Entrepreneurs and Business Owners
Here’s what you need to know about the laws as a business owner or entreprenuer in California
Choosing a business structure
Sole proprietorships, partnerships, LLCs, S corporations, C corporations… the options for business structures might make your head spin! The basic idea is that if you start doing any business activity on your own, but you don’t form an “entity,” you are automatically a sole proprietor or sole proprietorship. If you start doing any business activity with one or more others, but you don’t form an entity, you are automatically a “general partnership.”
So what exactly is a business entity?
A business entity comes in many forms, including a corporation (S corporation and C corporation), limited liability company (LLC), or sometimes a limited liability partnership (LLP). Once created, these have a “life of their own” and are a separate thing from the owners, though the owners control and carry out activities of the entity.
Which business structure is best for our business?
Though it may seem confusing, it can generally be boiled down to 2 questions:
1. How much taxes will you pay under each structure? This will depend on your unique circumstances. With an LLC or corporation (probably S corp), you may be able to pay less in taxes (particularly self-employment taxes) than under a partnership or sole proprietorship. Or you may end up paying a bit more, but it could be worth it to secure asset protection (see #2, below). You should definitely talk to a qualified tax professional (such as an accountant) about this.
2. If your taxes will increase with an LLC or corporation, are you willing to pay extra in order to protect your personal assets from business debts and obligations? If your taxes will be the same or will decrease by forming an LLC or corporation, it’s pretty much a no-brainer to set up one of those structures. But even if your taxes will increase, you may still want to do either an LLC or corporation because under either of these structures you will be able to protect or shield your personal assets from the debts or obligations (including lawsuits) of the business. If you aren’t willing to pay more for this asset protection, you will probably want to stick with a sole proprietorship (if an individual) or a general partnership (if 2 or more business owners).
CHECK OUT OUR CHARTS!
What is a DBA or fictitious business name statement and do I need that?
DBA stands for “doing business as,” such as if Mary and Jose want to do business as “California Graphic Design.” If they have not formed an entity, they would need to file a DBA also called fictitious business name statement with the county where they are doing business. If they have formed an entity, such as California Graphic Design, LLC, they would NOT need to file a DBA to do business as California Graphic Design.
Hiring for your business
Should I hire employees or independent contractors (freelancers)?
Determining whether to hire an independent contractor (aka freelancer) vs an employee is sometimes complex, and you may want to get an employment lawyer if you are unsure. Using independent contractors will usually save you on taxes, benefits, and administrative costs, but many employers misclassify (whether intentionally or not) employees as independent contractors, which can have serious consequences.
You may want to hire an independent contractor if most (if not all) of the following applies1Restatement (Second) of Agency §220 (1958). S. G. Borello & Sons, Inc. v Department of Indus. Relations (1989) 48 C3d 341, 256 CR 543:
a. You want to hire someone for a specific period of time rather than indefinitely;
b. You will give them the freedom to set their own hours/schedule;
c. They will use their own tools to do the job rather than using the company’s tools;
d. The work they are performing is NOT part of the company’s regular business.
What are the general employment laws I should know?
See our Employee rights page.
Do I need to file anything when hiring a freelancer?
If certain conditions apply, you need to file with the CA Economic Development Department and provide information about each independent contractor you hire.
Do I need to file anything after I hire my first employee?
Yes, you need to file with the CA Economic Development Department within 15 days of paying wages.
How do taxes work for a small business?
As a small business, you actually must pay taxes 4-5 times per year, not just once!
If you do NOT have a corporation or LLC (you are a “sole proprietor”), or if you are the sole owner of an LLC: you are generally required to file your tax return (and make payment) by mid April, and then make “estimated” quarterly payments without filing a return by mid June, mid September, and mid January.
If you have an LLC with multiple owners, or you have a corporation: you are generally required to file your LLC/corporate tax return (and make payment) by mid March, then your individual tax return (and make payment) by mid April, and then make “estimated” quarterly payments without filing a return by mid June, mid September, and mid January.
Do my clients need to send me any tax forms at all?
Unless your business operates as a corporation, a client which paid you $600 or more within a calendar year for services for their business must send you a Form 1099-MISC (“1099”) by the following Jan 31 (but even if they don’t, you still must report the income on your taxes), and the client must file the 1099 with the IRS by Feb 28.
To help them fill out the 1099, your clients may ask you to fill out a W-9 form, which asks for your basic information, including social security number.
Do I need to send any tax forms for freelancers I hire?
Yes, you must send a 1099 to each freelancer who you paid $600 or more. Send the freelancer the 1099 by Jan 31, and send a copy to the IRS by Feb 28. Note: If you have “employees” (see who are employees vs independent contractors), you would generally withhold taxes from each paycheck, and send a W-2 the following year by Jan 31.
What intellectual property rights should I be aware of when hiring?
If you are hiring a freelancer to create any intellectual property (writing, art, design, etc.) for you, the freelancer actually owns that intellectual property unless you have a signed contract stating that you will own it (“work for hire” or “assignment” agreement). If not, you would simply have a “license” to use the work. See Copyright for more details.2CA Labor Code Secs. 2870, 3351.5(c))
If you are hiring an employee to create intellectual property, you generally will own the work as long as it is clear that they were hired specifically to do that work.
General business law
References [ + ]
|1.||↑||Restatement (Second) of Agency §220 (1958). S. G. Borello & Sons, Inc. v Department of Indus. Relations (1989) 48 C3d 341, 256 CR 543|
|2.||↑||CA Labor Code Secs. 2870, 3351.5(c))|