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.

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.

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.

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.

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

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.

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.

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.

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.