Starting a new business in California has its pros and cons. On one hand, the Golden State has a booming economy, offers many networking opportunities to help entrepreneurs and business owners get off the ground faster than would have otherwise been possible, and has plenty of talented workers for those who plan on hiring employees at some point in time.
At the same time, starting a new business is never easy and, in some ways, it’s harder to start a new business in California than in other states. COVID-19 hit the state hard; from January 2020 to March 2021, nearly 36% of small business owners shut their doors. Taxes and expenses are higher in California than in other states, and the state is known for its unique, hard-to-navigate business regulations.
If you are thinking about starting a new business in California, consider the following eight concerns and possible answers to them in order to make smart business decisions. The state has much to offer and can be the perfect location for your new business if you set it up right; it’s wise to weigh up the pros and cons to ensure you’re making the right choice.
Complex Business Regulations
Nearly half of all business owners in California say navigating the state’s complex regulations is a very serious problem, and it’s not hard to see why. The Golden State typically sets trends by passing business-related legislation not found in other states. For example, in California, an LLC cannot provide professional services, and businesses falling under this criteria will need to set up corporations. There are also naming requirements to follow, and numerous documents that must be filed. Regulations in California can also vary depending on the city in which you operate. For instance, laws covering minimum wage and pay equity aren’t the same state-wide. What’s more, regulations are continually changing, which can make compliance difficult. When you form a business in California, make sure to do it with the help of a seasoned expert or a formation service to help you ensure you’re staying in step with state laws and requirements.
Granted, regulatory problems don’t affect all businesses equally. The nature of your firm will determine how many regulations affect your day-to-day operations. However, it’s important to get to know current and potential regulations to ensure you are able to maintain compliance long-term.
Federal and State Taxes
California businesses have to pay both federal and state taxes. It’s a double whammy that can take a huge bite out of an entrepreneur’s profits. What’s more, California has a higher state tax rate for business than most other states in the United States. Banks and financial institutions have a 10.8% tax rate. Other corporations pay an 8.84% tax rate while S corporations have a tax rate ranging from 1.5% to 3.5%. An owner of an LLC is taxed as if he or she owned a sole proprietorship, and the tax rate can be as high as 37%. Thankfully, there are some exemptions you can claim to lower this rate, but it’s still exceptionally high and some tax breaks available from other states aren’t available in the Golden State.
Acquiring Business Loans
The good news is that lenders offering business loans in California are required to be fully transparent when dealing with a loan applicant. The bad news is that, in California, regulations stipulating the type of businesses that can be considered “small business” in accordance with state law is a whopping fifty pages long. What’s more, since lenders are required to ensure that the businesses they lend to will be able to pay the loan back, you’ll need to show ample paperwork proving your business is a wise investment.
Finding and Keeping Employees
Given the fact that California attracts and graduates thousands of talented students, it would seem unbelievable that businesses in the state would have a hard time finding the right workers. However, that is indeed the case. The national worker shortage has hit California hard; what’s more, California law makes it incredibly difficult to hire independent contractors in the state.
There are several reasons why small business owners in California have a hard time finding and keeping employees. Supply chain shortages have made life difficult for employees who struggle to do their jobs without the right tools. Many employees are burned out, tired of doing extra work to make up for the lack of available workers. Additionally, there are more small business owners in California than in many other states, which means there is a lot of competition for employees, especially those with experience and/or specialized skills.
Cost of Health Insurance
Health insurance is a sought-after benefit, and offering it can help a small business owner attract and retain talented employees. However, it doesn’t come cheap if you have a limited budget. The average per-person premium for group health insurance coverage in the Golden State is about $450 a month; however, it can be significantly higher based on factors such as the age of your employees, your company’s geographic location, how you buy coverage, and who you buy it from, and the preferences set for out-of-pocket expenses.
Thankfully, there are some tax credits that small businesses can take advantage of. Businesses with fewer than ten employees who receive an average annual wage of $25,000 can receive a full tax credit for health insurance expenses under the Affordable Care Act. Businesses with eleven to twenty-five employees can also receive credit if they pay an average annual wage of no more than $52,000. So before enrolling in an insurance plan, make sure you get all the information, compare plans and get professional guidance.
Workers’ Compensation Costs
Workers’ compensation insurance is mandatory in California, even if a business has only a single employee. What’s more, it doesn’t come cheap. A business owner can expect to pay almost 3.5% of the company’s gross income on this form of insurance. Workers’ compensation insurance in the state not only covers the cost of medical care related to the injury in question, but also expenses involved in obtaining care, including compensation for travel to and from doctors’ appointments and pharmacies.
Taking care of paperwork is just part and parcel of running a business. However, California’s paperwork requirements surpass those of many other states. You can bypass some of these requirements by working from home and selling goods and/or services online, but even those who take this route will find there’s still plenty of paperwork to deal with. Many California counties require business owners who intend to work from home to obtain a home occupation permit. A California seller’s permit is required if you sell items that could be subject to sales tax. You’ll also need a business tax certificate in most cities. All companies except sole proprietorships are required to file for an EIN even if they don’t have employees.
California’s economy is larger than that of most nations on earth, providing incredible business opportunities for those who want to start their own business in the state. However, bear in mind that the Golden State’s many business opportunities have made it an incredibly competitive place to start just about any business. You’ll likely have plenty of competitors no matter which industry or field you work in, and you’ll be competing not only for customers but also employees (if you need them) and venues (if you plan on opening a brick-and-mortar outlet).
On the other hand, business owners making long-term plans should bear in mind that California is experiencing a slow yet steady population drop. From 2010 to 2020, over six million people left the state while only 4.9 million arrived from other parts of the country. The population dropped by over 180,000 in 2020 alone as COVID and other factors drove individuals to find new places to live. This shift will likely affect the state’s economy and the viability of businesses appealing to California consumers.
Is California a good place to start a business? Undoubtedly, the answer is yes, as the Golden State has a lot going for it. However, it’s not without its drawbacks, and it may not be the right venue for all aspiring entrepreneurs and small business owners. If you are thinking about setting up a new business in the state, do careful research to ensure you can meet all the legal requirements and handle the paperwork that comes from opening and running a business in California. You’ll also need to analyze your budget to ensure you can handle the extra expense that comes with living and working in the Golden State. Carefully assessing your situation will help you choose the best state for your new business to ensure its current and long-term success.