How to Overcome California’s High Business Costs when starting a Business

As an entrepreneur, you know that starting a business has many requirements, including various startup costs. If you’re trying to create a company in California, your costs will be much higher than in other states. However, California has one of the largest economies, so there’s also a lot of potential for growth and success.

So, before launching your brand and selling products or services, you must pay attention to the various costs associated with starting a business in the Golden State. To help you prepare, we’ve compiled a list of ways to reduce those expenses so you have more time and flexibility to grow your brand.

Why is Running a Business in California So Expensive?

When comparing business costs in California to other states, it’s clear that you need more startup capital to get your company off the ground. But why is it so expensive here? Some of the reasons include:

• High Lease Rates – If you need a brick-and-mortar location, you can expect to pay higher monthly or annual rates to keep your doors open. In Los Angeles, the median rental rate is about $44/sq ft for office space or $11/sq ft for industrial space. By comparison, the median rate for the entire United States is only $38/sq ft, although some cities are much cheaper than others.
• Higher Cost of Living – Utility bills, supply costs, and even gas prices are higher in California than in other parts of the country. So, your operating costs can get pretty high much faster than you might realize. Not only does it cost more to run your business, but other vendors and partners will also charge more.
• High Taxes – If you open an LLC, you can expect to pay around $100 to file documentation with the state. However, you must also pay $800 annually to keep your business in good standing. For comparison, the annual renewal in Georgia is only $50.

Overall, while running a business can be much more expensive in California, you also have access to more people and resources than you would in other parts of the US. So, as long as you plan accordingly and streamline your operating costs, you should be able to succeed.

How to Reduce Costs When Starting a Business in California

Some expenses are fixed, meaning there’s nothing you can do about them. For example, your registration and renewal fees are set by the Franchise Tax Board, so you can’t negotiate a lower price. However, here are some easy ways to trim your operating costs so you can work as lean as possible until you start making a decent profit.

By efficiently managing your employee expenses, you can tackle payroll taxes in California and reduce your overall business costs significantly. Utilizing accurate payroll calculators ensures compliance with 2023 CA Tax Rates and helps you avoid potential financial setbacks.

Choose the Right Business Entity

When starting a business, you can choose to be a sole proprietorship, a partnership, an LLC, or a corporation (S-Corp or C-Corp). Each option has its pros and cons, including the amount of documentation needed.

Although the annual renewal fee for an LLC is relatively steep, it is a flat rate. By comparison, S-corporations have to pay a 1.5-percent tax on net income, and C-corporations have to pay an additional 8.84-percent tax rate.

On the other hand, the taxes on partnerships and sole-proprietorships are lumped together with personal taxes. Not to worry though, tools such as Taxcaster are well equipped to handle that. However, while partnerships and sole proprietorships don’t have to pay separate taxes, they may not be the best entities for your business. For example, as a sole proprietorship, you can’t hire employees. So, if your business grows and you need help, you’ll have to reclassify your company as an LLC or corporation instead.

LLCs offer the most flexibility and are the easiest to start, making them ideal for new businesses. They allow you to have multiple partners and structure your business however you see fit. Corporations, on the other hand, have stricter rules that can be complex and challenging, especially when you’re first starting out. Including this information in your pitch deck can help potential investors understand why an LLC might be a better choice for your venture at the early stages.

Start Small

As a new business, you may be able to handle the entire workload yourself. If not, try to hire one or two people and work out of a relatively small office or storefront. Then, as you start earning income from sales, you can save money to pay for expansion.

If you have too many overhead costs upfront, there’s more pressure to succeed immediately. Even if you can generate decent sales, your expenses may be too high, creating razor-thin profit margins. Then, if something happens (i.e., a sales slump), you may be in trouble.

Buy Used or Leased Equipment

If you’re starting a business that requires equipment (e.g., office machinery, restaurant equipment, etc.), it’s best to buy used models instead of brand-new ones. Sometimes, you can buy items second-hand from other vendors, or you can attend auctions and potentially receive a huge discount in the process.

Another option is to lease equipment, meaning you’re not responsible for repairs and maintenance. However, while leasing is good for expensive equipment, it may only increase your monthly operating costs. So, you have to weigh the pros and cons of leasing and determine whether it’s better to buy the equipment outright.

Leverage Remote Workers

These days, fewer employees have to work in a physical office. In fact, more people prefer working remotely because of the convenience and flexibility it offers.

As a new business owner, you can leverage this dynamic shift to your advantage. Now, you can outsource some tasks (i.e., marketing, accounting, payroll) to remote companies or individual workers by embracing a remote hiring process that can help you operate with greater agility and efficiency, thus allowing you to allocate resources more strategically.

Since you don’t need to house everyone in a single office, you can save money on overhead. Also, outsourcing is often better than trying to handle everything in-house, particularly with specialized jobs like marketing or accounting. You can outsource accounting to services that use payroll for small business software, allowing you to efficiently handle employee wages.

Try to Maximize Business Incentives and Discounts

One of the perks of running a business is that you can seek out incentives, grants, and benefits from the state. California offers multiple incentives for companies in different industries. You may even be able to qualify for grant funds to help you expand or develop your business. Grants don’t have to be repaid, so they’re much better than a traditional merchant loan from a bank.

The state of California also works with various vendors and partners to offer discounts on different tools. For example, you can qualify for a free website from GoDaddy or receive discounts from UPS if you have to ship products to your customers.

While you may not qualify for many of these incentives, it’s always good to check to see what’s available. Also, apply as often as possible, just in case.

Don’t Forget About Insurance

Insurance may seem like a luxurious expense, but if disaster strikes your business, the cost of rebuilding will be much higher. Remember, California experiences earthquakes, droughts, and wildfires regularly. While business insurance can be relatively expensive, it offers peace of mind and can help you recover faster from a destructive incident.

For example, if you’re a plumber, you’ll need to get plumbing insurance in California to mitigate the high risks associated with water damage and other potential incidents.

Beyond physical damage, you should also invest in other types of insurance, such as liability coverage, interruption insurance, cybersecurity protection, and more. First, assess the risks associated with your business and industry and buy policies accordingly.

Compare Different Funding Options

Because you need startup capital to get your business off the ground, you’ll likely have to secure funding from one or more sources. While a bank loan can work for most situations, it’s best to do some market research and compare options to see what will work best for both short-term and long-term growth. Other funding sources can include:

• Angel Investors – Someone invests in your business for a share of the profits.
• SBA Loan – These loans often have better interest rates and make more money available to startups or riskier ventures.
• Credit Lines – Rather than borrowing a lump sum, you get access to a revolving line of credit. As you pay it off, you can ask for a higher credit line.
• Microloans or Crowd Funding – If your customers love your business or idea, they may be willing to invest small amounts to see you succeed.

Overall, starting a business in California doesn’t have to be an expensive, overwhelming process. With the right planning and preparation, you can position your brand for long-term success. That said, make sure you have realistic expectations regarding how much you need to get off the ground and how much you have to earn in sales.