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STARTING AND OPERATING A BUSINESS IN CALIFORNIA Copyright © 2005, Michael D. Jenkins
> CONTENTS OF THIS SECTION:
I. INTRODUCTION I. INTRODUCTION California, with roughly 32 million consumers, is by far the largest and richest state in the union, with an economy that would be the fifth-largest in the world, if it were a nation. However, since the "dot.com" bubble collapsed in early 2000, the massive boom that California (and Silicon Valley in particular) had been experiencing for several years has come to an end, and the state economy has been in somewhat of a recession until recently. The state's unemployment rate, at 5.8%, was higher than the national average (5.4%) in December of 2004, but is still improving, and is well below the 6.5% California unemployment rate that was experienced a year earlier, and that was as high as 10.1% in the mid-1990s. To view the latest federal Bureau of Labor Statistics unemployment rate data for California or any other state, visit the BLS website. California has a very complex tax and legal structure under which businesses must operate. While there are other states with higher taxes on businesses, there are few, if any, with more comprehensive and all-encompassing business regulations. For example, California has not one but three separate tax collection agencies that you may have to pay various types of taxes to:
This publication is general in nature, and will alert you to most of the most widely applicable business laws, taxes and regulations imposed by California, but the state has an enormous government bureaucracy and there are many other requirements that may apply to specific types of businesses, which are not covered here. Like most states, California imposes an income tax, a franchise tax (based on income) on corporations, a sales and use tax, various excise taxes, with property taxes generally imposed at the local level. The state has also adopted a limited liability company (LLC) law, and a limited liability partnership (LLP) law, so that some types of small businesses operating in California in LLC or LLP form may obtain the advantages of limited liability, without incorporating or becoming subject to corporate taxation, generally. However, California has the most restrictive and narrowly limited LLC law in the nation, as it does not permit any kind of business that requires a state license to operate to become LLCs, and those that do operate in LLC form are subject to a substantial annual "LLC fee" based on gross revenues, as well as an annual $800 franchise tax. Small businesses operating in California will now find it very difficult to avoid registering with local governments for required business licenses and use permits. The state Franchise Tax Board recently (in 2002) began entering into agreements with many California cities to supply the taxpayer names, addresses, Social Security or taxpayer identification numbers, and the principal business activity code of small businesses that file sales tax or other returns with the state. Cities that have signed up to receive such information from the state are now able to track down many small businesses that have not bothered to register for local business licenses, based on their tax filings with the Franchise Tax Board or State Board of Equalization. Since there can be substantial penalties imposed for failure to register, you need to be sure you promptly register you business with local governments, to the extent required. II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS. (a) In General. A business that operates in California can operate as a sole proprietorship, a general or limited partnership, a corporation, or, for some kinds of businesses, a limited liability company. In addition, like the federal tax law, the state income tax law also recognizes S corporations, for income tax purposes, and generally allows the income or losses of an S corporation to "flow through" and be taxed or deducted at the shareholder level. However, in addition to taxing the S corporation shareholders, California also imposes a franchise (income) tax on the S corporation itself, at a reduced tax rate. California also provides for limited liability partnerships, in which no partner is liable for debts of the partnership, in general, as in the case of a corporation or LLC, but with fewer legal formalities than are required for either a corporation or an LLC. Each of the above entities is discussed below, along with the basic requirements for forming such an entity and any general ongoing (non-tax) reporting requirements that are applicable to it. The tax treatment of each form of legal entity is discussed in Section IV. (b) Sole Proprietorships. In general, sole proprietorships in California can be formed with no formalities. However, as discussed in Section IV(b), it will typically be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, as well. No separate tax form filing is required, generally, for a sole proprietorship, under the California income tax law. Instead, as with the Schedule C on your federal Form 1040, you simply report the net income or loss from your sole proprietorship on the Schedule C of your state personal income tax return (Form 540). See Section IV(c) for information on the California income tax and filing requirements for individuals. (c) Partnerships. As a rule, general partnerships in California can be formed with no formalities, although it is highly advisable to have a written partnership agreement. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, for any type of partnership, including general or limited partnerships, or limited liability partnerships. Until recently, a partnership that owned real property in the state generally found it advisable to file a statement of partnership for the real property in each county where it owned such property. The statement had to be signed by the partners and also had to include a verification and be notarized. Now, however, a statewide registry is maintained by the Secretary of State, and a single filing can now be made on Form GP-1, Statement of Partnership Authority with the office of the California Secretary of State. A $70 fee is charged for filing the statement of partnership authority. While filing the Statement of Partnership Authority is strictly optional, it is generally a good idea to do so, since: A limited partnership must have at least one general partner and at least one limited partner, and a written limited partnership agreement is also a practical requirement. A limited partnership must file a Certificate of Limited Partnership, Form LP-1, with the California Secretary of State, plus a $70 filing fee, and may also file copies, certified by the Secretary of State, in each county where it does business or owns real estate. A foreign limited partnership, formed under the laws of another state, must register on Form LP-5 and also pay a $70 fee. For information on limited partnership filing requirements,
see the contact information for the offices of the California
Secretary of State, listed in Section VI(a).
Limited liability partnerships (LLPs) are a form of partnership permitted under the laws of California, and in virtually every other state. Like an LLC, an LLP provides limited liability for its owners, while retaining the tax advantages of a partnership for federal and California state income tax purposes. However, unlike an LLC, an LLP typically operates like a regular partnership, and is not required to file articles of organization. Also, an LLP does not protect a partner from his or her own negligence or malpractice but, like a professional corporation, can protect one partner against individual liability resulting from negligence, malpractice, or other wrongful acts of the other partners. The California LLP law differs significantly from that of LLP statutes in most other states, in that only certain law, architecture, and accounting firms may qualify for LLP status, and to do so must either maintain $100,000 of professional liability insurance per licensed person rendering such professional services, with a minimum of $500,000 coverage for each LLP (with a maximum $5 million required for accountants or architects, $7.5 million for attorneys); or, in the case of accounting or architecture firms, the LLP must confirm having a net worth of at least $10 million, or for law firms, meet other specified financial responsibility requirements, such as showing of a minimum net worth of $15 million. To form an LLP in California, you must file Form LLP-1 for a domestic law or accounting partnership (or Form LLP-5 for each foreign partnership) and pay a filing fee of $70 to the secretary of state. For more information on LLP registration and reporting requirements, see the contact information for the offices of the secretary of state, listed in Section VI(a). A partnership agreement, for any type of partnership, should spell out in considerable detail such matters as the following:
Partnerships, as entities, are not generally subject to state income tax in California. Instead, the income or losses of the partnership, as allocated among the partners, must be reported on the personal income tax returns of the individual partners (or on the corporate tax returns of any corporate partners). However, limited partnerships and LLPs are both subject to the annual minimum franchise tax, which is $800 a year. Partnerships are required to file an annual tax information return with the state. For more on California partnership tax return filing requirements, see Section IV(c). (d) Corporations. To form a corporation in California, you must file articles of incorporation with the California Secretary of State and pay a filing fee of $100. All corporations that incorporate or first qualify to do business in California on or after January 1, 2000 are exempt from the minimum franchise tax requirement for their first taxable year. In addition, the prepayment requirement for franchise tax was also repealed on and after January 1, 2000. Foreign corporations -- those created under the laws of another state -- must obtain a certificate of qualification to do business in California, from the Secretary of State of California. The application must be filed along with a filing fee of $100, a certificate of good standing from the state of incorporation, and certain other information, including the name of an agent for service of legal process within the state. For more information on filing articles of incorporation or applying for a certificate of authority to do business in California, see the contact information for the offices of the secretary of state, listed in Section VI(a). Prior to 2003, biennial, rather than annual, reports were required to be filed by corporations, effective since January 1, 2000. However, annual filing is again required, beginning in 2003. All corporations (foreign and domestic) are now required to file an annual statement within 90 days of filing articles or qualifying, on either Form SO-200C, Statement of Information or Form SO-350, for foreign corporations. (File Form SO-200NC for a domestic corporation if there are no changes since the last filing.) A $20 fee must be paid with each annual report, plus a $5 disclosure fee. In addition to paying federal income taxes on its income, a corporation that does business in California must also file corporate franchise tax returns with the state. Certain corporations that have California-source income, but are not considered to be engaged in business in the state, are subject to the California corporation income tax, instead of the franchise tax, but at the same tax rate. Such corporations subject to the state income tax are also not subject to the annual $800 minimum franchise tax. For tax forms and more information on the California corporation franchise and income taxes, see the contact information for the offices of the Franchise Tax Board, listed in Section VI(a). (e) S Corporations. An S corporation is simply a regular corporation that has elected, for federal income tax purposes, to be taxed somewhat like a partnership, with its income, losses and tax credits flowing through to its owners, who report such income, losses, or credits on their individual tax returns. California recognizes S corporations for income tax purposes, and treats them in a manner similar to the federal tax treatment. However, while the taxable income or losses of of an S corporation flow through to the shareholders for state income tax purposes, the S corporation itself must also pay corporation franchise tax on its income, at a reduced tax rate of 1.5% in 2000 and later years (rather than the regular corporate rate of 8.84%), or pay a minimum tax of $800 (or zero minimum tax for its first taxable year). A corporation wishing to elect S corporation status in California formerly had to file Form FTB 3560, S Corporation Election or Termination/Revocation, by the 15th day of the third month of the tax year to elect or terminate S corporation status for California tax purposes. However, in late 2002 the Franchise Tax Board ceased publication of this form, which is no longer required, since S corporation status in California is now based solely on the federal S corporation election, with no separate state election required or permitted. (f) Limited Liability Companies. California, like every other state in the U.S., has adopted a limited liability company (LLC) law. Thus, in addition to the traditional choices of a sole proprietorship, partnership, or corporation, a business that operates in California may also choose to operate in the form of an LLC. LLCs are very attractive entities for many small businesses, in that they offer the same protection as a corporation from creditors for debts of the business, while offering much of the flexibility plus the flow-through tax treatment of a partnership for federal tax purposes. However, unlike other states, California's LLC laws limit the use of this type of entity only to those firms that are not required to have state licenses to operate, or at least the law has been interpreted that way by the California Secretary of State until recently, which would not approve articles of organization submitted by any type of business licensed under the Business & Professions Code. The law defines "professional services" that cannot operate in LLC form to include firms providing "professional services," which is a circular definition, and thus very unclear. Accordingly, the Secretary of State has taken a very conservative position and has rejected any attempt by state-licensed businesses to file articles of organization. Thus, professional firms and a wide range of businesses, ranging from beauticians to auto mechanics, have not been allowed to set up an LLC in California, until recently. However, the California Attorney General issued a legal opinion to the Secretary of State in the summer of 2004, concluding that the law should be interpreted to prohibit LLC status only for certain "professional" firms, such as learned professions or those requiring passage of tests, and should not apply to a state licensed business such as food processing, which only requires that the applicant be a person of "good character," with no educational or testing requirements. Unfortunately, the legal opinion by the Attorney General has only served to muddy the water in this area. While it is fairly clear that professionals such as doctors, lawyers, accountants or architects are prohibited from setting up LLCs, it remains unclear which other licensed businesses would also be prohibited from operating in LLC form, and which such state-licensed businesses would now be able to legally set up an LLC. In response to the legal opinion issued by the Attorney General, the Secretary of State's office no longer will prevent any business, whether or not it requires a state license, from setting itself up in the form of a limited liability company. CAUTION: While the income of an LLC is taxed to its owners, like a partnership, and the LLC itself is not taxed on the income, firms that are allowed to operate in LLC form must pay an $800 annual minimum franchise tax and may also have to pay a substantial "LLC fee" or tax each year, based on gross receipts, if total worldwide gross receipts are more than $250,000. See Section IV(c), for a discussion of the income tax treatment of LLCs under California tax laws and a summary of LLC fees. To form an LLC in California, you must file articles of organization with the California Secretary of State, along with a $70 filing fee (Form LLC-1). Foreign LLCs that do business in the state must register with the Secretary of State on Form LLC-5, paying a $70 fee for filing the foreign LLC registration, in order to obtain authority to do business in California. California state law was amended, beginning January 1, 2000, to allow the formation of 1-member LLCs. California had already conformed to the federal tax treatment of 1-member LLCs, for LLCs formed outside of the state, since January 1, 1997, but did not allow formation of such LLCs under California law before 2000. All LLCs must file a Statement of Information (Form LLC-12) every two years, together with a $20 filing fee. For more information on filing articles of organization for an LLC, see the contact information for the offices of the secretary of state, listed in Section VI(a). III. BUSINESS ACQUISITIONS (a) In General. When acquiring an existing business, there are a number of state legal and tax issues you or, preferably, your business attorney, should attend to before closing the purchase. These include matters such as doing a title search for any real property that is being acquired, checking for any recorded security interests on personal property items, and thoroughly researching county, state, and federal records for any judgment liens, tax liens, or other liens, before property is acquired. You will also benefit from consulting a tax advisor before the agreement of sale is negotiated, in order to seek a structuring of the agreement so that the purchase price is allocated among the assets in a way that favors you. You may be able to obtain considerable tax savings if the purchase price is allocated in a way that gives you the best possible tax results under federal and state income tax laws, and other state tax laws, such as sales/use tax or property tax laws. When buying an existing business in California, some of the key state tax rules you need to consider are as follows:
Depending upon the state (or states) in which the seller's assets are located, you may also have to comply with state bulk sale or bulk transfer laws. You should also obtain tax releases from various state taxing agencies, as discussed below. (b) Bulk Sale Laws. Typical bulk sale laws require either publication of legal notices to all creditors in advance of the sale and recording of such notices in some cases, or maintenance of detailed lists of the property to be transferred, for inspection by the public. California has a bulk sale law and you will need to comply with this law when you purchase assets of an existing business. Failure to do so will expose you to liability to any creditors of the seller who do not get paid off when the sale of the business occurs. California's bulk sale law requires notification to creditors and suppliers of a business that is selling all or over half its assets in a bulk sale. However, most sales involving less than $10,000 or more than $5 million are exempt from the bulk sale law. You and the seller have certain obligations under the bulk sale law, where it applies:
Compliance with the bulk sales law should be handled by a competent business attorney, as its requirements are quite specific and very technical in nature. CAUTION: (c) Tax Releases. When you acquire an existing business, you will want to make sure that you do not unwittingly become liable for any unpaid taxes owed by the seller. Typically, to protect yourself, you will need to receive a tax release or releases from various state taxing agencies, for such taxes as sales and use tax, income tax withholding, and state unemployment taxes, in each state in which the seller does business. If you fail to obtain such a release or written statement from the tax agency that the seller is not delinquent on any tax payments, you will be held responsible for such tax if it is not withheld from the purchase price proceeds and paid to the state at the time the sale of the business transpires. When acquiring an existing business in California, you will want to be sure the seller has no outstanding state unemployment tax, withholding tax, or sales tax obligations. Otherwise, you may be held liable for such obligations, unless you obtain the appropriate tax releases from the state or withhold any unpaid taxes from the purchase price you pay to the seller. You should take the precaution of having the seller obtain a Certificate of Release of Buyer by filing Form DE 2220R, Release of Buyer Request Form from the Employment Development Department (EDD). Contact your local EDD employment tax district office. Similarly, to avoid being held personally liable for unpaid sales tax or state income tax withholding, you will want to withhold such amounts or obtain a letter from the EDD (withholding taxes) or the State Board of Equalization (SBE), showing that no tax is owed, or else telling you how much tax you should withhold from the purchase price. Request a sales tax certificate in writing, by certified mail. (d) Unemployment Tax Rating of Seller. In addition to obtaining tax releases, you may find it advantageous to succeed to the seller's unemployment tax experience rating, if the seller has a tax rate lower than you would otherwise obtain as a new business. To obtain the seller's favorable experience rating as a successor employer, you will need to apply on a timely basis to the Employment Development Department on Form DE 4453, requesting that you be treated as a successor employer. (e) Withholding Tax on Real Estate Purchases. As under federal law, California has generally required a purchaser of real estate located in the state to withhold state income from the purchase price if the purchaser was a nonresident, except that in this case the California tax had to be withheld if the seller is a nonresident of the state, rather than of the United States. California law generally required such withholding if the buyer was a foreign person, or had an out-of-state address, or if withholding was required under the federal tax law. However, beginning in 2003, withholding is now required even where the seller is a California resident. Certain small real estate transactions are exempted from the withholding requirement. The main exceptions to this withholding requirement are where the sales price does not exceed $100,000, or where the seller received a homeowner's property tax exemption in the year of sale on the property. In addition, since January 1, 2003, withholding on real estate transactions (at the rate of 3 1/3%) has been extended to many more transactions, including those where the seller is a California resident, as noted above. The $100,000 and homeowner exemptions will continue to be allowed, as well as exemptions for like-kind exchanges of property, and sales where the seller has a taxable loss on the transaction. Otherwise, individuals who sell California real property are required to pay the withholding tax, even if they will not owe any tax for the year -- making the withholding tax the equivalent of a mandatory interest-free loan to the state of California until the seller files a year-end tax return and obtains a refund of the withheld tax. Corporations, partnerships, LLCs, trusts and estates of decedents are not subject to the newly extended withholding requirement. IV. CALIFORNIA TAXES AND OTHER GENERAL REQUIREMENTS. (a) In General. California has a somewhat unusual, and highly complex tax system. While most states have only one tax-collection agency, California has three:
Tax rates in California are generally on the high end, compared to other states, but the top bracket on personal income taxes, formerly 11%, dropped back to 9.3%, since 1996. In addition, the state franchise tax (and income tax) on corporations has been reduced to 8.84% of taxable income since 1997. However, Proposition 63, passed by voters in the November, 2004 election, imposes an additional 1% tax on high-income individuals, on their taxable income of more than $1 million, the so-called "Millionaire's tax." Sales tax rates are also relatively high, with rates as high as 8.75% in Alameda County and 8.5% in San Francisco County. Property tax rates in California are quite low, as they are theoretically limited by law to 1% of value (actually about 1.25% in most areas), and business inventories and intangible property are entirely exempted from property taxes. (b) State and Local Licensing. Nearly any business operated in California will have to have at least one government license of some kind. In most cases, this will be a local license, issued by your city or county. Before you open your business, contact your local city or county hall and find out if your particular business needs one or more local licenses. Most kinds of local business licenses are granted upon payment of a fee, with no further requirements, except possibly for annual or other periodic renewal fees. However, if you are engaging in any kind of food business, you will usually need to also obtain a health department permit and show that you are in compliance with health department food-handling requirements. In addition, be sure to check with an attorney or local government zoning or planning department officials to determine if your businesses will be in compliance with all local zoning and planning restrictions. If you own or rent any type of facility, you will generally need fire department permits, showing that you meet fire safety codes and any construction or improvements to an existing structure will usually require a building permit. If you intend to simply operate your business from your home, you may be in violation of local zoning requirements, but this is less likely to be a concern if you don't have clients, customers, suppliers, or employees coming to your house on business, on a regular basis. State governments have also traditionally required special licenses for many kinds of professionals, such as physicians, dentists, lawyers, and accountants. To further protect consumers, California has expanded the list of occupations that must be licensed by the state to include many other occupations. Most state licenses not only require payment of fees, but are only issued for a given profession or occupation upon showing that you have completed certain educational or experience requirements, or passed certain tests, or some combination of the foregoing. The following is a partial list of professions and occupations requiring state licenses in California:
If you are not sure what types of state licenses you may need in California, the best place to start is with the Department of Consumer Affairs, which administers most state licensed businesses and professions. In addition, several important licensing departments are divisions of the California Commerce and Economic Development Program, including alcohol beverage control, real estate sales and brokerage, and banks and savings and loans. Other independent state licensing agencies include:
For information on state licensing and business registration requirements in California, see the contact information for the offices of the Department of Consumer Affairs and the California Commerce and Development Program, listed in Section VI(a). You may want to purchase ($20) their California License Handbook, or for guidance on environmental permits, the California Permit Handbook. (c) Income and Franchise Taxes. California has both an individual income tax and a corporate income tax or franchise tax on corporations. The California individual income tax is imposed at a maximum tax rate of 9.3%, generally, but an additional 1% tax on taxable income over $1 million was adopted by voters (Proposition 63) in the November, 2004, election, to fund mental health programs. Individual taxpayers generally pay state income tax on their business earnings from a sole proprietorship, or on their share of the earnings of a pass-through entity, such as a partnership, S corporation or LLC. The California personal income tax return is Form 540, which must be filed with the Franchise Tax Board. Partnerships are not subject to state income taxation in California, but must file an information return with the Franchise Tax Board each year, showing each partner's share of taxable income, losses, and credits, on Form 565. However, limited partnerships and LLPs are required to pay an annual minimum franchise tax of $800, whether or not they have any taxable income. Partnership information returns are due by the 15th day of the fourth month of the following year, or April 15th, in the case of a calendar year partnership. Individual taxpayers doing business as sole proprietors, or who are partners in partnerships, or members of LLCs, are required to make payments of estimated California individual income taxes, on Form 540-ES, if their net tax liability (not covered by withholding) exceeds $200. Prior to 2003, estimated tax payments were not required, if more than 80% of the tax liability was paid in by withholding for the current or preceding year, or if more than 80% of the current year's California adjusted gross income consisted of wages subject to withholding. Those two "safe harbors" have now been repealed, effective since 2003. In 2002 and earlier, only 80% of your California tax needed to be paid as estimated tax payments, unlike the 90% federal estimated tax requirement. Since 2003, however, California has conformed to the federal rule, and requires 90% of your estimated tax to be paid in during the year, rather than 80%. Estimated tax payments are due on the same dates as your federal quarterly estimated tax payments: on the 15th day of April, June, September, and January of the following year. If you pay in an amount equal to at least 100% of the prior year's tax liability (if the prior tax year was a full 12 months), you will generally not be subject to an estimated tax underpayment penalty, generally. As under federal tax law, high income taxpayers, with adjusted gross income of more than $150,000, must pay in somewhat more than 100% of the prior year's tax liability, if basing their estimates on the prior year's tax. For 2005, a taxpayer with over $150,000 of adjusted gross income must pay in 110% of the 2004 tax liability, if basing the estimate on the prior year's tax. Corporations that do business in California are generally subject to the franchise tax, which is a tax on net income. The California franchise tax on corporations, other than S corporations, is imposed at a flat rate of 8.84%. Income of S corporations is taxed at a rate of only 1.5%, but the S corporation income or loss is also reported on the individual tax returns of the shareholders, so that some double taxation results, for state tax purposes, when operating as an S corporation in California. There is an $800 minimum franchise tax that applies even if the corporation has no income or has a taxable loss. Banks and other financial corporations are subject to a 2% higher franchise tax rate (10.84% of income at present). The higher franchise tax is imposed because banks and financial corporations are exempt from certain other state taxes. The state corporation franchise tax return is Form 100 (Form 200 for corporations not doing business in the state, which are instead subject to the corporation income tax), or Form 100S for S corporations. Returns must be filed with the Franchise Tax Board by the 15th day of the third month following the end of the taxable year, or by March 15th in the case of a corporation whose taxable year is the calendar year. Corporations are also required to make quarterly estimated tax payments, equal to 100% of their tax liability for the year. Payments are due in four equal installments, generally, on the 15th day of the 4th, 6th, 9th, and 12th months of the corporation's taxable year, with Form 100-ES. The first quarterly payment must be no less than the full amount of the $800 annual minimum franchise tax. Penalties will be imposed for failure to make the required estimated tax payments on a timely basis. The minimum franchise tax does not apply to corporations for their first taxable year, and if a corporation's first taxable year ends less than 15 days after incorporation, and before the corporation has commenced doing business, no minimum tax will apply to the initial short period either. For example, if you incorporate on December 17, 2005, and select a calendar tax year, and do not begin doing business until January, 2006, no minimum franchise tax will apply for the short 2005 tax year, or for the full year 2006. IMPORTANT NOTE: Certain corporations, such as those which own rental property in the state, but which do not "do business" in California, are subject to the California corporation income tax, instead of the franchise tax. The state income tax on corporations is essentially identical to the franchise tax, except that there is no annual minimum tax of $800 under the corporation income tax, unlike the franchise tax. A corporation taxable in California is subject to either the franchise tax or the income tax, but not both. In the past, a corporation could elect to be an S corporation for California tax purposes, but not for federa tax purposes, or vice versa. However, California law was changed in 2001, so that now a federal S corporation election or termination of such election automatically applies for California tax purposes. S corporations in California are generally treated the same as for federal tax purposes, except that a 1.5% franchise tax applies to S corporation income, which is also fully taxable to the S corporation's shareholders, thus resulting in a slight degree of double taxation. The $800 minimum tax applies to an S corporation, just as it does to other corporations, LLCs and LLPs. S corporations file annual tax returns on Form 100S, which is due by the 15th day of the third month after then end of the taxable year (by March 15th, in the case of a calendar year taxpayer corporation). An environmental tax (payable to the State Board of Equalization on or before the last day of February, for the preceding calendar year) is imposed on all incorporated businesses with 50 or more employees. The tax ranges in 2005 from $243 for a firm with 50 to 74 employees, to as much as $11,625 for firms with 500 or more employees (the tax amounts are indexed for inflation each year); In California, a limited liability company (LLC), if it so elects, will be taxed in somewhat the same manner as a partnership, thus avoiding most of the possible double taxation of income that can occur with a corporation. Like limited partnerships and LLPs, however, California imposes an annual minimum franchise tax of $800 on LLCs. In addition, all but small LLCs (or LLCs that have elected to be taxed as corporations) must pay an annual LLC fee which is based on the amount of the LLC's worldwide gross receipts, rather than its taxable income, as follows, for tax years beginning on or after January 1, 2003:
For a business that sells goods from inventory, the cost of goods sold must be added back to "gross profit" from sales of such goods, for purposes of calculating an LLC's gross receipts. Where there is tiered ownership of LLCs, the Franchise Tax Board formerly took the position that the LLC fee must be doubled up or "pyramided" -- that you had to count the gross receipts of the "subsidiary" in that of the "parent" LLC, even though the "subsidiary" had to pay the LLC fee on the same gross receipts. However, for taxable years beginning on or after January 1, 2001, this is no longer the case, but the law grants the Franchise Tax Board (FTB) the power to determine the LLC fee based on the total gross income of a commonly controlled group, if the FTB determines that multiple LLCs were formed for the purpose of reducing LLC fees. Since an LLC, including a single-owner LLC that is a disregarded entity, must pay the LLC fee based on its total worldwide gross receipts, not just on its California receipts, and regardless of whether it operates at a profit or a loss, this fee can in some cases be considerably higher than if the LLC were taxable as a corporation, or were operated as another type of entity, such as a limited partnership. Note: the LLC fee is not considered to be a tax. Thus, unlike the $800 annual franchise tax, the LLC fee is deductible for both federal and California tax purposes. The $800 franchise tax is deductible for federal tax purposes, but not for California tax purposes. LLCs must file tax returns (Form 568) and pay the LLC each year by the 15th day of the fourth month after the end of the tax year. Under IRS (federal) regulations that went into effect in 1997, an LLC is able to elect to be treated as a partnership if it has more than one owner, or as a sole proprietorship if it does not, for federal tax purposes. California law has been amended, retroactive to January 1, 1997, to recognize the validity of a one-owner LLC, and to follow the federal classification of an LLC under the new IRS "check-the-box" regulations. However, before 2000, as a practical matter, this only applied to LLCs formed in other states, since the LLC law of California did not permit formation of a single-member California LLC. However, a law change in 2000 now permits formation of single-member LLCs in California, on or after January 1, 2000. Unlike federal tax law, however, California does not totally disregard a single-member LLC entity. While the person who owns the LLC must include all its income and deductions on his or her (or its) California income tax return, it is also necessary to file pages 1 and 3 of Form 568 and pay the annual $800 franchise tax and the annual fee, based on gross receipts. It is not always entirely clear whether an LLC is a "single-member LLC" LLC or not, in a community property state like California, where the "single owner" is a married person and the LLC is owned as community property. Fortunately, the federal Internal Revenue Service (IRS) has taken a very lenient position in Rev. Proc. 2002-69, stating that the IRS will accept whatever choice the couple make, either to disregard the LLC as an entity (treating it as a "single-member LLC") or to treat it as a partnership between the husband and wife. Presumably, the couple's choice of federal tax treatment will also apply for state tax purposes, since California follows the federal tax treatment of LLCs, generally. However, where the LLC is owned by a husband and wife as joint tenants, or tenants in common, or as tenants by the entirety, it is unclear whether the IRS treatment would be as lenient as for community property owners, since the IRS has not issued any published rulings on whether an LLC can be a disregarded entity if held in one of the various forms of tenancy by a married couple, rather than being held as community property. Thus, it is also unclear, where an LLC is owned by a husband and wife as co-tenants, whether California would treat the LLC as a single-member LLC or as a partnership. (d) Sales and Use Tax. If your business is involved in retail sales or rentals of tangible personal property, you are required to collect California sales tax. Sales tax also applies to furnishing, preparing, or serving food, meals, or drinks. Other activities involving tangible personal property, such as producing, fabricating, processing, printing, or imprinting for customers who supply the materials, are also taxable, as is the transfer of title or possession of personal property that is produced or fabricated to special order of a customer. The statewide sales and use tax rate is 7.25%, and ranges up to 8.25% when combined with the county rate, in several large counties, and is 8.5% in San Francisco County and 8.75% in Alameda County. Effective April 1, 2005, the combined tax rate in the City of Richmond also increases to 8.75%. When you buy merchandise that you will resell, lease or rent to others, you are not required to pay sales tax on the purchase, if you give the seller a properly completed resale certificate. Many items and transactions are also exempt, such as groceries, bottled water, and medicines, or sales made to the federal or state government. Use tax applies to the use of all taxable property purchased outside the state, where no California sales tax has been collected, when the property is used or consumed in California. It also applies to items bought tax-free for resale by a retailer, but which are used or consumed, rather than resold, by the retailer. Vendors, including both retailers and wholesalers, are required to apply for a seller's permit from the California State Board of Equalization (SBE), in order to be able to collect sales tax and resell merchandise. There is no fee for the licenses, which are needed for each place of business. However, your business may be required to post a security deposit of between $2,000 and $50,000, which can be refunded after three years if you make all tax payments and file returns on a timely basis for your first three years in business in California. Apply for a seller's permit on SBE Form BOE-400-SPA. As a seller, you should obtain a copy of Publication 73, which outlines your sales and use tax obligations and lists various sales tax regulations you can request from the SBE, as well as Publication 61, which lists the various sales and use tax exemptions. A sales and use tax return (Form BOE-401-A2, usually) is due quarterly, with payment of the collected taxes, one month after the end of the quarter. Some small businesses can file a simplified Form BOE-401-EZ, and some larger businesses may be required to make more frequent payments of tax. For more information on California sales and use tax registration and compliance, see contact information for the offices of the State Board of Equalization in Section VI(a). (e) Real and Personal Property Taxes. In California, as in every other state, any business real estate you own will be subject to real property taxes. Proposition 13 generally limits property tax to 1% of value, but in practice, tax rates tend to be about 1.25% in many areas. Increases in assessed value are limited to a maximum of 2% a year, unless there is a change of ownership of property (or of 50% ownership in the stock of a corporate owner of real property). California also imposes personal property taxes on tangible personal property. Your business must report all business personal property as of each January 1 on Form 571-L, Business Property Statement, if you have $100,000 or more of such property. Otherwise, no such filing is required unless requested by the county assessor. Certain types of business personal property, such as business inventories and intangible property, are exempt from personal property tax in California. (f) Other Business Taxes. California imposes a number of other taxes on businesses, including:
(g) Trade Names. A trade name, also known as a fictitious or assumed name, is any name used by a business that does not include the full legal name of all the owners of the business. Also, a business name that suggests the existence of additional owners, such as "company," "group," or "associates" may also be a fictitious name. If you operate any business in California under a fictitious name, you are required to file a certificate with the county clerk in the county that is your principal place of business, within 40 days after it begins business. Within 30 days after filing the statement, it must also be published for four weeks in a general circulation newspaper in the same county. An affidavit of publication must then be filed within 30 days after publication. There is a $10 fee for one business name. Your county clerk can provide you the necessary form, and the California Newspaper Service Bureau will handle the whole filing and publication process for you for a modest fee (including a preliminary name search, if you request it, for an additional fee). While registering a fictitious name may be helpful in establishing that you were first to use that name in the state of California, you may want to seek additional protection by registering it as a business or trade name. For information and registration forms, contact the Trademark Division of the California Secretary of State. See the contact information in Section VI(a) for both the California Newspaper Service Bureau and the Sacramento office of the California Secretary of State. V. EMPLOYER REQUIREMENTS IF YOU HAVE EMPLOYEES (a) Employer Registration and Withholding. If you have any employees, you will already be withholding federal income tax and FICA taxes from their wages. Since California imposes a state income tax on the income of individuals, you will need to also withhold California income tax and State Disability Insurance (SDI) from the wages of your employees. You must also pay state and federal unemployment taxes, based on the wages you pay. Before paying wages, you must apply for and receive a state employer identification number from the California Employment Development Department (EDD). If you will pay wages in excess of $100 in a calendar quarter, you will need to register first with the EDD as an employer, on EDD Form DE-1. The EDD will use that application to assign you an eight-digit state employer ID number. You will also receive a packet including required federal and California payroll tax posters and Form DE 88ALL blank payment coupons and, within 4 to 6 weeks after you register, a personalized Form DE 88 coupon booklet. To obtain withholding tax tables and other state information on employer withholding and tax payment obligations, and a state employer identification number, contact the nearest EDD field office. Note that there are different types of DE-1 forms for different types of businesses. The EDD can tell you which form best suits your type of business. State Disability Insurance (SDI) is a tax imposed on the first $79,418 of each employee's wages, at the rate of 1.08% of the employee's wages, for wages paid on or after January 1, 2005. This tax is imposed entirely upon the employee, but the employer is required to withhold it and pay it over to the EDD, together with state personal income tax (PIT) withheld. You must use Form DE 88 to make payments, and file quarterly report Form DE-6. SDI has been increased dramatically in recent years, now that SDI funds are being utilized to pay employees for up to 6 weeks of paid family leave per year, as well for disability leave. If you are employed by a corporation and are the sole shareholder, or the only shareholder other than your spouse, you may file a statement electing to be excluded from SDI coverage for benefits and for payment of the SDI tax. In general, employers are required to make deposits (payments) of withheld PIT and SDI when the amount that is accumulated exceeds $500, for employers required to make federal withholding tax requirements, within the same number of banking days required for making your federal deposits. The $500 threshold is adjusted each year, between $75 and $500, depending on the rate of interest that is earned on the state's Pooled Investment Fund. The deposit threshold is fixed at $350, for those smaller employers who are not required to make federal withholding deposits. The table below summarizes how the California payroll tax deposit rules mesh with the federal tax deposit requirements. 2005 CALIFORNIA SDI AND PIT WITHHOLDING TAX SUMMARY:
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If you make deposits averaging $20,000 or more over any one year period ending June 30th, you are required to make payment by electronic funds transfer the following calendar year.
For more information on California income tax withholding and registration requirements for employers, see the contact information for the offices of the Employment Development Department, listed in Section VI(a).
Besides wage withholding, businesses may be required to withhold state income taxes in other circumstances, some of which include the following:
Remit such withheld tax payments during the year on Form 592-A, and at year-end file Form 592 by January 31 to report the total amount of tax withheld during the year. Also, by January 31, file Form 592-B, Nonresident Withholding Tax Statement, and send Copies B and C to each contractor. Currently, the legislature is studying a proposal to extend withholding (possibly at 2%) to all payments made to independent contractors, not just nonresidents.
(b) Unemployment and Other State Payroll Taxes. If you employ one or more individuals and your payroll totals $100 or more in any calendar quarter in the current or preceding year, you must register as an employer within 15 days and begin paying California unemployment insurance tax.
Employers subject to the California unemployment tax are required to register with the Employment Development Department (EDD). The registration, on Form DE-1, also serves as the registration for state income tax withholding. You can seek a determination of employee status for any worker by filing Form DE-1870, Determination of Employment Work Status, with the EDD.
New employers are required to pay tax at a rate of 3.4% (plus a 0.1% employment training tax) in 2005 on the first $7,000 of wages paid to each employee. After you have had employees for a while, you will develop an unemployment tax experience rating. This rating is based on the number of employees you terminate who then claim unemployment benefits and the amount of such benefits paid to those former employees, under complex formulas. The state will inform you when they have assigned you an individual tax rate based on your firm's experience rating. That rate may be higher or, if you have had relatively few benefit claims charged to your account, lower than the standard new employer tax rate you initially were paying.
All state unemployment taxes are imposed upon you as the employer, and, under California law, cannot be charged to your employees or withheld from their wages. However, State Disability Insurance (SDI) is imposed entirely on the employee and must be withheld from the employee's wages at the rate of 1.08% of the first $79,418 of an employee's wages in 2005.
Unemployment contribution reports and taxes are due each quarter, by the end of the month following the end of each quarter. For helpful brochures and other information about your responsibilities under the state unemployment tax laws, contact the EDD at the address given in Section VI(a). Also obtain from the EDD a copy of Form DE 1857, Notice to Employees of Unemployment Insurance and Disability Insurance, which must be posted if your business is subject to disability and unemployment insurance taxes. Form DE 1857 is available in English, Spanish, Chinese, or Vietnamese.
For more information on your California unemployment tax obligations as an employer, see the contact information for the offices of the Employment Development Department, listed in Section VI(a).
(c) Workers' Compensation. Workers' compensation insurance is a state-mandated insurance requirement for most employers, in almost every state. In California, virtually all businesses with one or more employees are required by law to have workers' compensation insurance, except those able to self-insure. Note, however, that sole proprietors, partners in a partnership, or general partners in a limited partnership are generally not considered to be employees. Similarly, officers and directors of a corporation who are the sole stockholders of the corporation are not required to be covered for workers' compensation purposes, nor is a working member of an LLC.
Workers' compensation provides wage loss and medical benefits to employees injured on the job and it protects you, as an employer, from legal action for damages for injuries or job-related illnesses suffered by your employees. In effect, it is a "no-fault" insurance system for work-related injuries or illnesses. Thus, if you fail to obtain required workers' compensation insurance, and an employee is injured on the job, you will have opened yourself to unlimited liability and severe legal consequences, so it is very important to obtain workers' compensation insurance for your employees.
Be aware that neither general liability nor health and accident insurance can properly substitute for workers' compensation insurance.
As an employer, California law requires you to:For more detailed information regarding your obligations as an employer under the California workers' compensation laws, contact your insurance carrier or see the contact information for the offices of the State Compensation Insurance Fund, listed in Section VI(a).
(d) State Wage and Hour Laws. California has its own state minimum wage and overtime laws, which are often somewhat different and more stringent than the federal laws. While the federal minimum wage is currently $5.15 per hour, California's minimum wage has been $6.75 an hour since January 1, 2002. San Francisco has its own local minimum wage, as well, which is $8.50 for any employee who works two or more hours a week.
Depending on the nature of the business, employers must display one of an series of official Industrial Welfare Commission (IWC) posters entitled Orders Regulating Wages, Working Conditions, and Hours, as well as a Pay Day Notice. As under federal law, you must pay time-and-a-half wages for overtime, to an employee who works more than 40 hours in a workweek. California labor regulations also require employers to pay such an overtime premium if an employee works more than 8 hours in one day, or more than six days in a week, and to pay twice the regular wage for more than 12 hours work in a day or more than 8 hours on the seventh workday in a week. California is one of only a very few states that still requires the payment of overtime based on a daily calculation, which has become a serious disincentive for businesses to locate in California.
The daily overtime calculation was overruled by the IWC in 1997, but under Governor Gray Davis, the legislature now restored the old rules for daily overtime described above, effective since January 1, 2000, for non-union employees. As under the old (pre-1997) law, if at least two-thirds of a company's workers vote for an alternative work schedule, in a secret ballot, it is permissible in 2000 and later years to adopt a four-day, 10-hours-a-day work schedule, without having to pay overtime for workers who work four 10-hour days a week. Workers under such an alternative work schedule who work extra hours must be paid at least time-and-a-half for hours worked in excess of 10 hours a day, up to 12 hours, or double time for hours in excess of 12 a day, on regularly scheduled days, and must be paid time-and-a-half for the first 8 hours worked on days not regularly scheduled, or double time for hours in excess of 8 hours a day on days not regularly scheduled as workdays under the alternative work schedule.
More recently, in 2004, California enacted three stiff new penalty provisions for employers who fail to pay required overtime or otherwise violate any of the numerous complex provisions of the California Labor Code. These are summarized in Section V(f)(8).
Note that, as under federal wage-hour laws, certain classes of executive, administrative, and professional employees are exempted from the California wage-hour rules.
In addition to wage-hour laws, most businesses are subject to federal child labor laws, which put numerous restrictions on the working hours and kinds of work in which minors under the age of 18 may engage. As under federal laws, the employment of children under age 18 is strictly regulated by the state of California.
Children under 16 are generally prohibited from working in manufacturing industries, and no children can work in situations considered hazardous to their health, such as railroads, vessels, or mining operations. Children may only work specified hours, with some exceptions for 16- and 17-year old children who are not required to be in school.
For more information and required wage-hour posters you must display in the workplace, contact the California Division of Labor Standards Enforcement, at the address listed in Section VI(a).
(e) State Occupational Safety and Health Laws. Employers in California must comply with both state and federal job safety laws designed to protect workers from unsafe or unhealthy working conditions. While many states rely on the federal OSHA agency to enforce job safety and health rules, California is one of the states that administers its own occupational safety and health programs, through the California Department of Industrial Relations, Division of Occupational Safety and Health (DOSH).
California has its own extensive set of worker safety and health laws, known as Cal/OSHA. CAL/OSHA's reporting and record keeping requirements generally dovetail with federal OSHA rules, and you can even use the federal OSHA forms in lieu of the CAL/OSHA forms.
Your business must post a permanent job safety notice to employees (CAL/OSHA Form 1000, Safety and Health Protection on the Job) at each place of employment, or face a fine of up to $7,000 for failure to do so.
Other CAL/OSHA requirements include:SAFETY PLAN REQUIRED. Senate Bill (S.B.) 198, a California law which was enacted in 1989, requires a relatively complex written safety plan to be adopted. Among other requirements, the company safety plan must:
Employers without a written plan and someone to conduct training and maintain the plan can be assessed a penalty of up to $1000 (or $2000 if the violation is "of a serious nature").
However, the requirement to have a written safety program has recently been considerably relaxed for employers with under 20 employees, if they either have a good workers' compensation experience record or if they are in certain designated low-hazard industries. The only written documentation requirements for such small firms are as follows:
Licensed contractors in the construction industry also have less stringent record keeping requirements as to their implementation of safety programs.
To determine if your workplace is in compliance with federal and California job safety requirements, you may wish to contact DOSH and request a free on-site safety consultation. You will not be cited for any violations detected, provided that you promptly correct the unsafe conditions. This differs from the rules for consultations by federal OSHA inspectors, who are required to cite you for any violations they find.
For information on your job safety and health obligations as an employer, required posters, and possible on-site safety consultations, see the contact information for the offices of the Division of Occupational Safety and Health, listed in Section VI(a).
(f) Other Miscellaneous State Labor Laws. Other California labor laws you need to be aware of, as an employer, include the following:
(1) Wage payments to employees. Wages must be paid at least twice a month, except for certain exempt executive, administrative, and professional employees, who may be paid monthly.
A terminated employee, or one who quits after giving you 72 hours advance notice, must generally be given a final paycheck immediately, for his or her pay up to the time employment terminates, or else wages will continue to accrue, for up to 30 days' pay at the regular rate (including weekends or holidays, so the maximum amount, for 30 consecutive days, will be more than simply a month's regular wages). Payment is due within 72 hours to an employee who quits without giving you at least 72 hours advance notice, or is due at the time of termination if the resigning employee gave you at least 72 hours notice of his or her termination.
(2) Right-to-work laws. About half the states have enacted "right-to-work" laws, which guarantee that no person may be denied employment for refusing to join a union or for not paying union dues, thus banning either "union shop" or "agency shop" agreements, or both. In a union shop, an employee not belonging to a union may be hired but then must join the union, usually within 30 days. In an agency shop, an employee need not join the union but, to remain employed, must pay union dues.
California does not have such a right-to-work law and allows union shop or agency shop contracts between an employer and a union.
(3) State anti-discrimination laws. In addition to complying with all federal anti-discrimination laws, employers must also be aware of and comply with state civil rights laws in California.
California's anti-discrimination and civil rights laws include laws regarding equal pay, regardless of gender, and fair employment laws, generally similar to the federal fair employment laws, also covering marital status, sexual orientation, medical condition, and mental or physical disability.
However, unlike the federal laws, which generally exempt small employers with under 15 employees, the California fair employment laws apply to any employer that regularly employs five or more persons.
All covered employers are required to display an official state poster entitled Discrimination and Harassment in Employment are Prohibited by Law. You can obtain this poster from the Sacramento office of the California Department of Fair Employment and Housing, at the address listed in Section VI(a).
Also, in addition to laws prohibiting discrimination based on race, color, religion, disability, sex or ethnicity, California has enacted a gay rights law and a law prohibiting discrimination or harassment on account of gender identity (i.e., cross-dressing by transsexuals).
Beginning January 1, 2004, gender identity is now a protected class of employees. This means that if you employ individuals who choose to dress, appear, or behave in a manner traditionally associated with the opposite sex, you may not discriminate against them for doing so. For example, if a male employee wishes to come to work wearing a dress and lipstick, you may not fire the employee or allow him to be harassed by other employees for doing so, even if such appearance or conduct offends or drives away customers or clients.
(4) Reporting new hires. California employers are required to report all new hires, rehires, or returning employees to the California Employment Development Department (EDD) within 20 days of their being hired, rehired, or returning. Employers who choose to report via magnetic media must submit two monthly transmissions which are not less than 12 days nor more than 16 days apart.
New hires can be reported on EDD Form DE 34, Report of New Employee(s), but you may instead file a copy of the employees' W-4 forms. To mail or fax your report to the EDD, see the address, phone and fax number information for that agency listed in Section VI(a).
(5) Reporting Independent Contractor Services. While the new hires reporting requirements described in the preceding two paragraphs are intended to improve enforcement of child support orders, some parents were, until 2001, still able to avoid garnishment of their wages for child support by working as self-employed independent contractors, and thereby evade their child support obligations.
However, a California law, effective January 1, 2001, requires any company ("service recipient") that uses independent contractors in its trade or business to file a report, similar to a new hires report, with the Employment Development Department, when it retains the services of an independent contractor. A report is only required if the service recipient would be required to file a federal Form 1099 with the Internal Revenue Service with regard to that individual contractor (or partnership or corporation, in the case of services provided by certain law firms and medical corporations). The report is due within 20 days after a contract is executed, or, if there is no contract, 20 days after cumulative payments to the independent contractor first exceed $600.
In addition, a company must continue to file the independent contractor report for each subsequent year that it pays over $600 to the independent contractor.
(6) Domestic Partners Law. California has enacted a domestic partners law, effective January 1, 2005, for couples of opposite sexes who are both over age 62 and eligible for Social Security benefits, and for couples who are both over age 18 and are of the same sex. Couples registered as domestic partners do not have all the legal rights of married couples, but they are generally treated like married couples for purposes of employee health benefit plans and for various other purposes. Employers are not prohibited from requesting a copy of the Declaration of Domestic Partnership, for proof of such a relationship, when offering domestic partner benefits to employees. The San Francisco County Assessor has ruled that same-sex couples are eligible for exemption from reassessment of real property upon the death of a partner, in effect providing the same treatment as for married couples; this benefit is not available to opposite-sex partners, however, under the October 10, 2002 ruling of the Assessor.
(7) California smoke-free workplace rules. State law prohibits smoking in most enclosed workplaces in California. Small businesses with 5 or fewer employees are exempted, but only if they meet several requirements, such as venting any smoking areas and not making such areas accessible to minors, plus not requiring employees to work in smoking areas against their will. Detailed rules are prescribed as to where "No Smoking" signs must be posted, and specifying when and where smoking is permitted in various types of workplaces, such as hotel rooms and lobbies, restaurants, banquet rooms, warehouses, and other specified workplaces.
(8) New penalties imposed on employers for labor law violations. In 2004, California enacted new California Labor Code Section 2699, which provides for stringent penalties for employers who violate any of the state's numerous employment laws. The main provisions you, as an employer, need to beware of are the following:
(9) Employee meal break periods. Meal break periods are now part of the California law. Under new Labor Code provisions, an employee who works five or more hours in a day must have a meal period of at least 30 minutes, unless the total work day is no more than six hours and the employer and employee have mutually agreed to waive the meal period. A second meal period is required when an employee works more than a 10-hour day, unless the total work day is less than 12 hours and the employer and employee agree to waive the second meal period. An employer that fails to provide such meal breaks will incur a penalty, in the form of one hour of additional pay to each worker for each day worked where the employer failed to provide the required meal breaks.
(10) Disability rights laws. California is one of only three states (along with New York and Illinois) that has adopted its own disability rights laws, similar to the federal Americans with Disabilities Act.
The California disability laws generally have more extensive employer liability provisions than the federal law, now that the U.S. Supreme Court has limited liability of municipalities for punitive damages in private ADA suits (Barnes v. Gorman case, 2002), and has limited ADA coverage of employees with carpal tunnel syndrome, since ADA specifically covers only relatively permanent disabilities (Toyota Motors v. Williams, 122 S. Ct. 1516 (2002)), and excludes temporary conditions. In addition, the U.S. Supreme Court has upheld an Equal Employment Opportunity Commission regulation that permits employers to reject job applicants with medical conditions that might be exacerbated by workplace conditions, where no reasonable accommodation by the employer could remove this direct risk to the employee.
California disability laws, in general, do not follow the above exceptions in the federal ADA law or its interpretation by the U.S. Supreme Court. Secondly, the various California disability laws have a much broader definition of "disability" than the federal law, and do not take into account any mitigative measures, such as medications or corrective devices, when determining whether a condition constitutes a disability.
Finally, California law considers an employee to be disabled if his or her condition affects only one particular type of job, rather than a class or range of jobs, as under the federal ADA.
Thus, compliance with all federal ADA requirements may not be enough to protect you from liability under state law, if your business operates in California. You must take care to comply with the California requirements as well, since your potential liability as an employer is so greatly expanded under the California disability laws. For example, under the California law, an employer can be sued for damages for failing to be receptive to a requested discussion of how a worker or applicant with a disability can be accommodated, even where it is shown that the requested accommodation would not work if it were implemented.
(11) Family leave laws. California has a number of family leave laws, some of the most important of which include the following:
For more information about California's leave laws, contact the California Department of Fair Employment and Housing, at the address listed in Section VI(a).
VI. STATE SOURCES OF HELP AND INFORMATION
(a) Key State Agencies Contact Information. Unlike most other states, California does not have a single agency to whom you can go to handle all your licensing and permitting requirements for your business under the laws of the state. Accordingly, you may need to contact the various California agencies that are mentioned in this book and listed below on an individual basis, to obtain needed forms, official posters, information and other assistance from each such agency.
A list of addresses and other contact information for such key agencies is set forth below for your convenience.
BUSINESS STARTUP INFORMATION. The nearest thing to a one-stop information or permitting center in California for new or small businesses is the California Office of Small Business (COSB). COSB was established for the purpose of helping businesses in every stage of development. It has three divisions: A Financial Assistance Division, the California Small Business Development Center Program, and the Small Business Assistance and Advocacy Division.
For more information about COSB, contact:TAXES. As a business taxpayer in California, you will typically have to deal with three separate state taxing agencies: the State Board of Equalization (SBE), for sales, use, excise and numerous other taxes; the Franchise Tax Board (FTB), for income and corporate franchise taxes, and the Employment Development Department (EDD), for state payroll taxes and state income tax withholding.
The SBE has many field offices in all parts of the state, and offers information pamphlets, most of them free, on sales and use tax, cigarette taxes, and other taxes it administers. For a complete list of its publications, request Publication 73, from your local field office or from:
Also register with the EDD agency as an employer, for state income tax withholding purposes, at your nearest EDD offices, located throughout the state.
STATE LABOR LAWS. Contact the following agency about your obligations as an employer under various state labor laws, including:STATE LICENSES. The two following agencies are the main California licensing agencies. Contact them for information to determine if a state license is required for your particular type of business. You can order the California Professional and Business License Handbook from the California Commerce and Economic Development Program, at their address below.
EMPLOYER WITHHOLDING REGISTRATION. To register with the state as an employer, submit your completed DE-1 employer registration form, to obtain a state employer ID number, to:
STATE SALES TAX. Obtain your sales and use tax license or permit and information on the California sales and use tax law, from the State Board of Equalization, at the address listed above for that agency. Your registration with this agency can also start the process of registering as an employer for state withholding and payroll tax purposes.
STATE UNEMPLOYMENT TAX. Contact the Employment Development Department for information on state unemployment taxes, to determine whether you are an employer subject to payment of state unemployment taxes, and about registering as an employer if you are subject, at the address listed above for that agency.
NEW HIRES REPORTING. Mail or fax your Report of New Employees (Form DE 34) to the EDD at:
STATE ANTI-DISCRIMINATION LAWS. Contact the following state agency for more detailed information on California civil rights laws that may apply to your business, and to obtain anti-discrimination notices you are required to post in the workplace:
(b) Small Business Development Centers. A number of Small Business Development Centers (SBDCs) are located throughout California to assist you. These centers, usually located on college campuses, provide a wealth of start-up information and sponsor frequent business-oriented seminars. Contact the lead office below for information, or for the location of other SBDCs nearer to you.
(c) Internet Sites. If you have access to the Internet, there is a wealth of state and even local business information provided by state and local governments. All states now have a state government Web page, and most major state agencies also have sites on the Internet where you can obtain useful small business information on matters such as state taxes, financing sources, or the addresses and phone numbers (or e-mail addresses) of various state and federal agencies' offices in California.
Since new sites are appearing constantly, you might also want to search for other California government Web sites by using one of the popular Internet search engines, such as Excite! or Yahoo.
To start your Internet search for California government information, you may want to begin with the following Internet sites:
The California state government Home Page:
(d) Financing Sources. For information and help on locating financing for your small business, contact the nearest U.S. Small Business Administration office in California. There are also a number of state and private sources in California that can provide financial assistance or funding to your business. For information on economic development and financial assistance programs in the state, the California Office of Small Business (COSB), part of the Commerce and Economic Development Program (CEDP), offers financial assistance to businesses locating or expanding within the state. You can contact this agency at the address listed for it above.
California Financial Development Corporations provide loan guarantees and bond guarantees to businesses in the state, and also make available special direct loans to qualified small businesses. These loan programs, for which eligibility requirements are similar to those for SBA loans.
There are currently 11 Financial Development Corporations. You can obtain a current list of them by contacting COSB, or at their World Wide Web address on the Internet, as listed above in the section listing Internet sites, at the link for the Commerce and Economic Development Program.
For information about U.S. Small Business Administration financing programs in California, contact:
Copyright © 2005 Michael D. Jenkins
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