Selecting a Business Entity for your Startup

Posted February 12th, 2013 in Small businesses, Startups by Claire

When starting a business, one of the most important decisions an entrepreneur can make is which type of business to form. The most common types of entity are sole proprietorships, LLCs, C-Corps and S-Corps.   Of course, a business may always be restructured later if the company needs to switch from one form to another, but getting it right from the beginning can save a person time, taxes and legal fees. In order to determine what business formation will best suit your company’s needs, it is important to consult with an experienced business attorney regarding the specifics of your situation, and Kalia Law Group is available to help. To get you started thinking about which business entity may be right for you, below is some basic information about the most common types used by small businesses and startups.

Sole Proprietorships

Sole proprietorships are the most simple business formation to create and may well be the most common. In fact, you may be a sole proprietor and not even be aware of it; if you conduct business for yourself selling a product or a service, you are already a sole proprietor. There is no filing requirement for a sole proprietorship, unless you are doing business under different name than your given name, in which case you need to file for a fictitious name or “doing-business-as” (DBA) certificate with the county in which you are based.  While inexpensive and easy to form, a sole proprietorship is not a separate legal entity from its owner, meaning that the owner and the business do not need to file taxes separately and that there is no liability protection for the sole proprietor’s personal assets if the business gets sued.

Partnerships

A partnership is a business that two or more people own. General partnerships are the equivalent of sole proprietorships, in that there are few filing requirements and no liability protection, even for actions of the other partners.  For this reason general partnerships are very risk. A safer form of partnership is a limited partnership, which is similar to a partnership but have increased filing requirements and limit the limited partners’ liability to the amount of their investment.  However, these limited partners may not participate in the management of the business. General managing partners still have unlimited personal liability in a limited partnership.

Corporations

Corporations are a common business form for companies that wish to have personal liability protection for owners.  Corporations are popular choices for startups that wish to attract investors and share ownership by selling shares or ownership stakes in the company. Corporations provide the strongest shield against personal liability for its shareholders and directors. The main disadvantages to forming a corporation are the formalities required, meaning that there are extensive filing and record-keeping requirements, as well as operating requirements such as the election of a Board of Directors, the adoption of bylaws, among others. Depending on the type of corporation formed (S or C), a corporation may be taxed as a separate entity from its shareholders or be a pass-through entity, like a partnership.

Limited Liability Companies (LLCs)

Relatively new to the business entity scene, LLCs are a hybrid between partnerships and corporations, and attempt to combine the liability shield of a corporation with the flexibility offered by partnerships. Members of LLCs may be individuals or other LLCs, and may participate in the management of the company while maintaining liability protection. In addition, LLCs may elect to be taxed as a corporation or as a pass-through entity, making it one of the most flexible business forms for tax purposes. LLCs are relatively easy to form, and usually are not subject to stringent filing requirements. Another aspect of LLCs that is attractive to small business is the fact that they allow for flexibility for distributions and allocation of cash and other assets.

The Bottom Line: Consult an Attorney

The choice of a business entity is very important in starting a business and can have implications on the way you are taxed and your personal liability for business debts and liabilities. Each of these business types has different advantages and disadvantages, and the one that is right for you is largely dependent on the specific circumstances of your situation. In order to determine which entity would best suit you needs, it is best to discuss your options with an attorney who specializes in the issues that are most likely to affect small business.

The effects of the Affordable Care Act on small businesses

Posted January 7th, 2013 in Health care, Small businesses by Claire

Much ink has been spilled about the Affordable Care Act (ACA), but now that it is going into effect business owners are wondering what it really means for them.   Here is the ACA in a nutshell:

-       if you have less than fifty full-time employees, you don’t have to provide your employees with health insurance

-       if you are a small business and you provide your employees with health insurance, you may qualify for an increased tax credit of up to 50% of your contribution to their premium

-       if you currently have an insurance plan for your employees and it has been in place since 2010, it may be “grandfathered” and be subject to fewer coverage requirements under the ACA

-       if you are on the market for a new plan, the plan you choose must guarantee coverage regardless of health status, and must allow young adults to stay on their parents’ plan until age 26

-       if you have fewer than 100 employees you may be eligible for a grant to start a workplace wellness program

The ACA is a complex and new area of law, but there are many resources out there to help business owners.  A good starting place is here: http://www.healthcare.gov/using-insurance/employers/small-business/index.html.

Got an idea for a gourmet food truck, boba cafe or organic catering company?

Posted November 14th, 2012 in Small businesses, Startups by Claire

The San Francisco Bay Area is not all about tech.  The Silicon Valley ‘s innovative spirit is reflected in a thriving local foodie culture which rewards risk-taking and creativity.  However, if you are thinking of opening an eatery, whether in the Bay Area or elsewhere, you should know that a great idea is not enough to guarantee a successful venture.

As with any other business, opening a restaurant requires writing a business plan, finding a location to set up shop, and prudently investing your time and money into the venture. In addition to those basic but crucial first steps, opening an eatery—whether it’s a brick-and-mortar restaurant or a food truck—has additional challenges in the form of regulatory requirements that you have to comply with in order to stay in business.  Below are a few things to consider.

Brick-and- Mortar Restaurants

Once you have found the location for your restaurant, you should apply for a zoning permit from your local department of zoning and planning. This permit will allow you to alter your space in order to make accommodations for equipment and seating.

You should also contact your local health department in order to learn how to obtain a license from them. In California, for example, you must receive a license from the Health Department stating that you are in compliance with all sanitary regulations and food safety laws before you can open your eatery. All food service facilities and restaurants that store food for human consumption are also required to register with the FDA. The FDA’s website contains all the guidelines and forms for registration. You should also apply for a liquor license if you need one, obtain a certificate of occupancy, and arrange for garbage removal.

Food Trucks

Food trucks are the latest trend in eateries, and many cities are still adapting to their presence. In addition to conventional restaurant requirements such as licenses from the health department and FDA registration, you may need a permit that allows you to park your truck on a street or other public property. You also need to designate a permanent, non-P.O. box address to represent your place of business for official government mailings.

Your food truck business may also be subject to municipal regulations that don’t apply to brick-and-mortar restaurants. For example, you may need to obtain special insurance to cover your truck and the drivers. Your city may also have regulations that limit where, when, and how long you can park your food truck—the distance you can park from schools, other food trucks, and brick-and-mortar restaurants serving similar fare are examples of the regulations that some cities impose on food trucks.

 

Remember, government entities impose these regulations on restaurants, cafes, and other eateries to ensure that they are safe and healthy for employees and the general public. If you stay on top of the latest regulations and follow the applicable codes, operating your eatery can be a rewarding experience.

 

Obama v. Romney on Small Business

Posted October 22nd, 2012 in Small businesses by Claire

If you have been paying attention to our upcoming presidential election, there are two things that should be obvious: first, Mitt Romney and Barack Obama are desperately trying to get your vote. Second, they both would like to “fix” the economy and help small business.  But how are each candidate’s plans and policies likely to affect small businesses?

Here is a basic breakdown on each candidate’s stance on key issues that may affect your business.

Taxes

Each candidate sticks to their traditional party line on taxes: fundamentally, Obama would like to tax wealthy Americans more, while Romney believes that lowering taxes will stimulate the economy.

Romney is in favor of extending the tax cuts imposed by the Bush Administration in 2002. He advocates no taxes on interest, dividends or capital gains, and believes this will result in more money in the hands of the middle class thus stimulating the economy. Romney is in favor of abolishing the estate tax and ostensibly wants to lower the tax rate on middle-income Americans. Furthermore, Romney would like all investment income to be untaxed.

Obama supports a progressive tax system that taxes people who earn more at a higher rate. He has stated that he would like to return to the tax rate that was in place under Bill Clinton for people making less than $250,000 per year. The president has proposed legislation that would impose a minimum tax rate of 30 percent on millionaires. Obama recently approved the Middle Class Tax Relief and Job Creation Act that extended two percent social security payroll tax cuts and unemployment benefits, while simultaneously preventing cuts to the Medicare program. Obama has stated that he will not raise the tax rate on Americans earning less than $250,000 per year.

Job Creation

With the unemployment rate at near-record highs, both candidates have pledged to create millions of new jobs if elected.

Mitt Romney believes that his tax plan will create 7 million new jobs by allowing small businesses to keep more of the money that they earn.  If elected he plans to aggressively pursue equalizing the trade deficit with China and improving job training that he estimates will create 12 million new jobs. Romney also advocates an energy policy that will create 3 million new jobs.

Barack Obama similarly believes that his tax plan will create new jobs. Obama would like to lower the effective tax rates paid by people making less than a quarter of a million dollars annually. The President claims that “pass-through” taxation regimes, such as those enjoyed by sole proprietorships, partnerships and LLCs, will benefit small business and promote new hiring. Obama also believes that his energy policy, particularly his green-energy initiative, will create new jobs.

Below is a comparison of the main job creation strategies advocated by the candidates.

Barack Obama on Job Creation

  • Increasing infrastructure investment
  • Hiring more state and local employees
  • Doubling the size of the payroll tax cut
  • Adding tax incentives for small business that create new jobs

 

Mitt Romney on Job Creation

  • Expanding domestic energy production
  • Trade agreements with Latin America
  • Addressing trade issues with China
  • Cutting the corporate tax rate

Both candidates claim that their plans will improve the economy and help small business owners, but analysts (and potential voters) differ on their beliefs as to the potential success of each plan, partly because the economy is such a complex and multi-faceted issue.  In the end, many voters will likely choose their candidate based on the candidate’s party, personality, ideology or beliefs about the roles of government and business, rather than based on the specific economic policies advanced by each candidate.

 

 

Looking to bring in some cash by subleasing?

Posted October 9th, 2012 in Small businesses, Startups by Claire

As a startup or small business, you may have more office space than you need, and you may consider subleasing that space to help you cover rent and other business expenses. Before you enter into a sublease arrangement with a new tenant, you should consider the following factors to determine whether subleasing is a good decision for you.

 

Can you sublet your space?

First, you need to determine whether your lease allows you to sublease your property. Read your lease to see if it explicitly allows or prohibits you from subleasing. In either case, you should talk to your landlord directly about finding a tenant to rent the space you aren’t using. If your landlord consents or your lease allows you to sublet space, you should amend your original lease to reflect your decision to sublet space.

 

Factors to Consider Before Taking on a Tenant:

Before entering into a sublease agreement with another person or company, you should consider the impact it will have on your business.

Consider the growth projections for your own company in terms of headcount and operations. You may have too much space now, but you must ensure that you have enough space to conduct business. Your decision to sublet can’t be allowed to hinder operations and growth.

Second, consider whether the amount of space you have available to sublease is practical. If it’s too small, you may not attract any tenants, or you may not be able to rent the space for an amount that would benefit you.

Third, should think about the types of tenants you want to share your space with. Research all prospective tenants to ensure that their business is reputable and that it doesn’t clash with your company’s culture. If your businesses have clashing ideals, practices, and goals, it may disrupt productivity and chase away clients.

 

What to include in your sublease agreement:

Once you’ve decided to sublease your office space, you should begin drafting a general rental agreement that would work for most tenants. You can also look at the lease you have with your landlord to get some ideas for what you may want to include in your agreement. You should also read your city and state laws to see if there are any provisions that must be included in the lease.

 

At minimum, your agreement should include the following:

  • The term of the lease: six months, twelve months, and month-to-month are most common
  • Information about rent: Include the amount due and when the rent is due. Late fees should also be considered
  • The circumstances under which a default would occur, and the remedies for that default
  • The duties of the landlord and the tenant regarding the maintenance and the use of the property

 

If you consider the preceding factors, procure a solid lease agreement, and find the right tenant, your company can benefit from a sublease arrangement without hindering your growth or productivity.

Franchises: What Do You Need To Be Aware Of?

Posted August 7th, 2012 in Small businesses by Claire

The US has more than 900,000 franchises, and Kalia Law Group is routinely approached by aspiring entrepreneurs who are considering becoming involved in a franchise arrangement. The benefits of such arrangements for new entrepreneurs are brand recognition, marketing materials, support, training and a perceived lower risk in buying into an already-established brand.

However, franchise arrangements often come with hidden costs and fees (sometimes called “training fees” or “materials fees”) that a prospective franchisee may not be aware of, especially since such costs are often buried deep in a 50-100 page franchise agreement. In addition, once you buy into a franchise it can be extremely difficult (and expensive) to get out.

Buying into a franchise may be the right decision for you but there is also a very good chance that once you understand exactly what you are getting into, you’ll decide that it’s not the right move. Make sure you carefully review (or have an experienced professional review) every page of the franchise agreement and disclosure documents, and that you understand exactly what you are agreeing to, before you sign on the dotted line.