California has many great qualities, including abundant natural beauty and a nearly perfect year-round climate. However, it is a little-known fact that it is an ideal location for startups. California, with its high taxes and complex regulations, can be difficult for aspiring business owners to navigate.
California may have some unique challenges, but business success in the Golden State is still possible. Read this article to learn more about operating a business in California, including taxes, permits, and what you need to know about thriving industries across the state.
What you need to know about operating a business in California
Read below to learn more about the factors influencing California's complex business environment.
California is known for experimenting with new regulations. Compliance has become a moving target as states aggressively rely on new regulatory measures, which can be a challenge for some businesses. For example, the California Consumer Privacy Act of 2018 is the state's response to the European Union's General Data Protection Regulation (GDPR), which requires businesses to take steps to protect the consumer data they collect, analyze, and use. is required.
“California has a complex and ever-changing regulatory landscape, and the changing landscape can be one of the most difficult parts of operating a business in the state,” said Matt Saul, president of Conger in Northern California. said. “That is not to say that the regulatory environment is a negative aspect of doing business in our state. On the contrary, it is costly to do business in this great state.
“California is typically at the forefront of policy initiatives that 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 monitor our natural resources.” “and the environmental impact.'' Sole added.
Most business owners we spoke to consider regulatory compliance a reality, regardless of what state they operate in. California frequently creates new regulatory requirements and revise old ones, and many entrepreneurs are proactive.
California is generally known as a relatively high tax state, and every business owner knows that. Although taxes vary by business entity—for example, a C corp is taxed differently than a limited liability company (LLC)—the general consensus is that taxes in California are higher than in neighboring states.
“Taxation is always a topic of discussion in California,” said Rodney Yeo, owner of Best Online Traffic School. “I think it's an expensive place to do business.”
The state's top corporate tax rate is 8.84%, ranking it 48th in the nation for its overall business tax environment. Personal taxes affecting pass-through entities such as LLCs are also high. The top personal income tax rate is 12.3 percent.
Business transactions in California are subject to sales and use taxes imposed by the state, county, and municipality. If you employ employees, you must register for California employer taxes, including employee withholding tax, employment training tax, unemployment insurance tax, and disability insurance. Next, there is the California franchise tax that must be paid annually.
“It's no secret that California is a high-tax state, and that can put some burden on businesses, because who's willing to pay taxes?” Sole said. .
But Saul said tax money spent on public projects such as infrastructure and public transport also benefits businesses that rely on regular travel, including his company.
Still, Matthew Ross, former co-owner and chief operating officer of Slumber Yards, said the high tax burden on small businesses is too much for some businesses, even forcing them out of state. That's what it means.
“California taxes are a big disadvantage for business owners,” Ross said. “Honestly, taxes are the main reason we decided to move our company from California to Nevada. Living just an hour away saves us tens to hundreds of thousands of dollars a year. Why pay 13% more in taxes when you can? In my opinion, it’s a no-brainer.”
Cost of living
California is an overall wealthy state, with higher costs for goods, services, and wages than many other states. Companies operating in California can make more money, but the cost of doing business is also much higher than in other regions.
“We decided to move from California in 2018,” Ross said. “It was simply becoming too expensive, both from a tax and operational standpoint. There are tax issues, of course, but in California, you have higher wages, higher cost of living, higher commercial real estate rents, etc. We also have to deal with it.”
Per capita personal income is significantly higher than California as a whole. Californians earn an average annual salary of $77,036, while Americans earn an average annual salary of $65,423. This means the average Californian can spend more, but it also means a higher cost of living.
Additionally, California's revenue is not evenly distributed. The state's relatively high income inequality puts low-income Californians at risk of being priced out of all markets and having less disposable income available for small business goods and services.
The minimum wage for businesses of all sizes is $15.50 and will soon increase to $16 an hour. The annual minimum salary for an exempt employee in California is twice his minimum wage of 2,080 hours per year. As the minimum wage increases, so does the minimum wage for exempt employees, currently $64,480 per year.
The best payroll services can handle payroll needs in multiple states and ensure compliance with state laws regarding minimum wage, overtime pay, and more.
competitive labor market
California's economy is strong, unemployment is low, and the labor market is highly competitive. As many small business owners have told us, it's now a market for employees. This means that companies need to offer attractive compensation and employee benefits to attract and retain top talent. Talent may seem freely available, but companies must consider the challenges of recruiting employees in a tight labor market when developing compensation packages and workplace culture.
“The market for finding skilled workers is highly competitive,” says Yeo. “It's definitely a market for employees right now, but it's also become easier to find people to work virtually around the world.”
A competitive labor market means it takes more time and effort to fill open positions with qualified candidates. Some entrepreneurs see the competitive labor market as an opportunity to improve internal processes and position themselves well for the future.
“Given the continued growth of California's economy and low unemployment rates, California has become a competitive workforce market for companies,” Saul said. “Over the past few years, the time it takes to fill positions has increased. However, we are still able to find the skilled talent we need, which has helped us evaluate our compensation and incentive plans. , to ensure we provide a great place to work.”
Although it may be difficult to compete with large companies in the region, Saul added that the steady influx of new immigrants to the state is helping to ease the strain on the competitive labor market.