Category: Legal

Business Law, Legal

Which Corporate Entity Works Best?Legal Reasons #66

Sanjay Sabarwal

LLC (Most Recommended) (Most Ideal for Non-U.S. Citizens)

Limited Liability Company (LLC) is the most common and best business structure for most small businesses because LLC offers personal liability protection.

Having an LLC establishes your business as a separate legal entity — meaning members are not personally responsible for business debts and liabilities. In other words, if someone sues your business or if your business is liable to debtors, then your personal possessions, such as car or home, can’t be touched by creditors.

Also, unlike Corporations, LLCs enjoy pass-through taxation — meaning all the profits and losses are “passed through” the business to each members of the LLC. Members report their share of the LLC’s profits and losses on their individual tax returns, and any tax due is paid at the individual level.

The first thing most businesses do is form a LLC and as a business lawyer, I highly recommend having a registered LLC before you start your business.

 

C-Corporation

Corporation is also an independent legal entity, separate from the people who own, control, and manage it. Corporations can enter into contracts, incur debts, and pay taxes apart from its owners.

In other words, the Corporation itself, not the shareholders who own it, is held legally liability for the actions and debts the business incurs.

However, Corporations are more complex than other business structures because they tend to have costly administrative fees and complex tax and legal requirements. Because of these issues, Corporations are generally suggested for more serious companies.

C-Corporation is typically not suggested for most businesses to avoid double taxation. Ask me if you have any questions about this.

 

S-Corporation (Recommended for U.S. Citizens, Most Tax-Friendly)

S-Corporation is a special type of corporation created through an IRS tax election.

An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S-Corporation.

What makes the S-Corporation different from a traditional corporation (C-Corporation) is that profits and losses can pass through to your personal tax return. Consequently, the business is not taxed itself. Only the shareholders are taxed.

S-Corporation offers the best of both worlds: personal limited liability protection along with the tax benefits of an LLC.

S-Corporation is recommended for most businesses as well.

Can’t decide on which business structure is right for you?

A business lawyer can help you choose the right business structure and relieve the administrative burden of registering, organizing, and forming your proper business structure with state and federal authorities.

 

 

Business Law, employment law, Legal

So You Want To Start a Business?Legal Reasons #66

Sanjay Sabarwal

Before starting a business in California, you should consider the multitude of legal issues that surround such a task, including choosing the right business structure (sole proprietorship, corporation, limited liability company, or partnership), selecting the right company and/or product name, and how the business (including legal and accounting fees) will be financed, what potential liabilities you face with your proposed business, and what licenses and permits you will need.

Choosing the Right Business Entity For a California Business Start-Up.

Once you have determined that you are prepared to start your own business, you should begin the process of making your business legal. The first step should be to decide which legal structure is right for you. There are four main types: sole proprietorship, partnership, corporation and limited liability company. Which one is right for you? A sole proprietorship may be sufficient if: (1) you have no assets; (2) your proposed business is unlikely to be a source of liability; and (3) you don’t anticipate earning more than $50,000 a year. If you do have assets that you want to protect, or if you believe your new business will generate at least $50,000 in income, then you should consider either a corporation or a limited liability company. See, S-Corporation or LLC and then discuss your impressions with a local attorney, hopefully Melissa C. Marsh. Seeing an attorney for just an hour to learn more valuable information could save you thousands down the road.

Sole Proprietor.
If you are not ready to form a corporation, or a limited liability company, you can simply remain a sole proprietor. To start a business as a sole proprietor, all you need to do is get: (1) a taxpayer identification number ( EIN ), (2) a fictitious business name, (3) a local city business license, (4) a seller’s permit if you will be selling taxable goods, and (5) other city or state permits required for your particular business. Prior to selecting a fictitious business name, it is important to make sure the name is available.

Partners.
If you are planning to go into business with one or more other individuals, get a commitment — an agreement that sets forth your planned relationship, expectations, and financial commitment. If you are forming a corporation, make sure there is a shareholder buy-sell agreement in place. If you are forming a limited liability company, make sure the Operating Agreement contains buy-sell provisions. If you plan to operate as a general partnership, ask yourselves if the additional co-owners are merely going to contribute products and/or services as opposed to money. If so, consider forming a single owner business (sole proprietorship, corporation, or single member LLC) with contractual agreements with those who are to provide products and/or services. If a party later fails to perform, then you can typically find a replacement. If you are going to operate as a partnership, then make sure you execute a written partnership agreement that contains provisions addressing how each partner can leave the business.

It is always best to start a business on your own, rather than with partners. If co-ownership is essential, then make sure you have a well written partnership agreement that: (1) calls for the formation of a corporation or limited liability company if a certain goal is met, and (2) contains buy-sell provisions that provide for the buyout of any co-owner at a set price in the event the co-owner fails to perform, becomes disabled, dies, files for bankruptcy, or becomes involved in a divorce. Most owners of a business never intend, or expect, to become partners with their co-owner’s spouse, but that is exactly what can happen if you don’t have a well prepared buy-sell agreement executed by all of the co-owners.

Corporation. To determine if a corporation will best suit your needs, I will cover in the next blog post.

Brownness, employment law, Legal

5 Things Small Businesses Should Be Aware of:Legal Reasons #65

Sanjay Sabarwal

California’s state minimum wage increased for California’s employers on January 1, 2018.  California’s minimum wage law provides for two different rates based on the size of the employer, and the minimum wage increases are reflected in this chart:

Date Minimum Wage for Employers with 25 Employees or Less Minimum Wage for Employers with 26 Employees or More
January 1, 2017 $10.00/hour $10.50/hour
January 1, 2018 $10.50/hour $11.00/hour
January 1, 2019 $11.00/hour $12.00/hour
January 1, 2020 $12.00/hour $13.00/hour
January 1, 2021 $13.00/hour $14.00/hour
January 1, 2022 $14.00/hour $15.00/hour
January 1, 2023 $15.00/hour

 

Once the rate reaches $15 per hour, it will be adjusted annually based on inflation.  Here are five potential pitfalls California employers need to be careful to avoid with the increase in the state minimum wage.

 #1: Who is considered an employee?

California’s Department of Industrial Relations website provides the following explanation:

Labor Code section 1182.12 defines “employer” as: “any person who directly or indirectly, or through an agent or any other person, employs or exercises control over the wages, hours, or working conditions of any person [and] includes the state, political subdivisions of the state, and municipalities.”

Any individual performing any kind of compensable work for the employer who is not a bona fide independent contractor would be considered and counted as an employee, including salaried executives, part-time workers, minors, and new hires.

 #2: The salary level to qualify as an exempt employee increases based on the state minimum wage.

Employers need to review the base salary for all exempt employees to ensure the employees meet the salary required to be exempt.  To be exempt from the requirement of having to pay overtime to the employee, the employee must perform specified duties in a particular manner and be paid “a monthly salary equivalent to no less than two times the state minimum wage for full-time employment.” (Lab. Code, § 515, subd. (a).)

With the increase in the state minimum wage in 2018, the equivalent of two times the minimum wage of $10.50 per hour for small employers equals $43,680 per year, and two times the minimum of $11.00 per hour for large employers equals $45,760 per year to qualify for the white collar exemptions.

It is important to note that the salary basis test is set according to the California state minimum wage, not the applicable minimum wage that may apply in the various local city and counties in California.

#3: Which minimum wage rate applies if the number of employees raises and falls below 26 employees throughout the year? 

The California Department of Industrial Relations provides that: “An employer with 26 or more employees at any time during a pay period should apply the large-employer minimum wage to all employees for that pay period.”  Changing the rate of pay for each pay period raises another pitfall about the notice employers are required to provide employees before changing their rate of pay ( #4 below).

 #4:  Employers are required to update the notice to employees setting forth the employee’s rate of pay. 

California employers are required to provide non-exempt employees with certain information upon hire as required by the Wage Theft Protection Act.  The law became effective in 2012 and is codified at Labor Code section 2810.5.  Many employers use the Labor Commissioner’s template to meet this notice requirement.

However, employers who pre-populate the form will need to revise the forms to ensure that the wage rates comply with the increased minim wage rate in 2018.  Likewise, it is a good practice to review the notices mid-way through the year to ensure compliance with  the various local cities and counties (such as Los Angeles and Santa Monica) that typically increase their minimum wage rates in July each year.

 #5: Employers still need to comply with local city or county minimum wage requirements if those laws provide a higher minimum wage rate. 

Employers need to review any applicable local city or county laws that may provide for a higher minimum wage than the state minimum wage requirement.  Employers must comply with the highest minimum wage rate applicable to their workforce.  It is also important to review the local minimum wage ordinances as many ordinances differ in how to determine if the employer is small or large, and usually contain their own notice requirements.

Legal

Why Partnerships Should Have an Operating Agreement;Legal Reasons #65

Sanjay Sabarwal

Operating Agreements are necessary for businesses partnerships as they establish the management and operations of the partnership. This is a necessary legal document for your business to get future protection if the partnership breaks down for some reason.

An Operating Agreement is different from Bylaws  which are necessary for Corporations  that set out the basic rules for operating one’s corporation.

Bylaws are not filed with the state and your corporation is not legally required to have corporate Bylaws, but you should have Bylaws because it establish your corporation’s operating rules, and help show banks, creditors, IRS, and others that your corporation is legitimate.

An Operating Agreement defines each member’s rights, powers, and entitlements. Operating Agreement includes capital accounts, membership interest, distributions of profit and allocated tax responsibility, etc.

This internal document is an agreement set by the members that contains provisions for important items and rules that run the company. Operating agreements can be changed at any time by the company members or managers.

While you can find templates of Operating Agreements online, these templates do not reflect any specific agreements that you have with your partners and may often be missing sections that will act as great protection for you long-term.

Most template Operating Agreements are really not comprehensive. If you have partners, you want something that is customized to your business and your needs because this document can be very crucial in case one of the partners wants to sell his or her shares or dies. This document will also come in handy if you have disputes with your partners.

If you’re starting a business, my office drafts Operating Agreements and makes sure that they are customized to exactly what you need and I also ensure that you understand this agreement.

employment law, Legal

New California Employment Laws: Legal Reasons #64

Sanjay Sabarwal
  • Stop asking about salary history – AB 168 bars employers from asking job applicants about their previous salary. The legislation’s goal is to narrow the gender gap by preventing employers from basing offers on prior salary and thus, presumably, perpetuating historical discrimination. This will also remove the perceived gap in negotiating power between an employers and employees who must disclose their prior salary. Employers should ensure that their job applications don’t seek prohibited information and that those interviewing applicants know not to ask these questions.
  • More employers must offer parenting leave – SB 63, officially titled the Parental Leave Act, requires employers with between 20 and 49 employees to offer parenting leave that mirrors the Family Medical Leave Act. The new Act allows employees who work for a covered employer to take 12-weeks of unpaid, job-protected leave if they have worked a minimum of 1,250 hours in the 12-months prior to taking leave.  Employees can take leave only for the purpose of bonding with a newborn child, adopted child or foster child within a year of the birth or placement. Covered employers will also need to maintain health coverage under the same terms as an active employee. The Act also prohibits discrimination and retaliation against an employee for taking parental leave.The Parental Leave Act does not require employers to pay any portion of the leave but requires that employees be able to use accrued sick and vacation time. Employees can apply to have a portion of the parental leave paid for through the state’s Paid Family Leave program.  As we’ve previously explained, San Francisco requires some employers to pay a remaining portion of parental leave.
  • Expanded harassment training – California requires at least biannual harassment training for supervisors in companies with 50 or more employees. Having given a dozen sessions of the  training in the last month, I can assure you that there’s no shortage of material to talk about. But as of January 1, 2018, SB 396 requires that the training include information on gender identity, gender expression, and sexual orientation. If your handbook doesn’t specifically prohibit discrimination and harassment on those bases, you’re overdue for a revision.
  • Ban the box – Following the leads of San Francisco and Los Angeles, AB 1008prohibits employers with five or more employees from:
    • Asking on employment applications about criminal convictions;
    • Asking applicants about criminal convictions before making a conditional offer of employment;
    • When conducting background checks on applicants, considering, distributing, or disseminating information about prior arrests not leading to conviction, participation in diversion programs, or convictions that have been sealed, dismissed, expunged, or otherwise nullified.

Employers who wish to rely on criminal conviction information to withdraw a conditional job offer must notify the applicant of their preliminary decision, give them a copy of the report (if any), explain the applicants right to respond, give them at least five business days to do so, and then wait five more business days to decide when an applicant contests the decision. There are exceptions for employers who operate health facilities hiring employees who will have regular access to patients or drugs.

  • Minimum wage increases – On January 1, 2018, the California state minimum wage goes up to $11.00 per hour for businesses with 26 or more employees and $10.50 per hour for smaller companies. The inimitable Sahara Pynes discusses which cities are raising their minimum wages here.
Brownness, employment law, Legal

The New Parent Leave Act: Legal Reasons #63

Sanjay Sabarwal
Biracial mom on bed with her multiethnic black infant son (baby is 3 months old)

Under the New Parent Leave Act (Parental Leave), employers with 20 or more employees must provide eligible employees with 12 weeks of unpaid, job-protected leave to bond with a new child.

Compliance with this new law is essential. You will be liable if you fail to provide an eligible employee with Parental Leave, fail to guarantee the employee the right to return to the same or comparabl?e position at the end of Parental Leave, or take any adverse action against an employee for taking Parental Leave or for exercising his/her rights under the law.

Who’s Eligible for Parental Leave?

The New Parent Leave Act applies to:

  • Any person who directly employs 20 or more persons to perform services for a wage or salary; and
  • The state and any political or civil subdivision of the state and cities, regardless of the number of employees.

To be eligible for Parental Leave, an employee must:

  • Have worked for a covered employer for at least 12 months;
  • Have worked at least 1,250 hours in the 12 months before taking leave; and
  • Work at a worksite that has at least 20 employees within a 75-mile radius.

Duration and Timing of Leave

Eligible employees can take up to 12 weeks of Parental Leave to bond with their new child. The leave must be taken within one year of the child’s birth, adoption or foster care placement.

The 12 weeks of Parental Leave is in addition to the up to four months of Pregnancy Disability Leave (PDL) available to a pregnant parent. An employee eligible for PDL and Parental Leave can take up to four months of protected leave when disabled by pregnancy and then an additional three months of Parental Leave.

If both parents work for you and both are eligible for Parental Leave, you must allow both to take Parental Leave. However, you are not required to provide more than 12 weeks total for both employees. You may allow the employees to take the leave simultaneously, but are not required to do so.

 

Employer Notice Requirement

The New Parent Leave Act requires that employers provide employees with a guarantee of reinstatement before an employee begins his/her Parental Leave. If you fail to provide this guarantee of reinstatement before the employee’s leave begins, you will be treated as if you refused to allow the employee to take Parental Leave and can be held liable for a violation of the law.

Employers should ensure that all employees taking Parental Leave are provided a guarantee that the employee will be reinstated to the same or comparable position at the conclusion of the employee’s Parental Leave. The guarantee should be in put in the handbook or an additional policy that all employees are aware of.

Returning to Work After Leave

When an employee returns from Parental Leave, you must reinstate the employee to the same or comparable position. If you need to terminate an employee on Parental Leave or have concerns about reinstatement, seek legal counsel.