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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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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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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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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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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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S-Corporation Election For Your Limited Liabiliy Company (LLC)?

Written on April 16, 2009 by in Tax

You are probably wondering, why would I want my limited liability company to elect to be treated as an S-Corporation?  Wouldn’t I be better off forming an S-Corp right from the beginning?  The answer is, it depends.

In a previous post, I discussed the differences between tax treatment of LLCs and S-Corps, so I won’t go over all the differences here.  I also discussed how taxes are not the only differences between Corporations and LLCs.  LLCs are more flexible in regards to structure, and do carry less formalities when it comes to corporate governance. You still have to be compliant, or California may come after you, but for the most part less corporate governance and compliance is required.

So why would you make the election to treat your LLC as an S-Corp?  If you find the flexibility and ease of corporate governance for LLCs attractive, yet find that the tax advantages of S-Corps applies to your company, you can go ahead and combine the two.

Of course, you will still have to satisfy the requirements of S-Corporation:

  1. Domestic corporation or eligible domestic entity (LLCs are)
  2. No more than 100 shareholders
  3. Shareholders must be individuals, estates, certain trusts and exempt organizations
  4. No non-resident alien shareholders
  5. Only one class of shares
  6. Cannot be: A bank or thrift institution that uses the reserve method of accounting for bad debts under section 585, An insurance company subject to tax under subchapter L of the Code, A corporation that has elected to be treated as a possessions corporation under section 936, A domestic international sales corporation (DISC) or former DISC.
  7. Tax year ending 12/31, a natural business year, an ownership tax year, a tax year selected under section 444, 52-53 tax year based on any of the above, or any tax year for which the corporation establishes a business purpose
  8. Each shareholder consents in writing

If you satisfy all these requirements, then you should look into possibly electing S Corporation treatment for your LLC, which is done by completing Form 2553 (Instructions) and possibly Form 8832. For California, you are no longer required to send in any forms to report, elect or terminate S corporation status. Federal S election and termination are binding for California.

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Small Business Audits

Written on April 7, 2009 by in General Business

Small businesses should conduct a legal audit of their company to see if they are complying with the various rules and regulations covering your company.  Depending on the industry your business is in, you may have to see if you’re complying with:

 * Antitrust and other fair trade laws affecting advertising and sales;

* Government procurement and contracting and False Claims Act investigations;

* Securities law reporting and insider trading;

* Environmental issues;

* Labor relations and employment discrimination;

* Sexual harassment;

* Wage and hour laws;

* E-mail and Internet use;

* Workplace privacy;

* Substance abuse;

* Workplace safety;

* Product liability;

* Consumer protection and consumer fraud;

* Gifts and entertainment;

* Commercial bribery;

* Money laundering (PATRIOT Act) and other currency transactions;

* Accurate books and records;

* Regulations affecting industry-specific practices;

* Export control and other international issues (e.g., Foreign Corrupt Practices Act, regulations of the Office of Foreign Assets Control, Trading with the Enemy Act); and

Do not think that because your business is small, that you do not have to worry about things like these.  It may be true that a significant amount of companies get away without worrying about compliance, but in the chance that you catch they eye of any authority, you may have to deal with consequences of not doing a little preventative planning and implementation.

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Tax Rates Faced By Small Businesses Varies By Form Of Organization

Written on April 2, 2009 by in Tax

The SBA Office of Advocacy released a report where they examined the effective tax rates faced by small businesses. It found that the effective tax rate faced by small businesses varied by the form of organization of the company.  The effective tax rate is calculated by totaling all income and dividing it by all taxes paid. So if your income was $100,000 and you paid $34,000 in taxes, total, your effective rate was 34%.

Sole proprietorship’s faced the lowest effective rate at 13.3%.  Small business partnerships have an average effective tax rate of 23.6%, small S corporations have a rate of 26.9%. I did not see limited liability companies (LLC) in the report, but I’m guessing the rate would be similar to that of S corps.

I think the numbers reveal a couple things.  First, do not assume that choice of entity causes the different variation in rates.  It’s just that the distribution of the different form of entities follows a certain pattern.  Sole proprietorship’s tend to be smaller companies with less income, while larger enterprises tend to be partnerships and S corporations.  The study just goes to show that progressivity in the tax code, at least in terms of small businesses, is alive and well.

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Is Obama’s New Plan To Help Small Business Too Narrow?

Written on March 17, 2009 by in Policy and Legislation

Today President Obama and Treasury Secretary Geithner revealed a plan that they hoped will aid small businesses in this current economic downturn.  In this day and age where talk of billions and trillions are now considered the norm, it is frustrating to hear that the sector that employs roughly 50% of salaried workers is only talked about in denominations of millions and just now, low billions.

The administration’s plan focuses on credit and lending, a topic I have covered before.  There are four main components of the plan released yesterday:

  1. Buying up to $15 billion of securities backed by current SBA loans.  The secondary market which I’ve discussed before, is normally an active market.  But like most other areas of the credit market, it ground to a halt last year.  Once again, an active secondary market frees the loans from the lenders’ books, and allows more loans to be made.
  2. Increase the guarantee on SBA loans to 90%.  Currently the SBA guarantees up to 85% or 75%.  The hope is that increasing the guarantee will give lenders more confidence.
  3. Temporary eliminate SBA loan fees to reduce the cost of capital.  Some fees related to SBA loans can run up to 3.75% of the loan amount, which is a large amount.
  4. Increase reporting requirement by banks in regards to loans made to small businesses.  Some believe the administraton will monitor banks to see which are actually lending … and which ones are not.  Some writers have presumed that the administration will monitor lending, and put the squeeze on those who are not lending enough.

While I applaud any aid given to small businesses, I feel somehow this really isn’t enough.  I think the administration obviously had to do something as the focus has been on big banks, insurers and automakers.  The populist were growing restless at the lack of focus on everyone else.  I don’t have any specific numbers to quote but I am willing to bet money that the percentage of true small businesses who even apply for SBA loans is small.

In other words, small businesses, who make up over 90% of all businesses and employ up to 50% of all workers, directly receive only a small portion of aid that has been given out – about 1%.  And furthermore, this aid will only benefit those very few who actually apply for, and receive SBA loans.

Studies have shown that small businesses lead an economy out of recession.  With their smaller size they’re more nimble and are quick to act.  A small business owner can decide today they need more work and by tomorrow a new hire is filling out a Form I-9. Probably due to the nature of the sector (they’re small) they don’t have a dominant and imposing voice.  Therefore the lion’s share of government help have not been delivered directly to small businesses.  Sure some projects and what not will trickle down to small businesses, but is that enough?

If the administration really wanted to jump start the small business sector quickly, it should have supplemented this plan with tax breaks.  Eliminating some or a portion of employment taxes for companies making under a certain amount would have been more beneficial, and would affect all small businesses.  I think this would have gone a long way to help small businesses, much more so than easing the credit crisis which would not help a majority of those affected.

What do you think, could the government have done more?

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Tax Differences Between LLC and S Corporations

Written on March 13, 2009 by in Tax

A frequent question that gets asked is, "what is the difference between a limited liability company (LLC) and an S Corp?"  There are some structural and management differences between the two which I will address in a future blog post. But for now, I’ll will focus on the tax differences between the two.

First, an S Corporation is really just a corporation that has chosen to be treated as a pass through entity.  Meaning profits and losses should pass through to the shareholders, thereby avoiding an entity level tax (and avoiding the dreaded "double taxation."  It is strictly a tax election.   An LLC is also a pass through entity, essentially a partnership with limited liability properties.

But there are subtle tax differences between the two.  For the purposes of this article I will assume for the most part that all owners of either entity also participate in the management of the company, which is how a lot of very small businesses operate.

Retained Earnings

When you employ yourself your salary is subject to a self-employment tax.  The self-employment tax is basically the FICA tax you see on paychecks (Social Security and Medicare) plus the employer’s portion. This amounts to 15.3% so it is not a trivial amount, however you get to deduct 1/2 of this as an expense.

In an S corp, if you retain any earnings that amount will not be subject to the self-employment tax.  Companies retain earnings to have a cash cushion, to make capital investments, etc.  If you retain earnings in an LLC, the owners would still be subject to the tax whether they received the funds or not.

Dividends

In an S Corp, if after you pay the owners a "reasonable salary" there is money left over for a dividend, this amount would also not be subject to the self employment tax.  What a "reasonable salary" is varies, so be sure you consult your tax advisor before declaring a salary.  In an LLC there are no provisions for dividends.  Everything is subject to the SE tax unless the dividend goes to a non-manager/worker owner; in the case of the S Corp the party receiving the dividend can also be an employee.

Misc. Differences

LLC’s are more transparent therefore owners can contribute and withdraw property tax-free for the most part.  For S Corps this applies usually only at incorporation unless the contributing owner is an 80% or more owner.  For LLC owners, they allow inclusion of LLC debt in basis (to take advantage of losses, if any), disproportionate allocations and distributions.

California Differences

Note that the above differences apply at the Federal IRS level.  States may treat the two differently.  California treats the two entities slightly different as well.  California applies a 1.5% flat tax on all income of an S Corporation.  LLC’s have a minimum $800 franchise tax plus what’s called an LLC fee based on gross receipts (not income), which can be seen in California FTB Publication 568 on page 5.

Conclusion

So there you have some of the minor differences.  The differences may be minor for some, and may be major for others. In some cases the differences may not even matter if some other overriding factors cause you to choose one entity over another.  The key point is that before you sit down and choose an entity, you make the choice based on specific circumstances related to your business or business plan.

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Will TALF Finally Bust The Credit Crunch For Small Businesses?

Written on March 4, 2009 by in Policy and Legislation

Two of the most common complaints by small business owners are lack of demand, and lack of credit.  The Fed hopes to solve the latter problem with TALF, which stands for the cleverly named Term Asset-Backed Securities Loan Facility.  It is a program created last year, but for which details were scarce until yesterday, when the Fed relased more details about the program.

The program seeks to offer low interest loans to potential investors of AAA rated asset backed securities.  Once a lender is able to package loans it has made into ABS’s, it moves those loans off its books and provides some cash to the lender, which in turn allows the lender to make more loans.  This market freezed up during the credit crisis last year and hasn’t eased up much since then.  The Fed is hoping that this will spur up to $1 trillion in new lending in the auto, consumer and small business sectors.

Some small businesses rely on loans to operate throughout the year, for various reasons.  One reason is uneven revenue stream, with the bulk of revenue concentrated within short periouds throughout the year.  Loans may allow such companies to continue operating even during periods where revenue is low or non-existent.  The Fed is hoping to help such companies, and only time will tell if this is effective. But it it does, it will allow companies to focus on their other problem, demand.

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Is Your Small Business Website In Compliance With California Online Privacy Laws?

Written on February 23, 2009 by in General Business

Companies that conduct business in California, whether headquartered here or not, must comply with some of the strictest privacy laws in the country.  Citing the rise in identify theft and recognizing the damage that is inflicted upon victims of identity theft, California has rejected the federal approach to data protection and has crafted their own, onerous laws.

California Civil Code Section 1798.82 is triggered when there has been a breach of security involving consumer’s personal information.  Personal information is defined as an individual’s first name or initial AND his or her last name with any of the following:

  1. Social security number
  2. Driver’s license number or California identification card number
  3. Account number, credit or debit card number, in combination with any PIN or password that would permit access to an account
  4. Medical information

 If there has been a security breach, the statute requires disclosure to affected California residents.  The process of the disclosure is very burdensome.  California’s Office of Privacy Protection has recommended practices in the event of a security breach that triggers Section 1798.82.

California’s Online Privacy Policy Act of 2003 requires website owners to conspicuously display a privacy policy if the site collects personally identifiable information, which can include just a first and last name, a phone number, or even just an email address.  The act lays out what must be disclosed in the policy. 

Also note that if your company is in a regulated industry, such as finance, securities, insurance etc. there may be additional rules and regulations regarding privacy of consumer information.

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Formation and Tax Guides When Starting A New California Business

Written on February 20, 2009 by in Tax

Have you recently completed an incorporation of your company, or an organization to a limited liability company?  Or are you looking to start a new business and want some general guidance on different forms of entity

  1. The IRS’ Publication 583 "Starting a Business and Keeping Records"
  2. California FTB "Guide To Forms of Ownership", and
  3. California FTB Publication 1060 "Guide For Corporations Starting Businesses in California"

Now, I do not suggest business owners read these in order to maintain their own books and records and prepare their own taxes.  That is unless you are trained and experienced enough to do so. Unless your business is very simple, I suggest seeking out the assistance of an accountant and/or a tax preparer.  The level of their involvement depends on your level of competence in this area.  However, even cursorily reading thorugh these guides will help as it gives you a general understanding of the concepts, which should be very helpful.

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Personal Guaranty: What Is It, And Why It May Be Necessary After An Incorporation

Written on February 16, 2009 by in General Business

One of the features touted when discussing incorporation or organization of a limited liability company (LLC) is limited liability.  In other words, by forming a corporation or LLC (or other limited liability entity) you shield your personal assets from most business liabilities.  There are instances where your entity will not shield you from business liabilities but we'll cover that another time.  Today we're discussing personal guarantees which normally arise during the formation process or shortly thereafter.

As a newly formed entity there is no credit history for your entity.  Remember back to when you were 18. No matter where you were, credit card companies found you. And they offered you credit.  But not much.  My first card had a $500 limit.  Why was my limit so low?  I didn't have bad credit, but I had no credit.  My credit history was too short.  Maybe if my parents co-signed I would have gotten a higher limit.  The same risks are associated with a new company.  With no credit history, the lender has no way of knowing the risk profile of the new business.  There may be no recourse if the entity should go belly up.  It also opens up the possibility of fraud in some cases, if no individual will offer up a personal guaranty.

A personal guaranty is essentially what it sounds like, a guaranty from the person soliciting the loan/credit/contract on behalf of the entity.  This usually includes residential leases, loans and some other business related contracts.  Whoever agrees to the guaranty is putting up all of their personal assets in order to complete the deal.  This may sound like it defeats the purpose of the entity, but it should not be viewed as that way.  When you start a business in earnest you're not assuming it will fail anytime soon.  If everything goes as planned you will have a successful business and when you have established enough business credit, you may seek to lift your personal guaranty and rely solely on the credit of the entity.

This is quite common among small businesses when first beginning operations so don't be alarmed, but be aware of what a personal guaranty entails.

Download our FREE REPORT "The Top 10 Mistakes That Can Destroy Your New Small Business" to learn about this and other mistakes to watch out for.

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California Budget Plan May Include Provisions For Business

Written on February 16, 2009 by in Policy and Legislation, Tax

According to a Los Angeles Times article, businesses are the big winner in the California budget that lawmakers hope to vote on soon.  There are $1 billion in tax cuts, but as the article points out these are directed primarily at multinational/multi-state businesses.  The bulk of the tax cuts are due to changes in the way corporate taxes are computed. Instead of taking into account number of employees and amount  of property they own, the proposed formula would only factor in income earned in the state.

Assemblyman Nathan Fletcher (R-San Diego), said:

the proposed corporate tax breaks are intended to keep the recession from spiraling deeper in California while unemployment is soaring.

"We have a tax code that incentivizes moving jobs out of the state," he said. "It only makes sense to change that. . . . We want to be a state that welcomes job creation. The benefits of this will be substantial."

But does this budget do enough to keep smaller businesses who can move much more quickly? There are some small business specific provisions, including a $3,000 tax credit for any company with fewer than 20 employees that hired a new worker.  Some argue this is not enough incentive to hire a worker the business would not have hired in the first place.

However, the budget is not  solely comprised of tax cuts but tax hikes as well.  With at least  5 new tax hikes small business owners are certainly to be affected negatively.  These hikes comprise a larger percentage of revenue and income of the business as well as the owners themselves.

While efforts to make the tax climate for business here in California should be applauded, once again we see that efforts seem to be concentrated on big busisiness, while smaller companies across our state are routinely ignored.

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Get Your Piece Of The Stimulus Pie

Written on February 10, 2009 by in Policy and Legislation

The Senate passed their version of the stimulus bill yesterday.  While there are differences between this bill and the version that the House passed, you can probably assume a version resembling these two bills will become law.  On many occasions on this blog and in my Twitter messages I’ve pointed out many times how small businesses, the heart of our country and the engine that runs the economy, have been ignored during this whole stimulus debate.  During the campaigns much lip service was paid by both candidates to your average Joe and Jane Sixpack.  Now that we’re past the campaign stage, small business discussion has been very scarce, and provisions that obviously target small business even rarer.

The Senate Finance Committee’s Republican staff did a study on the provisions in this stimulus, and found that less than $6 billion in tax relief targeted small business directly.  This is less than 1% of the total stimulus package.  So what is a small business owner to do?  What all small businesses should be doing in this economic environment.  Be aggressive.

While this bill will not target SMBs (Small and Medium Businesses) directly, there is going to be a massive amount of money spent.  The USA Today listed many of the different allocations in the bill.  If you are lucky enough to be in one of those industries targeted, your competitors will be be clamoring for any work that may trickle down and so should you.  And you don’t need to be a large manufacturer or in the construction industry.  The Wall Street Journal cites a San Diego windows covering maker who appeared optimistic about earning some government dollars.  The article provided some good links to find out more about small business contracting with the government. 

You can find a helpful primer on small-business government contracting here, and a helpful FAQ here. This searchable government database lists federal agency government contracting opportunities valued at $25,000 or more. (Even small winemakers apparently have a shot.)

So what are you doing to prepare for the potential flow of money from the government?

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New I-9 Form Delayed Until April 3, 2009

Written on February 2, 2009 by in Labor and Employment

Form I-9 is to be used by all employers to verify employment eligibility for new employees.  A new form with a new set of requirements was set for implementation (after several delays) at the beginning of February.  Well  US Citizenship and Immigration Services (USCIS) has delayed implementation yet again, until April 3, 2009.

So employers should be aware that, for now, the new form shall go into effect in April.

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House Approved Stimulus Bill: What’s In It For Small Business?

Written on January 29, 2009 by in Policy and Legislation

The House passed the much talked about stimulus bill yesterday.  Voting was pretty much cast along party lines.  The bill consistis of a mixture of spending and tax cuts.  At $800 billion it covers a vast array of programs shaping policies on "energy, education, health care and social programs."

Without getting into the politics of the bill which have been debated ad nauseum everywhere you look, I want to focus on how this bill as it currently exists affects small business.  The Wall Street Journal Independent Street blog already took a look at this when it asks "The Economic Stimulus Bill: What’s In It For You?"  They write:

According to this WSJ story, the highlight for many businesses is a set of provisions that would allow companies to get cash refunds from the federal government to offset current losses, as well as for tax credits they can’t use because they aren’t making enough money. Companies could file for a refund, using current losses to offset tax on past profits.

Other breaks are offered to help local governments raise money and, in some cases, for companies that have accumulated clean energy or research tax credits. Those companies could trade the credits in for cash. The bill also includes $430 million for the SBA to use toward its lending programs.

I’ve covered some of these provisions in several posts contained in the Policy and Legislation section.  As you can see in the WSJ piece, several small business groups feel that more can and should be done.  The SBA Office of Advocacy released a chart detailing the percentage of workers in each state employed by small businesses.  The numbers are staggering, ranging from the high 44% in Florida to almost 70% in Montana!  With small businesses comprising such a large percentage of all US workers how is it that they receive such little attention when it comes to this and other legislation?

The National Federation of Independent Business criticizes the bill stating that it "provides limited relief or incentives for small businesses and instead spends massive amounts of taxpayer dollars on programs that have little to no connection to economic growth or job creation.”  As I wrote before, I also agree that businesses as well as employees should get a temporary break from payroll taxes.

The American Small Business League issued a press release stating Obama Dropped Small Business Stimulus Plan Days Before the Election.  The ASBL drafted legistlation titled the Fairness and Transparency in Contracting Act, which would prevent diversion of small business contracts to larger firms and businesses.  They contend that if calculations by the President and the ASBL are correct, up to 4 million new jobs could be created "at virtually no expense to taxpayers."

I’m sure we’ll see more analysis on what exactly each revision of this legislation contains, and how it affects small businesses.  We can assume that some of the provisions that do not directly target small business will benefit them in some way.  However, at 50% of the workforce, wouldn’t you think small businesses across the country, owned by regular people, employing regular people, would be the focus and not the afterthought of any bill aimed at stimulating the economy?  Some of these programs may take months, years to deploy.  Increasing tax cuts and/or breaks gets much needed funds into the economy much faster.  Days after implementing them.  There are some good provisions already, but there needs to be more.

Tell me, what do you think should be done in order to stimulate the economy?

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Does Your Business Have Workers’ Compensation Insurance?

Written on January 26, 2009 by in Labor and Employment

Just recently I came across two businesses who did not have workers’ compensation insurance.  Unfortunately one of them seeked my counsel a little too late.  Workers’ compensation is required of all employees yet some business owners are not aware of the severity of the consequences of failing to obtain insurance.  Others mistakenly believe they are compliant with general liabilty coverage they currently have.

California has a website with some general information describing what workers’ compensation is, and who is required to obtain it.  In essence, workers’ compensation is a social insurance program that has advantages and disadvantages to employers and employees.  Employers are forced to obtain workers compensation, even if you only have one employee.  Roofers are required to obtain insurance even if they don’t have any employees, and real estate brokers are required to obtain coverage for their real estate agents, even if they are independent contractors.  This ensures that all employees receive "prompt, effective medical treatment for on-the-job injuries or illnesses no matter who is at fault."  In turn, employees are not prevented from suing employers over these injuries, a huge benefit to employers.

If you are a sole owner with no employees, or own the company with your spouse with no employees, coverage is optional.  You can find a list of authorized insurers at the website of the California Department of Insurance.  If you cannot find a company that will insure you, the State Compensation Insurance Fund is required to provide you with coverage.

What are the consequences if you don’t obtain coverage?  Significant.  It is a misdemeanor to be uninsured.  You face a $10,000 fine and up to 6 months in jail.  The state may levy additional fines up to $100,000.  If a worker is injured while you are uninsured, you must pay all bills and are now subject to a civil action against you in addition to the workers’ compensation claim.

If the state labor commissioner finds you are operating without proper insurance, they can prevent you from employing anyone until proper insurance is obtained.  In addition, they can assess a fine of $1,000 per employee on your payroll at the time the violation is discovered.  On top of all that, if an employee is injured and a claim is brought before the Workers Compensation Appeals Board, they can assess a penalty of $10,000 per employee on the payroll at the time of the infraction if that employees case was compensable; or $2,000 per employee if not.

As you can see, there are severe penalties for not obtaining workers’ compensation insurance.  If you reading this and do not currently have coverage, contact an agent specializing in workers’ compensation immediately.  You can find answers to frequently asked questions here.

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House Stimulus Plan Includes More Than $800 Million for Small Businesses

Written on January 20, 2009 by in Policy and Legislation

Just last week I discussed various plans to stimulate small businesses put forth by business leaders and government officials.  One such plan was to allow direct lending in lieu of the loan guarantees offered by the SBA.  A problem that arose during the recent bailout funds handed out to large banks was a reluctancy to actually lend these funds out.  When this is combined with lowered optimism by business owners, small business lending plummets.

The House has put forth a stimulus plan that thankfully includes several provisions that target small busineses. The most important of which allocates $430 million in direct lending and loan guarantees.  I’d still like to see some tax proposals enacted, such as an exemption of employment tax for a portion of a worker’s salaries.  What better way to get money into the hands of business owners and workers than to not have it go through the government in the first place?

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Do You Need a Business License (Tax Certificate)?

Written on January 16, 2009 by in Tax

Due to the widespread budget deficits being experienced by government at all levels, it appears a lot of government entities are diligently going after revenue owed them. San Diego is no exception.  All businesses, including home business, must file and pay for a Business Tax Certificate if you operate in an incorporated area of San Diego.  A new law in 2001, AB63 allows the state and cities to share taxpayer information in order to find unregistered/licensed businesses.

Even if you are self-employed, an independent contractor, or a home based business, you must apply and pay for a certificate regardless of the amount of income you actually earn throughout the year.

If you are operating in one of the unincorporated areas of San Diego County you do not need to obtain a business license, but be aware that if you conduct business in any of the cities, they may require a license anyway.  San Diego requires a business tax certificate if you conduct business within city limits.  You can learn more about San Diego’s Business Tax Certificate program here.

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Tax Calendar for Small Businesses and Self-Employed

Written on January 16, 2009 by in Tax

The IRS releases a calendar to help small businesses and the self-employed, titled Tax Calendar for Small Businesses and Self-Employed (Publication 1518).  According to the calendar itself, it is packed with information on:

General business taxes • Internal Revenue Service and Social Security Administration customer assistance • electronic filing and paying options • retirement plans • business publications and forms • common tax filing dates • federal legal holidays.

In addition, you can import due dates and actions into Outlook and iCal for Mac users.  Definitely a useful resource for any small business owner or if you are self-employed, even if you employ an accountant/tax preparer.

Credit to the California Tax Attorney Blog.

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Small Business Leaders Offer Up Stimulus Ideas During House Committee Hearing

Written on January 15, 2009 by in Policy and Legislation

The House Committee on Small Business held an open forum yesterday to discuss the role of small business in economic recovery.  The press release states that small businesses are the backbone of the economy, "creating 80 percent of all new jobs and driving innovation in virtually every field, small businesses will be vital to the nation’s economic turnaround." 

During the hearing several small business leaders suggested how policies and legislation can be crafted in such a way to "bolster small businesses and prevent mass bankruptcies."  I feel the most compelling suggestion mentioned that would provide immediate and significant benefit to business owners is to exempt the first $30,000 of net earnings from the self-employment tax.  At 15.3%, this tax is a huge burden on self-employed taxpayers and entrepreneurs.  Several speakers also expressed hope that new projects would create green jobs by upgrading federal buildings to be more energy efficient.

Margot Dorfman, CEO of the US Womens Chamber of Commerce supported the tax incentives for small businesses, but also stated that the government:

needs to ensure that money used to unfreeze the lending markets actually lands in the hands of small businesses, and this could be achieved through giving the SBA authority to grant and fully process small-business loans rather than just backing them through other banks and lenders.

Currently the SBA only guarantees loans to borrowers who meet the requirements of their programs; lending and processing still originate with local banks.  Considering that this very committee held a hearing back in November to discuss why bailout funds have failed to trickle down to smaller companies, and Chairwoman Velazquez chided Treasury and Federal Reserve officials, I hope relevant officials consider this proposal seriously.

Back in December, I asked if Washington will have the back of Small Businesses.  I have noticed the lack of attention small businesses have been receiving throughout any discussion of economic recovery.  With so many statistics showing how small businesses are the backbone of this country and its economy, one must ask why are they being ignored for the most part?  In my opinion, two contributing factors that are the lack of visibility and ease of implementation.

It is really easy to point to Wall Street with its huge players in the financial markets and Detroit with the big three automakers.  What is the equivalent in the small business arena?  There is joe six-pack, mom and pop, and possibly you.  In addition, it is much easier to release several hundreds of billions at the very top, with the hope that these funds will eventually trickle down.  This is understandable becuase deploying any funds or stimulus directly to small busineses would take much longer and require more planning.  However, with the first half of the $700 billion in bailout funds, the government has done a horrible job ensuring these funds were being used in ways that would help stimulte the economy. In fact, I’m not sure they even know how these funds have been used.

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