- You'll need to navigate a complex set of rules and regulations unique to California.
- Expect to pay more in taxes and have a higher cost of living than you would in almost any other state.
- Tap into the right resources to get the help you need and make sure you're within the law.
California is home to more than 4 million small businesses, which employ 7.1 million people across the state. Small businesses make up 99.8% of all businesses within the state and employ 48.8% of the state's workforce, making them a vital part of the Golden State economy. California's gross domestic product (GDP) grew at a rate of 3.5% through the third quarter of 2018, which outpaced the U.S. economy's national growth rate of 3.4%.
The state's unemployment rate stands at a healthy 4.3%, which is slightly higher than the national unemployment rate of 3.6%. The top five industries in the state are finance, insurance, real estate, rental and leasing; professional and business services; government and government enterprise; information; and educational services, healthcare and social assistance.
How does this economic landscape translate to the fortunes of small businesses throughout the state? What unique challenges do California's 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.
Complex regulations
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 recent California Consumer Privacy Act of 2018, for example, is 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 the Bay Area. "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. While California frequently creates new regulatory requirements or revises old ones, many entrepreneurs are willing to roll with the punches.
High taxes
California is generally known as a state with relatively high taxes, something that business owners universally recognize. While taxes vary by entity (for example, a C-corp will be taxed differently from an LLC), the general consensus is that they 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."
According to the Tax Foundation, the state's top corporate income tax rate is 8.84%, and its overall business tax climate ranks 49th in the nation. Individual taxes, which impact pass-through entities like LLCs, are also high. The top individual income tax rate is 13.3%. Tax Freedom Day, which represents how long it takes taxpayers to meet their tax burdens, falls on April 23 for California; that's seven days later than the national Tax Freedom Day, placing it at No. 38 in the nation.
California businesses have sales and use tax levied by states, counties and municipalities 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. Check out the California Tax Service Center for forms you'll need. [Need help with your taxes? Check out our reviews and best picks for online tax software.]
"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 serve to benefit businesses that rely on regular travel, like his.
Still, the high tax burden can be excessive for some companies, even to the point of driving them out of the state, said Matthew Ross, co-owner and COO of The Slumber Yard.
"California taxes are a big disadvantage for business owners," he said. "To be quite honest, taxes are the primary reason why we decided to move our company from California to Nevada. Why pay 13% 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."
Cost of living
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."
According to the U.S. Bureau of Economic Analysis, per-capita personal income is significantly higher in California than the nation at large. Californians make $62,586 on average each year, while the average American pulls down $53,712 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. There is a relatively vast income disparity in the state, 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.
As of Jan. 1, 2019, hourly wages have changed in the state. For businesses with 25 employees or fewer, minimum wage is $11 this year. Next year, it will be $12. For businesses with 26 employees or more, minimum wage is $12 in 2019, and that moves to $13 next year. But these numbers vary by city. For instance, in Oakland, the minimum wage in 2019 is $13.80, but it's $15.65 in Mountain View.
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 do the minimums for exempt employees. That's $47,760 for small companies and $49,920 for larger companies. [Need help managing your payroll? Check out our reviews and best picks of payroll services for small business.]
Competitive labor market
California's economy is doing well, and unemployment is low (4.3% as of March 2019), 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 have to offer attractive compensation and benefits. While talent may seem freely available, businesses must heavily consider the 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."
Sole added that competing with large companies in the area can be difficult, but a steady flow of new people moving into the state has helped to ease the burdens of a competitive labor market. [Need help with recruiting? Check out our reviews and best picks for recruiting software for small business.]
Frequently asked questions
These questions are commonly raised when one starts a business in California. The answers below will help you to file the necessary documents, pay the appropriate fees and understand the basics of starting a business in California.
How do you start a business in California?
Starting a business in California requires you to select a business structure and file the appropriate tax and employer identification documents.
- Stumped on what type of business you want to run? Check out our list of smart business ideas for 2019.
- Need help writing a business plan? These business plan templates should help you get started.
- Not sure which is the best legal structure for your business? We've broken down the various types, including sole proprietorship, partnership, LLC and various types of corporations. Note: If you file articles of incorporation, you have 90 days to file the SI-200 Statement of Information, which requires a $20 filing fee and a $5 disclosure fee, as a matter of compliance.
- Looking for funding for your startup? These reviews and best picks for alternatives to small business loans can help.
- Make sure you're managing your money properly with the right accounting software for your business.
Do you need a business license in California?
Most businesses require licenses or permits to operate. The 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 where you operate.
There are specific licensing requirements for regulated professions and industries. The California Government Online to Desktops offers the 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 need 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.
How do you obtain a business license in California?
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.
How much does a business license cost in California?
Business licenses are administered by cities in California, so prices vary from place to place. Typically, business licenses cost between $50 and $100.
How do you register a business name in California?
If you intend to use a "doing business as" (DBA) name that is different from the official name of your LLC, you must register it within 40 days of the launch of the business. Locate the appropriate office near you and file an application for your DBA.
How much does a DBA cost in California?
Filing fees for DBA applications are charged by the counties in California and vary by city. Typically, the fee is around $40.
What is a California corporate number?
California corporations are assigned a seven-digit corporate number that starts with a C, while LLCs are assigned a 12-digit corporate number that begins with the four digits of the year of incorporation. These numbers are distinct 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.
What is your California state employer ID number?
Your California state employer ID number, also known as your EIN, is used for taxation purposes and on other state and federal documents to identify your business. To find out your state EIN, you can contact the Employment Development Department or the federal Internal Revenue Service.
How much is the LLC fee in California?
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.
Is the LLC fee deductible in California?
According to the California Tax Service Center, the annual LLC fee is considered a deductible ordinary and necessary business expense and, as such, can be deducted from your tax bill.
Resources for small businesses in California
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 driven by volunteers. Here are some of the chapters in California:
U.S. Small Business Administration (SBA) District Offices
The 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.
The Governor's Office of Business and Economic Development
Established by current Gov. Edmund G. Brown, the GO-Biz office, as it is called, 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.
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 crafting business plans to navigating the state's tax code. You can find your region's small business development center at the link below.