How useful is a condom that is never taken out of its box and wrapper?
If you were the kind of person with enough forethought to buy a condom, you would probably want it to protect you from several things.
But it would not be very useful to go through the trouble of buying the condom and not taking the additional necessary steps to get its benefit.
Lawyers call certain legal services “prophylactic.” That’s because their purpose is to prevent problems and unwanted consequences.
Completing your necessary corporate compliance and regulatory paperwork is prophylactic. Buying an LLC and not taking it out of the box will not give you the desired results.
Say you filed an LLC using Legal Zoom. Are you personally protected from lawsuits?
Maybe a few, but mostly, no.
Because they don’t give legal advice, budget legal sites don’t tell you there are numerous things to do after you file the LLC to legitimately and legally set up your business.
After years of starting businesses, we have developed a list that is several pages long made up of single spaced bullet points.
If you don’t do all the things on this list for your LLC, then the “corporate veil” can be pierced.
But more likely, if you don’t do all of the things you are supposed to do to start up your business legally, you will violate one of several laws that carry personal liability even if you are incorporated.
Taxes take a big bite out of profits for small business owners.
True story: I pay five times my salary in taxes every year as the business owner. For every dollar I take home to feed my family, I have to earn five just for taxes.
Too bad those tax dollars don’t go to feed other families. I’d rather use that money to take care of orphans.
But I digress.
California is much worse for taxes (business and personal) than all other states in the country.
So it is not surprising that I am asked constantly whether a business operating in my home town of San Diego would be better off incorporating in Nevada.
Nevada takes advantage of this and encourages businesses to incorporate in their state.
But for most small businesses, the answer to where they ought to incorporate is the state in which they are doing business. You can’t get away from California taxes by incorporating in Nevada if you are going to do business in California.
You didn’t really think California would let you get away from taxes that easily?
Can I incorporate in Nevada to avoid California taxes?
You can incorporate in Nevada.
But if you plan to do business in California, you cannot avoid paying taxes in California.
No matter where you’ve incorporated, if you’re running a business in California you must pay taxes on any income earned from California sources.
This is the rule for any combination of states that you mention. California, while tax-greedy, isn’t the only state to have these laws.
But sometimes there are good reasons for incorporating in another state.
For example, you may be able to divert some of the income you earn to the more tax-favorable state.
And there may be other taxes, business laws, and regulations that favor incorporating in one state versus another.
The best way to figure out how to structure your business is to have a great CPA and business lawyer help you along the way.
Do you know how to hire the best professionals for your business? Learn the secrets other lawyers won’t tell you by requesting our free e-course, How to Hire A Lawyer. Call us at 800-449-8992 or email us at [email protected] to find out more.
Congratulations on making the decision to start your own business! As you already know, one critical aspects of business formation is deciding which legal structure your entity will assume, i.e., a limited liability company or corporate entity. The legal structure you select significantly impacts aspects of the company’s legal and financial rights, responsibilities, and limitations throughout the duration of the entity’s existence. For instance, the legal structure you choose will impact significant matters such as personal financial liability, tax considerations, the maximum number of business members, and costs related to the legal maintenance of the business.
The limited liability company (LLC) enjoys widespread popularity among entrepreneurs across all types of industries because it’s “hybrid” legal structure simultaneously offers liability protection while avoiding dreaded “double taxation” issues faced by C Corporations. However, while the LLC structure has the potential to offer considerable legal and financial benefits, it is also important for new business owners to familiarize themselves with the pros and cons of operating as an LLC.
The business formation attorneys of Bellatrix PC have extensive experience assisting entrepreneurs at all stages of their business, including LLC formation, the operation process, and business dissolution or sale of the business. At Bellatrix PC we are well-versed in California and federal laws governing limited liability companies. Whether you need assistance drafting enforceable LLC operating agreements, have questions about converting an LLC into a corporation, or simply need guidance pertaining to entity selection, our knowledgeable legal team is ready to help you meet your goals.
To learn more about how we can help your LLC succeed, call our law offices at (800) 449-8992 to set up a confidential legal consultation.
How LLCs Limit Personal Liability
The limited liability company does exactly what its name suggests, limits the personal financial liability of business owners should the business itself become liable for a debt.
While creditors may pursue funds held by the entity itself, individual members enjoy robust protection against the seizure of personal assets and other collection actions. In most instances, it is illegal for creditors to pursue vehicles, homes, or other possessions held personally by LLC members in order to satisfy debts arising from business transactions. This feature makes the LLC an attractive option compared with other entities which do not limit personal liability on behalf of the individual owners, such as general partnerships and sole proprietorships.
However, while LLCs generally restrict personal liability in the event of financial hardship experienced by the business, there are several situations in which members could still potentially be held personally liable for certain debts. Entrepreneurs must be made aware that even the LLC structure will not shield a member from assuming liability if he or she:
Personally and directly causes personal injury and/or wrongful death, resulting in civil litigation.
Makes a personal guarantee regarding debt repayment.
Engages in fraudulent or otherwise illegal activities pertaining to the business, including but not limited to tax evasion, embezzlement, and employment tax fraud.
Treats the LLC as an extension of his or her personal affairs, rather than as a separate legal entity.
Tax Obligations for Limited Liability Companies
In addition to limiting their personal liability, most entrepreneurs are equally concerned with minimizing their tax liabilities. The LLC structure can be ideal in this regard.
Like S Corporations (but not C Corporations), the LLC is what’s known as a “flow-through” or “pass-through” tax entity. This term derives from the fact that income which is generated by the LLC “passes through” the LLC itself to individual members thereof. Individual members report profits and losses on individual income tax returns, thereby avoiding the double-taxation applicable to C Corporations. Unlike their pass-through counterparts, the LLC and the S Corporation, C Corporations are effectively taxed twice: first at the corporate level, and then again at the level of the individual shareholders.
While they are both pass-through entities for tax purposes, the LLC enjoys several practical advantages over the S Corporation. To provide just a few examples, LLCs are generally simpler and less costly to form than S Corps, and can have an unlimited number of members.
Single-member LLCs have special tax considerations. The IRS designates single-member LLCs as “disregarded entities” for tax purposes, meaning profits and losses must be reported on the member’s Schedule C Form 1040 (Profit or Loss from Business) just as they would be for a sole proprietorship (in fact, Schedule C is expressly designed for use by sole proprietorships.) This special tax designation means it is unnecessary to file additional taxes for the LLC itself.
If you are forming a single-member LLC and do not wish to be treated as a disregarded entity, you may elect to be treated as a corporation by filing Form 8832 (Entity Classification Election) with the IRS. If you fail to file Form 8832, the IRS will simply use the default federal tax classification. Note that LLCs with two or more members can also request re-classification as a corporation by filing Form 8832.
If you are considering forming an LLC or other type of business entity, it is critical to seek legal guidance from an experienced business attorney. It is absolutely essential to provide a robust legal framework for your LLC during its formative stages to help put your new entity on the path toward success.
The attorneys of Bellatrix PC are prepared to help you navigate formation procedures and administrative requirements, draft company policies and operating agreements which comply with both state and federal laws, and most importantly, help you take all necessary legal measures to protect your bottom line so that your new entity can flourish and grow into the future.
I hear a lot that businessowners should lease cars for tax purposes. The tax treatments of leased versus owned cars for businesses and entrepreneurs is, unsurprisingly, confusing. I’m not a tax expert, even though taxes touch everything I do as an entreprenuer. But here’s a link to the best explanation I could find on how the deductions work, by an actual tax expert (or so she says… I don’t personally know her). She basically recommends buying over leasing.
The other day, I counted and learned that I have owned 10 cars and leased 1. I far prefer to buy (even though my lease was my best car ever). Like most Libertarians, I like tangible assets and don’t trust banks. But there are some definite perks to leasing.
The conclusion I made after going through more than a dozen car transactions in my life (I also help family members buy cars) is that buying is more financially sound but also more austere. A friend of mine recently said that he wanted a Tesla (and test drove one) but paid down his mortgage instead. He said “future me will appreciate that decision more than current me.” That’s what the buy vs. lease decision boils down to: you have to balance future and current happiness factors.
Advantages to Leasing
For most people, buying a new car stands as the second largest financial decision they make. Only the purchase of a home tends to rank higher than buying a car. The bottom line is that new cars do depreciate instantly once they are driven off the lot; this fact is not a myth. Opting to buy a used car to avoid depreciation may be a savvy financial decision, but is not nearly as much fun. Leasing negates this issue.
No worries about maintenance
You don’t have to worry about maintenance when you lease a car (well, some contracts have you pay for oil changes and tires). There’s definitely a pampered feeling when you go to the dealer and drop the car off and they give you a loaner of some really high-end car — it’s a different experience than my normal Jiffy Lube run. And the car is under warranty the whole time. When the warranty runs out, poof, new car time.
Always have a new car
Do you love the look, smell and feel of a brand new car? With leasing, you’ll never have to worry about driving a car that feels outdated. This also means you’ll always be able to benefit from the newest safety features and technological innovations.
Change cars as your needs in life change
The one time I leased, I did so because I wanted a big firm lawyer car without the long term commitment. I planned someday to have a family, and so my sporty little Mercedes wasn’t going to cut it. Three years was the perfect amount of time to enjoy it. By then, I got a sporty husband and a sporty dog, and a truck became necessary.
With leasing, you don’t have to worry about making a huge mistake by picking the wrong make or model. If you end up selecting a car that you don’t like for one reason or another, your lease will simply run out and you will not be stuck with the car.
Advantages to Buying
No mileage restrictions
Regardless of whether you opt for a new car or used car, the bottom line is that mileage matters. If you know that you will be driving your car many miles on an annual basis, then buying is likely to be the superior option.
Leases have mile restrictions, which tend to be 9000, 12,000 or 15,000 miles a year. They charge overage if you go over these amounts. This factor can quickly turn leasing into a losing proposition.
2. Free yourself from car payments
If you are hoping to some day be without a car payment, then buying is the way to go. I haven’t had a car payment (or a mortgage payment) for years and that gives me a lot of happiness. I highly recommend it.
No wear and tear fees
Leasing can be stressful if you are prone to accidents or you want to put a spoiler or racing stripes on your car. If you spill your coffee or degrade the inside of the car, you’ll be charged fees to clean it up. That’s why people with small children or pets should probably buy. You can also be charged high fees for small dings and dents in your vehicle.
In the end, both options have their advantages, and the right pick depends on your needs, lifestyle and financial goals. If you do decide to lease, be sure to read the fine print in your contract to make sure you thoroughly understand the terms.
Eric is really angry. Less than a year ago, he started a business with four guys he knew from friends of friends. They shared the dream of opening a sports bar dedicated to soccer that would serve international beer and bar food.
They found the perfect spot and signed a lease. Eric personally guarateed the lease and put $30,000 down for a deposit. He paid for all the kitchen equipment and hired a contractor to bring the building to code.
His partners (they were all equal according to the one page document he typed up) chipped in for a little while. One brought in some TVs. Another bought some beer and tended bar sometimes. Another pitched in a few thousand dollars to buy some advertising to announce their grand opening.
After a month, the first partner was run out by Eric after taking cash from the till. He never came back.
Then one of the partners got sued for pinching the waitresses. Eric became embroiled because they were not a registered partnership or corporation.
Six months in, Eric ran out of savings before the bar started turning a profit and he got behind on rent. He asked the third partner for money. Instead, the third partner took all the TVs and left.
The waitresses quit because they were paid late. There was no cash for food or beer. And the landlord said that Eric was personally responsible for the five year lease — a debt of $250,000 at least.
After a few more months of barely scraping buy, Eric closes the doors to his dream bar. And the landlord sues.
Although this is a fictional story, I get a call from someone like Eric at least once a month. The details vary, of course. But the story is more or less the same: an erstwhile entrepreneur gets burned by less-than-honest partners or landlords and now has major problems. He’s broke, depressed and ruined.
It’s a really depressing story for an optimistic entrepreneur like me. But sadly, 80% of businesses fail within their first year. And the blow up is usually spectacularly devasting for an owner like Eric.
I am CONVINCED that many businesses would not fail if they had simply started off right. New business owners make a lot of the same mistakes that lead to failure. These include:
Not organizing legally, following ALL the steps necessary (e.g. just filing an LLC is not good enough)
Failing to keep professional accounting records from Day 1 and getting into tax problems
Not having good contracts with business partners and investors (this is one of the biggest mistakes)
Getting stuck in a bad commercial lease
Not having adequate resources to deal with all the things a new business must do because of lack of planning or education, which destroys cash flow because of constant traps and problems
Failing to follow good employment and pay practices from Day 1
Underestimating what starting and running a successful business takes
Eric didn’t call me before starting his business. If he had, I would’ve given him my ebook, How to Start A Business… Legally: A Quick and Easy Checklist.
I cannot stress this enough. Getting set up right and under the guidance of someone who has started or help start many businesses will save you thousands of dolalrs and help prevent failure.
Someone like Eric spends $100,000 to open his bar, only to crash and burn in just a few months. Now he’s liable for another $250,000 just with a broken lease…. There are still employee liabilities and taxes to deal with (and that’s if the partners all just disappear). His legal fees with me are going to be a minimum of $50,000. Alternatively, he will bankrupt and lose everything.
In a more perfect universe, Eric would have come to me a year ago. He would have hired me for between $5000 and $18000 and I would’ve helped him set up everything and given him the benefit of my years experience in business start ups.
He would’ve avoided the bad partners, the bad lease, the sexual harassment lawsuit and the waitresses quitting.
He also would have been on track to avoid the plethora of other problems that come from starting a business.
And then his $100,000 investment would not have been such a hopeless risk!
If I practiced law just for money, I would rather have people like Eric pay me $50,000 or more to pick up the broken pieces of their dreams and help them move on.
But I’d rather more small businesses be successful. And the odds of that are much improved when you invest in the foundation when you start up.
Determining whether your hired labor should be paid as employees or independent contractors has a major effect on your business’ bottom line. Employers may be tempted to treat this issue lightly, or to attempt to classify all hired labor as contractors in order to keep costs down (specifically, costs related to wage-hour laws and payroll taxes). However, specific rules govern whether your hired labor is an employee or contractor, and you must classify carefully and correctly.
Improperly characterizing an employee can have significant negative ramifications for you and your business. Not only can a misclassified worker be retroactively entitled to all of the protections that they would have had if they had been classified as an employee, such as overtime, timely payment of wages, reimbursement of expenses, and protection from discrimination — but the employer in error could also be subject to significant penalties imposed by the Internal Revenue Service (IRS), Employment Development Department (EDD), California Division of Labor Standards and Enforcement (DLSE), Franchise Tax Board (FTB), or Department of Industrial Relations (DIR).
The experienced employment attorneys of Bellatrix PC can help your business classify, document, and compensate your employees accurately, ensuring you stay compliant with the law and avoid being targeted by a lawsuit or IRS investigation. To start discussing your concerns and objectives in a private legal consultation, call Bellatrix PC at (800) 449-8992 today.
Penalties for Misclassifying Workers: Fines and Lawsuits
Some employers attempt to deliberately misclassify their workers in order to avoid providing costly employee benefits or paying payroll taxes. As a result, governing bodies such as those noted above frequently audit businesses to determine whether independent contractors are properly classified. The IRS aggressively investigates thousands of instances of suspected payroll tax fraud, tax evasion, and other tax crimes each year. Simply put, it is never prudent to gamble with your chances of being examined.
In addition to the dangers of triggering an IRS investigation, California employers who intentionally misclassify their employees face another legal and financial risk: employees who believe they have been misclassified can sue directly for wages, both in Superior Court and before the DLSE. Widespread or systematic workforce misclassification can even result in costly wage and hour class actions against the employer.
Furthermore, you may also lose workers’ compensation coverage when the insurance company realizes you have misclassified your employees. Insurance companies audit your workforce and base their premiums on the number of employees you have, and the salaries that you pay. Therefore, it is in your best interests to know whether your workers and contractors are properly classified — and to comply with all relevant laws accordingly.
The Difference Between Employees and Independent Contractors
Courts use different tests for classifying whether workers are employees or independent contractors, but there are some general principles and guidelines.
As opposed to employees, independent contractors are generally in business for themselves, and offer their services to a number of different companies. They often have specialized skills and control not only the outcome of their work, but also the means used to accomplish their work. They also control most of their own profit and loss decisions. For example, lawyers and accountants are commonly independent contractors.
Historically, courts have used the following factors to help make determinations in employee misclassification cases:
Worker opportunity to share in profits and losses.
How heavily the worker is invested in equipment and facilities.
How much control the employer exerts over daily operations performed by the worker.
Whether the relationship between employer and worker is permanent or temporary.
To what degree services factor into the employer’s business.
The dependency of the worker upon the employer for ongoing work.
How heavily factors such as independence, planning, and personal discretion factor into the worker’s methods of operation.
If you have any doubts about whether members of your workforce are appropriately classified, you should speak with an employment lawyer with experience handling these sorts of cases. An ounce of prevention today can save you and your organization a massive legal headache tomorrow. Our business risk review service can help you identify and correct weaknesses and inaccuracies in your company’s employment policies, thereby minimizing your chance of exposure to litigation and subsequent fines.
Contact Our Business Attorneys
The attorneys of Bellatrix PC are experienced in giving advice and representing employers in disputes against their former employees alleging misclassification issues. We believe in helping employers save time, money, and unnecessary disruption to their daily operations through efficient, proactive efforts to classify their hired labor properly at the outset.
The knowledgeable legal team at Bellatrix PC can also handle all of your business’ day-to-day legal needs. By establishing an ongoing relationship with our firm, we can act as an outsourced general counsel for all of your company’s legal questions and regulatory concerns. Establishing a relationship with experienced counsel can ensure that when a conflict or lawsuit arises, your company will know where to turn for dependable legal advice.
To arrange for a confidential case evaluation, call Bellatrix PC at (800) 449-8992 right away. Our law offices are located in St. Louis, San Diego, and Riverside, CA. We consult with organizations nationwide.
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Alicia I. Dearn is the founder of Bellatrix PC, a woman-owned law firm with offices in Missouri and California. Bellatrix PC handles lawsuits and business transactions. We advise in business, employment, real estate, intellectual property, civil litigation, and election law.
The articles published by Bellatrix PC are for informational purposes only and do not constitute legal advice. If you have a legal issue, please get competent advice from a licensed attorney in your jurisdiction. Use of Bellatrix PC's site is subject to our Attorney Advertising Disclaimers.