Step 7 - Withholding Taxes

10 Steps to Starting a Business

STAGE THREE – HIRING EMPLOYEES

Complying with Employer Requirements

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Step 7 – Withholding Taxes

As previously discussed, the moment a business hires even one employee, it is subjected to an overwhelming barrage of government regulations and requirements.  Stage Three of starting a business covers all the steps necessary (Steps 4 through 9) for complying with these employer requirements.  The previous newsletter discussed Step 6 – complying with the New Hire Reporting Act.  This newsletter continues the discussion of the 10 Steps to Starting a Business, moving on to Step 7 – Withholding Taxes.

7.  Withholding Taxes

Employers are not only required to pay taxes, they are also required to withhold taxes owed by their employees.  Both the Federal and State governments require employers to comply with various withholding requirements with respect to their employees’ wages.  Figuring out which withholding requirements apply and correctly calculating the amount of taxes to withhold from each employee’s wages can be agonizingly complicated, which is only further exacerbated by the fact these laws are constantly changing and employers are regularly subject to new withholding requirements.  For these reasons, the best (and safest) way of complying with these complex withholding requirements is by working with a CPA or other tax professional, or simply outsourcing this task to a payroll service provider.  A brief overview of the Federal and State withholding requirements is set forth below.

Federal Income Tax Withholding (Form W-4)

The Federal government requires employers to keep and maintain a signed withholding exemption certificate (Form W-4) for each employee, which is used for calculating the amount of Federal taxes to withhold from the employee’s wages.  Additionally, employers are required to report wages paid and taxes withheld for each employee by filing a Wage and Tax Statement (Form W-2) with the Social Security Administration.  To learn more about complying with the Federal tax withholding requirements, check out the IRS' Employer's Tax Guide, as well as the Social Security Administration's Employer W-2 Filing Instructions and Information.

State Taxes

Additionally, California also requires employers to comply with a number of State withholding laws – such as requiring employers to withhold from their employees’ wages payroll taxes, disability insurance taxes, and personal income taxes.  Similar to the W-4 Form used to calculate withholdings for Federal taxes, California employers must use Form DE-4 for withholding State income taxes.  To learn more about California’s withholding requirements, check out the EDD’s California Employer's Guide, as well as the California Tax Service Center website.

Step 7 basically consists of setting up systems and procedures to ensure you accurately comply with the various Federal and State withholding requirements.  Assuming you have set up these procedures (or outsourced the task to a CPA or payroll service provider), you should be ready to deal with the next step in setting up your business – carrying and maintaining insurance for your employees.  Accordingly, the next newsletter will discuss Step 8 – Complying with Employee Insurance Requirements…

The Escondite

The Escondite

410 Boyd Street, Los Angeles, CA 90013 (follow the signs)

el escondite – noun.  Spanish for: the hiding place;  the refuge; the underground shelter; the shelter; the port of distress; the asylum; the lurking-place; the free port; the safety zone; the haven of refuge; the port of refuge.

So what's better than a bar named the Hiding Place?  A bar that’s named "The Hiding Place" in Spanish, and that’s actually hidden.  Really hidden.  And really really awesome.

For those who just started following my Bar Fly reviews, go back to my first article and read the first paragraph describing my ideal bar.  Normally, I wouldn't expect that kind of experience to exist in reality, so I usually just settle for places that come close to that ideal.  But what if it actually existed?

Imagine you’re trying to find a new hidden place.  Imagine you park on a dark side street across from the Higashi Honganji Buddhist Temple, where the western edge of Little Tokyo merges with the border of Skid Row.  Now imagine that rather than heading back into the tranquil, but lively and safe familiarity of Little Tokyo, you instead cross the street and enter into the unknown and foreboding darkness, along suspiciously abandoned streets lined by empty warehouses and run-down storage facilities.  Imagine that as you continue walking deeper into the unknown, you find yourself forced off the sidewalk and into the middle of the street as tents and sleeping bags progressively fill the walkways, becoming increasingly engulfed in the sleepy encampment of the local “residents” – heading deeper and deeper into what clearly seems to be the wrong way, at the wrong time.  Imagine you finally turn down a street, pass another row of tents and a small congregation of homeless guys, and stumble upon an empty looking brick building covered in ivy, set far behind a spacious parking lot.  Imagine you walk through the parking lot toward the front of the building, led only by an ambiguous blue neon arrow pointing toward a large heavy-set rustic wooden door, which is closed.  Imagine the door appears to have a mafia-style sliding peephole latch, covered by a speakeasy grill.  Imagine you knock on the door and the latch slides open from the inside, and a pair of eyes peer out at you.  Now imagine the latch closes, the door opens, and you’re led into a shockingly unexpected “sanctuary in the woods,” dimly lit with soft red lighting, antlers, cuckoo clocks, cow skulls, an incredibly ornate polished wooden bar, a giant wooden Indian, an inviting and friendly staff, live music, a huge assortment of beers and cocktails, and some of the heartiest food you’ve had since you were a kid…

Now wake up.  You just imagined what it’s like to experience The Escondite.

The Escondite is self-described as “a hideout that takes you away from the norms of L.A into a chill sanctuary,” and it certainly matches this description – sitting on the southeast corner of San Pedro and Boyd Street, on the border between Little Tokyo and Skid Row, in a place affectionately dubbed “Skidrowkyo” by its owners, Erin Carnes and Brian Traynam, the place is truly hidden – in both name and location.  And while the imaginary journey depicted above describes the back entrance to Escondite, the place is even hard to find from the front – set far back behind a large (and usually empty) parking lot and marked only by two wordless signs – an illuminated sign of Escondite's logo at the far corner of the parking lot (a single eye peering through a rustic wood door), and a blue neon arrow pointing to the entrance.

And while the place has a purposely sketchy location, once inside, it is absolutely amazing, in all respects – ambiance, food, drinks, views, and entertainment.  The place is actually split into two sections – an inside bar and restaurant, and an outside patio with a beautiful panoramic view of the downtown skyline.  The inside can really only be described as having an “American West” ambiance – displaying antler light fixtures, cuckoo clocks, cow skulls, stuffed white owls, posters of “American Outlaws,” pie tin lamps overhanging comfortable red booths, an exceptionally ornate polished wooden bar with a carved lion’s head, and brick walls with windows made out of wooden pallets.

And whether you want to eat or drink, the place will blow your face off, hosting nine draft beers, 15 bottle beers, cocktails, and a menu that includes a full assortment of appetizers, salads, sandwiches (“sandos”), and burgers named after TV shows the owners watched as kids – my personal favorites are the Fat Albert Burger (provolone, applewood smoked bacon, maple syrup, with a glazed doughnut bun) and the Capt. Kangaroo Burger (egg over easy, hash browns, cheddar, Canadian bacon, gravy and Cholula).  And if you’re just into beer, check out the Great Bottle Challenge, where participants taste eight craft beers – new brews and rarities – and play a drinks-trivia game.  Or if you’re just into eating (after drinking too much?), help yourself to the Hangover’s Revenge Brunch Menu (Saturday and Sunday from 11:00 am to 5:00 pm).

And if that wasn’t enough, The Escondite keeps long hours, open from 11:00 am to 2:00 am every day, and features live music 7 days a week.

So whether you’re into food, drinks, hang-over cures, live music, exceptional views of downtown’s skyline, or just hanging in a legitimate hideaway, The Escondite is a definite must – hands down one of LA’s best hidden gems.  And even if you’re apprehensive about strolling through Skidrowkyo at night, c’mon, who can pass up a bacon maple syrup burger with a glazed doughnut bun?  No one.

Step 6 - New Hire Reporting Act

10 Steps to Starting a Business

STAGE THREE – HIRING EMPLOYEES

Complying with Employer Requirements

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Step 6 – New Hire Reporting Act

As previously discussed, the moment a business hires even one employee, it is subjected to an overwhelming barrage of government regulations and requirements.  Stage Three of starting a business covers all the steps necessary (Steps 4 through 9) for complying with these employer requirements.  The previous newsletter discussed Step 5 – verifying the employment eligibility of your employees.  This newsletter continues the discussion of the 10 Steps to Starting a Business, specifically focusing on Step 6 – Complying with the New Hire Reporting Act.  So without further ado...

6.   New Hire Reporting Act
The Personal Responsibilityand Work Opportunity Reconciliation Act of 1996 requires all employers to report newly hired and re-hired employees to the California New Employee Registry within 20 days of their hire or rehire date.  Basically, the employer must use the Report of New Employee(s) DE-34 form to submit the following information:

•  Employee’s name, social security number, address, and start-of-work date.
• Employer’s name, address, California EAN, and Federal EIN.

Visit the New Hires Reporting Requirements page to learn the full details on how to register with California’s New Hire Reporting System.

After completing Step 6 and reporting the hire of your employee(s), you have successfully completed all the steps necessary to ensure that you properly hired your employees.  But now your employees will begin working and earning wages, which exposes the employer to litany of requirements – specifically, withholding taxes and maintaining insurance for employees.  Accordingly, the next newsletter will discuss Step 7 – Withholding Taxes for Employees…

Step 5 - Verify Employment Eligibility

10 Steps to Starting a Business

STAGE THREE – HIRING EMPLOYEES

Complying with Employer Requirements

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Step 5 – Verify Employment Eligibility

As previously discussed, the moment a business hires even one employee, it is subjected to an overwhelming barrage of government regulations and requirements.  Stage Three of starting a business covers all the steps necessary (Steps 4 through 9) for complying with these employer requirements.  The previous newsletter discussed Step 4 – the process of obtaining employer identification numbers (EIN) at the State and Federal level.  This newsletter continues the discussion of the 10 Steps to Starting a Business, specifically focusing on Step 5 – Verifying Employment Eligibility.  So without further ado…

5.       Verify Employment Eligibility (Form I-9)

Federal law requires employers to verify an employee's eligibility to work in the United States by completing an Employment Eligibility Verification Form (I-9).  An I-9 Form must be completed for each employee within three days of hiring the employee, and must be kept on file for three years after the date of hire or one year after the date of termination.  Compliance with these I-9 requirements is governed by the U.S. Citizenship and Immigration Services (USCIS) agency, which conducts routine workplace audits to ensure that employers are properly completing and retaining their I-9 forms, and that employee information on the I-9 Forms matches government records.

E-Verify.  To assist employers in complying with the I-9 requirements, the USCIS agency created an online service called E-Verify, which allows employers to electronically verify the employment eligibility of newly hired employees by comparing the information taken from the I-9 Form with existing government records for any particular employee.  Using E-Verify should virtually eliminate Social Security mismatch letters, improve the accuracy of wage and tax reporting, protect jobs for authorized workers and help maintain a legal workforce.

So Step 5 is really about developing policies and procedures for verifying the employment eligibility of all your employees, completing I-9 forms for each employee, and retaining such forms for the required period of time.  In order to ensure procedural compliance with these requirements, it may be a good idea to use a lawyer or other professional, or simply work with a consultant or compliance specialist, to ensure your compliance with employment eligibility verification.  Assuming you have successfully implemented Step 5, you are now ready to move to Step 6 – complying with California’s New Hire Reporting Program…

Step 4 - Employer Identification Numbers

10 Steps to Starting a Business

STAGE THREE – HIRING EMPLOYEES

Complying with Employer Requirements

This newsletter covers Stage Three of walking through the 10 Steps to Starting a Business.  Now that you have a legally formed business entity and all licenses and permits necessary to conduct business, the next step is hiring employees. 

The moment a business hires even one employee, it is subjected to an overwhelming barrage of government regulations and requirements.  And as discussed below, complying with the litany of Federal and State requirements relating to employees is by far the most complicated, convoluted, and burdensome aspect of setting up a business In California.  Therefore, it is imperative that any business wishing to hire employees put systems in place to ensure compliance with these laws. 

Accordingly, Stage Three, the largest of the four stages, provides a basic overview of the California’s employment laws, breaking down the process of complying with these laws into six steps (Steps 4 through 9):

STAGE ONE

1.       Business Formation

2.       Fictitious Name Statement

STAGE TWO

3.       Apply for Business Permits and Licenses

STAGE THREE

4.       Employer Identification Numbers

5.       Verify Employment Eligibility (Form I-9)

6.       New Hire Reporting Program

7.       Withholding Requirements

8.       Insurance Requirements

9.       Workplace Poster Requirements

STAGE 4

10.    Pay Taxes

Because Stage Three is the most complicated stage, each step within Stage Three will be discussed in its own individual newsletter, starting with Step 4 – Obtaining Employer Identification Numbers.  So without further ado…

4.   Employer Identification Numbers

The first step to hiring an employee is getting employment identification numbers for your business from both the Federal and State governments.

EIN (federal)

The Federal government requires employers to obtain an Employment Identification Number (EIN) by filing Form SS-4 with the U.S. Internal Revenue Service (IRS).  The EIN is necessary for reporting taxes and other documents to the IRS, as well as when reporting information about your employees to various State agencies.  To obtain an EIN, an employer can contact the IRS directly or apply online.  To learn more about obtaining an EIN, check out the IRS’s Guide to theEmployer Identification Number.

EAN (California)

Additionally, California requires employers to register for a California Employer Account Number (EAN), which is used for many of the same purposes as the Federal EIN (e.g. paying and reporting taxes, etc.).  California employers can register for their California EAN by contacting the California Employment Development Department (EDD) directly or by registering online through the EDD’s e-Services for Business.  To learn more about obtaining your California EAN, check out the EDD’s website.

After your business has obtained its Employment Identification Numbers, it is now ready to actually hire employees.  And once you hire an employee, you must verify that the person you hired is eligible to be employed.  Accordingly, stay tuned for Step 5, which discusses the requirement of Verifying Employment Eligibility…

Stage Two - Getting Licensed

10 Steps to Starting a Business

STAGE TWO – GETTING LICENSED

Obtaining Business Licenses & Permits

This newsletter continues the multi-part series describing the 10 Steps to Starting a Business, which are described as follows:

1. Business Formation
2. Fictitious Name Statement
3. Apply for Business Permits and Licenses
4. Employer Identification Numbers
5. Verify Employment Eligibility (Form I-9)
6. New Hire Reporting Program
7. Withholding Requirements
8. Insurance Requirements
9. Workplace Poster Requirements
10. Pay Taxes

The first newsletter discussed the first two steps in Stage One (Setting Up Shop), and provided an overview of how to legally set-up and form a business entity.  This newsletter continues with this series and discusses Stage Two (Getting Licensed”), which covers the third step of starting a business, and provides an overview of how to obtain the business licenses and permits necessary for actually running a business after it has been set up. 

As explained in this letter, simply having a legally formed business entity through which you can run your business doesn’t mean your business is actually authorized to engage in the type of activities you wish to perform.  After forming your business, you must then obtain a variety of licenses and permits, depending on the type of business you intend to run (e.g. restaurant, bar, retail sales, etc.).  In other words, even though your business CAN engage in business, you need to ensure that it MAY engage in business – in the same way that even though someone can drive a car doesn’t mean they are legally permitted to do so without a driver’s license.  Accordingly, Step 3 of setting up a business involves identifying, applying for, and obtaining all necessary licenses and permits necessary to operate your business.

3.       Apply for Business Permits & Licenses

Obtaining all necessary licenses and permits for your specific business can be incredibly convoluted and time-consuming, as there are various license requirements at every level of government – from the Federal level to the State level, all the way down to the County, City, and sometimes even a regional or local level. 

CALGOLD.  To help employers determine which licenses and permits they need for their particular type of business, the State of California has created an online service called CALGOLD.  Employers can use CALGOLD to search for all licenses and permits required for a specific type of business (say, a restaurant or bar), within a specific County (say, Los Angeles), and the search results will provide an extensive list of all licenses and permits required at the Federal, State, County, City, and even local and regional level.

For example, a search of CALGOLD for restaurants operating within Los Angeles County indicates that such businesses may need to obtain the following licenses and permits:

• Alcoholic Beverage License (“Liquor License”)
• Sales & Use Permit (“Seller’s Permit)
• Public Health Operating License (“Food Service Establishment Permit)
• Building and Construction Permit
• Burglar Alarm Permit
• Business License (Business Tax Certificate – see EAN, above)
• Conditional Use Permit (required for sales of alcohol)
• Industrial Wastewater Discharge Permit
• Land Use Permit
• Zoning Approval

While CALGOLD is invaluable for small business owners by providing them with an easy-to-use means of identifying all permits and licenses potentially required for their specific business, take note that identifying the licenses needed is simply the first step.  Once you have identified the licenses your business must have to operate, you must then apply for and obtain all such necessary licenses and permits.  And completing the applications for each type of license or permit required is often less than intuitive – requiring multiple application forms to various government entities, all requesting different forms of identification and information.  Accordingly, while CALGOLD provides small business owners with a vital and truly ingenious service, its limitations must be recognized, as it leads business owners to the uncharted labyrinth of communicating with a myriad of government entities and complying with their numerous rules and regulations.  And furthermore, failure to have all required licenses and permits can subject you to serious fines, lawsuits, or penalties.  Therefore, while CALGOLD points you in the right direction, it is still highly advised that you employ an attorney to assist you with Step 3, and oversees the process of obtaining all required licenses and permits for your business.

Assuming we have now successfully completed Steps 1 through 3, our business should now be formed and properly licensed to engage in business.  However, now that you may lawfully engage in business, you now come to the most precarious stage in setting up and running a business – Hiring Employees!  Accordingly, we are now ready for Stage Three – hiring employees and complying with California’s litany of employer requirements.  Stay tuned for the following newsletters, which will carefully walk us through the steps involved in Stage Three – complying with California’s employer requirements…

Stage One - Setting Up Shop

10 Steps to Starting a Business

STAGE ONE – Setting Up Shop:

Establishing the Legal Structure of Your Business Entity

This article continues the multi-part series describing the 10 Steps to Starting a Business, beginning the first substantive discussion of the 10 Steps.  As discussed in the previous posting, the 10 Steps to Starting a Business are as follows:

1. Business Formation
2. Fictitious Name Statement
3. Apply for Business Permits and Licenses
4. Employer Identification Numbers
5. Verify Employment Eligibility (Form I-9)
6. New Hire Reporting Program
7. Withholding Requirements
8. Insurance Requirements
9. Workplace Poster Requirements
10. Pay Taxes

The 10 Steps have been further distilled into four general stages:  Setting Up Shop; Getting Licensed; Hiring Employees; and Paying Taxes.  This article addresses the first stage of starting a business:  Setting Up Shop.  As previously discussed, Stage One covers the first two steps of starting a business:  1. Business Formation, and 2. Fictitious Business Statement.  Accordingly, the remainder of this article will discuss each of these steps in more detail. 

 

    1. Business Formation.

When starting any business, the first decision you’ll have to make is deciding what form your business can take.  In general, a business will take one of four forms:

1. sole-proprietorship
2. partnership
3. limited liability company (LLC)
4. corporation

Each form of business has different legal, financial, and tax considerations (e.g. limited liability, ownership and control, etc.), and therefore, anyone wishing to open a restaurant or bar (or any business, for that matter), should carefully consider the various options in order to determine which form is best for their particular goals, objectives and desires.

Most small business owners assume they can accomplish this stage simply by using online service providers, such as LegalZoom, to set up a low-cost corporation or LLC.  However, it should be noted that this can be incredibly risky.  For example, business owners will usually choose to operate as a “single-member LLC,” one of the most popular forms of business.  Generally, the main purpose in forming an LLC (or corporation) is to acquire limited liability – i.e. the LLC provides the owner with a liability “shield,” such that if the business is sued for negligence or unpaid debts, the individual owner cannot be held personally liable.  However, what most small business owners don’t know is that this liability shield can be “pierced” if the entity is improperly structured, drafted, or operated.  That means if you are sued, you could be personally wiped out!  And in California, the single-member LLC is the most commonly pierced type of business entity.  Accordingly, it is highly advisable that you consult with an attorney before setting up your business entity.

After selecting the form your business will take, you must then actually establish it as a distinct legal entity – which consists of completing the appropriate applications, drafting the necessary paperwork, and registering your business entity with the State.  In California, after your business is formed, you must register it by filing the appropriate forms with the California Secretary of State.  (Note, if your business is a sole proprietorship, you do not need to register your business with the State.)

      2. Fictitious Name Statement

In addition to forming your business, you will also obviously have to name it.  All persons and entities planning to do business in California under a name different from their personal name must file a Fictitious Name Statement with the County Recorder Clerk's Office where the business will be conducted.

While filing your FBN may seem like an unimportant technicality, it should not be neglected, as it can result in fairly extreme consequences.  For example, Business & Professions Code 17918 essentially specifies that you cannot maintain any legal actions under the trade name unless the FBN has been properly executed, filed and published.  So make sure to complete this step before moving forward.

After completing Steps 1 and 2 – properly forming and naming your business – your business should now be established as a distinct legal entity.  But that is only the beginning.  The next stage is Getting Licensed…

Starting a Business

10 STEPS TO STARTING A BUSINESS

INTRODUCTION

An Overview of the Four Stages

This month's posting is the first of a multi-part series discussing the complicated process of starting and legally operating a business - breaking this process down into the following 10 basic steps:

1.                   Business Formation

2.                   Fictitious Name Statement

3.                   Business Permits and Licenses

4.                   Employer Identification Numbers

5.                   Employment Eligibility Verification (Form I-9)

6.                   New Hire Reporting Program

7.                   Withholding Requirements

8.                   Insurance Requirements

9.                   Workplace Poster Requirements

10.               Pay Taxes

These 10 steps have been organized chronologically, and should basically be accomplished in four general stages: Setting Up Shop; Getting Licensed; Hiring Employees; and Paying Taxes.  Rather than diving right into the 10 steps, this first article is meant to lay the foundation for the individual steps by describing the needs of every business within these four stages.  Subsequent postings will then discuss each of the 10 steps in more detail.

STAGE ONE - SETTING UP SHOP (Steps 1-2)

Establishing the Legal Structure of Your Business Entity

The first step to opening any successful business is simply setting up and naming the business entity itself.  This first stage requires two basic steps:

• Business Formation - forming your business entity (e.g. corporation, LLC, LP, etc.) and registering it with the California Secretary of State.
• Fictitious Business Name - naming your business and filing your Fictitious Name Statement with the County Recorder Clerk's Office.

After properly forming and naming your business, your business should now be established as a distinct legal entity. But that is only the beginning...

STAGE TWO - GETTING LICENSED (Step 3)

Obtaining Business Licenses & Permits

While you now have a legally formed business entity through which you can run your business, that alone doesn't mean your business is fully authorized to engage in the type of activities you wish to perform.  After forming your business, you must then obtain a variety of licenses and permits, depending on the type of business you intend to run (e.g. restaurant, bar, retail sales, etc.).

For example, if you are thinking of opening a restaurant in Los Angeles County, you may need to obtain any/all of the following licenses and permits:

• Alcoholic Beverage License ("Liquor License")
• Sales & Use Permit ("Seller's Permit)
• Public Health Operating License ("Food Service Establishment Permit)
• Building and Construction Permit
• Burglar Alarm Permit
• Business License (Business Tax Certificate)
• Conditional Use Permit (required for sales of alcohol)
• Industrial Wastewater Discharge Permit
• Land Use Permit
• Zoning Approval

Since the licenses and permits required for any business will vary depending on the type of business you are operating, it is impossible to provide an exhaustive list of every license or permit you must obtain.  However, since operating a business without all the necessary licenses and permits can subject you to fines and other nasty consequences, anyone operating a business should make it a priority to be fully licensed before commencing operations, or as soon thereafter as possible, to avoid any unexpected penalties.  And since not all licenses and permits can be obtained simply by filling out an application (such as liquor licenses or conditional use permits), it's probably a good idea to employ a lawyer to assist you in getting your business fully licensed. 

Stay tuned for a more thorough discussion of how to obtain all licenses and permits required for your specific business in subsequent postings.

STAGE THREE - HIRING EMPLOYEES (Steps 4-9)

Complying with Employer Requirements

The most complicated, convoluted and burdensome aspect of setting up a business In California is the need to comply with a litany of Federal and State requirements relating to employees.  The moment a business hires even one employee, it is subjected to an overwhelming barrage of government regulations and requirements.  Therefore, it is imperative that any business wishing to hire employees put systems in place to ensure compliance with these laws.  Accordingly, most of the steps required to properly set up and operate a business in California are related to these requirements for hiring employees.  This stage includes the following six steps:

• Employment Identification Numbers - obtain employment identification numbers, at both the Federal and State level.
• Employment Eligibility Verification - verify employment eligibility of all employees using I-9 Form.
• New Hire Reporting Program - comply with the New Hire Reporting Program in reporting all newly hired and re-hired employees to the California New Employee Registry.
• Withholding Requirements - set up systems to comply with Federal and State withholding requirements regarding withholdings from employees' wages.
• Insurance Requirements - obtain all required types of insurance for employees.
• Workplace Poster Requirements - obtain and display all required workplace posters.

Stay tuned for a more thorough discussion of these six steps in subsequent postings.

STAGE 4 - PAYING TAXES (Step 10)

Filing and Paying Your Business Taxes

Now that you've formed your business entity, acquired all necessary licenses and permits, hired employees and complied with all employer requirements, you can begin legally running your business.  But don't forget, there is one very important final step to properly operating your business: paying taxes.  Employers are taxed at both the Federal and State level, and the taxes paid vary depending on a myriad of factors - such as the form of business, the number of employees, etc.  Accordingly, because of the complexities involved in filing and reporting taxes, it is highly recommended you consult with a CPA, tax lawyer, or other experienced tax professional, to ensure that you're properly calculating and paying your taxes (and also to ensure you are not overpaying). 

Stay tuned for a more thorough discussion of how to pay your business taxes in subsequent postings.

SUMMARY

As can be seen, the process of starting and successfully [and legally] running a business in California can be extremely complicated and time-consuming.  Those wishing to start their own business should contact us, as we offer package deals for assisting you with all 10 steps of setting up and operating your business - so you can avoid the headache of navigating these burdensome legal and regulatory obstacles, and just focus on running and growing your business. Something you do best.

Franchising

In response to my previous article, a good friend of mine and an exceptional real estate agent, Erica Frey, contacted me and expressed interest in opening a restaurant franchise, and asked for some insight regarding the process and legal issues involved.  In light of her concerns, I decided to devote this blog article to the concept of franchising.  Accordingly, the article below will briefly address the advantages, disadvantages, process and legal issues involved in opening and operating a franchise. 

I. A BRIEF INTRODUCTION TO FRANCHISING

What is a “Franchise”?

Voltaire once said, “If you wish to converse with me, define your terms.”  In light of that maxim, the first step in starting a discussion about franchising is to define what is meant by the term, “franchise.”  According to Corporations Code section 31005(a), a “franchise” is a contract between two or more people regarding the sale and purchase of a business having the following three characteristics: 

1. Global Marketing Plan.  A franchisee is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor; and
2. Global Trademark.  The operation of the franchisee's business pursuant to such plan or system is substantially associated with the franchisor's trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor or its affiliate; and
3. Franchise Fee.  The franchisee is required to pay, directly or indirectly, a franchise fee.

Franchises are regulated on both a State and Federal level.  On the State level, franchises are regulated by and must be registered with the California Department of Corporations (DOC).  On the federal level, franchises are required to maintain a “franchise disclosure document” (FDD), the contents of which are regulated on a national level by the Federal Trade Commission (FTC).

An obvious example of a textbook franchise is McDonald’s:  The marketing plan of every McDonald’s location is dictated by McDonald’s Corporate (which is why every McDonald’s restaurant looks identical, and is also why you can never get a McMuffin after 10:30 am, anywhere!).  Each McDonald’s franchise makes use of McDonald’s trademarks (such as the infamous “Golden Arches”).  Lastly, each McDonald’s franchise pays a franchise fee to McDonald’s Corporate for the benefit of operating the franchise. 

Advantages and Disadvantages

While many people think buying a franchise is a shortcut to success, the ultimate success of any franchise depends on many factors.  If you are interested in starting a franchise, you should consider some of the advantages and disadvantages discussed below. 

Advantages

• Lower Failure Rate.  When you buy a franchise, you are buying an established concept that has already proved to be successful, rather than “reinventing the wheel” on your own venture.  Therefore, it’s not surprising that franchisees stand a much better chance of success than people who start independent businesses.  According to the U.S. Small Business Administration (SBA), independently-owned restaurants have the highest failure rate of any new business, and only about 20% survive the first two years.  In contrast, franchisees have an 80% survival rate. 

• Startup Assistance.  In contrast to independently-owned businesses, franchises are essentially “turnkey” operations, and the franchisor will provide you with a lot of help in starting up and running your business.  Often, the franchisor will provide you with all the equipment, supplies, and instruction needed to start the business.  Additionally, franchisors will usually also provide ongoing training, and help with management and marketing. 

• Economies of Scale.  Franchises have the huge benefit of “economies of scale” – as the franchisor, supplying uniform products and inventory to all of its franchisees, can buy in bulk and pass the cost savings on to the franchisees.  Accordingly, inventory and supplies will usually cost much less to franchisees than to those running an independent business. 

• Brand Recognition.  Probably the most significant advantage of owning a franchise is access to a well-known (often nationally-recognized) brand-name.  Essentially, buying a franchise can be like buying a business with built-in customers.

       Disadvantages

• Large Initial Investment.  Buying into well-known franchises is very expensive, and often requires extremely deep pockets or the ability to arrange the necessary financing.  As discussed below, some franchise agreements may even require a “personal guaranty” by the franchisee for the franchise’s obligations.

• Surrender of Independence (Their Way or the Highway).  The main disadvantage of buying a franchise is the loss of independence – the franchisee must [rigidly] comply with the franchisor’s system, sometimes right down to the way the napkin holders are filled.  True entrepreneurs, or those who highly value their autonomy, will probably find it difficult (or impossible) to successfully operate a franchise, as some franchisors exert a degree of control that can be excruciating.  As a franchisee, you are running the show…but running it their way. 

• Ongoing Costs.  In addition to the initial franchise fee, franchisees must also pay monthly royalties – a percentage of the franchise’s business revenue (often calculated as a percentage of “gross sales”).  The franchisor may also charge additional fees for certain services provided (e.g. the cost of advertising, or share in national marketing campaign). 

Assuming you have evaluated all the pros and cons and determined you still want to start a franchise, you will probably want to know how you can go about accomplishing that goal.  The next section will answer this question by describing the general process of starting a franchise, from beginning to end. 

II. PROCESS OF STARTING A FRANCHISE

From a legal standpoint, the process of starting a franchise can be summarized into four general steps:  completing the franchise application, verifying the legal standing of the franchise, reviewing the Franchise Disclosure Document (FDD), and reviewing the Franchise Agreement. 

        Step 1 – Complete Franchise Application

The first step in buying a franchise is similar to applying for a job, and begins by contacting the franchisor and completing their franchise application.  The franchise application is comparable to your franchise “resume,” and the franchisor will use the application in a similar way – a first level review to screen applicants and determine which applicants it should consider as potential franchisees. 

The franchise application will usually include detailed questions about your finances, your personal assets, your spouse’s financial situation, your experience, background, aspirations and goals, etc.  The franchisor not only wants to determine whether you are financially capable of operating the franchise (especially in the event the franchise runs into financial difficulties and requires the franchisee to tap into personal finances to keep the operation afloat), but also wants to determine whether you are the right type of person to operate their franchise (i.e. somebody who is not a “Maverick”, but somebody who can successfully operate within the franchisor’s pre-made system).  For better or worse, franchises depend on the uniform application of the franchisor’s system, so the franchisors usually don’t want people they view as too independent. 

If your franchise application is accepted by the franchisor, the next step will usually involve a meeting with the franchisor – similar to a job interview.  During this time, the franchisor will continue to explore your interest, commitment and suitability, and you will try to find out as much as possible about the franchise.  At this point, you should retain an attorney to assist you in evaluating the franchise and negotiating the deal. 

        Step 2 – Verify Legal Standing of Franchise

As a preliminary matter, your attorney should conduct several searches of the franchise, in various State and regulatory databases, to verify it is registered in California, in good legal standing, and not subject to any desist-and-refrain orders or other administrative proceedings. 

        Step 3 – Review Franchise Disclosure Document (FDD)

Next, you and your attorney need to review the franchise disclosure document provided to you by the franchisor to verify it is complete and up-to-date.  As stated above, the FDD is a document regulated by the FTC concerning disclosures required to be delivered to prospective buyers of franchises.  As required by the FTC, the FDD must contain 23 specific “items” of information, including the business background of the franchisor, litigation history, franchise fees, territorial rights, intellectual property, financial performance and statistical information, and the franchisor’s financial statements.  The FDD should be reviewed carefully, as it contains vital information about the specific details and “economics” of the franchise opportunity, such as the financial analysis of all fees, the calculation of royalties, and the performance of all franchisees (including existing franchises and those who left). 

As part of this analysis, you should also contact other franchisees and interview them with respect to their experience – i.e. their success, their relationship with the franchisor, their satisfaction with the franchise, etc.  These interviews should provide real-life, practical information about the franchise opportunity that would otherwise be unavailable.  Even if the economics look good on paper, if all the franchisees interviewed are unsatisfied with the franchise, you may decide to pursue a different opportunity. 

        Step 4 – Review Franchise Agreement

The last step in completing the franchise is the drafting of the franchise agreement.  Usually, the franchise agreement is a long (usually 30-200 pages!) standard-form agreement prepared by the franchisor.  Like any contract, the franchise agreement is technically negotiable.  However, since the franchise’s success depends on the uniform application of the franchisor’s system, the franchisor will most likely be unwilling to change many of the agreement’s provisions.  Regardless, you and your attorney should carefully review the franchise agreement so that you are fully informed of all the franchise details. 

As a note of caution, you should be concerned with any provisions requiring a personal guaranty, indemnification provisions, provisions discussing renewal/transfer/terminations rights, arbitration clauses and non-compete covenants.  If possible, you should have the franchise agreement redrafted so these provisions are as favorable to you as possible. 

Assuming both parties agree to the terms of the agreement, the agreement simply needs to be signed for the process to be complete.  Once the agreement has been signed and all formalities completed, you will be the proud owner of a franchise and [hopefully] ready for business. 

III. CONCLUSION

As discussed above, the process of starting a franchise is complicated and time consuming, requiring extensive background research and due diligence, the careful review of multiple documents and lengthy agreements, as well as a genuine self-evaluation to determine whether you are the type of person who can (and actually desires to) own and operate a franchise.  While a franchise involves the loss of a certain amount of autonomy that could make some entrepreneurs cringe, those devoted to the operation can reap huge economic benefits.  If you are interested in starting a franchise or simply have questions, please do not hesitate to give us a call. 

How to Get a Liquor License in California

How to Get a Liquor License in California

The First Step to Starting a Bar

Many people dream of starting and owning their own restaurant or bar.  Especially in the City of Angeles, owning a restaurant or bar carries a very distinct level of acclaim, panache, and sophistication.  However, while the concept itself is exciting to most, the work required in simply starting the process of opening a restaurant or bar is confusing, complicated, expensive, frustrating, and fraught with pitfalls!

The first step in starting any successful restaurant or bar is acquiring a liquor license.  In the State of California, the Department of Alcoholic Beverage Control (ABC) controls the issuance of liquor licenses.  While the process of acquiring a liquor license is multifaceted, complicated, and infinitely varied based on the type of establishment you wish to operate (e.g. bar, club, restaurant, etc.), the general steps to acquiring a liquor license are as follows:

1.       Control a Business Location

2.       Obtain Zoning Permits

3.       Buy Liquor License

4.       File Liquor License Application

Step 1 - Control a Business Location

The first step in acquiring a liquor license is obtaining control over an actual business location.  The ABC will only issue a liquor license to a real, physical retail location, and the basic ABC requirements for controlling a business location are as follows:

1.       Commercial Location - the proposed location for license must be a commercial location (no residential units allowed).

2.       Own Property - you must own the property for the proposed location, or have a lease agreement granting you right to control the proposed location.

3.       Name of Entity on Deed - the name on the property (or lease) must be in the name of the entity (e.g. corporation, partnership, LLC, etc.) who will apply with the ABC for a liquor license.

As stated above, the ABC will require proof that you have control over your proposed business.  However, even if you don't currently own or lease a location, you can still apply for a liquor license by providing the ABC with a signed lease for a business location, or a "letter of intent" with a prospective landlord to lease a commercial location. [Note, to reduce your risk, you should sign your lease so that it is subject to the final approval of your liquor license application.]

Step 2 - Obtain Zoning Permits

The second step in acquiring a liquor license is to comply with any local zoning regulations and obtain zoning permits that may be required by your city.  These zoning permits are generally called "Conditional Use Permits" (or "CUPs").

Zoning Permits

In order to find out if your city requires a zoning permit for the sale of alcoholic beverages at your business location, you will need to contact the zoning department of your local city or county and speak with a planner.  The planner will research the location's zoning information and tell you whether a zoning permit is required for your location. If a zoning permit is required, you will need to prepare and file a zoning application with the city or county - a task that requires the drafting of specialized maps, careful research, notification of local residents of your application, negotiation and the preparation of a written application. You may even have to attend a public hearing before the zoning board to make a case as to why your business should have the right to sell alcoholic beverages.

Zoning Affidavit

The ABC liquor license application requires that the applicant also file a "Zoning Affidavit" (ABC Form 255), indicating whether or not your local city requires a zoning permit for your business location.  Due to the complexity involved in acquiring the necessary zoning permits in any given city or county, it is strongly advised that you get professional help for this step. 

Step 3 - Buy Liquor License

The third step in acquiring a liquor license is actually buying a license from a private seller.  The State of California no longer issues hard liquor licenses, and therefore, these licenses can only be acquired by finding someone in your county who is willing to sell their license to you.  You can use a liquor license broker or try to negotiate the purchase of one directly from a private seller.

Additionally, the State of California requires an escrow account to be opened for the transfer of the liquor license (regardless of whether the liquor license is purchased through a broker or directly from a private party).  This liquor license escrow is not the same thing as a real estate escrow, and has a unique set of escrow requirements mandated by the ABC.  There are several escrow companies throughout California that specialize in liquor license transfers.

Step 4 - File California Liquor License Application

The fourth, and final, step in acquiring a liquor license is actually filing the liquor license application with the ABC.  The type of application you file depends on the specific type of business you intend to operate (e.g. those intending to start a bar could apply for License No. 40, which allows for On Sale Beer, whereas those intending to start a restaurant could apply for License No. 41, which allows for On Sale Beer & Wine at a "bona fide eating place").

After successfully filing your liquor license application, you will need to notify the surrounding community that you are applying for a liquor license.  The ABC requires three forms of notification:

1.       Building - posting a notification on your building for 30 days.

2.       Mail - mailing an official ABC notification to residents within 500 feet of your business.

3.       Newspaper - publishing a public notice in a local newspaper.

As you can see, the process of acquiring a liquor license - one step in a myriad of steps required to successfully start a restaurant or bar - is infinitely complex and highly specialized.  If you are thinking of starting a restaurant or bar, please contact us immediately!  We will provide you with ongoing representation and start-up document preparation - we will prepare all of the ABC documents (other than escrow documents) required by the ABC for a complete application, gather the required information from you and then carefully prepare your application paperwork for filing with the ABC.