How to Run a Business in California

The state of business in California

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:

• Finance, insurance, real estate, rental and leasing
• Trade, transportation and utilities
• Professional and business services
• Manufacturing
• Information

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.

What to know about running a business in California

Read ahead for details on the factors that affect California’s complex business landscape. 

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 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.

High taxes

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.”

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.”

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. 

Competitive labor market

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.

The best and worst industries for starting a business in California

Below, you’ll find an overview of California’s most thriving — and most challenging — business sectors for new companies.

The best industries for starting a business in California

• Real estate: Considering that real estate is one of California’s top industries, it makes sense that businesses in this field will likely be successful. There’s a substantial market for real estate rentals in California, in particular. 
• Property services: Residential and commercial property services — such as cleaning, repair and maintenance — are also in high demand.
• Sustainability: Because California is a leader in sustainability, businesses that offer green energy alternatives, such as solar panel installation, are also growing. 
• Technology: Given the state’s technology hubs, like San Francisco and Silicon Valley, many opportunities exist for tech startups and e-commerce ventures. 
• Cannabis: California’s regulatory landscape makes it a prime location for cannabis-related businesses. 

The worst industries for starting a business in California

California’s hospitality and retail industries have suffered a decline in recent years. 

• Retail: Not all retail is hurting, but luxury retail targeted toward the average consumer will most likely struggle.
• Hospitality: Hospitality, in particular, is one of the most challenging industries to break into during any economically difficult time. With inflation rising, consumers may cut back on non-necessities such as dining in restaurants. When you consider that starting a restaurant in California can cost up to $300,000, you’re facing quite an uphill battle. 

Resources for small businesses in California

If you’re a small business owner in California seeking resources to help you move forward, here are a few organizations to consider.

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 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.

Governor’s Office of Business and Economic Development

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 Small Business Development Centers

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.

Being prepared is key to starting a successful business in California 

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.