Business Law, Legal

What is the Best Legal Structure For Your Business?

Clients often come into my office and wish to start a business but are unsure what type of legal entity they wish to start. Here is a brief primer on the different types of legal structure one can be and their advantages.

Legal structures shape your journey as a business, and choosing the best structure for your company requires time and consideration. There are many types of business entities, each with its own pros and cons. Your choice can greatly affect the way you run your business, impacting everything from liability and taxes to control over the company.

The key is to figure out which structure gives your business the most advantages to help you achieve your organizational and personal financial goals. We’ve outlined the most popular business entities, and the factors to consider when choosing your business structure.

This is the simplest form of business entity. With sole proprietorship, one person is responsible for all of a company’s profits and debts.

This entity does not offer the separation or protection of personal and professional assets, which could prove to become an issue later on as your business grows and more aspects hold you liable.”

This entity is owned by two or more individuals. There are two types: general partnerships, where all is shared equally; and limited partnerships, where only one partner has control of its operation, while the other person or persons simply contribute to and receive only part of the profit. Partnerships carry a dual status as a sole proprietorship or limited liability partnership (LLP), depending on the entity’s funding and liability structure.

This entity is ideal for anyone who wants to go into business with a family member, friend or business partner, like running a restaurant or agency together. A partnership allows the partners to share profits and losses and make decisions together within the business structure. Remember that you will be held liable for the decisions made, as well as those actions made by your business partner.

A limited liability company is a hybrid structure that allows owners, partners or shareholders to limit their personal liabilities while enjoying the tax and flexibility benefits of a partnership. Under an LLC, members are protected from personal liability for the debts of the business, as long as it cannot be proven that they have acted in an illegal, unethical or irresponsible manner in carrying out the activities of the business.

The law regards a corporation as an entity separate from its owners. It has its own legal rights, independent of its owners – it can sue, be sued, own and sell property, and sell the rights of ownership in the form of stocks.

There are several types of corporations:

  • C corporations, owned by shareholders, are taxed as separate entities.
  • S corporations avoid this double taxation, much like partnerships or LLCs. Owners also have limited liability protection.
  • B corporations, otherwise known as benefit corporations, are for-profit entities structured to make a positive impact on society.
  • Closed corporations, typically run by a few shareholders, are not publicly traded and benefit from limited liability protection.
  • Nonprofit corporations exist to help others in some way and are rewarded by tax exemption.

For new businesses that could fall into two or more of these categories, it’s not always easy to decide which one to choose. You need to consider your startup’s financial needs, risk and ability to grow. It can be difficult to switch your legal structure after you’ve registered your business, so choosing correctly at the start is crucial.

You’ll want to ask yourself where your company is headed, and if your structure allows for it. Turn to your business plan to align your goals with the proper structure. Your entity should support the possibility for growth and change, not hold it back from its potential.

When it comes to startup and operational complexity, there is nothing simpler than a sole proprietorship. You simply register your name, start doing business, report the profits and pay taxes on it as personal income. However, it can be difficult to procure outside funding. Partnerships, on the other hand, require a signed agreement to define roles and percentages of profits. Corporations and LLCs have various reporting requirements with the state and federal governments.

A corporation carries the least amount of personal liability, since the law holds that it is its own entity. This means that creditors and customers can sue the corporation, but they cannot gain access to any personal assets of the officers or shareholders. A LLC offers the same protection, but with the tax benefits of a sole proprietorship. Partnerships share the liability between the partners as defined by their partnership agreement.

An owner of a LLC pays taxes just as a sole proprietor does: All profit is considered personal income and taxed accordingly at the end of the year. The LLC structure prevents that, and makes sure you’re not taxed as a company and as an individual.

Individuals in a partnership also claim their share of the profits as personal income. Your accountant may suggest quarterly or biannual advance payments to minimize the end effect on your return.

A corporation files its own tax returns each year, paying taxes on profits after expenses, including payroll. If you pay yourself from the corporation, you will pay personal taxes, such as for Social Security and Medicare, on your personal return for what you were paid throughout the year.

If it is important for you to have sole or primary control of the business and its activities, a sole proprietorship or an LLC might be the best choice for you. You can negotiate such control in a partnership agreement as well.

A corporation is constructed to have a board of directors that makes the major decisions to guide the company. A single person can control a corporation, especially at its inception, but as it grows, so does the need to operate it as a board-directed entity. Even for a small corporation, the rules intended for larger organizations – such as keeping notes of every major decision that affects the company – still apply.

If you need to obtain outside funding sources, like investor or venture capital and bank loans, you may be better off establishing a corporation, which has an easier time obtaining outside funding than does a sole proprietorship. Corporations can sell shares of stock, securing additional funding for growth, while sole proprietors can only obtain funds through their personal accounts, using their personal credit or taking on partners. An LLC can face similar struggles, although, as its own entity, it is not always necessary for the owner to use their personal credit or assets.

In addition to legally registering your business entity, you may need specific licenses and permits to operate. Depending on the type of business and its activities, it may need to be licensed at the local, state and federal levels.

It’s important to note that the structures discussed here only apply to for-profit businesses. If you’ve done your research and you’re still unsure which business structure is right for you, Friedman advises speaking with a specialist in business law.

For more information on the types of business structures you can choose, visit the Small Business Administration website or contact our Firm.

 

Inpsiration, Journal, Legal

October 1

It’s strange to think that in just three months, 2018 will come to an end. It hits me that after 9 months, there are so many goals I didn’t even get to, and perhaps it was a stretch to try to do so much. Yet it comes down to responsibility not as in blame, but in that instead of blaming others, my failure or lack of action was due to the choices I made and no one else.  It’s strange to even say 2019, but here it is. A futuristic sounding year, and I picture what it will look like. Will it be more of the same, or will I make gains in all areas of my life?

Again, it comes back to me. Everything I desire requires work and action from me not wishful thinking. If I want to improve relations with loved ones, I get to be present. If I want success in work, I get to do good work (the referrals will come), if I want to be in service, I get to show up and do those things. Over and over again, I am reminded that if I want change in my life, it comes down to my thoughts and actions. It has never been up to others or circumstances, those are just victim stories I can tell myself to give myself excuses.

Sure, life happens, but how I deal with it is still my choice. So 3 months to, I hope to end it with a bang!

Happy October (and Monday)

Business Law, employment law, Legal

What To Do When Firing an Employee in California

1. Documentation of the reason for termination

What is the reason for termination? Is there a company policy that was violated? [Note: Is the company policy in writing?  Has it been distributed to the employee?  Is there a signed acknowledgement of the policy in the employee’s file?]  Who was involved in termination decision? Review documentation for termination if “for cause” and ensure this documentation is maintained in personnel file.

2. Final pay and accounting

Employers need to prepare the employee’s final paycheck and ensure that any unused accrued vacation time is also included.

Final wages must be paid within certain time limits, including the following:

  1. An employee who is discharged must be paid all of his or her wages, including accrued vacation, immediately at the time of termination.
  2. An employee who gives at least 72 hours prior notice of quitting, and quits on the day given in the notice, must be paid all earned wages, including accrued vacation, at the time of quitting.
  3. An employee who quits without giving 72 hours prior notice must be paid all wages, including accrued vacation, within 72 hours of quitting.
  4. An employee who quits without giving 72-hours’ notice can request their final wage payment be mailed to them. The date of mailing is considered the date of payment for purposes of the requirement to provide payment within 72 hours of the notice of quitting.
  5. Final wage payments for employees who are terminated (or laid off) must be made at the place of termination. For employees who quit without giving 72 hours’ notice and do not request their final wages be mailed to them, is at the office of the employer within the county in which the work was performed.

Employers should also review if commissions, bonuses, or expense reimbursement owed to employee?  Obtain all expense reimbursement forms from employee.

Employers with multiple locations need to ensure that the final wages are made available.  The place of the final wage payment for employees who are terminated (or laid off) is the place of termination. The place of final wage payment for employees who quit without giving 72 hours prior notice and who do not request that their final wages be mailed to them at a designated address, is at the office of the employer within the county in which the work was performed. Labor Code Section 208.

 3. Company property and passwords

Obtain all company property from employee and reset passwords.  Also, has employee returned all company provided uniforms?  Have all company keys been returned?  The company should also develop a list of all passwords employee had access to and ensure the passwords are reset.

4. Final notices

Employers need to ensure that all required notices are provided to the employee.  For example, common notices include:

  • Notice to Employee as to Change in Relationship (download here)
  • For your Benefit (Form 2320) (download here)
  • COBRA and Cal-COBRA Notices from insurance provider
  • Notify insurance provider
  • Health Insurance Premium (HIPP) Notice (download here)

5. Retention of employee files

Employers need to take measures to secure and save employee’s file, wage, and time records.

family law, Legal

6 Things You Need to Know About Divorce

1. Don’t Expect to “Win” Your Divorce Case

A lot of people start their divorce hoping to “beat” their spouse in court. In fact, there’s seldom a true winner in divorce. The typical divorce involves various issues, such as child custody, support, and the division of property. Rarely do divorcing spouses end up with everything they want. For example, one spouse might be awarded primary physical custody of the children, but may receive a much lower amount of spousal support than requested; it’s virtually impossible to tell the “winner” from the “loser” so trying to “win” is pointless.

Instead, consider the consequences of a full-blown court battle before you go down that path. In addition to the many thousands of dollars you’ll spend, your children may suffer the most in a heated divorce battle. After the dust has settled, you may soon forget who “won.”

2. Don’t Make Important Decisions Without Thinking Them Through

Many life-changing decisions come up during a divorce. For example, you may have to determine whether to you need to sell the family home. Resist the impulse to make a quick decision just to get the case over with. When making important choices, it’s essential that you consider the potential consequences.

3. You’re Getting Divorced: Your Kids Aren’t

It’s easy to get wrapped up in the heat of the moment. However, saying cruel things to your spouse in the presence of your children can have a lasting effect. Psychological studies show that the more parents fight during a divorce, the more damaging the whole process is to the children.

Whenever you’re about to say something hurtful give yourself some time to think before you speak. A simple rule to follow is to count to ten before you answer a question or make a statement.

In addition, unless there’s a history of abuse or neglect, your children will continue to have a relationship with their other parent. No matter how upset you are with your spouse, you should not try to discourage or interfere with a healthy parent-child bond.

You may want to consider asking an experienced mental health professional to counsel your children about the divorce, and seek counseling for yourself as well, so you can learn how to address your children’s needs during this difficult process.

4. Don’t Believe Everything Other People Tell You About Their Divorce

Your divorced friends may give you advice about what should happen in your divorce. Unfortunately, the information and advice you get from other people can be misleading or wrong.

Every divorce has a different set of issues. Your friends may believe what happened in their divorce is typical, but it’s best not to base your decisions on someone else’s experiences. Instead, rely on the advice you get from your attorney, mental health professionals, and financial consultants, all of whom are familiar with the specifics of your case.

5. Court is Not All That It’s Cracked Up to Be

When things are not going well in a divorce case, one spouse may threaten to terminate negotiations and head to court. However, the road to a divorce trial is long and costly. The expense of a trial can deplete the very assets that are often the subject of the dispute. Even simple matters can require multiple court days to complete, and after spending many thousands of dollars, spouses and their attorneys are left with the total uncertainty of how a judge will rule.

6. Create an Inventory of Household Furniture and Furnishings and Make Copies of Important Documents

Disputes over furniture, furnishings and other valuable items, such as a great wine collection or an expensive piece of art, can be avoided by taking a complete inventory of your home as follows:

  • take photographs of every item and photograph sets of small items, such as dinner ware, together
  • use the front page of that day’s newspaper in every photograph in order to create a “time stamp,” which avoids any claims that the photo was taken at an earlier date
  • keep your photos in a safe, protected place
  • create a list of all items, including where they’re located and your estimated value of each, and
  • get appraisals or ask for insurance inventories of the items in your inventory.

Despite the strict rules for disclosure, some divorcing spouses will hide or destroy key documents such as pre-nuptial agreements. This problem can be avoided by making copies of important documents as soon as you decide to file for divorce, or learn that your spouse is doing so.

Business Law, employment law, Legal

What Small Businesses Should know about Meal Break Waivers

Many California employers know that anytime an employee works a 8 hour shift, that must include an UNPAID meal break and a two 10 minute PAID rest breaks. What about when an employee doesn’t work 8 hours and doesn’t want to take a meal break? Under California law, there is an option to waive that break.

1. Meal break timing obligations.

An employer may not employ an employee for a work period of more than five hours per day without providing the employee with a meal period of not less than thirty minutes.  A second meal period of not less than thirty minutes is required if an employee works more than ten hours per day. Labor Code Section 512.

2. Employer’s duty to authorize meal breaks.

As long as employers effectively allow an employee to take a full 30-minute meal break, the employee can voluntarily choose not to take the break, and the employer would not owe the employee the additional hour of pay in the form of premium pay for a violation.

While employees may voluntarily work through meal breaks, if the employer knows or should have known that the employee working during this time, the employer must ensure that the employee is paid for the time working.

3. Employees may waive meal breaks for shifts less than 6 hours or shifts less than 12 hours.

If the total work period per day for an employee is no more than six hours, the meal period may be waived by mutual consent of both the employer and employee.  Likewise, if the if the total hours worked is no more than 12 hours, the second meal period may be waived by mutual consent of the employer and employee only if the first meal period was not waived.  Labor Code Section 512.

 4. Meal break waivers for shifts less than six hours and less than 12 hours are not required to be in writing, but should be.

Labor Code section 512 does not require an employee’s waiver of their meal breaks for shifts less than six hours or shifts less than 12 hours to be in writing.  However, in order to avoid any potential disputes and to be able to defend against any potential claims by disgruntled employees, it is always a good practice to have the voluntary waivers documented and signed by employees.

Business Law, employment law, Legal

Let’s Make Everyone An Independent Contractor!

Although the idea of converting all employees to Independent Contractor to avoid Wage and Hour headaches as well as payroll taxes sounds like Manna from heaven, it guarantees that you will be found liable for violations under California Employment laws.

Mislabeling a worker as an independent contractor creates potential liability for employment taxes and penalties, and liability for failure to fulfill the many legal obligations owed to an employee, such as wage and hour requirements. California courts have decided several cases about who is, or is not, an independent contractor. Cases have been brought for failure to pay overtime, as well as for other labor code violations.

California administrative agencies, the federal Department of Labor (DOL) and the Internal Revenue Service (IRS) closely scrutinize alleged principal/independent contractor relationships to ensure that those relationships are not, in reality, employer/employee relationships. Enforcement efforts to combat misclassification are on the rise.

Challenges to the legitimacy of an existing independent contractor/principal relationship can arise in many forms, including:

  • Filings for unemployment insurance (UI) benefits
  • Claims for unpaid wages
  • Claims for workers’ compensation
  • Charges of employment discrimination
  • Investigations by the IRS, the DOL, the Department of Industrial Relations (DIR) and Employment Development Department (EDD) to audit wage payments, workers’ compensation coverage and Unemployment Insurance Fund contributions

Willful Misclassification

It is unlawful for any person or employer to “willfully misclassify” an individual as an independent contractor. The law also prohibits employers from charging a misclassified independent contractor for goods, materials, space, rental, services, government licenses, repairs, equipment maintenance or fines that arise from the individual’s employment, if the charges would have violated the law if the person had been an employee.1

Willful misclassification means: “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.”

The civil penalty for violation of this law ranges from $5,000 to $25,000 for each violation. Other remedies include requiring the employer to display on its website or in the workplace a notice of the serious violation of misclassifying an independent contractor, a statement that the employer has changed its business practices in order to comply with the law, and information on how to contact the California Labor and Workforce Development Agency to report misclassification.

The notice must be posted for one year, and signed by an officer of the employer.

The law also imposes joint liability on a person who is retained to assist with classification and who knowingly advises an employer to treat an individual as an independent contractor to avoid employee status. Joint liability does not apply to a licensed attorney or to a person who provides advice to his or her own employer. Joint liability would apply to a non-attorney outside consultant.

These civil penalties are in addition to any fines or taxes owed to the DOL, IRS or the EDD or any unpaid wages owed to workers.

Defining Independent Contractor

California labor law defines an independent contractor as “any person who renders service for a specified recompense for a specified result, under the control of his principal as to the result of his work only and not as to the means by which such result is accomplished.”2

An independent contractor works for another entity under a verbal or written contract, usually for a specific length of time. The independent contractor is responsible for only his/her own work, and is generally responsible for his/her own schedule. The independent contractor must also be responsible for how the work is completed.

  • You should assume all workers are employees unless they clearly meet all legal requirements and pass all tests various federal and state agencies use for proper classification of independent contractors. Consultation with legal counsel is usually warranted.

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