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New Requirements to Classify California Workers as Independent Contractors Changes Everything

A California Supreme Court decision issued in late April drastically changed the requirements to classify workers as independent contractors for the purposes of California wage and hour laws. In Dynamex Operations West Inc. v. Superior Court, the Court overruled the previous multi-factor test for classifying workers as independent contractors and replaced it with a new test. Where the… Read More

A California Supreme Court decision issued in late April drastically changed the requirements to classify workers as independent contractors for the purposes of California wage and hour laws. In Dynamex Operations West Inc. v. Superior Court, the Court overruled the previous multi-factor test for classifying workers as independent contractors and replaced it with a new test. Where the previous test was a balancing of factors that provided for much more uncertainty and, arguably, more manipulation of the facts, the new Dynamex test starts with the presumption that all workers are employees and then requires an employer to prove that all of the following are true before a worker can be identified as an independent contractor:

  1. The worker is free from the control and direction of the company in connection with performing the work, both in reality and under the terms of the relevant contract;
  2. The worker performs work that is outside the usual course of the company’s business; AND
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work being performed for the company.

The first and third prongs of the new standard are similar to the previous test, which focused on the amount of control the employer exerted over the worker and also whether the worker had other sources of income besides through the employer.

The second prong, however, is the significant change – if the worker is performing work that is inside “the usual course of the company’s business,” then the person must be classified as an employee. Therefore, even if a worker is hired to take on overflow work or pick up intermittent jobs, if this work is in the scope of the company’s main business activities then the worker must be classified as an employee.

The decision will very likely be a blow to the growing “gig economy,” but the implications for small businesses and start-ups that have limited resources and may need more intermittent services is staggering. This new checklist test is much more stringent, and as a result the majority of workers in California should now likely be classified as employees (there have been some broad generalizations that plumbers and electricians will be the only remaining independent contractors…). As employees, the workers are entitled to overtime pay, meal and rest breaks, and at least minimum wage, and employers need to obtain workers compensation insurance for them and comply with other logistical requirements related to reporting and payment.

While workers providing ancillary services to businesses, such as lawyers and accountants (though it depends on the business, as these workers still provide work inside the course of some companies’ business), are likely still contractors under the new Dynamex standard, all employers need to honestly, and immediately, assess their workforce and determine if any contractors need to be reclassified. The new test went into effect as soon as the decision was issued in late April, so misclassified contractors need to be reclassified as employees as soon as possible. Misclassification lawsuits can result in enormous judgments, made up of backpay and penalties, that will very likely outweigh the “savings” of classifying a worker as a contractor.

 

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article. 

 

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How Should Professional Service Providers in California Structure Their Business?

Doug Bend was recently interviewed by, Nikole Mackenzie, a CPA and the owner of the owner of Momentum Accounting, on whether a California professional corporation should elect to be taxed as an S-corporation. Nikole: It’s a pleasure having you! I’ve been following your articles on your blog, so I’m excited to finally have a chance to speak with you… Read More

Doug Bend was recently interviewed by, Nikole Mackenzie, a CPA and the owner of the owner of Momentum Accounting, on whether a California professional corporation should elect to be taxed as an S-corporation.

Nikole: It’s a pleasure having you! I’ve been following your articles on your blog, so I’m excited to finally have a chance to speak with you one-on-one.

Doug: Absolutely. It’s nice to be here, Nikole.

N: So, today I was hoping we could go over your thoughts on what professional service providers should do about incorporating their new ventures. What does someone need to know if they’ve just started out on their own?

D: Well, first of all, in California, certain professions that require a state license are prohibited from forming a limited liability company or a traditional corporation. Most of the companies affected by this are in the financial, legal and medical fields.

N: What would you recommend then for companies in those industries?

D: In most cases, I would tell them to incorporate as a professional corporation and elect to be taxed as an S-Corporation.

N: What are the advantages to being taxed as an S-Corp?

D: If you do not elect to have your California professional corporation taxed as an S corporation, the default is for it to be taxed as a C-Corporation.

N: And what exactly does that mean?

D: Well, as a C-Corporation, your professional corporation would pay federal taxes on its profits and you would also pay individual taxes if you receive salary, bonuses, or dividends from the corporation.

N: How would being an S-Corp differ?

D: By electing to be taxed as an S-Corporation, your professional corporation would instead be a pass-through tax entity, like an LLC or a partnership.  Electing to be taxed as an S-Corporation may also allow you to pass losses from the business to your personal income tax return, where you can use the losses to offset income that you may have from other sources.

N: Ok. And can you talk about how the owner might take out a “reasonable salary?”

D: If the corporation pays you a “reasonable salary,” you may not be required to pay self-employment taxes on any additional corporate profits that are paid to you as dividends as a shareholder in addition to your reasonable salary.

N: That does sounds very advantageous—especially for those just starting out.

D: It is. It’s a great way to help small business owners who are sole proprietors get some financial breathing room.

N: Now, what would the disadvantages be?

D: The main drawback of electing to have your professional corporation taxed as an S-Corporation rather than a C-Corporation is that, in a C-Corporation, the cost of the premiums for shareholder benefits, such as insurance coverage, are deductible as a business expense. In addition, the shareholders may not be taxed on the value of the benefits.

N: Are there any restrictions on who can be a shareholder of an S-Corp?

D: Yes.  The Internal Revenue Code limits the number of S corporation shareholders to 100 or less. Also, S corporation shareholders can only be individuals, estates and certain types of tax-exempt entities and trusts, and the individuals must also be U.S. citizens or permanent residents.

N: And what about stock?

D: S-Corporations may only issue one class of stock, whereas C-Corporations can have different classes of stock that have different rights and liquidation priorities.

N: What would you recommend to someone who is just starting their professional corporation?

D: I would tell them to consult with their CPA or tax professional to make sure being taxed as an S-Corporation is the best fit for them. That being said, for most California professional corporations, electing to being taxed as an S-Corporation rather than a C-Corporation is likely to provide the most tax savings.

N: Thank you so much, Doug! I think that just about answers everything we were hoping to cover.

Doug Bend is the founder of Bend Law Group, PC, a law firm focused on advising small businesses and startups. To find out more, please contact Doug at Doug@BendLawOffice.com.

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The Top 7 Ways The New Tax Law Could Affect Your Startup

By: Doug Bend This article first appeared on Forbes. On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act of 2017 into law. The Act was the biggest change in tax laws in more than 30 years and brought about many changes for individuals and companies. Overall, we believe that the changes will benefit new… Read More

By: Doug Bend

This article first appeared on Forbes.

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act of 2017 into law. The Act was the biggest change in tax laws in more than 30 years and brought about many changes for individuals and companies. Overall, we believe that the changes will benefit new businesses by lowering tax rates, accelerating the depreciation of equipment and eliminating the corporate alternative minimum tax. Here are the top seven ways the new tax law could affect your startup:

    1. Lower Taxes for C-Corporations: Most startups that are looking to raise third-party capital to grow are C-corporations. Under the new tax law, the corporate tax rate will drop from 35% to 21% starting this year (See Section 13001 of the act). Clearly, income-producing corporations will retain more profits. For startups, which generally do not generate profits in the early years of the business, this change will likely be minimal but still beneficial.
    2. Lower Taxes for Certain S-Corporations and LLCs: Startups that are S-Corporations or LLCs might qualify for the 20% deduction on the income attributable to that entity as long as the business or service isn’t listed on the exclusions. Excluded businesses and services include consulting, health, law, athletics, financial services, brokerage services industries or businesses where the principal asset is the reputation of the employees. Excluded business can still take the 20% deduction if their taxable income is less than the threshold amount — $157,500 for single filers and $315,000 for joint filers. The deduction is fully phased out when income exceeds $207,500 for single filers and $415,000 for joint filers for 2018 tax years. In addition, the 20% deduction is phased out if you have W-2 income above $157,500 or $315,000 for joint filers. Thus, excluded businesses owners cannot increase their wages to decrease the S-Corporation income to circumvent the threshold amounts. Nor can you have wage income from other sources that exceed the threshold and still avail yourself of the deduction.
    3. Accelerated Depreciation of Equipment:Previously, startups had to depreciate the cost of equipment over the asset’s useful life. Under the new tax law, 1 million in equipment can be fully deducted in the year it is purchased. This means you generally can expense twice the amount in 2018 through 2022 than what you did in 2017. If you have substantial fixed asset cost and current tax liabilities, this benefit provides significant tax savings. After 2022, the increased expensing phases out.
    4. Elimination of Entertainment and Transportation Expense Deductions:Entertainment expenses, such are sporting events, are no longer deductible. Although business meals remain 50% deductible, employer-provided eating facilities are now subject to the limitation. Expenses for employer-provided transportation benefits, such as mass transit passes or providing transportation (related to commuting to/from your residence to work) are disallowed. You should note that the bicycling commuting reimbursements exclusion is suspended under Section 11047 of the Act.
    5. Elimination of Corporate AMT: The alternative minimum tax was eliminated from corporate taxation. (The individual component was drastically raised.) Previously, many unwary entrepreneurs were subjected to the AMT by exercising incentive stock options (ISO) resulting in unrealized gains. Unrealized ISO gains and state income taxes among other items are “preference items” or additions to taxable income under the AMT system. Going forward, the act raises the exemption amount by almost 30%, which will allow more entrepreneurs to escape the AMT trap.
    6. Repatriation of Overseas Profits:Repatriated profits will be taxed at 8% for non-cash assets and 15.5% for cash. This is a deemed repatriation so you are taxed regardless of whether you actually repatriate the funds. In addition, most companies will need to record income tax expense for profits, which were permanently deferred historically.
    7. Legal Entity Choice: Despite all these changes, it’s just as important to recognize what will likely stay the same. Most startups that plan to raise third-party capital are likely to continue to be Delaware C-Corporations as venture capitalists haven’t indicated that they’ll no longer prefer to invest in Delaware C-Corporations. While the Tax Cuts and Jobs Act of 2017 will increase the tax liability for some individuals, overall the law will benefit most startups.

This article was co-authored by Doug Bend and Andrew McCormac. Andrew is a consulting CFO at Early Growth Financial Services.  Early Growth Financial Services provides accounting, CFO, tax and valuation services to startups. Doug is the founder of Bend Law Group, PC, a law firm focused on advising small businesses and startups. 

 The information provided here is not tax or legal advice and does not purport to be a substitute for advice of counsel on any specific matter. For tax and legal advice, you should consult with your accountant or an attorney concerning your specific situation.

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Amazon Brand Registry: Add Trademarks To The Cart

By Vivek Vaidya The retail industry has been revolutionized by online marketplaces. Amazon leads the charge, with programs like Amazon Prime making it easier to purchase products online than going to a brick-and-mortar stores. The rise of Amazon has also caused an increase in counterfeiting, trademark infringement and the unauthorized resale of products on the… Read More

By Vivek Vaidya

The retail industry has been revolutionized by online marketplaces. Amazon leads the charge, with programs like Amazon Prime making it easier to purchase products online than going to a brick-and-mortar stores.

The rise of Amazon has also caused an increase in counterfeiting, trademark infringement and the unauthorized resale of products on the platform. Third parties are selling products using the good will of others, resulting in lost sales and licensing revenue to the true owner of the brand. Previously, the only option for parties who believed their products may be victim to counterfeiting was to prove the infringement to Amazon, instead of the seller bearing the burden of proving that they are not violating the law. There has also been a growing concern with fraudulent complaints by parties who are not the true owner of a brand.

In an effort to streamline the thousands of complaints filed each day, Amazon has launched the Amazon Brand Registry. The Amazon Brand Registry allows brand owners, manufacturers, distributors, and resellers to control its content and marketing materials, including its titles, product descriptions, and product photographs. Most importantly, successful registration with the Registry establishes a brand owner’s valid ownership of a trademark with Amazon and provides an expediated process for causing Amazon to remove unauthorized sale of products bearing its trademarks. It also serves as a deterrent and a defense against fraudulent complaints.

The threshold requirement for joining the Amazon Brand Registry is trademark registration with the United States Patent and Trademark Office (USPTO). Not only can the store name be registered as trademark with the USPTO, but so can the individual products that are being sold, along with any logos and tag lines that are used. Copyrights registered with the U.S. Copyright Office can also be included, allowing copyright owners to efficiently cause the removal of infringing photographs, videos and other content.

If you sell your goods on Amazon, registering your trademarks with the USPTO and then with the Amazon Brand Registry is extremely important in the new retail landscape, and will provide great return on your investment. The process can be complicated, but we’re here to help with the logistics of protecting your intellectual property on Amazon and beyond.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article

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The Top Seven Things For Which A Business Owner Can Be Held Personally Liable

By: Doug Bend & David Nied This article first appeared on Forbes. In general, the owner of a legal entity cannot be held personally liable for the liabilities of their business. That being said, business owners should be wary of the following seven items that they can still be held personally liable for: 1. Bank… Read More

By: Doug Bend & David Nied

This article first appeared on Forbes.

In general, the owner of a legal entity cannot be held personally liable for the liabilities of their business. That being said, business owners should be wary of the following seven items that they can still be held personally liable for:

1. Bank Loans

Most bank loans for new business owners require a personal guarantee. If a business owner provides that personal guarantee and the company is unable to meet the loan obligations, the bank can hold that owner personally responsible for the loan.

2. Security Filings

When raising a round of capital, it is important to make sure that any required security filings are made in each state in which there is an investor.

If the proper security filings are not made and the company does not do well, the investor can have their investment rescinded and the owner of the company can be held personally responsible for the investment amount.

3. Contracts

Business owners should make sure that they sign all contracts on behalf of their legal entity and not themselves as an individual. In the first paragraph of each contract, it should be clear that the agreement is being made on behalf of the company.

Similarly, in the signature line, the owner should sign the agreement on behalf of the company and not themselves as an individual.

4. Government Taxes

The government can sometimes come after the business owner for any unpaid taxes. In particular, when a corporation fails to withhold proper payroll taxes, the person responsible for withholding those taxes — in many cases, the owner of the business — can be held personally liable for the unpaid taxes.

5. Wages

At least in California, owners of a business can be held personally responsible for any unpaid employee wages plus late payment penalties. This includes liability for failing to pay minimum wage, failing to pay overtime, failing to provide mandatory meal and rest breaks and other wage violations.

While officers and directors may have a claim for indemnification for such personal liability, that safety net does not apply to the owner of the business.

6. Entity Maintenance

A court is more likely to pierce the corporate veil and allow an aggrieved party to go after the personal assets of an owner if the legal entity is not being properly maintained, such as having annual shareholders and board of directors meetings.

Even though courts weigh many factors to assess alter-ego liability, failing to maintain current, accurate and complete books and records that document required meetings and events is a surefire way to get a judge to look askance at your plea for limited liability.

7. Co-Mingling Funds

In addition, a court may pierce a company’s corporate veil if the business owner is co-mingling personal and business funds. Do not be tempted to use your corporate credit card for personal, non-business related expenses — it may open the door for a creditor to march into your personal bank account.

If properly maintained, a legal entity can provide a business owner with a great deal of legal liability protection. By being wary of the above pitfalls, a business owner is more likely to prevent their personal assets from being put in jeopardy by the activities of their business.

This article was co-authored by David Nied of Ad Astra Law Group, LLP and a member of Forbes Legal Council.

The information provided here is not legal advice and does not purport to be a substitute for advice of counsel on any specific matter. For legal advice, you should consult with an attorney concerning your specific situation.

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Can Shareholders Waive Directors’ Fiduciary Duties?

By Luthien Niland In California, directors and officers have fiduciary duties, or legal obligations, that they must adhere to when making decisions for the corporation and the shareholders. If they do not fulfill their fiduciary duties, the directors and officers can be sued. Therefore, in order to minimize their risk, directors and officers may try… Read More

By Luthien Niland

In California, directors and officers have fiduciary duties, or legal obligations, that they must adhere to when making decisions for the corporation and the shareholders. If they do not fulfill their fiduciary duties, the directors and officers can be sued. Therefore, in order to minimize their risk, directors and officers may try to convince shareholders to release them of these duties, but such efforts are illegal under California law.

Background on Fiduciary Duties

Fiduciary duties imposed on directors and officers of corporations generally fall into one of two categories: duty of loyalty and duty of care. The duty of loyalty requires directors and officers to always act in the corporation’s best interest and forbids them from engaging in “self dealing,” or taking advantage of their position in the corporation to benefit their own interests. The duty of care obligates directors and officers to carry out their duties as a normal prudent person would do under the circumstances, including making sure that they are completely informed before making decisions.

If a director or officer makes decisions for the shareholders or the corporation in a manner that does not meet these obligations, then the shareholders can bring a lawsuit against the director or officer for breach of a fiduciary duty. Additionally, in small, non-public corporations, majority shareholders can generally control the corporation by electing themselves as directors and officers, thereby “freezing out” minority shareholders. Therefore, directors and officers of small or close corporations are generally held to a higher standard for fiduciary duties.

Waiver of Fiduciary Duties is Void

California statutory law and common law expressly prohibit the waiver of fiduciary duties for directors and officers. In particular, section 204(a) of the California Corporations Code states that a corporation’s Articles of Incorporation may not “eliminate or limit the liability of directors” for acts or omissions that violate the directors’ fiduciary duties to the corporation and shareholders. Furthermore, section 1668 of the California Civil Code provides that any contracts (such as a shareholders agreement) that “exempt any one from responsibility for his own fraud, or willful injury to the person or property of another” are against public policy. Based on these statutes and prior court cases, the California Court of Appeals in Neubauer v. Goldfarb held in 2003 that “waiver of corporate directors’ and majority shareholders’ fiduciary duties to minority shareholders in private close corporations is against public policy and a contract provision in a buy-sell agreement purporting to effect such a waiver is void.” As a result, directors and officers cannot limit or avoid their fiduciary duties through the company’s incorporation documents or another contract.

Minimizing Risks for Directors and Officers

Although directors and officers cannot obtain a waiver from shareholders of their fiduciary duties, there are a number of ways to minimize the risk of a shareholder lawsuit:

  1. Fulfill duty of loyalty – Directors and officers should make sure that all decisions made are in the best interests of the corporation and the shareholders, not just one or a small number of shareholders. Robust, detailed written board and/or shareholder resolutions or minutes documenting the reasons for a decision are recommended so these reasons can be provided to the shareholders and also as evidence in the event of a lawsuit.
  2. Fulfill duty of care – Directors and officers should obtain and review all information necessary for making a decision and, when helpful, either include this information in board resolutions or refer to it. Again, the more detailed the board and shareholder resolutions or minutes, the better the historical and legal record that is created. All shareholders, even minority shareholders, have the right to request information from and about the corporation with reasonable cause. Therefore, while directors may not want to include confidential company information in a resolution that is being freely circulated, otherwise it is prudent to add whatever supporting information was used for a decision to a resolution since it is open to shareholders anyway.
  3. Sign indemnification agreements between the company and the directors – In the event that a director acts in good faith and is still sued, the company is then agreeing to pay for the lawsuit.
  4. Provide E&O (“Errors and Omissions”) insurance for directors – The financial viability of this option generally depends on the size of the company and can be discussed with a business insurance broker.

In conclusion, although shareholders cannot waive their right to sue directors and officers for breach of fiduciary duties, directors and officers can protect themselves from such a lawsuit by making all decisions in the best interests of the corporation, being properly informed before making any decisions, and documenting all decisions and reasoning in writing thoroughly.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article

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Preparing an Employment Agreement

By Doug Bend When a small business or startup considers offering an employment position to a candidate, it’s common practice to create an employment agreement, or offer letter, which stipulates the general terms of the relationship. Before presenting such an agreement to a candidate, make sure you consider a couple of key provisions: • The… Read More

By Doug Bend

When a small business or startup considers offering an employment position to a candidate, it’s common practice to create an employment agreement, or offer letter, which stipulates the general terms of the relationship. Before presenting such an agreement to a candidate, make sure you consider a couple of key provisions:

• The position and title, including whether the offer is for full time employment, and the expected days and hours the candidate should fulfill
• Whether or not the position is considered exempt or non-exempt, as defined by the Fair Labor Standards Act
• The rate of pay and if the offer includes any equity compensation
• The term of employment. The law presumes the relationship is “at will” (See Cal. Labor Code 2922) unless specifically changed within the agreement.
• The statement of benefits being offered, if any

To help highlight the “at-will” nature of the relationship, many employers will bold or place the at-will provision in all caps. Speaking generally, if the employer provides a clear at-will provision within an employment agreement or offer letter, it hinders the ability for the employee to later claim there was an inferred agreement that the employee could only be terminated for cause (See Guz v. Bechtel Nat. Inc., 24 Cal.4th 317 (2000)).

Under CA law, certain information must be given to employees at the time of hiring. For non-exempt employees, the employer must give specific information about pay rates and paid sick leaves (See Cal. Labor Code Section 2810.5). Any changes to this information must be provided in writing to employees within seven (7) days of implementing the changes. For employees whose compensation includes commission, the employer must provide a written commission agreement stating the method for computing and paying the commission (See Cal. Labor Code Section 2751).

Finally, it should be noted that as a CA employer non-compete agreements are generally unlawful. However, a prudent employer can create some indirect non-compete provisions, such as including proper non-disclosure and confidentiality clauses within the employment agreement or offer letter. Furthermore, employers can also include non-solicitation language that would prohibit an employee from recruiting co-workers after the employee leaves.

The information provided above is far from an exhaustive list. Employers should work with an attorney to ensure they are properly following state and federal rules to avoid costly mistakes down the line. If you’re interested in speaking to an attorney at Bend Law Group, please reach out at info@bendlawoffice.com, or give us a ring at 415 633 6841.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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