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California is a great state in which to start a business. California’s economy is among the biggest in the world. If California were its own country, its economy would be the fifth-largest in the world. An op-ed published in Bloomberg in late 2022 even predicted that California could overtake Germany in the near future to become the world’s fourth-largest economy. California receives high rankings in various lists of states with good business climates. U.S. News and World Report, for example, ranks the state at #2 for its “business environment.” California places twelfth on Forbes’ list of “the best states to start a business in 2023.”
The state offers many advantages for businesses. It is the most populous state in the country and home to some of the nation’s most prestigious universities. This provides businesses with a deep well of talent from which they can draw. California has large concentrations of many industries, particularly entertainment and technology. It provides easy access to ports, which enables California businesses to develop close ties with markets in Asia.
When starting a new business in California, it is crucial to keep costs in mind. The startup process can be quite costly if not planned and managed carefully. Saving on startup costs is just as important as securing financing. You can begin by choosing the right business entity for your new business. Read on to learn more about reducing costs when starting a business in California.
Startup Costs Associated With Creating and Managing a California Business
Certain expenses are unavoidable when starting a new business in California. As a business owner, you will be responsible for state and federal taxes, which could include income tax, payroll taxes, sales tax, and others. You will have to obtain various licenses and permits, such as a general business license, health permit, or building permit, depending on the nature of your business.
You might be able to save on other startup costs. The following provides an overview of some possible strategies:
Choose a Business Entity Wisely
The type of business entity you choose will determine the processes you must follow in order to keep your business in good standing with the state. Some business entities require you to hold regular meetings and file regular reports, which can add to your workload. Other entity types provide more flexibility.
Starting a limited liability company (LLC) in California gives you wide latitude in terms of how you organize and manage your business. This gives you the freedom to find a system that works for you. It offers financial advantages by cutting down on the time you must spend on legally-mandated administrative tasks.
Value Your Time
Your new business may depend to a large extent on your ideas and knowledge. The time you spend building your business is, in a sense, an asset that you need to protect. You have a limited amount of time each day. It is important to make that time count.
If you bill clients by the hour for your services, it is easy to see the value of your time. Your time still has inherent value even without hourly billing. Pay attention to how much time you are devoting to devising ways to save on business expenses. The amount that you save should be greater than the value you could create doing something else for the business with that time. For example, spending an entire day on something that will save the business a one- or two-digit amount of money is almost certainly not worth the effort.
Keep Your Team Small
It might be tempting to build your team quickly. Many businesses, however, do not need to have a complete team in place from the beginning. There might not be enough revenue to cover everyone’s salaries, benefits, and overhead costs. Limiting your hiring to the people you need can help you avoid volatility and uncertainty in the company’s finances.
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Outsource
Payroll is likely to be one of your company’s biggest expenses. You can outsource tasks that you will only need on a temporary basis. Freelancers and independent contractors can provide a vast array of services during the business startup process, such as setting up a website or obtaining business permits.
Be sure that you follow California law regarding the distinction between independent contractors and employees. Significant penalties can result from misclassifying an employee as an independent contractor.
Buy Used Equipment, or Lease It
Depending on the type of equipment you need, you might be able to find used equipment for significantly lower prices than the latest models. This can apply to computers, machinery, vehicles, and other business equipment.
For particularly large items, leasing might be better than buying for several reasons. A lease typically requires less money upfront. Deducting lease payments as business expenses also tends to be simpler than amortizing the cost of equipment over time.
Keep Overhead Low
The COVID-19 pandemic has many businesses rethinking the very concept of workspaces. Maintaining office space is a substantial expense for many companies. It is worth considering how much space your business needs. The less space you have to manage, the less you will spend on rent and utilities.
Go Paperless
Using paper in your business can be a bigger expense than you might realize. You not only have to keep reams of paper on hand, but you also need toner, printers, and the infrastructure to keep the printers running. Digital technology and cloud computing have made many once-common uses of paper unnecessary. Storing paper records requires space, which increases your overhead costs.
Make Insurance a Priority
Even the most foolproof business plan is vulnerable to unforeseen events or circumstances. Insurance provides financial protection if something unexpected happens. It might be tempting to forego insurance coverage when starting a new business, but it should be a top priority.
Obtain a Business Line of Credit
Your business will find itself in need of extra money at some point. A business line of credit can give you access to funds when you need them. You will not be obligated to repay any money until you have drawn from the line of credit.
Look for Discounts
Many vendors and other businesses offer discounts for small or new businesses. Keep an eye out for promotions and other opportunities. Local, state, or national business organizations can also offer discounts to their members, The amount you could save through those discounts might be worth the membership fee.
Barter for Services
California is full of entrepreneurs who are eager to grow their businesses and concerned about their companies’ finances. You can help each other by entering into agreements to barter services with one another. A few strategic barter arrangements can result in huge savings for your business.
For example, suppose your business designs websites. You have a small team of people who excel at every part of the website creation process, but you need help setting up the company’s finances. You meet another entrepreneur, an accountant, who is starting their own accounting firm. They have no problem setting up their own finances, but they need a website. You can help each other by bartering services. Once you both have your businesses up and running, you could have an ongoing business relationship. It is a win-win for everyone.
Learn More About Starting a CA-Based Business
When starting a new business in California, registering it as a business entity under California law can offer both legal and tax benefits. Many factors will affect your decision about what type of entity you will create. You have access to a wide variety of resources that can help you understand your options and make an informed decision. To learn more, contact Tailor Brands.
