Disclaimer:
I am not an attorney, this is not legal advice. This information can be found in any Business Law Textbook.
How should I organize my business?Think about:
- Liability
- Ownership
- Taxes
- Filing requirements, fees and other formalities
Types of legal entities
- Sole Proprietorship
- Partnership: General or Limited
- Corporation: C Corporation or S Corporation
- Limited Liability Company
Sole Proprietorship
What is it?
- One owner
- Owner and business are the same
- You ARE your business
- No separate entity
PROS
- Simple, easy. Profits taxed as personal income on income tax returns.
- No formal requirements to form or conduct business (easy to establish)
- Need a Sales & Use Permit (Seller's permit)
- File a Fictitious Business Name Statement with the county if your business has its own name.
- Need a business license
- http://www.calgold.ca.gov/
- www.ciwmb.ca.gov/RMDZ/Guide/Permit.htm
CONS
- Unlimited liability: WARNING!
- Community (marital) property is also at risk (Cal. Family code SS 910)
- Protect yourself with insurance
- No tax advantages: business profits taxed as your own income
General Partnership
What is it?
- At least two owners
- WARNING: unlimited liability. Each partner is responsible for the debts and obligations of the business (partners: protect yourselves with insurance)
- Partnership does not pay federal income tax
- Each individual partner files returns
- Most flexibility in allocating profits and losses (cash paying partner can deduct all the losses)
No formal requirements
Partnership agreement
- can create agreement for the most part how you want it, but if you don't default partnership laws will apply.
- Determines and outlines responsibilities between the partners.
Limited Partnership
- Similar to General Partnership, at least two owners
- Must have one general partner and one limited partner. Can have multiple limited partners.
BUT:
- General partner has unlimited liability
- Limited partner's liability limited to that partner's contribution
- Limited partner CANNOT participate in control of partnership without losing shield from liability (Cal. Corp. Code SS 15632)
Filing Requirements:
- Must file Certificate of Limited Partnership with the California Secretary of State
- Initial $70 filing fee (Cal. Govt. Code SS12188(b): $800 minimum franchise tax, payable to Secretary of State, due at time Limited Partnership files its information return.
- Must have a limited partnership agreement.
- Name must end with "Limited Partnership" or "L.P."
Registered Limited Liability Partnership (LLP)
- Generally available only for architecture, accounting, and legal services businesses (Cal. Corp. Code SS16101(8))
- Two or more partners
- A partner in a registered limited liability partnership does not have unlimited liability. (Cal. Corp. Code SS16306(c))
- Flow through taxation of income
- Filing fee: $70, payable to California Secretary of State (Cal. Govt. Code SS12189(a))
Corporation (General)
- No partners, it's a separate legal entity.
- More formal - state filings, meetings, minutes
- Liability limited to the corporation's assets, individual owners generally NOT personally liable.
Ownership and Management
Owned by shareholders
- One or more shareholders
- No limit on number of shareholders
- Managed by board of directors (one or more directors)
- Directors generally elected by shareholders
- Ordinary operations performed by officers (one person can hold multiple positions)
Must file Articles of Incorporation with the Secretary of State
- $100 filing fee to CA Secretary of State for filing articles of incorporation (Cal. Govt. Code SS12186 (c))
- First tax year --pay tax rate on taxable income to CA Franchise Tax Board (currently 8.84%)
- Next tax year and thereafter -- pay tax rate on taxable income or minimum $800 tax, whichever is more, to CA Franchise Tax Board
Must qualify in other states where it does business
Formalities: separate bank accounts, meeting minutes, etc.
Corporate Taxation C Corporation
Taxed as a separate entity
Tax based upon corporation's net income
Profits distributed to its owners - Two levels of tax:
- Corporation taxed on income
- Then employees taxed on compensation and shareholders taxed on dividends
S Corporation
What is it?
- No Federal income tax -- single tax level
- Owners (shareholders) pay taxed individually on the profits when earned ("flow-through" taxation)
- Owners (shareholders) can also deduct losses on their personal income tax returns
- Still pay state taxes -- currently 1.5% for S corporations.
Requirements:
- Generally limited to 100 shareholders
- Corporation, partnership or trust cannot own shares
- Shareholders cannot be nonresident aliens (for tax purposes)
- Cannot have more than once class of stock
Additional filing requirement with the Internal Revenue Service (must file IRS Form 2553) and with the CA Franchise Tax Board
Close Corporation
What is it?
- One or more shareholders, no more than 35
- Similar to general corporation, but shareholders may have more control if they wish
- May be structured more like a partnership
- Taxation may be as an S Corporation or a C Corporation
- Limited liability, but if shareholders take on more control, they may face greater liability
Limited Liability Company (LLC)
What is it?
- No partners, separate legal entity
- May not engage in banking, insurance, or trust company business
- Owners are called members (may be just one); they may have full or limited management rights
- Fewer formalities to follow than a corporation and more flexible management structure(may be managed by one or more members or managers)
- No limit on the number or types of members (for example, a corporation, another LLC or a natural person may be a member)
- Liability generally limited to the LLC's assets (i.e., the individual owners are not personally liable)
- Exceptions: LLC's owners may be held personally liable for certain actions, including:
- Personally and directly injuring someone
- Personally guaranteeing a loan or debt on which the LLC defaults
- Intentionally doing something fraudulent, illegal, or reckless that causes harm to the LLC or someone else
- Treating the LLC as an extension of himself, herself or itself, rather than a separate legal entity.
TAX MATTERS
An LLC is typically taxed as a partnership if it has more than one owner; if so, it will not pay federal income tax as a result of flow through tax treatment. If the LLC has only one owner and no election has been made to treat it as a corporation, the owner will be treated as earning the income directly and the LLC will be disregarded for federal income tax purposes
Each individual member files tax returns reporting items of income and loss that "flow through" to each member
Maximum flexibility for allocating profits and losses (i.e. there's no requirement that profits and losses be divided according to the percentage of ownership). For example, the cash paying member can deduct all the losses
Must file Articles of Organization with the Secretary of State
- Initial $70 filing fee (Cal. Govt Code 12190(b))
- $800 annual tax due to CA Franchise Tax Board
- First year tax of $800 payable within first 3 months of organization
- Also subject to an annual fee to CA Franchise Tax Board based on LLC's gross income
Formalities: Must have an Operating or LLC Agreement and maintain separate bank accounts; however, no board meetings or minutes are required
Key Factors in Selecting Your Entity
- Liability
- Taxes
- Filing requirements, fees, and formalities
USEFUL WEBSITES
Licenses and Permits
Obtain a business license
Federal, State, county or city permits and licenses may be required
- Requirements vary by business type and activities
- Varies from place to place
- Considerations include location of business and state of organization
Small Business Insurance
Property Insurance
- Fixtures, equipment, furniture, computers, inventory, etc.
- Various levels of coverage (basic, theft, replacement value)
Liability Insurance
- Damages due to injuries to others (for example, slip and fall accident)
- Automobile liability (business use)
- Does NOT protect against regular business debts
Home Based Business
- Check with your homeowner's or renter's insurer
- Additional coverage may be required
- Rented or leased space: Check lease for insurance requirements
Choosing a Name
Reserve name with Secretary of State before you file Articles of Incorporation
Secretary of State will reject a name that is:
- Confusingly similar to another corporation, LLC or partnership or
- Same as another name already on file
File Fictitious Business Name statement with the county if a Sole Proprietorship
Check statutory requirements for a name
- In California, name of corporation must include "corporation," "incorporated," "limited," or an abbreviation of one of these words
Check other states if plan to operate the business outside the state
Avoid trademark infringement
Becoming an EmployerWhen do you become an employer?
A business becomes an employer when it pays wages in excess of $100 in a calendar quarter to one or more employees
Registration as employer:
Within 15 days of becoming an employer, you must register with the Employment Development Department (EDD)
Report new employee(s)
All employees who are newly hired must be reported to EDD within 20 days of the employee's start of work date
Report independent contractors.
Independent contractor information must be reported within 20 days of paying an independent contractor $600 or more, entering into a contract with an independent contractor for $600 or more, whichever is earlier.
Obtain an Employer Identification Number (EIN)
Federal tax identification number used to identify employers. All employers with at least one employee must obtain an EIN.
Required disclosure to employees
Provide your employees with pamphlets on employee withholdings and Unemployment Insurance (UI), State Disability Insurance (SDI), and Paid Family Leave Insurance (PFL)
Required employee notices.
You must post an employee notice with UI, SDI, and Paid Family Leave claim and benefit information. This notice should be posted in a prominent location where it is easily seen by your employees. The appropriate notice will be sent to you after your register.
Worker's Compensation Insurance
State mandated insurance system which ensures that employees who suffer work related illnesses or injuries receive compensation
Requirement:
- All employers with at least one employee must obtain workers' compensation insurance
Employment Issues
Statutory Discrimination
- Federal, State, and local laws prohibit discrimination based on a number of characteristics, including race, religion, national origin, ancestry, physical/mental disability, medical condition, marital status, sex, age, sexual orientation
- Sex discrimination includes sexual harassment
Avoiding Discrimination
Application for employment
- Avoid non job related inquiries that express, directly or indirectly, any limit or discrimination regarding protected characteristics
Employee Handbook
- Compile policies, procedures and other important information, including policies to prevent harassment and discrimination, method for complaining of and remedying harassment and discrimination
Take Immediate Remedial Action
Handling termination
- Don't fire someone based upon protected characteristics
- Retain records relating to performance in personnel file
Disability Laws
Prohibit discrimination against qualified employees with disabilities
- Employer must make "reasonable accommodations" to enable disabled employees to perform essential job functions
- Employer must engage in "interactive process" with employee to identify a reasonable accommodation
Employment Contracts
- Not necessary--default is at will employment
- Offer letter for full time employees:
- "At will" language important; avoid representations that might be construed as assurances of continued employment
Wage and Hour Laws
In general:
- California Minimum Wage 1/08 = $8.00
- San Francisco Minimum Wage 1/08 = $9.36
Overtime =
- 1.5x regular pay for
- hours worked in excess of 8 hours up to and including 12 hours
- first 8 hours worked on the seventh consecutive day in any week
- hours in excess of 40 in one week
- 2x regular pay for hours in excess of 12 in one day or in excess of 8 on the seventh consecutive day in any week.
Industrial Welfare Commission promulgates wage orders setting minimum wage, hours and overtime standards for many industries
Immigration issues for the Employer
- Employer must file I-9 for all employees
- Employer cannot ask job applicant if he/she is a U.S. Citizen or has a green card, but may ask if he/she has legal right to work in the United States
- Employer must verify employment authorization by completing Employment Eligibility Verification form I-9 for all employees within 3 days of commencement of employment
- Only documents listed on I-9 may be used to verify employment, and employer may not specify which documents on the I-9 the employee should present
- If employee's work authorization has expiration date, employer must update I-9 when authorization expires
Significant penalties to employers for:
- Improperly completing I-9
- Knowingly employing persons without work authorization
- Favoring U.S. Citizens over Permanent Residents and other persons with legal right to work in the United States
- Many questions regarding I-9 completion are answered at USCIS (U.S. Citizens and Immigration Services) website: http://uscis.gov/graphics/howdoi/eev.htm
Independent Contractors
- Not subject to wage and hour laws, workers' compensation, unemployment insurance, or I-9 filing requirement
Independent contractor (IC) vs. employee:
- Who controls methods and means of performing the job?
- Are hours fixed?
- Does the employer manage the individual?
- Paid based upon hours or by project?
- Bring own equipment or use employer's?
Significant penalties for misclassifying employees as ICs
RESOURCES FOR EMPLOYERS
CA Employment Development Department: http://www.edd.ca.gov/
CA Department of Industrial Relations: http://www.dir.ca.gov/
US Citizenship and Immigration Services: http://www.uscis.gov/
US Equal Employment Opportunity Commission: http://www.eeoc.gov/
Intellectual Property
Trademark: A trademark identifies the SOURCE or ORIGIN of goods and service
A SYMBOL, A WORD, A PHRASE
How do I establish trademark rights?
- Use the Mark ("TM")
- Use the mark may only provide LOCAL protection
Register THE MARK ("R")
- Federal registration provides NATIONWIDE protection
- Worldwide protection is possible
How do I register my mark?
Perform a Trademark Search
Complete the Federal Trademark Application Form
Copyright
Copyright protects original works of authorship fixed in a tangible medium of expression.
- Books
- Music
- Paintigs
- Movies
- Photographs
Copyright laws grant the creator the exclusive right to:
- Reproduce the work
- Distribute the work
- Display the work
How do I get a copyright?
Your work is protected as soon as it is fixed in a tangible form.
- You write it donw
- You paint it
- You take the picture
Generally, a copyright lasts for the life of the author plus 70 years
Do I need to register my copyright?
- Your work is protected as soon as it is fixed in a tangible form -- so, no
- You can give notice your copyright: Copyright symbol, Dates by author/owner
- You can register a copyright: http://www.copyright.gov/
- Complete an application form
- $30.00
Patent
A patent grants a person the right to prevent others from making, using, or selling the patented invention
Two main types of patents:
- Utility Patent
- Design Patent
Utility Patent
- Patent on the invention or discovery of any machine, method, process, or composition that is new and useful
- New and useful improvements also patentable
- Term 20 years from patent filing date
Design Patent
- Patent on the unique appearance (new, original, and ornamental design) of an item (e.g., furniture or jewelry)
- Term 14 years from grant of patent
How do I patent my idea?
FEES
Utility Patent
- Filing Fee + Search Fee + Examination Fee + Issue Fee (Approximately $2,400)
Maintenance Fees:
- Due at 3.5 Years = $900
- Due at 7.5 Years = $2,300
- Due at 11.5 Years = $3,800
- 50% Reduction in fees for certain independent investors, small businesses, or nonprofits
Design Patent
- Filing Fee + Search Fee + Examination Fee + Issue Fee (Approximately $1,230)
- No maintenance fees for design patents
- 50% reduction in fees for certain independent investors, small businesses, or nonprofits
Real Estate Issues
Zoning Laws
- Operating business out of one's home
- Find out zoning plan from county clerk's office
- Look around
- Make sure in compliance or seek a variance
Leasing
- All Terms are negotiable
- Important terms as a tenant:
- Hazardous waste representation from the landlord
- Ability to assign and sublet the premises
Important terms as a tenant
- Rights to expand the area leased
- Option to extend the duration of the lease
- Negotiate specific needs of business into the lease
Subletting
- Make sure landlord has given written consent
- Get copy of master lease and sublets agreement
Other Resources
Legal Services for Entrepreneurs (LSE) and the Lawyers' Committee for Civil Rights of the SF Bay 415-543-9444 http://www.iccr.com/
http://www.nolo.com/ (popular small business legal guide, also available in book form
ABA Legal Guide for Small Business (available at most major bookstores)
