Report: California's a difficult state for small businesses
Report: California's a difficult state for small businesses
Madeline Shannon Wed, July 29, 2026 at 10:00 PM UTC
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A sign reading "Sorry We're Closed" hangs in the window of a small business. Photo: Grace David / The Center Square
(The Center Square) – A new report from the National Federation of Independent Businesses shows California is one of the nation's most challenging states for doing business.
The small business optimism index in the study, which tracks economic conditions small businesses operate in, is 97.2 in the Golden State. That's 1.3 points under the national small business optimism index of 98.5.
So far this year, California’s small businesses largely reported a drop in profits, a 12-point deficit compared to the rest of the country. There are also fewer reported job openings at small businesses throughout the state.
Other measures of small business optimism showed small drops in areas such as expected credit conditions, expectations the economy will improve, low inventory concerns, expansion plans and efforts to increase inventory.
“We were able to look at about 11 states, California being one of them, to see how the unique set of circumstances in these states differ from the national average and give a snapshot of what these states look like in terms of economic conditions for the small business sector,” Holly Wade, executive director for the National Federation of Independent Businesses, told The Center Square on Wednesday. “Small business owners are a bit less optimistic than those in the rest of the country.”
Some measures of small business optimism showed increases, with real sales increasing by six points and plans to increase employment showing a rise of five points. Small business owners also reported that their businesses did well between October 2025 and March 2026. In that time frame, 45% of small business owners said their businesses are in good health, while 11% said their businesses are in excellent health. Approximately 38% said their businesses were in fair health, while 6% said their businesses were in poor health.
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The employment index, which is also measured by the report, shows that California’s employment index sits at 102.8, 1.2 points higher than the national average, which sits at 101.6. Expectations of hiring more workers and compensation plans for those jobs are two main drivers of the employment index, according to the report.
Government regulation is the main point point for small businesses in California, according to the report, with small business owners reporting too much government regulation as a drawback – more so than competition from big business, labor costs, financing and interest rates, inflation, labor quality, taxes, poor sales or the cost and availability of insurance.
“Government regulation is the category that is far and away the bigger challenge for those small business operating in the state of California versus the rest of the country,” Wade said. “That is a unique challenge for this state and far more burdensome in California.”
The Center Square reached out to 17 Democratic lawmakers in the California Legislature who sit on business-related committees. Staffers representing five of those lawmakers responded to say the politician they worked for was not available for an interview, and 12 did not respond to The Center Square. However, California’s Republican politicians did respond, saying the report tracks with concerns they have about the small business landscape in the state.
“The NFIB report is not surprising, but it is deeply concerning,” Sen. Tony Strickland, R-Huntington Beach, told The Center Square via email on Wednesday. “Small businesses are the backbone of California’s economy, yet decades of harmful policies have made it harder for them to succeed. California businesses deserve better, and we must put them first.”
California had 4.3 million small businesses in 2025, according to the U.S. Small Business Administration. Approximately 7.6 million people worked for small businesses in the state, making up 47.4% of all California employees. More than 703,000 of those businesses functioned in the professional, scientific and technical services, while 545,000 were in the transportation and warehousing industry. More than 405,000 were in the real estate, rental and leasing industry.
“The quality of the labor force here is strong, and you can imagine that has a lot to do with the small biotechs and the small technology companies, and we don’t want to lose that advantage,” Wayne Winegarden, senior fellow in business and economics at Pasadena-based Pacific Research Institute, told The Center Square. “We have the quality of the labor force that small businesses need. But the regulations are an obstruction and is a warning sign that we have that potential, but we just can’t lose it.”
Source: “AOL Money”
