Business Law, Legal

Reasons Why a Small Business Should Incorporate

Many small business owners launch their companies as sole proprietorship in which they and their businesses are essentially the same. However, changing the format of a small business to a corporation or a Limited Liability Company (LLC) can offer a range of advantages for entrepreneurs.  Most notable is that a corporation or LLC protects entrepreneurs’ personal assets in case debts or legal judgments are claimed against the business.

The advantages of incorporating a small business include:

No. 1: Personal asset protection. Both corporations and LLCs allow owners to separate and protect their personal assets. In a properly structured and managed corporation or LLC, owners should have limited liability for business debts and obligations. Corporations generally have more corporate formalities than an LLC that must be observed to obtain personal asset protection.

No. 2: Additional credibility and name protection. Adding “Inc.” or “LLC” after your business name can add instant legitimacy and authority. Consumers, vendors, and partners frequently prefer to do business with an incorporated company. In most states, other businesses may not form an entity or use a trade name that is the same as your corporate name. This benefits the business legally and helps in brand-building and marketing.

No. 3: Perpetual existence. Corporations and LLCs can continue to exist even if ownership or management changes. Sole proprietorship and partnerships just end if an owner dies or leaves the business.

No. 4: Tax flexibility. A LLC is taxed at the same rate as a sole proprietorship while providing limited exposure to personal liability. Though profit and loss typically pass through a LLC and get reported on the personal income tax returns of owners, a LLC can also elect to be taxed as a corporation. When an entrepreneur sets up a corporation, he or she is taxed on both the individual and corporate levels. However, a corporation can avoid double taxation of corporate profits and dividends by electing Subchapter S tax status.

No. 5: Deductible expenses. Both corporations and LLCs may deduct normal business expenses, including salaries, before they allocate income to owners.

Should My Business Incorporate or Form a LLC?

I am often asked this question.  It is important to consider the following:

1. Corporations and LLCs are both separate legal entities (business structures) that enjoy certain protections under the law and important benefits. Most people form a legal business structure to safeguard their personal assets.

2. Incorporating or forming a LLC allows you to conduct your business without worrying that you might lose your home, car, or personal savings because of a business liability.

Business Law, Legal

Remember UBER/LYFT Cheaper than a DUI: Legal Reasons #76

DUI Checkpoints

DUI checkpoints are used throughout California to find and arrest drunk drivers. These checkpoints are commonly found on the highways or surface streets. If the symptoms of a DUI are noticed, the driver will be requested to step out of the vehicle and perform field sobriety tests at the scene.

The United States Supreme Court found in the case of The Department of State Police v. Sitz, 496 U.S., 444 (190) that DUI checkpoints do not violate the Fourth Amendment’s prohibition against unreasonable searches and seizures and sobriety checkpoints outweighed the constitutional rights of the individual citizen. It was ruled that interests of government in identifying DUI drivers, reducing the fatalities overturned, the intrusion of human privacy rights, and sobriety checkpoints, were acceptable.

This weekend, be smart and don’t drive if you plan on drinking. The cost of a using a car service is still much, much cheaper than a defending a DUI

Here are some planned checkpoints for Orange County and LA County

Business Law, employment law, Legal

Upcoming Business and Employment Law Seminar: Legal Reasons #75

I am glad the week is done as I and my senior associate Jemal Yarbrough cannot wait to present information that we feel is vital for anyone considering starting a business or any business with employees. One of the main things that motivated me to start my own law practice was to find ways to be in service to others in the legal arena and give information that is beneficial (and affordable) to anyone who desired it.

As in house counsel for Ziba Beauty for the past 17 years, I know it is very easy to run afoul of the many employment laws in California.  Too often, small businesses are not aware of the various rules in regard to wage and hour issues as well the recent uptick in sexual harassment claims. If you are interest, please do come out.

 

Happy Friday!

Business Law, employment law, Legal

Common Small Business Employee Lawsuits: Legal Reasons #74

The most common lawsuits brought against businesses are wrongful termination suits brought by employees or candidates who have suffered a negative employment action. This can be anything from being fired to being demoted or even passed over for an advancement opportunity. If the employee or candidate believes that the action was taken for a reason related to race, gender, religion, identity, or another protected classification, that employee might file a lawsuit. For this reason, it is important to document any sort of negative or positive behaviors at work, so that if an employee does complain of discrimination, the courts can see the employee’s work history and the real reason why he or she may have been passed over for a promotion. Disparaging remarks made about any of these protected classes have no business in a work place as they can create a hostile work environment and lead to lawsuits as well.

Many employers choose to save money by denying their employees overtime pay. This can create many extra costs, as employees will sue for the money they are owed, and the legal fees can be significant. It is a good idea to have contracts establishing the boundaries of a relationship between an employer and an employee to minimize confusion.

It also makes sense to put agreements with vendors and customers in writing. The contracts should include a general description of the work to be performed, a list of any items to be delivered, a project schedule with deadlines, the fee, and the circumstances under which additional fees might be charged, warranties included with the work, how long the contract lasts, how it can be terminated, and how disputes will be resolved.

Personal injury lawsuits against businesses are also common, so it is important to make sure that a place of business is kept in safe condition. Floors should always be dry and warnings should be presented to customers of any dangerous conditions. Drivers should be selected carefully as any accident they cause can be made the responsibility of the business that employs them. Employees who are injured at work are usually precluded from suing their employer and are instead referred to worker’s compensation courts which have their own legal fees. Most states require employers to carry insurance in case of a workplace injury.

Business Law, employment law, Legal

4 Common Legal Mistakes by Small Businesses:Legal Reasons #72

1) Failing to “put it in writing” early

Before founders do any significant work together, it is essential to put into place a written agreement which outlines the roles and obligations of each respective party. Founder Agreements provide clarity regarding critical aspects of the work relationship, including but not limited to ownership percentages, salaries, removal grounds and procedures, governance and management, voting protocol and profit-sharing.

2) Failing to carry out buy-sell provisions

The decision by one founder to leave the company can lead to internal turmoil, customer erosion and disruption in revenue flow. These issues also could arise in the event a founder passes away or experiences long-term disability.

Simply put, failing to plan for the end is planning to fail. A properly drafted buy-sell agreement executed by the founders of the business at the outset (in conjunction with a founder agreement) can effectively account for how the company will proceed in the event of unanticipated change.

3) Using inadequate employment agreements

It is critical to invest in properly drafted agreements that can serve as the foundation for the employment relationship. Common terms included in an employment agreement include, among other things, the length of employment or whether the employment is at-will; the classification of the worker (i.e., employee/independent contractor, exempt/non-exempt); and rights and restrictions upon termination.

Employers should be mindful to not expose the company to liability by disregarding any prior-employment related obligations of job candidates, including any restrictive covenants and/or obligations to return sensitive documents that belong to the prior-employer.

4) Misclassifying workers

Many employers hire independent contractors rather than employees and/or misclassify employees as exempt under the Fair Labor Standards Act in an effort to avoid the payroll obligations that come with the traditional employment relationship, such as the duty to pay minimum wage and overtime. Serious liability can result from these misclassifications, including substantial wage repayment going back as far as three years and other harsh penalties.

Business Law, Legal

Reasons to Incorporate Your Business:Legal Reasons #71

Incorporating your company allows you to protect your personal assets from any actions that might affect your business. It also gives you the professionalism of an incorporated company, making it more likely that others will choose to work with you.

Business owners choose to incorporate outside their home state for many reasons. California is one of the most popular states for incorporation, because it has a thriving business community and offers important business benefits.

One major benefit of corporations in the state of California is management flexibility – the state only requires three officer positions in the filing: president, chief financial officer, and secretary. You can even fill all three of these with the same person. This allows you a lot of flexibility when it comes to filling out your corporation’s leadership team in the future.

Another reason forming a California professional corporation is a great choice is due to the anonymity of shareholders and management. The state only requires the director and resident agents to be disclosed, allowing stockholders to avoid having their names in the public record.

Finally, California corporation taxes are only 9%, with other significant advantages available depending on the type of corporation formed.

How to Incorporate in California

The process of registering a company is California is straightforward. Below is a brief overview of the steps to incorporating:

  1. Make sure your chosen business name is available under California rules and regulations.
  2. File California articles of incorporation.
  3. Have your organizational meeting and create your company bylaws.
  4. Get your Federal Employer Identification Number (FEIN) and open your incorporation’s bank account.
  5. Get business licenses from the county and/or city where you will do business.
  6. Submit your initial report, called a Statement of Information, within 90 days.