How to Run a Business in California?
California is considered by experts and first time entrepreneurs as the first choice for setting up a business. Apart from the $3.2 trillion economy, the robust logistics & infrastructure makes running a business in California quite uncomplicated and smooth. If you have chosen this state for your startup and are wondering how to run a California business successfully then this guide will provide you an insight into the benefits and challenges for running a small business and the steps you can take to make your business operate smoothly.
Doing Business in California
The Gross Domestic Product (GDP) of America was approximately $21.5 trillion in 2019 with California ranked number one for being the largest state economy. One of the top industries in California is manufacturing as it accounts for approximately 10.67% of the total output generated in this state, which was $316.76 billion in 2018. There are more than 35,000 entrepreneurs running a business in California in the manufacturing industry. The state is also home to some of the biggest corporations and hosts events and meets where as a first time entrepreneur you can learn how to run a California business successfully like others have before you.
Why is California good for small businesses?
There are 4.1 million small businesses in California and there are plenty of reasons why so many businesses are registering in the state. As an entrepreneur or first time business owner, you may wonder whether doing business in California is beneficial or not. The honest answer is that the state offers several small business programs, incentives, and provides an overall business and economic value that can be considered the most competitive.
Today, 99.8% of all businesses in the state are small businesses and each of these owners have faced the challenges of running a business in California and succeeded in achieving the intended growth. Each business has its own reason for choosing to form in California but there are some general aspects of this state that have benefitted each new and existing business in the state. They are:
- Customer Base: One of the underrated aspects related to running a business in California is the customer base. Yes, every new business forming in the state has access to over 39 million residents or prospective customers. Whether you are running a retail store, a pharmacy, a home-based business, or an online business; if you can tap into the customer base then you will never have to worry about how to run a California business successfully.
- Talent Pool: One of the challenges of running a business in California or any other state is hiring the right employees. On the bright side, California is home to some of the top universities and large research institutions, which provides businesses with the talent pool as required. Some of the top institutions include Stanford University, California Institute of Technology, University of California—Los Angeles, and University of California—Berkeley among others.
- Small Business Assistance Centers: Whether you are running a business in California or any other state; you may require assistance in a variety of areas. You can find assistance on business related areas from the several small business assistance centers located within California. They provide assistance in areas like drawing up a checklist for starting a new business, information pertaining to various state business programs, financing a startup, contracting opportunities, getting import or export licenses or permits, and small business resources like taxes and planning assistance.
- Business Incentives: If you have been wondering how to run a California business successfully then here is a tip – take advantage of the various state business incentive programs. Some of the top incentive programs include California Competes Tax Credit, New Employment Credit (NEC), Manufacturing and Research & Development Equipment Exemption, California Research & Development Tax Credit, California Small Business Loan Guarantee Program (SBLGP), California Capital Access Program (CalCAP), and the California Opportunity Zones program.
Challenges for running a California business
Doing business in California has its many benefits but at the same time, there will be hurdles and challenges to overcome. It is never easy to operate a business in any state and there are certain challenges of running a business in California that you will need to work around or overcome during various startup lifecycle stages. Although, California is the land of opportunity and innovation, the various challenges that your startup may face are:
- Tax: One of the first challenges of running a business in California is taxes. The state is known to have one of the highest state business tax rates in the nation. The sales tax is at 7.25 percent and goes up to 10.75 percent if local sales tax is included. California also has a minimum franchise tax of $800, which is the highest in the country. If you are planning to set up a small business then these taxes will increase the average cost of doing business in California significantly.
- Regulations: California is known for experimenting with new regulatory measures and this creates challenges to running a business in California. A new business in the state will have to keep itself updated with regulatory changes and also ensure regulatory compliance.
- Cost of living: This is one of the major challenges of running a business in California as it can be quite an expensive affair from a purely operational standpoint. Higher cost of living translates into higher rent for commercial property and higher wage. The cost of living and doing business in California can vary from one city to another. For instance the cost is higher in Los Angeles as compared to lower costs in Camarillo or Simi Valley.
How to Run a Business in California?
California is not just an economically strong state but is a heaven for startups as it promotes innovation and technology. If you are thinking of doing business in California then you can establish your startup in any industry as all industries and sectors are highly growth oriented. For example: The hospitality sector is one of the top industries that has a dynamic and vibrant economy with $65.1 billion in travel-related spending in 2020 while the restaurant industry shows estimated sales of over $97 billion. The question is how to run a California business successfully in any industry and the processes that will help in making your business fully operational. Let’s take a look at the fundamental requirements for starting a new business in this state.
1. Understand your target market
A target market is essentially a specific segment that constitutes your potential customers whom you can reach out to or attract using various marketing strategies. The target market is often known as the target audience and hence it is important to define your audience prior to launching and running a business in California. Let’s look at an example to understand this:
If your business believes in selling or supplying or retailing PlayStation Games then your target market will be in the age group of 18 to 40 but if your business is in the hospitality industry then your target audience can be any age group. At the same time, you have to also determine what exactly you are offering in the hospitality industry because for example, a business spa or conference center will not cater to children, teenagers, and even retired senior citizens.
Defining the target market will also help you in positioning your brand properly thus helping you overcome initial customer focused challenges of running a business in California.
2. Set revenue goals
The ultimate objective of doing business in California or any other state is generating revenue (profits) and achieving growth. Revenue and growth are interrelated as higher revenue will open the door for expansion, which is a type of growth that every business aims for. Hence, it is important to set your revenue goals early. Revenue goals will revolve around generating profits and this is possible with a strong sales and marketing strategy that will help develop a strong customer base. One of the challenges of running a business in California is to create a fine balance between generating income and controlling operational costs. An illustrative example of revenue goals is:
You are starting a restaurant that caters to a wide target base. You want to increase your revenue goal to enable market expansion or lateral growth. In such a scenario, you can permit weddings and events like live bands to cater to a larger customer base and also generate higher revenue. Your short-term target should focus on improving the gross revenue of the restaurant by at least 30%.
3. Prepare business plan
If you are wondering how to run a California business successfully then a business plan is what you need. Even before you register your business, a business plan needs to be in place. A robust business plan has the following benefits:
- It will help you to steer your business in the right direction
- It will help you in creating an effective business growth and expansion strategy
- You will be able to identify the various marketing and sales strategies for creating brand awareness
- It will help you to overcome the challenges of running business in California
- A good business plan will attract investors as well as lenders
- You will gain a higher understanding of your existing market and competition
If you are thinking of running a business in California, your business plan will take into account several factors like the city you want to operate from, the product or services being offered, and what do you expect to achieve in 5 years or 10 years. The plan will vary according to the requirements of each business but the general plan will incorporate the following:
- Company description
- Market analysis
- Description of products or services
- Marketing strategies
- Management and operational structure
- Staffing requirements
- Financial projections
4. Choose a business location
One of the rules of “how to run a California business successfully” is to always choose the right location for your business. It is important to understand that choosing a business location is like a strategy playing out and a number of factors will help you to decide the location you choose. Some of these factors are:
- Business activity: The location for retailing or selling products will be different from those in the service industry.
- Accessibility: Your business location should be accessible to customers/clients as well as vendors and suppliers
- Competition: Competition can make doing business in California challenging hence choosing a business location not saturated by competition will be beneficial
- Utilities and Rental: If the cost of rented commercial space and utilities is high then it will increase overall startup costs. Hence, you need to look for a location that is within your budget
5. Choose a legal structure for your business
A legal structure for your business is as important as operating or running a business in California. The legal structure of any entity will play a key role in influencing several aspects of the business right from day-to-day operations to filing of taxes and even asset protection. It is hence always recommended to choose a legal structure that doesn’t create challenges of running a business in California and instead provides benefits and legal protections. You can choose any of the following business structures:
- Limited Liability Company
- Limited Partnership
- General Partnership
- Limited Liability Partnership
- Sole Proprietorship
The most popular business structures in California are corporations and limited liability companies although you can choose to form any of the above entities depending on your requirement. If you are planning on doing business in California and are wondering how to form your business then IncParadise can help you with the incorporation/registration process in California.
Do you want to form a California LLC or a Corporation?
6. Obtain necessary license and permits
If you plan on doing business in California then one of the foremost requirements is a business license. If you don’t have the necessary license or permit then you will be unable to make your business operational in the state. In California, there are business licenses or permits that are categorized under two types, they are:
- General business license
- Regulated professions and industries licensing
You can apply for a general business license in the city your business is based in. A general business license is also known as a business tax certificate in certain cities and counties in California. General business licenses and permits are issued by the city or county clerks offices.
For example: If you plan on doing business in California and form your startup in San Francisco then licenses and permits will be issued by the Office of the Treasurer & Tax Collector. A business license has to be renewed annually or on the date as prescribed by the Ordinances or Regulations Code of the issuing city or county. The fee for general licenses vary from one city to another and the renewal fee depends on the business activity.
Some businesses may require additional licenses in the form of regulated licenses, which are also known as regulatory agency permits in certain cities and counties. These are normally issued by different regulatory bodies or agencies like the Department of Public Health, Police Department, Fire Department, Entertainment Commission, and Alcoholic Beverage Control (ABC) among others.
You may face certain challenges of running a business in California without a proper business license. You can always order our California business license check report as it will provide detailed information pertaining to the type of license required by your business, fees, renewals, and filing instructions.
7. Secure funding
It is never easy running a business in California but with the right strategies you can achieve all your business objectives. Every business is unique and so are its requirements. One of the challenges of running a business in California is the high startup costs. So how do you manage the cost? The best option is to secure funding. There are several ways to secure funding or financial aid in the state and they are:
- Approach venture capital firms
- Look for Angel investors
- Find the top business incubators or accelerators
- Apply for government grants and subsidies
- There is an option for bank loans
- Apply for business incentive programs like the Small Business Loan Guarantee Program
8. Hire right employees
One of the challenges of running a business in California is finding the right employees. California is home to some of the most prestigious universities as well as a highly motivated talent pool. The first step is to introduce a formal hiring process as it will improve your chances of finding and hiring efficient and professional talent. Here is a checklist of points to consider prior to hiring employees.
- Job analysis is necessary as it will define responsibilities, skills, and outcomes of a specific job
- Have an Employee Recruiting Strategy in place
- Prepare a well structured interview using evaluation scorecards and behavior-based interviewing techniques
- Always try and look beyond the resume or CV of a probable candidate
- Ask for references of previous employers
It is not always necessary to hire employees for running a business in California successfully especially if most of your business is online. In such a scenario, you can outsource the work or have employees work from remote locations. This move can help bring down the overhead costs.
9. Comply with taxes and other state regulations
Once you start doing business in California, you will be required to comply with state regulations and other requirements including filing of taxes. As a business owner in California you will have to comply with federal, state, and local tax requirements. California has different types of taxes including sales tax, franchise tax, corporate tax, and alternative minimum tax (AMT). You need to identify the taxes applicable for your business and ensure they are filed on time. One of the challenges of running business in California is following all state regulations. In order to do so, you will have to identify the annual business requirements and fulfill them so that the business remains in active status.
10. Keep finance in order
One of the key challenges of running business in California is keeping business finances in order. There are many small business owners who are unable to use the various technologies available in the market to keep their finances in order. One of the options of doing business in California is opening a business bank account, which can help separate your personal expenses from the expenditure and revenue earned by your business. This will also ensure that your annual tax filing is smooth. Here are some tips that will help you to maintain organized and clean financial records.
- Use accounting software like QuickBooks Online, Xero, or FreshBooks
- You can also use a custom enterprise resource planning (ERP) system for complex accounting
- You can set aside 20% to 25% of your net income for income taxes
- Use a cloud based tool for better management of payments across customers and vendors
- Hire a professional bookkeeper to ensure tax filing is correct while maintaining optimal cash flow
11. Implement right tools for business growth
Small businesses can achieve high growth quickly but it requires strategy and tools to achieve that. Running a business in California will not necessarily translate into business growth as achieving your short-term and long-term objectives may take time. There are several variables that influence business growth like:
- Customer loyalty
- Adoption of technology
- Cultural, political and economic conditions of the market
- Business location
- Brand positioning
- Marketing & sales strategies
It is nearly impossible to control the above variable but with the help of specific tools, you will be able to overcome most of the challenges of running a business in California. Some of the tools you can use or implement are:
- Business contact database tools to help grow contact or customer database
- Influencer marketing campaign tools and community intelligence marketing platforms
- Search Engine Optimization (SEO) tools to create higher visibility online
- Tools for Social Media Monitoring & Publishing
- Email and Marketing Automation tools
12. Focus on giving a great customer experience
The essential aspect of running a business in California is to create a loyalty base of satisfied customers. This is possible only when a business offers a positive customer experience. What is customer experience? It is an impression developed by your customers regarding the brand through their journey of using your product or service. This impression is basically how a customer views your brand and this can have short-term and long-term impact on the bottom line including revenue generation. The following tips will help you focus on giving a positive customer experience:
- Measure your customer experience by analyzing results of a customer satisfaction survey
- Identify the reasons and the rate for customer churn
- Create a forum for customers where they can request new features or products
- Make the process of returning a product easier
- Identify the customer’s touch point with the business
- Create promo runs offering products or services at discounted rates
- Use customer experience management tools like Zendesk, IBM Tealeaf, and Satmetrix among others.
Need any Assistance in Running Your California Business?
If you are thinking of doing business in California, online or offline then you will require leading registered agent services to help you with the formation or incorporation of your small business. IncParadise is one of the top California registered agents and we have helped thousands of companies to register their business successfully in the state.
We will not only help you in running your California business successfully but also offer several additional services that your startup or business may require in the state. Our services are focused at assisting you with all business related annual and ongoing requirements. You can avail of services like EIN assistance, California Certificate of Good Standing, and filing of annual report, among others.