effort to fill open positions with qualified candidates. Some entrepreneurs view the competitive labor market as an opportunity to improve their internal processes and position themselves advantageously for the future.
“Given the continued growth of the California economy, combined with a low unemployment rate, it has become an employee market where businesses have to compete hard for talent,” Sole said. “My time to fill a position has increased over the last couple years. But we are still able to find the skilled talent we need, and it has helped push me to evaluate our compensation and incentive plans to ensure I’m providing a great place to work.”
Competing with large companies in the area can be difficult, Sole added, but a steady flow of new people moving into the state has helped to ease the burdens of a competitive labor market.
Below, you’ll find an overview of California’s most thriving — and most challenging — business sectors for new companies.
California’s hospitality and retail industries have suffered a decline in recent years.
These questions are commonly raised when someone starts a business in California. The answers below will help you file the necessary documents, pay the appropriate fees and understand the basics of starting a business in California.
appropriate tax and employer identification documents.
Most businesses require licenses or permits to operate. The business license you require will depend on your location and the type of business you plan to operate. There are general business licenses, which vary by city. If you operate in multiple locations, you may need a license in each city or unincorporated section.
There are also specific licensing requirements for regulated professions and industries. The California Office of Business and Economic Development offers CalGold business permit assistance, which is a database of regulated industries. If you sell or lease merchandise in California, you’ll need a seller’s permit. Plus, you’ll have to register your business entity — including various kinds of partnerships, LLCs and corporations — with the California Secretary of State’s office.
You may also need other permits, depending on your industry. For instance, restaurants will need a health permit, a building permit, signage permits and more. In some cases, you may even have to take some short classes. Contact your county clerk to ask about local licenses and permits. The CalGold site can also help.
You can obtain a California business license by accessing CalGold to find the appropriate licensing office for your location and business type. Once you’ve identified your licensing office, fill out and submit an application for a business license.
Business licenses are administered by cities in California, so prices vary from place to place. Typically, business licenses cost between $50 and $100.
If you intend to use a “doing business as” (DBA) name that is different from the official name of your LLC, you must register your DBA within 40 days of the business’s launch.
Filing fees for DBA applications are charged by the counties in California and vary by city. The fee ranges from $10 to $100.
California corporations are assigned a seven-digit corporate number that starts with a C; LLCs are assigned a 12-digit corporate number that begins with the four digits of the year of incorporation. Corporate numbers differ from tax ID numbers and are assigned to every new entity incorporated in the state by the Secretary of State or the Franchise Tax Board.
Your California state employer ID number (EIN) is used for taxation purposes and on other state and federal documents to identify your business. To find out your state EIN, contact the Employment Development Department or the federal Internal Revenue Service.
In California, an LLC must file the LLC-1 Articles of Organization by mail or online. The fee to file the LLC-1 Articles of Organization is $70, plus $5 for a certified copy. LLCs must also pay an annual minimum tax of $800 to the California Franchise Tax Board for every year they are in business.
The annual LLC fee is considered an ordinary and necessary deductible business expense and, as such, is tax deductible.
If you’re a small business owner in California seeking resources to help you move forward, here are a few organizations to consider.
“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 of Sacramento SCORE
SCORE offers volunteer business professionals and expert mentors to counsel and guide entrepreneurs who are looking to start or expand their businesses. The services are entirely free and driven by volunteers. Check the SCORE website to find your local chapter.
U.S. Small Business Administration (SBA) District Offices
The SBA offers financing, grants, 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.
Established by then-Gov. Jerry Brown, the GO-Biz office is intended to guide small businesses through the various regulatory processes and help entrepreneurs get started. In addition, the office assists with international trade and serves as a linchpin between small businesses and additional resource outlets.
California hosts dozens of small business development centers. Each is dedicated to supporting the development and retention of small businesses by offering services such as helping entrepreneurs craft business plans and navigate the state’s tax code. You can find your region’s small business development center via the California SBDC Network.
California may present obstacles to starting a business, but prosperity is still possible in the Golden State. That’s especially true if you dedicate plenty of time to research and planning before launching. Consider your business budget, the permit requirements, the competitiveness of your industry, and local regulations. If you pay close attention to the details, it’s possible to build a flourishing enterprise.
Natalie Hamingson contributed to this article. Source interviews were conducted for a previous version of this article.