Los Angeles is often synonymous with Hollywood, but its economy consists of much more than the entertainment industry. In addition to hosting world-class entertainment and media, Greater Los Angeles is a diverse and export-oriented economy powered by aerospace, technology, petroleum, and manufacturing. The port of Los Angeles and Long Beach comprises one of the world’s busiest ports and a key link to the Pacific Rim. Overall, the Los Angeles metro area generated $765.7 billion in gross metro product in 2012—the second-highest in the U.S. and greater than those of Switzerland and Saudi Arabia. Los Angeles’s output would make it the 19th-largest economy in the world.
Greater Los Angeles is home to 13 million people, with 3.8 million living in the city. The city has a rich arts and cultural community along with prominent universities. The United States’ second-largest economic center attracts highly skilled and talented individuals due to the employment opportunities, beaches, and cultural attractions of the city. Los Angeles has a burgeoning start-up scene, but, like any large city, faces challenges to maintain its competitiveness.
Benchmarking Against Others
Among the cities under review, the 2014 Regulatory Climate Index ranks Los Angeles in eighth position, with the first place representing the most efficient regulatory environment.
Los Angeles is below the average performance of the 10 cities covered in the report in 2014, ahead of only San Francisco and New York City.
What Los Angeles is Doing Well
- Los Angeles and San Francisco are tied for the top spot for Starting a Business. Starting a new business in Los Angeles takes the lowest number of procedures, a minimal amount of time, and the lowest administrative costs.
- Los Angeles has a low number of procedures for compliance in Dealing with Construction Permits and Registering Property, which shows the city has made an effort to streamline regulatory procedures.
- Los Angeles has placed a temporary exemption of the business license tax on new firms opening from 2010 to 2015 for the first three years of operation.
Where Los Angeles Needs Improvement
- Los Angeles ranks poorly in Dealing with Construction Permits. The city has a long waiting time and a costly process for attaining a commercial construction permit. The waiting time is largely attributed to the zoning and environmental review. Los Angeles’s high cost for permits—nearly 3% of total cost of construction—is driven by the city’s fees for building permit plan and approval. New commercial office buildings over $500,000 are required to pay an arts development fee of $1.57 per square foot. This translates to $23,550 for the type of project covered in this report.
- Los Angeles ranks near the bottom in Registering Property due to higher waiting times and administrative costs for transferring commercial real estate. The city has a high real estate transfer tax that places additional burdens on small businesses when transferring commercial property through a sale.
- Entrepreneurs and small businesses face the most burdensome tax system of the cities covered in this report. In Los Angeles, small companies face high corporate tax rates and additional regulations, such as franchise taxes. Los Angeles professional service companies are required to pay business license taxes based on gross receipts from previous years. While there is currently a tax exemption for new businesses for the first three years of operation, because this is not a permanent alleviation of the tax, it is included in the analysis.
- Los Angeles ranks near the bottom in Enforcing Contracts. This position is a result of a high number of procedures and a waiting time of nearly a calendar year through the litigation phase.
Los Angeles’s business community, local governments, universities, and nonprofits have developed a strategy to enhance the city’s competitiveness and build the local economy. The Los Angeles Area Chamber of Commerce has specifically led an effort to strengthen the start-up and entrepreneurial environment in the city. Together with the U.S. Small Business Administration, the local chamber launched its Bixel Exchange program. The Bixel Exchange is a small-business development center that focuses on technology start-ups and provides entrepreneurs with access to legal advice, angel investors, mentors, and networking programs. The LA Chamber’s initiative complements an impressive roster of incubators in Los Angeles, including LA Cleantech, Amplify.LA, and Start Engine. The business community is also working with programs at local universities—USCViterbi and Startup UCLA—to foster a vibrant entrepreneurial community.
Access to capital is a critical part of a successful start-up environment. The business community and city have worked together to bolster those resources for entrepreneurs and small businesses. The Los Angeles Development Fund (LADF) and Los Angeles BusinessSource provide start-up capital and financing for the expansion of small businesses. The LADF gives entrepreneurs access to capital so that they establish or expand businesses, and it generates private investment in businesses. Further, Los Angeles is a prominent city for venture capital, with more than $1.6 billion, or 6.2% of the U.S. total, to aid in the development of high-growth companies. These factors are positive attributes for the future of the Greater Los Angeles economy.
Along with developing a vibrant start-up environment, Greater Los Angeles has a campaign to prepare an educated workforce, enhance the quality of life, and build an infrastructure fit for economic growth. Importantly, this campaign includes creating a business-friendly environment that will allow the companies that emerge from programs like the Bixel Exchange and LA Cleantech to become high-growth companies.
Los Angeles has room for significant improvements across four areas of business regulation. For example, the city has streamlined a number of procedures for Dealing with Construction Permits, but the process lacks efficiency and high costs for administrative compliance. Further, the city should make the tax exemption for business licenses for new firms permanent. Los Angeles is endowed with a diverse economy, venture capital, and conditions to foster a vibrant start-up community. Improving the local regulatory environment for entrepreneurs and start-ups will be necessary for a vibrant economy to flourish.