Has your landlord shifted American Disabilities Act liability to you?

Written on January 11, 2012 by in Lease Reviews

The American With Disabilities Act is a civil rights law, designed to prevent discrimination against the disabled. Although passed with good intentions, the application of the act has proven controversial, opportunistic for some plaintiffs (and their lawyers), and for some small businesses, very costly.

It is a federal act but gives great leeway to states on how to enforce it. In a lot of states, injunctive relief is the only remedy (plus attorneys fees). That’s just a fancy way of saying if you get sued under the ADA in some states, you will have to fix the violation, pay the attorneys fees, and that’s it.

In California however, the violations may run afoul of a few state acts, including the Unruh Civil Rights Act and the California Disabled Persons Act, allowing state claims damages to be added on. On top of all that, treble damages may also be added. Treble damages are just another fancy legal term, meaning the judge can add another amount, up to 3 times the original damages, to the judgment.  Oh yeah, each occurence gives rise to a violation. So if you visit a place twice, that’s two violations.

It’s no wonder then, California, 1/50th of the United States, is home to over 40% of all ADA lawsuits. What this means is that you are at risk of being sued under the ADA and other related acts.

Usually the landlord and the owner of the business (if not the same person) or both liable for any lawsuits under the ADA. However some landlords may have shifted the burden of this liability to the tenant. So go and read your lease to see if such a shift has occurred.

Whether it has or not, it’s a good idea to brush up on ADA requirements and examine your business location to find any violations of the Act. Maybe it makes sense to hire an ADA expert to give the location a top to bottom review. If there is a violation, you’ll eventually have to fix it anyway. Better now, before being sued, then after.

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San Francisco Car Accident Attorney

Written on December 15, 2011 by in Uncategorized

If you or a loved one have been involved in a car accident in San Francisco or the surrounding Bay Area, California. Visit San Francisco Car accident attorney. He focuses his practice on representing those injured by the actions of others who negligently caused an accident thereby causing injuries to the passengers of the other vehicle or even worse, pedestrians.

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A proper buy-sell agreement for your San Diego small business

Written on September 18, 2011 by in General Business

If you own a company with anyone other than your spouse, you need a buy sell agreement. Also called a buyout agreement, or a business pre-nupt.

A proper buy-sell agreement, will protect all business owners when one of the co-owners wants to leave the company. It will protect the remaining business owners as well as the one leaving. If an owner wants to retire, sell their shares, goes through a divorce, or even passes away, the agreement will have clear, defined procedures that the owners are bound to. It will set the terms and prices for such a buyout. Each day a co-owned business is without an agreement is a financial risk

I have personal experience with this as a company I was hired to be General Counsel for was going through the process of buying out a deceased partner’s share. The kicker here is, that there was a buy sell agreement. However, it was a boilerplate buy sell agreement, meaning it came in a form and was not modified for this particular business. So it did not take into account the particular concerns with this highly regulated business and it was a much messier process than it should have been.

So a proper buy-sell agreement for your California small business will take into account what the owners want to happen if one of these triggering events occur. Do the co-owners care if one of the owner’s spouse is a managing partner should that partner pass away? Or divorced? Do the owners want to allow unknown partners if one owner wants to sell their share to a 3rd party? How do you value the interests when one of these triggering events occur. Business valuation is a complicated and involved process. Sometimes you can simplify it with an agreement. Other times you don’t want it to be so simple.

These are just some of the questions that would be raised in a detailed buy-sell agreement planning session.

If you own a small business with anyone, including a sibling, contact San Diego Business Lawyer Joseph Dang immediately to discuss how a buy-sell agreement will remove these risks from your small business. Give him a call at (858) 925-4525.

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Incorporate your business too … avoid an IRS audit?

Written on August 25, 2011 by in Entity Formation

According to a IRS statistics, those who incorporate their business is 10 times less likely to be audited than those who run a business and report that income on a Schedule C form. Schedule C is for sole proprietors who report that income directly to their personal 1040 tax form.

Now, correlation does not equal causation. That is for certain. So all we can do is guess as to why this is. Is it possible that the IRS algorithm’s feel that those who report income on the Schedule C are more likely to hid income, or take inappropriate deductions? It’s possible. Also, is it harder to do these things when the Corporation must file its own tax return? That is also highly possible.

When you incorporate your San Diego small business, you will most likely elect to tax the corporation under Subchapter S. This makes it a separate entity. You must file a tax return for the Corporation, then report the results of that onto your own tax return. Most of this must be done by an accountant or CPA. It is therefore not an unreasonable assumption to believe there is less risk of abuse here, although the risk still remains.

Oh and you also get increased asset protection as well. Not a terrible side effect.

Small businesses are the IRS favorite targets. They are ripe for abuse. Unnecessary deductions, excessive deductions, hidden income here and there. Sure why not, who is counting anyways.

So as a small business you must do your best to keep a low profile from the IRS so you don’t risk being on the receiving end of an audit. According to figures from the IRS, rates of audit for Schedule C filers can reach as high as 3.68%. The rate for Corporations under Subchapter S? 0.30%.

That is amazing and quite surprising to see such low rates of audit.

So whether it’s causation or just plain old correlation, it appears that incorporating your business may lower your audit risks substantially.

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When Do I Incorporate My Company?

Written on June 10, 2011 by in Entity Formation

As soon as possible. If you are starting up a small business and plan to incorporate sooner or later, than it should be sooner. There are some pitfalls that you must watch out for if you do not incorporate early.

If there is more than one founder, you should definitely incorporate early. Partnerships are generally informal arrangements and this can harbor many misconceptions and therefore, disagreements. Incorporating the business will introduce formality, definitive roles and rights.

If there is any intellectual property created then it should be assigned to the corporation. IP assignment clauses should always be a part of incorporation documents in some form or another. Let us say two founders create some IP but never form a corporation or never assigned the IP rights to the corporation. If one partner/shareholder decides to leave, the corporation may be stuck without the right to use that IP of the founder.

If you plan to offer stock options as incentives to anyone, you are better off having a formed corporation to do so.

Liability. Corporations help protect your personal property in those situations where your whole net worth might be liable for a wrong that you committed, even accidentally.

Funding/further investments. It is much easier to obtain funding if in corporate form and ready to go. Investors are wary to invest in sole proprietorship’s and other forms of business. They are familiar with corporations and can easily do business with corporations.

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A sole shareholder is not an “employer”

Written on May 18, 2011 by in Entity Formation

A California Court of Appeals has determined that being a sole shareholder does not make you an employer. This is important for cases involving the California Family Rights Act because recovery under that act is only available from the employer. The employer in that case being the corporation. Plaintiffs argue that the shareholder should also be personally liable since he exercised control over them, and also under a theory of alter ego. The court rejected plaintiffs argument:

In this instance, where a third party seeks to hold the sole shareholder liable for the wrongdoing of the corporation, an alter ego theory is the appropriate way to determine whether the shareholder is liable.

The opinion goes on to say that in California a corporation (or other entity for that matter) is normally considered separate and apart from any shareholders, employees, officers etc. Only in very narrow circumstances will they deviate from this, and only in the interest of serving justice.

If you really like to torture yourself you can read the whole opinion here Leek-v.-Cooper

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S-Corporation Explained

Written on April 27, 2011 by in General Business

Most people have heard of an S-Corporation or an S-Corp, but not many people really know what it really is and more importantly, what it isn’t.

I get asked a lot by potential clients, if I can form an S-Corp for them. I have to inform them that you do not form an S-Corp, you elect it.

To be more specific, when you create a corporation under California law, the letter S never comes into play. You have to look at this at two levels. First is the entity creation at the state level. California code regulates entity formation in our state. So if a corporate form of entity is what you want (as opposed to limited liability companies, partnerships, etc.) you form a regular corporation or a statutory close corporation (if your company qualifies).

Once the corporation is formed, you or your incorporator will then file for a Federal Employer Identification Number, or EIN/FEIN.  You will tell the IRS what form your business is, and then whether you will elect to tax your corporation under Subchapter S of the IRS code, as opposed to Subchapter  C (which is why you will hear the term C-Corp). Subchapter S of course being the pass through treatment whereas income is taxed at the corporate level but no taxes are paid, the income “passes through” to the owners and tax is paid at the shareholder level. Thus, S-Corps are treated almost like partnerships, with some differences.

This was created because many small businesses are owned by very little people, making the formal C-corp treatment very tedious, as well as wanting to see the inherent double taxation of C-Corps eliminated for small businesses.

 

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S-Corporations and the low salary-high profit trick

Written on April 18, 2011 by in Tax

A lot of small business owners seek the services of an incorporation lawyer looking to form an S-corporation.  Mainly for two reasons, limiting liability and tax advantages. They don’t know the specifics, they just know this is what S-Corps provide, and they want it.

One “trick” or technique that a lot of tax professionals promote, including CPA’s, preparers and lawyers, is the low salary/high profit trick.  You see, all salaries are subject to what is called employment taxes.  If you receive a paycheck, you will see taxes taken out for social security and medicare.  You may also hear this called FICA taxes. Medicare tax is 2.9%, Social Security 12.4% up to $106,800 in salary.  As an employee, you would only pay half these amounts, the employer the other half.  If you are self-employed, you would pay all of it (however you would be allowed to deduct half of this tax on your return).  This is normally called “self-employment taxes.” And as you can see it’s a significant amount.

Partnerships, and those entities taxed as partnerships pay this self-employment tax on all income – essentially salary and profits. Corporations however, and more specifically those taxed under Subchapter S (s-corps) would only pay this on salary or wages, not on profits.  So there you have it, the trick. Pay yourself a low salary, and maximize your profits.  You will still have to pay an income tax on everything, but you do not pay any FICA/self-employment taxes on the profits, or dividends.

However, as I always tell clients, you need to pay yourself a reasonable salary or find yourself challenged by the IRS.  As the Wall Street Journal reports, the IRS did just that, challenging a CPA  on his structure of his S-Corp.  He paid himself a $24,000 salary while receiving over $200,000 in profit distributions.  This clearly was too off-balance and  red flag for normal business operations.  The IRS imputed an income of $91,000.

This would otherwise be an excellent result, otherwise.  An aggressive salary/profit ratio would be 70/30 for professional service businesses (lawyers, CPAs, consultants) where the product is the professional’s labor.  Factors to consider would be how many employees the firm has, if there is significant capital assets. These factors would support a higher profit margin.  In the case of the CPA, they only imputed roughly 40% which is an extremely low number.

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Congress repeals tax rule that would have harmed small businesses

Written on April 5, 2011 by in Tax

Last year a tax provision was passed that would require all businesses to file a tax form for anyone they did more than $600 worth of business with each year.  Yes. That means if your small business bought a software program for $601, you had to issue this form (called a 1099) to the software company.  All of your vendors, possibly dozens if not hundreds of them, would receive a 1099 from you, if you paid them more than $600 each year.

Initially proposed by the Obama administration as a way to track down people and companies who were not paying everything they owed, it was designed to raise $17 billion over 10 years.  As it is now, you have to file such forms for any freelancers or independent contractors who you paid more than $600 to in each tax year.  The attempt to expand this form to all service providers and vendors distressed the entire small business community.  They galvanized and mobilized very quickly for such a large but scattered community.

Some small corporations would have seen their filings increase from 25 per year to over 70.  Surely a boon for accountants and tax preparers, but a nightmare for small businesses, from sole proprietorships to partnerships to corporations, no small business would have been spared.

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Is your business current with all license, permit and fee requirements?

Written on March 30, 2011 by in General Business

Make sure your business is in compliance with the many fee, license and permit requirements that every small business must review

Is your small business compliant with the many licenses, permits and fees required of all business operating in San Diego?  Due to the never ending bureaucracy and duplicative rules, regulations and procedures, it is hard to keep track of all the necessary requirements of operating a business, even a small business consisting of only a few employees.

This applies whether you are a corporation, limited liability company (LLC), partnership or sole proprietorship.  These requirements are in addition to the formalities that are related to your choice of entity.  For example, for every business that operates in San Diego city limits, a business tax certificate (license) must be paid for each year.  In addition to this, you may need a sellers permit.  If you happen to fall into a category California calls a Finance Lender, you must apply for a California Finance Lender license.  Fix cars?  Bureau of Automotive Repair has a license program.

The list goes on and on.  So if you operate a business in San Diego, and all you have is a business tax certificate, it is likely that you are deficient on at least one additional license/permit.

If you have any questions regarding business licenses and programs for your particular business, or just questions about small businesses in general, give Joseph Dang a call at (858) 925-4525 to schedule an appointment for a consultation.

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San Diego finally passes medical marijuana dispensary rules

Written on March 29, 2011 by in General Business

San Diego finally passes medical marijuana dispensary rules.  California passed the Compassionate Use Act 15 years ago which legalized the cultivation and possession of marijuana for those who have a doctor’s recommendation.

The controversy surrounding the act actually centers around the expansion of the act to collectives and cooperative distribution centers.  San Diego initially refused to implement state programs, and offered up one of the greatest resistance in the state.  There was much uncertainty surround dispensaries in the city, with supporters of the act clamoring for clarity so that legitimate dispensaries could operate under the Act.

The new law limits dispensaries to light industrial and commercial zones, and must be 600 feet from any residence.  Before this law was passed, 100% compliance with the rules were necessary, any violation no matter how trivial resulted in serious consequences.  Of the 165 dispensaries operating in the city, San Diego considered all of them illegal.

It remains to be seen how the new law will be implemented, and how strict the requirements will be.

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S Corps prepare to fight tax reforms

Written on March 14, 2011 by in Tax

Treasury Secretary Timothy Geithner last month suggested that government should reconsider tax rules that allow small businesses to be taxed as pass through entities.  The reason that these tax rules were created in the first place was to eliminate double taxation that Corporations taxed under Subchapter C face.  A C Corp is taxed at the corporate level, and then if a dividend is paid out to the shareholders, that money is taxed again (with some exceptions totaling in the thousands).

Most tax experts and observers were shocked that he would even suggest such a thing.  To suggest such a change at a time when our nation is crawling out of a deep recession is very imprudent.  A double tax or anything resembling one imposed on small businesses is too onerous of a burden for most small businesses to survive.  What small businesses do best is quickly hire and expand when things get moving. They are nimble.  But they are also small.  They do not have the luxury of extended periods of red ink.  You cannot take away even more of their profit (if any) and not expect disastrous results.

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Out-House General Counsel For Your Small Business

Written on November 6, 2009 by in General Business

As an attorney who focuses my practice on issues facing small business owners, one way I stay current with notable issues, new development and the like is to follow other small business legal bloggers such as myself.  One such blogger is Daniel J. Alexander II of the Out-House General Counsel blog.  The name is a clever play on the concept of having your own personal "in-house" counsel that is not an employee of your business.

Alexander has written some great articles that’ll help your company such as California Labor Law Tips for Small Business Owners, or this great article about Legal Issues Associated With Starting or Buying a Small Business, or my personal favorite, Legalzoom vs. A Real Lawyer.

So definitely give the blog a read, as there is valuable information contained from beginning to end.

 

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Are Your Personal Assets At Risk From Your Business?

Written on October 26, 2009 by in Asset Protection

Whether the economy is still faltering or on the mend, the undeniable truth is that small businesses everywhere have suffered and many more are currently experiencing rough times.  There is a running thread at Chowhound about restaurants closing right here in San Diego, and it’s depressing reading about some well known names that have shut their downs to the public.

Your personal assets may be at risk not just because of lawsuits against your business, but also in bankruptcy.

The Wall Street Journal discusses how in bankruptcies, entrepreneurs often are unaware their personal assets are at risk. Small business owners should be aware of the following risks of certain business structures:

  • Sole proprietorship. This is the riskiest form of business to use.  You expose all of your personal property to any type of lawsuit during operation, and in bankruptcy as well, because you cannot file bankruptcy “just for the business” because in the eyes of the courts, there is no separate entity.  The business was never incorporated.
  • LLC’s and Corporations.  These structures provide a little more protection, but are not full proof.  Most small businesses do not have enough credit for taking out small loans or signing big leases.  Therefore small business owners often sign personal guarantees for loans or leases.  While this will not expose personal assets to general liability, they may be exposed in cases of bankruptcy or suits related to the loan/lease.  Read more about Personal Guaranty.Also, keep in mind that just forming an LLC or Corporation is not enough.  Formalities must be followed during formation and continual operation of the business, or the limited liability shield may be pierced.  California clamped down on limited liability companies that were not following proper formalities and procedures.

Asset protection works both ways.  You want to protect your personal assets from your business, and your business assets from your personal life.  Proper planning may not eliminate every risk that lies out there, but it may shield your assets from those risks that you can control.

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Selecting Your Agent For Service Of Process

Written on September 4, 2009 by in General Business

I came across an nice online book titled TEN FATAL MISTAKES BUSINESS OWNERS MAKE (AND HOW TO AVOID THEM), put out by Gibson Ferrin & Riggs, PLC.  All small business owners should read it.

Mistake #4 was failure to use a qualified statutory agent.  In California we generally call these agents, “Registered Agent For Service of Process.”  To put that in English, when you form a legal entity, such as a corporation or a limited liability company (LLC), you need to designate an agent that, when faced with a lawsuit, will receive service of process by the people suing you.

Failure to use a trustworthy agent can lead to problems, such as failing to respond in a timely manner, or outright concealment by the agent.   If you currently have a small business attorney you work with, you may ask if they provide this service (sometimes at no charge to you).  You will also see CPA’s, accountants and other service providers act as agent for their clients.  Personally I suggest using your attorney or a dedicated company that provides such services.

While I do not endorse these companies specifically, a few companies I have seen mentioned as big players in the market are:

  1. National Registered Agents, Inc.
  2. Corporation Trust Company
  3. Corporation Service Company

Those are the big 3, and with any service provider, perform your due diligence before hiring anyone.

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Par Value For Your California Corporation

Written on July 28, 2009 by in Entity Formation

Par value is the minimum price that a share of a corporation may be issued for, set by the company issuing the shares.  Par value is usually unrelated to market value.  You may see par value at $0.0001 a share, which means the founders can issue themselves 10,000,0000 shares for $1,000.

The value is set arbitrarily, and for most small businesses may not be needed at all.  California does not require par value shares, so you do not need to set par value unless required to do so by Federal or other regulations and statutes.    As a matter of fact, California does not distinguish between par and no-par value stock.  California Corporations Code 205. 

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Non-Disclosure Agreement

Written on June 24, 2009 by in General Business

As a business owner you must take care to protect your confidential or proprietary information, or trade secrets.  You must protect this information when dealing with independent contractors, vendors or service providers, and also when negotiating deals or ventures with other businesses.  A non-disclosure agreement or confidentiality agreement is the best way to protect your sensitive information.  Trade secrets can be items as simple as your customer or client lists, list of vendors and costs of goods to you.

Employers must also seek to protect trade secrets that it discloses to its own employees.  A clause containing NDA or confidentiality language may even be included in an employment contract.  Individuals seeking to shop a product, idea or process to companies must also enter into a clear and defined NDA.

There are several types of NDAs.  One is a directional or unilateral NDA, where only one party needs the protection of the NDA.  Usually you will see this in the service providers and independent contractors, as well as with employees.  A mutual NDA is used where both parties require protection, normally seen when two businesses are discussing deals or ventures.  But either type may be used in any situation depending on the circumstances.

Be sure to read any NDA you are asked to sign, to ensure you are not giving up any rights and include any protections you may require.

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Workplace Notices For California Businesses

Written on June 12, 2009 by in Labor and Employment

In California, all employers must meet workplace posting obligations.  These may be related labor and wage laws, hours, working conditions, safety, etc.  There are many posters, some required of all employers, some only of specific ones.

You can start at the California Department of Industrial Relations for their workplace postings.  

Business.gov has a nice compilation of Federal postings which are required.

The Deparment of Labor has their Minimum wage poster.   California is a very diverse state, and San Diego in particular, so for convenience here are the posters in:

Use the elaws Poster Advisor to determine which Department of Labor posters need to be placed at your business.

If you search the internet (or just check your junk mail) you will find that many companies sell products which include all necessary postings in order to keep current easily.

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How Unpaid Interns Can Get You In Trouble

Written on June 1, 2009 by in Labor and Employment

Unpaid interns can be trouble for your small business. Through no fault of their own of course.  If you take on unpaid interns with the idea that they will do some "grunt" work while you teach or train them you may run afoul of the Fair Labor Standards Act (FLSA).  More specifically, you need to be aware of a 6 factor test the Supreme Court in Portland Terminal developed specifically for determining whether an individual is a trainee/intern vs. an employee entitled to at least minimum wage, overtime etc.  The factors are:

  1. The training, even though it includes actual operation of the facilities of the employer, is similar to that which would be given in a vocational school;
  2. The training is for the benefit of the trainee
  3. The trainees do not displace regular employees, but work under close observation
  4. The employer that provides the training derives no immediate advantage from the activities of the trainees and on occasion the employer’s operations may actually be impeded
  5. The trainees are not necessarily entitled to a job at the completion of the training period; and
  6. The employer and the trainee understand that the trainees are not entitled to wages for the time spent in training.

The bad news (yes I know there was no "good news") is that the above test is only for Federal purposes.  Yes there are California standards as well.  The  Department of Labor Standards Enforcement, in a 1996 opinion letter stated:

the training be an essential part of an established course of an accredited school or of an institution approved by a public agency to provide training for licensure or to qualify for a skilled vocation or profession. The program may not be for the benefit of any one employer, a regular employee may not be displaced by the trainee, and the training must be supervised by the school or a disinterested agency,

 Of course, as we are all accustomed to, California has a stricter standard than the Federal government.  Don’t forget to check with your worker’s compensation policy holder, and any other aspect of your business where number and nature of employees is material.

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General Partnerships In California

Written on May 28, 2009 by in Entity Formation

A general partnership is one of the easiest form of business to create.  In some cases two or more business owners do not want to form a more formal entity such as a corporation or limited liability company.  While a corporation or LLC provides greater protection for its owners, in some cases business owners are not ready to form such entities.

This may be due to costs, time or complexity due to the formalities attached to these entities. A general partnership can be formed as easily as agreeing verbally with another partner.  You will need to get an Employer Identification Number from the IRS in order to perform many business functions, such as opening a bank account.  The bank will usually require a written general partnership agreement as well.

If you do not have a partnership agreement, your partnership shall be governed by the California Uniform Partnership Act (scroll down to Section 16100).  But as mentioned above, you will most likely need some form of written agreement before you can even open a bank account.  How simple or complex such agreement needs to be depends on the bank, but I’ve seen an account opened with a very simple agreement before.  The UPA essentially declared general partnerships as entities separate and apart from its partners.  This determination affects titling and ownership of partnership property.  Please note, that joint and several liability of acts by other partners are still in effect, and that general partnerships do not shield your personal assets from liabilities of the business.  A very important point.

There are no mandatory filings with the Secretary of State, however partnerships may file GP-1 with the Secretary a Statement of Partnership which which can act as a supplemental grant of authority or a limitation on authority to enter into transactions on behalf of the partnership for certain partners.

There are very few situations where forming a general partnership is advisable, due to the lack of limits on liabilities which other entities provide.  Please note that while there may be a few less formalities, the law for general partnerships are still complex.

 

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If A Big Earthquake Hits, Does Your Business Have A Plan?

Written on May 18, 2009 by in General Business

 Last night a tremor hit Southern California. It registered a 4.7 on the Richter scale, was centered in Los Angeles and was felt here in San Diego by your very own.  Fortunately the quake originated over 8 miles deep in the earth and initial reports show no significant damage or injuries.

However, the earthquake brings up a crucial question: Does your small business have a disaster recovery plan or a business continuity plan?  Business continuity planning is the more general planning involved when a significant disruption occurs and includes plans for personnel, facilities, communications (between personnel and customers) and other issues.

Disaster recovery planning focuses on IT infrastructure, data, hardware and communications.  If an earthquake hits, would you be able to resume business elsewhere?  How long would it take to retrieve business data?  Can you even retrieve it? Earthquakes are not the only concern. Fires, energy blackouts, flu pandemics all factor in to such planning. Your facilities may not even be destroyed but something may prevent you from accessing your physical buildings.  A power surge may blow up your server with critical applications and data stored on that server.

DRP should involve at a minimum backups of all applications and date off-site, and the ability to restore them should anything happen to the server or access to the server is limited.  Storing this data in a different region is even better to safeguard against local disasters (think hurricane, total blackouts, etc.).

A DRP should take into account any regulations that cover your business.  Many businesses these days are regulated by a regulator/agency somewhere, and they may have rules in place requiring a minimum level of recovery planning.  Even if your business is not regulated by a specific agency, there may be state requirements that, while not explicitly requiring a plan, make it prudent for your business to have some sort of DRP in place to satisfy other requirements.

Planning for disasters and other disruptions will require collaboration between the business owners, the IT department/person and someone knowledgeable in related regulations to develop an effective plan.

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Do You Negotiate Primarily In A Foreign Language?

Written on May 11, 2009 by in General Business

California is a very diverse state, with many residents speaking a language other than English.  In fact, according to the 2000 census, 12 million residents of California spoke a language other than English in their home, out of approximately 34 million, or about 35%.  Of these 12 million, 83% speak either Spanish, Chinese, Tagalog, Vietnamese or Korean.

San Diego is no different, with a very diverse demographic comprising the population here in town.  There are many businesses that cater to a population that speaks one of these languages.  If your business is one these, be sure to check Civil Code 1632 to ensure you are not entering into a contract that is required to be translated before being signed.

Section 1632 states that any person, while engaging in business or trade, that negotiates primarily in one of the above listed languages must present to the other party a translated agreement, and it must include every term and condition in the agreement, if the contract falls into one of the categories listed. The contracts primarily have to deal with credit transactions, loans, leases (auto and home) and other various installment contracts.

If you think you might fall into one of these categories and you negotiate primarily in one or more of the five languages listed, you should review the statute more carefully and possibly prepare some translations.  With the economy tanking, consumers and lawyers are trying to find any angle they can to obtain relief from obligations.  Indeed a quick search for this section reveals discussion of using this law to defend against foreclosures or create leverage to obtain a loan modification.

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Are You Using Your Social Security Number As Your Employer Tax ID?

Written on May 6, 2009 by in General Business, Tax

I do not need to warn you about the dangers of identify theft.  By now you should have seen, read and heard countless stories about identity theft crime.  So what are many business owners doing that is raising the risk they may become victims of identity theft?  Using their social security number as their federal employer identification number (EIN/FEIN).

Business owners believe as a sole proprietorship their business does not need to obtain an EIN.  It is believed that only partnerships, corporations, LLC and other entities apply for and obtain EIN’s.  This is true, a sole proprietorship with no employees may not need an EIN in some instances (if you do have employees, or operate as one of the other entities you must apply for one).  But that does not mean you should not get one.  You have to give out your EIN for opening up bank accounts, merchant accounts, and other essential services for your business.

Do you feel entirely comfortable handing out your Social Security Number to service providers for your company?  You shouldn’t.  Apply for an EIN at the IRS website and you can have it issued within minutes. 

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Employment Taxes and What To Look Out For

Written on May 1, 2009 by in Labor and Employment

I recently discussed the difference between independent contractors and employees with the employment taxes associated with the hiring of employees.  For federal taxes, this includes FICA (Federal Insurance Contributions Act) taxes, which are comprised of Social Security and Medicare taxes.

California has its own set of payroll taxes, including unemployment insurance (UI), employment training tax (ETT), state disability taxes (SDI) and personal income tax (PIT).  UI and ETT are paid by the employer.  SDI and PIT are paid by the employee but the employer is required to withhold these amounts and forward them to the state.

Failure to collect and pay these taxes (which can result from mis-classifying employees) can result in serious fines, penalties and in the worst case scenarios you may find yourself out of business until issues are resolved.

This article at Accounting Web discusses 7 things small businesses should know about payroll taxes.  The article discusses IRS practices, but San Diego (and California) businesses can apply these items to California as well.

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Independent Contractor Or Employee?

Written on April 27, 2009 by in Labor and Employment

When hiring a new worker sometimes it is tempting for the employer to classify that worker as an independent contractor.  It is cheaper for the employer because employment taxes do not have to be paid, certain benefits do not have be extended, additional insurance may not have be acquired. Also the employer may not have to comply with labor laws, like wage and hour, overtime, meal and rest periods.

So it is tempting to go ahead and classify that new worker as an independent contractor. But doing so may get you in trouble.  Government agencies would rather you classify workers as employees for the very reasons just listed.  The IRS and state revenue agencies would like for you to pay the employment taxes.  They lose countless amounts of money each year to underreported self employment income.  What better way to combat that then to have you pay these taxes upfront each pay period?  California’s Deparment of Industrial Relations (labor department essentially) would also like to cover all workers with the broad labor laws in place.

So it’s a battle between you and the government.  You want independent contractors.  They want employees.  So what do you do?  You examine each classification carefully for each worker.  You keep a detailed folder of such determinations and document everything that will support your classification of a worker as an independent contractor.  And you must do this for several different agencies.  IRS, California Franchise Tax Board, previously mentioned DIR.

The IRS does have a safe harbor, Section 530 of the Revenue Act of 1978:

 

1. Classifying the individual as an independent contractor is supported by judicial precedent, published rulings, a technical advice memorandum issued with respect to the taxpayer, or a letter ruling issued to the taxpayer. 

2. A past employment tax or other IRS audit resulted in no assessment of employment taxes for improperly classified employees in substantially similar positions.

3. The independent contractor classification is supported by a long-standing and recognized practice in a significant segment of the taxpayer’s industry. 

 You must be very clear if you think you qualify for the safe harbor and the procedures must be followed precisely for the safe harbor to apply.

The IRS has a nice publication discussing worker classfications.  Visit the DIR for labor relatedclassification discussion..  Finally, the Employment Development Department has an excellent handbook discussing this topic for California companies.

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