Whether you’re a native looking to start a new business or a newcomer wanting to put down more than just roots, starting a business in the Golden State comes with its fair share of opportunities – and risks.
For most entrepreneurs with dreams of making it big, California is a no-brainer option. After all, it’s host to the largest economy in the U.S., dwarfing numerous other countries, let alone states. With an economy that large, it’s no surprise that the state’s median household income is also higher than most other areas.
In addition to being an economic powerhouse, the state also draws in a very talented and diverse workforce from all over the U.S. The state is also home to a sheer number of prestigious universities, both public and private, giving you a vast talent pool for your business to pull from. And with over 39 million people already living within its borders, California offers plenty of opportunities to network with like-minded entrepreneurs as well as customers.
Let’s take a deep dive into starting a business in California, including the unique legal and tax considerations
Potential Tax Hurdles
Taxes are usually the first issue that many start-ups run into when starting their own businesses, whether it’s within the state or even outside of its borders. That rings especially true for fledgling companies looking to do business with Californians without being headquartered in the state itself. Even if your business isn’t registered in California, it’s still subject to the state’s tax rates on revenue generated through doing business with its residents. Knowing the ins and outs of the local tax policy is a big advantage when growing a company.
This unique hurdle often results in an out-of-state business paying twice – first taxes in its own home state and additional taxes in California. It’s no wonder why many businesses aggressively compartmentalize their California operations from the rest of the company. For the above reason, establishing your business in California makes sense, especially if you plan on doing business primarily within the state.
Navigating through Regulations
Another potential hurdle facing those starting their own business in California is the state’s notoriously complex and ever-changing business regulations. With an economy as big as California’s, it doesn’t come as a surprise that its guidelines for business compliance are both numerous and varied.
One of those regulations, the California Consumer Privacy Act of 2018, mandates all businesses within the state to safeguard collected consumer data. This particular regulation is similar to the General Data Protection Regulation enacted in the European Union. While the CCPA is aimed at protecting consumers through safer handling of their data, regulations like these can pose an additional burden on fledgling businesses.
Franchise Tax
Despite the state offering numerous tax breaks for small businesses, the one tax you won’t be able to avoid is the franchise tax. No matter where you are in the state, the size of your company or how you do business, you’ll have to pay an annual minimum $800 fee simply for doing business in California. Like many other taxes, the franchise tax goes toward funding many of the state’s regulatory functions, including infrastructure maintenance and other public projects.
There is, however, a first-year exemption available for companies starting out in the Golden State. In 2021, the state legislature enacted Assembly Bill 85, which introduced a variety of changes to the state’s revenue and taxation code. One of those changes involved exempting California businesses from paying the franchise tax in their first taxable year of business.
You also won’t have to pay the franchise tax if you didn’t conduct business in the Golden State during the taxable year and said taxable year was 15 days or less. This works if you’ve temporarily shuttered your business for the fiscal year in preparation of a relocation, for instance.
Registering Your Business
When starting your own business in California, you’ll have the option of starting it as a traditional C corporation, an S corporation or a “Limited Liability Company” or LLC for short. Whereas C and S corporations pay a flat percentage rate based on the company’s net income, LLCs pay a flat dollar tax based on where they fall in a gross income tier. For instance, a company grossing between $500,000 and $999,999 during a taxable year pays $2,500 in taxes.
LLCs also offer some unique advantages to start-ups. For example, an LLC shields your personal assets in the event of a lawsuit. However, a LLC only provides those liability protections on a state level, whereas a C corporation offers liability protections similar to an LLC but at the federal level.
Starting an LLC in California is relatively affordable compared to other states, even “business-friendly” states like Delaware and Connecticut.
Once you’ve decided how you plan to start your new business, you’ll need to file LLC-1 “Articles of Organization” either online or via mail. Keep in mind that California requires you to file a DBA or “Doing Business As” if you plan on doing business under any name other than the one used for your LLC.
You can use any name of your choosing as your DBA, plus you can also trademark your DBA to gain exclusive usage rights. Trademarking your DBA isn’t a necessary step, but it’s always a good idea if you have a unique marketing name.
Starting a new business in any state can easily turn into a hair-pulling process, but starting one in California can be particularly fraught given the unique regulations and tax issues involved. Fortunately, Tailor Brands makes it easier to start a new LLC in the Golden State. The all-in-one platform provides a simple step-by-step process that walks you through starting your own business, from start to finish. That includes naming your new California LLC, choosing a registered agent and filing the proper paperwork.
Other Costs of Doing Business
Keep in mind that California not only has high individual income taxes (13.3%), but also high business taxes (8.84%). Add to that the relatively high cost of living compared to surrounding states and you’ll have a recipe that could significantly impact your cost of doing business. Some of the state taxes you’ll have to be mindful of as a new company include the unemployment insurance tax, employment training tax and employee withholding tax.
It’s not just state taxes that could impose additional costs on a new startup. You’ll also have to contend with other taxes levied by various counties and municipalities. Considering that start up costs are a big hurdle for any new business, planning ahead and having clear financial goals in mind is a must.