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STARTING AND OPERATING A BUSINESS IN CALIFORNIA Copyright © 2009, Michael D. Jenkins CHAPTER 18
CONTENTS OF THIS CHAPTER:
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 slow-down mode in recent years, and more recently, in free-fall, as a deepening national recession has taken its toll. While the state's unemployment rate, at 5.9% in December, 2007, was not too much higher than the national average (4.9%) at that time, by December of 2008 the California unemployment rate had shot up to 9.3%, considerably higher than the national rate of 7.2% for the same month, and rising rapidly. Soaring state taxes and a state budget deficit that has grown to $41 billion as of this writing, in February, 2009, along with constantly increasing regulatory burdens on businesses, have combined to drive many firms and upper-income taxpayers to exit what is becoming an increasingly chaotic state. The state's fiscal situation has become so dire in early 2009 that it is not even able to make tax refund payments. 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 governmental bureaucracy and there are many other requirements that may apply to specific types of businesses, which are not covered here, since we have tried to keep the length of this book down to a manageable 500 or so (print) pages. 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 generally does not permit a business that requires some kind of a state license, such as a professional service firm, to operate as or become an LLC, and those businesses that can operate in LLC form are subject to a substantial annual "LLC fee" based on gross revenues, as well as an annual $800 franchise tax. (Note, however, that a 2006 San Francisco Superior Court case held that the LLC fee -- but not the minimum franchise tax -- is unconstitutional, and has been upheld on appeal.) Additionally, California has the most restrictive limited liability partnership law in the nation, which restricts the use of LLP's to three types of professional service partnerships -- law, accounting, and architectural firms. In short, California offers a huge and rich market for all types of businesses, but doing business here is extremely difficult and not for the faint of heart. II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS. (a) In General. A business that operates in California may do so as a sole proprietorship, a general or limited partnership, a corporation, or, for some kinds of businesses (but not most state-licensed ones), 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 (corporate income) tax on the S corporation itself, albeit at a much-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 far fewer legal formalities than are required for either a corporation or an LLC. However, California law only allows partnerships that render a few specified types of professional service firms to become limited liability partnerships -- law, accounting, and, at least until 2012, architectural firms. Partnerships are generally not taxable entities in California, but limited partnerships and limited liability partnerships must pay an annual $800 minimum tax. 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. PLANNING POINT: (b) Sole Proprietorships. In general, sole proprietorships in California can be established 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. In addition, if you sell any kind of tangible personal property at retail or provide any of various types of services, you may be required to obtain a sales tax license and collect sales tax, as discussed in Section IV(d). 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. Doing business as a sole proprietor in California is generally much simpler than operating as any other kind of business legal entity. As a sole proprietor, if you have no employees, you are not required to pay any unemployment taxes, withhold any federal or state income tax from wages, or obtain workers' compensation coverage for yourself. However, if your sole proprietorship operates under an assumed or fictitious business name (trade name), it will be required to register the name with the county or counties where you do business, as discussed in Section IV(g). In addition, unlike most other states, California requires any business to file new hire reports when retaining the services of independent contractors, as well as when hiring employees, as discussed in Section V(f). Thus, even if you organize your business in the simplest manner possible, as a sole proprietorship with no employees, you may have to file new hire reports if you make payments for services to persons who are independent contractors, including payments you make to certain law or medical corporations. (c) Partnerships. California's partnership laws allow creation of either a general partnership, in which all partners are liable for the debts of the business, or a limited partnership, in which only the general partners are liable for debts, while the liability of limited partners is limited to the amount they have invested, in general. State law also allows for the creation of a limited liability partnership, for certain types of professional practices, in which no partner has personal liability (subject to certain exceptions). 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 LLP's 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). 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 be made on Form GP-1, Statement of Partnership Authority with the office of the California Secretary of State. The statement must be signed by at least two partners and a copy must be sent to every other partner and any person named as a partner in the statement. A $70 fee is charged for filing the statement of partnership authority. A partnership agreement, for any type of partnership, should spell out in considerable detail such matters as the following:
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. While filing a Statement of Partnership Authority, Form GP-1, by a general partnership is strictly optional, it is generally good practice 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. A foreign limited partnership is required to also submit a Certificate of Good Standing or similar document from the foreign jurisdiction in which it was formed, beginning in 2008, under the new Uniform Limited Partnership Act of 2008. Limited partnerships are subject to the annual minimum franchise tax, which is $800 a year. For more information on limited partnership filing requirements, see the contact information for the offices of the California Secretary of State, listed in Section VI(a). Note that in 2006, California's legislature, in AB 339 (Ch. 06-495), repealed the state's limited partnership law and has enacted the Uniform Limited Partnership Act of 2008 which replaces it. The new law applies to limited partnerships formed on or after January 1, 2008. Beginning in 2008, new limited partnership forms must also be used when filing with the secretary of state. AB 339 also allows foreign limited liability limited partnerships (LLLP's) to register with the secretary of state and provides that the secretary of state may not deny registration to such a foreign LLLP due to any difference between the foreign laws under which the LLLP is organized and California law. On first reading, one might think that this means that the California restriction that limits LLP treatment to three professions -- law, accounting, and architecture -- will not apply to a foreign LLLP that operates a different kind of business or profession. However, this new law specifies that a foreign LLLP will be treated as a limited partnership, but not as an LLP, for California purposes. Thus, while a foreign LLLP may register as such when doing business in California, its general partners apparently will not be afforded any degree of limited liability under the California LLP law. The new Uniform Limited Partnership Act of 2008 does not allow the formation, under California law, of an LLLP, according to the 2006 Form 565 Instructions issued by the Franchise Tax Board. LIMITED LIABILITY PARTNERSHIPS Limited liability partnerships (LLP's) are a relatively new form of partnership permitted under the laws of California and in 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. Partners in a general partnership rendering certain professional services can obtain a significant degree of limited liability by simply registering the partnership with the state as an LLP. However, becoming an LLP will not affect the liability of a partner in an LLP for his or her own omissions, negligence, wrongful acts, misconduct or malpractice. The California LLP law differs significantly from that of LLP statutes in most other states. All other states except New York (and, until recently, Nevada) generally allow almost any type of business to operate as a limited liability partnership. However, California's LLP law is the most restrictive of any state. Under it, only certain law, architecture, and accounting firms may qualify for LLP status. To do so they must either maintain specified amounts of professional liability insurance or confirm having a net worth of at least $10 million for accounting or architecture firms or $15 million for law firms. The minimum amount of professional liability insurance coverage is, for a firm with five or fewer professionals, $1 million; for larger firms $1 million plus $100,000 for each professional in excess of five. The maximum amount of required insurance coverage is $5 million or, for law firms, $7.5 million. CAUTION: IMPORTANT NOTE: To form an LLP in California, a general partnership must file Form LLP-1 for a domestic law, accountancy, or architecture partnership (or Form LLP-5 for each of those types of foreign partnerships) and must pay a filing fee of $70 to the secretary of state. Formation of a limited liability limited partnership (LLLP) is not permitted. LLP's are subject to the annual minimum franchise tax, which is $800 a year. 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). (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, since 2003. All corporations (domestic and foreign) are now required to file an annual statement within 90 days of filing articles or qualifying to do business in the state, on either Form SI-200 C, Statement of Information or Form SI-350, for foreign corporations. (File Form SI-200 N/C 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 that are only subject to the state income tax are not subject to the annual $800 minimum franchise tax. See Section IV(c), for a discussion of the franchise and income tax treatment of corporations under California tax laws. 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). UPDATE NOTE: (e) S Corporations. An S corporation is simply a regular corporation that has elected, for federal or state income tax purposes, or both, 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. However, California also imposes a tax, at a greatly reduced tax rate of 1.5% on the income of S corporations, which must pay a minimum franchise tax of $800 each year even if they have little or no net taxable income (except that there is no minimum tax in the corporation's first taxable year). A corporation wishing to elect S corporation status in California formerly had to file a separate California election. However, this 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. See Section IV(c), for more on the franchise and income tax treatment of S corporations under California tax laws. (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, in many cases, also choose to operate in the form of an LLC. LLC's 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 any other state, 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 had, for several years, taken a very conservative position and had 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 further muddy the water in this area. While it is clear that professionals such as doctors, dentists, lawyers, accountants or architects are prohibited from setting up LLC's, it remains unclear which other licensed businesses or professions 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. However, the Secretary of State's office will not register a foreign professional service LLC, since professional service firms may not practice in LLC form in California. 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, a firm that is 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 its total worldwide gross receipts (for years before 2007) or total California gross receipts (in 2007 or later) exceed $250,000. See Section IV(c), for a discussion of the income tax treatment of LLC's under California tax laws and a summary of LLC fees. That section also discusses a March, 2006 decision by the San Francisco Superior Court which held that the California LLC fee is unconstitutional. 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 LLC's 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 LLC's. All LLC's must file a Statement of Information, Form LLC-12, every two years, together with a $20 filing fee. The first such statement is due 90 days after a domestic LLC is formed or after a foreign LLC registers to do business in California. The Franchise Tax Board or the Secretary of State may suspend an LLC that fails to file the Statement of Information, and each such agency will impose a $250 penalty for non-filing. 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 under 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:
PLANNING POINT: 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, including the California bulk sale law. You should also obtain tax releases from the 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. All but a few states have repealed their bulk sale laws in the last two decades, but California still 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 occurs. 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 from the Employment Development Department (EDD), by filing Form DE 2220R, Release of Buyer Request Form. 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 from the SBE 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 and requesting a transfer of seller's reserve account. PLANNING POINT: EXAMPLE: Note that a transfer of the seller's reserve account may not always be beneficial. Careful analysis will be necessary before you decide whether or not to apply for a transfer of the seller's reserve account to your business. Whenever an employer transfers its business to another employer, the reserve account and experience rating will be transferred if the two firms are under common ownership, management, or control. The law also provides that if such an acquisition was for the purpose of getting a lower unemployment tax rate, the reserve account and experience rating transfer will be denied, and penalties of $5,000 or more may be imposed in sham transactions designed to reduce the tax rate, so-called "SUTA dumping" schemes. (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 tax 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 was any nonresident of the state, rather than just nonresidents 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, since 2003, withholding has been required even where the seller is a California resident and even if there was no taxable gain on the sale of the property. 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. On January 1, 2003, withholding on real estate transactions (at the rate of 3 1/3%) was extended to many more transactions, including those where the seller is a California resident, as noted above. The $100,000 and homeowner exemptions continue to be allowed, however, 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 have been required to pay the withholding tax, even if they would owe little or no state income tax for the year -- making the withholding tax the equivalent of a mandatory interest-free loan to the state of California until the seller filed a year-end tax return and obtained a refund of the over-withheld tax. Effective for real estate sales occurring on or after January 1, 2007, a seller may elect to have tax withheld at the highest applicable tax rate (for individuals, 9.3%; for C corporations or S corporations that are not exempted from withholding, 8.84% or 1.5%), on the taxable gain, rather than at a 3 1/3% rate on the total sales price. The seller must, under penalty of perjury, certify the alternative withholding amount to the buyer or the escrow agent. UPDATE NOTE: Sales of California real estate by corporations, partnerships, LLC's, trusts and estates of decedents are not subject to the state withholding tax requirement, except for a corporation that is a foreign (non-California) corporation that has not qualified to do business in the state and does not maintain and staff a permanent office in California. 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:
Also unlike many other states, California's tax laws are often quite different from federal, especially with regard to matters such as depreciation or expensing of business assets. The state occasionally enacts "conformity laws," conforming to some recent federal changes, but even those changes usually go into effect considerably after the federal law has changed. For example, at present, California has not conformed to most of the tax changes in the three major federal tax enactments in 2005 or the three major tax bills enacted by Congress in 2006, or large portions of recent federal stimulus legislation, such as 50% bonus depreciation. Tax rates in California are generally on the high end, compared to other states, although the top bracket on personal income taxes, formerly 11%, dropped back to 9.3% in 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." Because of California's high individual income tax rates (the 9.3% rate applies to taxable income in excess of $47,055 for single taxpayers in 2008, or in excess of $94,110 for married couples), and because the federal alternative minimum tax does not allow a deduction for state taxes, many California residents are either subject to the federal alternative minimum tax (AMT), or are very nearly subject to the AMT. As a result, the numerous new federal tax credits for various energy-efficient items, such as hybrid automobiles, do not benefit many California residents, due to the combination of the high California income tax rates and the workings of the federal alternative minimum tax. In addition to requiring withholding on real estate purchases, as described in Section III(e), California also requires wage withholding and withholding on certain payments to independent contractors or to nonresident partners in partnerships, as discussed in Section V(a). Sales tax rates are also relatively high, with rates as high as 8.75% in several cities and in Alameda County, and 8.5% in San Francisco County (8.75% in Los Angeles County, beginning July 1, 2009). UPDATE NOTE: 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. In addition, under Proposition 13, enacted by voters in the 1970s, the assessed value of real estate may not increase at a rate greater than 2% a year, unless there is a change of ownership of the property, at which time the property will be re-assessed at its current value. UPDATE NOTE: (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. 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 has entered into agreements with many California cities in recent years 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 your business with local governments, to the extent required. 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 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 Business, Transportation, and Housing Agency, including the Department of Alcohol Beverage Control (liquor licensing and regulation), the Department of Real Estate (real estate sales and brokerage), the Department of Financial Institutions (banks and savings and loans), and the Department of Corporations (securities regulation and financial lending practices). 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, listed in Section VI(a). (c) Income and Franchise Taxes. California has an individual income tax and a franchise tax (or instead, for some corporations, a corporate income tax) on the taxable income of corporations, including a tax at a reduced rate on S corporations. Corporations (and now, beginning in 2007, unincorporated businesses) with 50 or more employees are also subject to an annual environmental fee or tax. The income of unincorporated entities is not taxed (except to the owners), but a minimum franchise tax of $800 a year applies to limited partnerships, LLP's, and LLC's. In addition, LLC's with over $250,000 of annual California gross receipts are subject to an annual "LLC fee" based on their gross receipts. Each of these taxes and fees is described in more detail in this section, including a discussion of a recent (2006) San Francisco Superior Court case that held that the LLC fee is unconstitutional. CALIFORNIA INFORMATION RETURNS California, like the IRS, requires businesses to file a wide range of information returns or reports each year, similar to IRS Form 1099 filing requirements. However, since January 1, 2006, California has added a new requirement that does not correspond to any federal requirements. For third-party check-cashing firms, it is now necessary to obtain the name, address, taxpayer I.D. number and any other identifying information regarding any person for whom a check is cashed, and to keep a record of the date and amount of every check cashed for each such customer. This data has to be reported to the Franchise Tax Board (FTB) no later than 90 days after the end of the calendar year. The new check-cashing reporting requirement does not apply to banks or other financial institutions, or to retailers who merely cash checks or issue money orders as a convenience for their customers, for a fee of not more than $2.00, where the service is incidental to the main business of the retailer. There are stiff financial penalties of $50 for each person for whom the check casher fails to file a required report, and criminal penalties for wilful failure to file. PLANNING POINT: NEW ESTIMATED TAX REQUIREMENTS Facing enormous budget deficits, California has resorted to a number of gimmicks to increase revenues without an outright general tax increase. One major change is the acceleration of estimated income and franchise tax payments for individuals and corporations, beginning in 2009. Under the new estimated tax rules, individuals and corporations will be required to pay in 30% of their estimated tax in each of the first two quarterly installments, and 20% in each of the last two installments, rather than 25% of the tax in each installment. In addition to the above new requirements, LLC's will have to pay two LLC fees in 2009: The 2009 annual LLC fee (based on 2008 gross receipts), due on April 15, 2009, and a prepayment of the 2010 LLC fee by June 15, 2009, which the LLC must somehow estimate based on its gross receipts for all of 2009. TAXATION OF SOLE PROPRIETORS AND PARTNERSHIPS 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 income tax rates begin at 1% on the first $7,168 of taxable income in 2008, with graduated rates above that, reaching the 9.3% rate at only $47,055 of income, for single filing status. Tax brackets are doubled for joint filers, so that married filing joint couples do not pay the 9.3% rate until income reaches $94,110. (The tax brackets for 2009, as indexed for inflation, will not be announced until the latter part of 2009.) UPDATE NOTE: Like the federal tax code, California has its own alternative minimum tax (AMT), which applies to alternative minimum taxable income at a tax rate of 7%. The above-noted 0.25% increase in tax rates for 2009 and 2010 will also apply to the California AMT, which increase to a rate of 7.25% for those two years, or perhaps longer. Beginning January 1, 2009, if an individual taxpayer makes a payment of estimated income tax or an extension payment in excess of $20,000 (or pays a total of $80,000 in California income tax for the year), he or she will be required to make all subsequent tax payments by electronic funds transfer (EFT). Failure to pay by means of EFT will result in a 1% penalty. 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. California law has allowed gay couples to register as domestic partners since 2003, but had not allowed domestic partners to file joint income tax returns. However, the state tax law has been amended to allow domestic partners to file joint returns, or file separate returns, on the same basis as married couples, beginning with the 2007 taxable year. (Note, however, that joint Federal income tax returns may only be filed by married couples, under current federal law.) UPDATE NOTE: 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 LLP's 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. A partnership that does business in California must withhold tax at the maximum state income or franchise tax rate on any California-source income allocable to foreign partners, or at the rate of 7% on distributions to partners in U.S. states other than California. However, no withholding is required with respect to a U.S. partner, unless that nonresident partner's total California-source distributions from the partnership exceed $1,500 during the calendar year. Withholding is required on all California-source income allocable to foreign partners, at a 9.3% rate for foreign individuals or 8.84% for corporations (10.84% for foreign banks or financial institutions). Individual taxpayers doing business as sole proprietors (or who are partners in partnerships, members of LLC's, or shareholders in S corporations), who have taxable income from the business, will generally be required to make advance payments of estimated California individual income taxes, on Form 540-ES, if their net tax liability (not covered by withholding) in the current or prior year exceeds $500, or $250 if married and filing separately (previously $200 or $100, prior to 2008 legislation). Individuals who did not have a California tax liability the prior year are not required to make estimated tax payments in 2009 if they are:
Before 2003, 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%. California previously did not require estimated tax payments for the additional tax liability that might arise from the California Alternative Minimum Tax ("Cal AMT") for individuals. However, beginning in 2005, individual taxpayers are required to include the Cal AMT in their estimated tax payments. 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. However, beginning in 2009, you must pay 30% of the estimated tax on April 15th, 30% on June 15th, 20% on September 15th, and 20% on the following January 15th, rather than making four equal installments. 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 2009, a taxpayer with over $150,000 of adjusted gross income must (generally) pay in 110% of the 2008 tax liability (including California AMT liability), if basing the estimate on the prior year's tax. Note that for 2009, taxpayers with $1 million or more of adjusted income must pay in at least 90% of the 2009 tax to avoid a penalty -- no "safe harbor" (paying in 110% of the prior year tax) will be available for those high-income individuals. UPDATE NOTE: 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 a profitable S corporation in California. An $800 minimum franchise tax applies even if a corporation has little or 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 (also filed by 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, generally. Corporations may base their current year's estimated tax payments on the tax owed for the current year or, if less, an amount equal to 100% of the tax liability of the prior year (except for "large corporations," as under federal tax law, which may base only their first quarter estimate on the prior year's tax liability). Corporations, like individuals, are required to include the state corporate Alternative Minimum Tax when computing the amount of estimated tax that must be paid in during the year, in order to avoid underpayment penalties. Penalties will be imposed for failure to make any required estimated tax payments on a timely basis. UPDATE NOTE: 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 in California or received income from California sources, no minimum tax will apply to the initial short period either. For example, if you incorporate on December 17, 2009, and select a calendar tax year, and do not begin doing business in California until January, 2010, no minimum franchise tax will apply for the short 2009 tax year, or for the full year 2010. 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 will be considered to "do business" in the state if it is a partner in a partnership or a member in an LLC that does business in California. A corporation taxable in California is subject to either the franchise tax or the income tax, but not both. Formerly, corporations subject to the corporate income tax filed Form 200, rather than the Form 100 tax return. Now, however, all corporations, other than S corporations, file on Form 100, whether they are subject to the franchise tax or the corporate income tax. S corporations file annual tax returns on Form 100S, which is due by the 15th day of the third month after the end of the taxable year (by March 15th, in the case of a calendar year taxpayer corporation). California recognizes S corporations for income tax purposes, and treats them in a manner similar to the federal tax treatment, except that a 1.5% franchise tax applies to an S corporation's income, which income is also taxable to the S corporation's shareholders, thus resulting in a slight degree of double taxation. In the past, a corporation could elect to be an S corporation for California tax purposes, but not for federal tax purposes, or vice versa. However, California law was changed in 2001, so that now a federal S corporation election or termination of such an election automatically applies for California tax purposes. The $800 minimum tax applies to an S corporation, just as it does to other corporations and to LLC's and LLP's. In 2006, the Franchise Tax Board began mailing out notices to S corporations that do business in California, advising that they would have to begin withholding California income tax with respect to nonresident shareholders, beginning January 1, 2007, at tax rates of 7% to nonresidents (of California) who reside in the United States and 9.3% for foreign nonresidents. Nonresidents may be exempted from the withholding requirement by filing a group or composite return or may request exemption by filing Form 588, Nonresident Withholding Waiver Request. An environmental tax or fee (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, as discussed in more detail in Section IV(f). (Recent legislation extended this tax to unincorporated businesses, as well, beginning in 2007.) TAXATION OF LIMITED LIABILITY COMPANIES In California, a limited liability company (LLC), unless it elects to be treated as a corporation, 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 corporations, limited partnerships and LLP's, however, LLC's are subject to the California annual minimum franchise tax of $800. Be aware that California has been very aggressive in imposing this $800 minimum franchise tax on LLC's that operate in other states, if any member-manager of the LLC lives in California and conducts any activities there related to the out-of-state business. EXAMPLE: A similar holding in 2007 was to the same effect, where an LLC's managing member and 2 of the 3 other members lived in California at least part of the year and had some activities in the state, such as making disbursements and using a California tax professional, even though the LLC's only asset was a rental property in Nevada. Appeal of Destino Properties, LLC (2007). In addition, all but small LLC's (or LLC's that have elected to be taxed as corporations) must pay an annual LLC fee, which is based on the amount of the LLC's California gross receipts, rather than its taxable income, as follows:
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 LLC's, 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 LLC's 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 California gross 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. This situation was even worse before 2007, when the fee was imposed on total worldwide gross receipts of the LLC, even if it had little or no California income or gross receipts. 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. But see the following discussion of an important 2006 court case, which has tentatively held that the LLC fee is a tax -- and an unconstitutional one, at that. IMPORTANT NOTE: PLANNING POINT: Note that, in the fall of 2007, a bill (AB 198) passed in the California Assembly that requires that the LLC fee be apportioned (based only on California gross receipts), where an LLC does business both within and outside of California, beginning in 2007. It was signed into law by Governor Schwarzenegger on October 11, 2007 and has since been upheld by a trial court and partially upheld by a California Court of Appeal, in the case of Ventas Finance I, LLC v. FTB, Case Nos. A116277 A117751 (August 11, 2008). AB 198 also included a provision that is to apply if the tax cases currently on appeal hold that the fee, as applied to global gross receipts, was unconstitutional in prior years and must be fully refunded. AB 198 would only allow partial refunds for prior years, to the extent gross receipts outside of California increased the amount of the fee paid, and thus it amounts to a retroactive tax increase (which also may well be challenged as unconstitutional). The California Court of Appeal has upheld this partial tax refund in the Ventas case, which has since been appealed to the U.S. Supreme Court, which declined to review the California Court of Appeals decision, which thus has now become final. The Franchise Tax Board has provided an explanation of the new rules for apportioning LLC gross receipts, in the 2007 Form 568 booklet, LLC Income Worksheet Instructions, which is available on the FTB website. LLC's must file tax returns (Form 568) and pay the LLC fee each year by the 15th day of the fourth month after the end of the tax year. However, an LLC that has income from California but does not do business in California (such as a foreign LLC that is a limited partner in a partnership that does business in the state) would instead file a partnership tax return (Form 565) and would not be subject to the LLC fee or $800 minimum tax. UPDATE NOTE: 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 was 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 IRS "check-the-box" regulations. However, before 2000, as a practical matter, this only applied to LLC's 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 permitted formation of single-member LLC's 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 parts of Form 568 and pay the annual $800 franchise tax and the annual fee, based on California gross receipts. Beginning in 2008, single-member LLC's are required to file Schedules B and K of Form 568 if the total income or loss of the LLC is $3 million or more, or if any income or loss amount reportable on Schedule B, Line 1 or Lines 3 through 11, is $3 million or more. If the single-member LLC does not meet the $3 million threshold requirement, it does not file Schedules B or K, but instead simply files Form 568, Side 1, the LLC Income Worksheet, and pays the annual $800 tax and (if any) the LLC fee. It was not always entirely clear whether an LLC is a "single-member 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 LLC's, 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. LLC's that are treated as partnerships and which have nonresident members must withhold state income tax on behalf of such nonresident members, as is discussed in the segment on partnership taxation in this Section IV(c). IMPORTANT AND TROUBLING DEVELOPMENT REGARDING LLC'S IN CALIFORNIA: While California's income tax laws generally follow the federal tax law choice of entity by an LLC for state income tax purposes, the state Employment Development Department (EDD), in recent payroll tax audits, has in effect been ignoring any election by an LLC to be treated as a corporation for income tax purposes. Thus, if a business is established in the form of an LLC, but has made the IRS "check-the-box" election on Form 8832 to be taxed as a corporation, the EDD will nevertheless treat wage payments it makes to some members (such as managing members) as partnership distributions rather than corporate wage or salary payments, creating considerable confusion and havoc. The EDD says it will apply common law rules to determine whether an LLC member is a "partner" or an "employee" for payroll tax purposes. Not many LLC's elect corporate tax treatment, so the above problem will not affect many LLC's in California. More recently, however, the EDD has made the situation even worse, by also taking the position that in a typical LLC (i.e., one that is taxable as a partnership), any members of the LLC who are not "managing members" will generally be treated as employees, rather than as partners, for tax purposes. The result is that amounts they are paid or credited by the LLC will be considered taxable wages, rather than partnership payments or allocations. This can even have the novel effect of requiring such an "employee" to pay tax on "wages" that he or she has not yet been paid, where amounts are credited to the person's capital account in the LLC, rather than being paid out. These positions by the EDD can cause a large number of complex problems. For example, if wages or salary paid to a managing member of an LLC (taxable as a corporation) are not considered to be wages, then no California unemployment tax will be owed (and the individual will not be eligible for unemployment benefits). As a result, there will be no federal unemployment tax (FUTA) tax credit for state UI tax on his or her wages, so the full 6.2% federal FUTA tax will be imposed, rather than just 0.8%. But the more serious ramifications are for LLC's that are treated as partnerships, including the following problems for nonmanaging members:
(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. IMPORTANT NOTE: 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. The cities of Avalon (Los Angeles County) and National City (in San Diego County) also have combined tax rates of 8.75%. Effective April 1, 2005, the combined tax rate in the City of Richmond (Contra Costa County) increased to 8.75%, as well. As of April 1, 2007, the combined tax rate in the City of Inglewood (Los Angeles County) and the City of Pinole (Contra Costa County) also increased to 8.75%. The tax rate in rest of Los Angeles County will increase from 8.25% to 8.75% on July 1, 2009, since voters approved an increase in the sales tax to fund transportation improvements. The City of Southgate (Los Angeles County) currently has the highest sales tax rate in the state in early 2009, at 9.25%. UPDATE NOTE: 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. A shadow tax, the use tax, is also imposed at the same rate as the sales tax. 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. Use tax 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. Generally, no bond or deposit is required of a corporation or LLC that has equity in real estate in California that would be adequate to secure future tax obligations. For sole proprietorships and partnerships, a deposit is usually not required unless the applicant has a history of failure to file returns, late payments, or bounced checks. PLANNING POINT: 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 and other publications 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. Since January 1, 2006, taxpayers whose estimated sales and use tax liability averages $10,000 or more (previously $20,000 or more) per month must remit the amount due using electronic funds transfer (EFT). IMPORTANT NOTE: 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 taxes 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 where than more than 50% ownership in the stock of a corporate or other entity owning real property is acquired by one person or entity, generally. Where such a change of ownership occurs, the property will be reassessed at its current market value, under Proposition 13. UPDATE NOTE: California also imposes personal property taxes on tangible personal property. ("Personal property" is any kind of property that is not real estate.) Your business must report all business personal property as of each January 1 if you have $100,000 or more of such property. Personal property tax rules vary from county to county, so you will need to obtain a business personal property tax form from your county assessor. Otherwise, no such filing is required unless requested by the county assessor. Some types of business personal property, such as inventories and intangible property, are exempt from personal property tax in California. (f) Other Business Taxes. California imposes a number of excise and other taxes on businesses, including:
California previously had an estate tax on the estate of decedents, a "pick-up tax" equal to the amount of the federal death tax credit for state death taxes. Since there is no longer a federal death tax credit for state death taxes, effective since January 1, 2005, there is no longer a California estate tax and it is no longer necessary to file a California estate tax return for deaths occurring on or after January 1, 2005. (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 includes terms that suggest the existence of additional owners, such as "company," "group," "& son," "brothers," or "associates" may also be a fictitious name. However, a limited partnership or LLP that is registered with the California Secretary of State is not considered to be using a fictitious name, unless it uses a name other than the name it registered with the Secretary of State. Similarly, a corporation will be considered to use a fictitious name only if it uses a business name other than its actual legal 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 successive 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 with the county can 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 with the state 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. Once you hire 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 $90,669 of wages, for wages paid in 2009. This tax is imposed entirely upon the employee, but the employer is obligated 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. The SDI tax rate increased from 0.6% to 0.8% in 2008, while the wage base increased from $83,389 in 2007 to $86,698, so that the maximum tax per worker in 2008 was $693.58, a 39% increase over the 2007 maximum. For 2009, the wage base has increased to $90,669 and the tax rate to 1.1%, a total tax of $997.36, which is an additional increase of 43.8% in the tax, or a total increase of 99.4% in the last two years. 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 $400 (in 2009), for employers required to make federal withholding tax requirements, within the same number of banking days required for making your federal deposits. The $400 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 for 2009. 2009 CALIFORNIA SDI AND PIT WITHHOLDING TAX SUMMARY:
NOTES:1 Electronic Funds Transfer (EFT) transactions for next day deposit must be settled in the State's bank account on or before the third banking day following the payroll date. 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 (EFT) the following calendar year. EFT transactions for Next Banking Day deposits must be settled in the State's bank account on or before the third banking day following the payroll date. 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). NON-WAGE WITHHOLDING Besides wage withholding, businesses may be required to withhold state income taxes in other circumstances, some of which include the following:
(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 2009 on the first $7,000 of wages paid to each employee. After you have had employees for about 3 years, 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 each employee's wages at the rate of 1.1% of the first $90,669 of an employee's wages in 2009. SDI benefits are paid to an employee who is temporarily disabled to replace lost wages. Unemployment contribution reports and taxes are due each quarter, by the end of the month following the end of each quarter. See the table in Section V(a) regarding the time for depositing withheld SDI and state personal income tax. 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 in the workplace if your business is subject to SDI and unemployment insurance taxes. Form DE 1857 is available in English, Spanish, or several other languages. Beginning in 2008, California now requires all employers that are subject to the unemployment tax to notify all their employees that they may be eligible for the federal earned income tax credit, within one week before or after they are given their annual Form W-2. 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 or 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. However, working members of a partnership or LLC who receive compensation irrespective of the profits of the partnership or LLC, such as guaranteed payments, may be required to be covered, unless they are general partners or managing members of the 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. CAUTION: As an employer, California law requires you to:
Workers' compensation costs for employers in California are extremely high. A recent state-by-state comparison of workers' compensation costs, based on premiums per $100 of payroll, showed the that California had the highest rates of any state in the union, at $5.23 per $100 of payroll. In contrast, North Dakota had the lowest costs, at $1.24 per $100 of payroll. 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 from and more stringent than the federal laws. While the federal minimum wage is currently $6.55 per hour (increasing to $7.25 on July 24, 2009), California's minimum wage has been $6.75 an hour since January 1, 2002, until it was increased to $7.50, effective in 2007, and is $8.00 in 2008 and 2009. San Francisco has its own local minimum wage, as well, which was $9.14 in 2007 and increased to $9.36 in 2008, and $9.79 in 2009, for any employee who works two or more hours a week. Companies that do business with the City of Los Angeles -- such as airport restaurants or parking lots -- must pay workers at least $10.00 per hour with $1.25 in health benefits, or $11.25 if such benefits are not provided (for the period from July 1, 2008 - June 30, 2009). 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 require the payment of overtime based on a daily calculation, which has become a serious disincentive for businesses to locate in California, since it can result in overtime premium pay when an employee works 40 hours or less in a week. The daily overtime calculation was overruled by the IWC in 1997, but under former Governor Gray Davis, the legislature 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)(7). 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. Child laborers may not be hired, generally, without obtaining a work permit from the school superintendent or principal. Children may only work specified hours, with some exceptions for 16- and 17-year old children who are not required to be in school. In general, 16- and 17-year old children may not work more than 48 hours a week, or more than 8 hours a day (4 hours a day on a school day), or before 5 a.m. or after 10 p.m. (12:30 a.m. if next day is not a school day); 14- and 15-year olds may not work more than 3 hours on a school day (outside of school hours), or 8 hours otherwise, and no more than 18 hours a week when school is in session, or 40 hours in a week when school is not in session, and they may only work between the hours of 7 a.m. and 7 p.m. (9 p.m. from June 1 to Labor Day). Detailed requirements, including obtaining written consent of the Labor Commissioner, apply to the employment of children in movies, television or other performing arts. The above limitations generally do not apply to minors employed to deliver newspapers to consumers, if they are at least 12 years old. 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 maintain required records and 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 each violation. 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 required elements, 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 and within 10 days after the pay period ends, except for certain exempt executive, administrative, and professional employees, who must be paid no less frequently than 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). Special rules apply for employers in the oil drilling and motion picture industries, where payment is considered to have been made "immediately" if made as soon as it is reasonably possible to make any necessary wage calculations. 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. If the terminating employee requests that the final paycheck be mailed, the date of mailing will be considered the date of payment. California's Labor Code also provides that an employer may not employ an employee for a work period of more than five hours per day without providing the employee with a meal period of at least 30 minutes, except that if the total work period per day of the employee is no more than six hours, the meal period may be waived by mutual consent of the employer and employee. Also, an employer may not employ an employee for a work period of more than 10 hours per day without providing the employee with a second meal period of at least 30 minutes, except that if the total hours worked is no more than 12 hours, the second meal period may be waived by mutual consent of the employer and the employee (but only if the first meal period was not waived). 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. In addition, state law prohibits an employer from causing employees to work more than 6 days out of 7, unless the employee's total hours of work do not exceed 30 hours for the week or 6 hours on any day of the week. CAUTION: (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 a wide range of state civil rights laws in California. The California 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, but also covering marital status, sexual orientation, medical condition (including genetic characteristics), 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 has been made 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, so long as the employee meets any permissible employee dress standards you have established that are applicable to his or her chosen gender identity. See the discussion of the California disability rights law at Section VI(f)(8). Other forms of illegal California workplace discrimination include the following:
(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 or electronically must submit two monthly transmissions (if needed) 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). 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, California law, effective since 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-MISC 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 in each subsequent year that it pays over $600 to the independent contractor. To report payments to independent contractors, file Form DE 542, Report of Independent Contractor(s), by mailing or faxing to the address listed in Section VI(a). (5) Domestic Partners Law. California has enacted a domestic partners law, effective January 1, 2005, for couples of opposite sexes, one or both of whom are over age 62 and eligible for Social Security benefits, or both of whom are 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, now including their filing status for California income tax purposes, "married, joint return" or "married, separate return." Employers are not prohibited from requesting a copy of the Declaration of Domestic Partnership that they have filed with the California Secretary of State, 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 was not available to opposite-sex partners, however, under the October 10, 2002 ruling of the Assessor. Similarly, see Section IV(e) regarding the new state law that went into effect beginning with the 2006-2007 property tax lien date, regarding real estate transfers between registered domestic partners (which may include some opposite sex unmarried couples, as noted above). UPDATE NOTE: (6) California smoke-free workplace rules. State law prohibits smoking in most enclosed workplaces in California. 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. 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. (7) Additional penalties on employers for labor law violations. In 2004, the California Legislature enacted Labor Code Section 2699, which provides for stringent penalties to be imposed on employers who violate any of the state's numerous employment laws. The main provisions an employer needs to beware of are the following:
The above new provisions have spawned a new wave of litigation against employers in California who, either intentionally or inadvertently, have violated any of the countless technical requirements of the state's voluminous labor laws. (8) 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. (9) 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) or the Employment Development Department at the address also listed in Section VI(a). PAID SICK LEAVE: SAN FRANCISCO San Francisco (city and county) has become the first jurisdiction in the United States to require employers to provide paid sick leave to employees, effective since February 5, 2007. Under this ordinance, employees accrue one hour of paid sick leave for every 30 hours worked, up to a maximum of 72 hours (limited to 40 hours for employees of small firms with fewer than 10 employees). Employees become eligible for sick leave after 90 days of employment. Any unused sick leave that is accrued can be carried over from year to year, subject to the 72-hour limit. However, no payment for accrued sick leave is required when employment terminates, voluntarily or otherwise. Such sick leave must be granted not only when the employee is ill or injured, but also when taking time off to care for an ill family member, including a registered domestic partner. The city has adopted the San Francisco Health Care Security Ordinance (SFHCSO) surcharge. Under the ordinance, employers are generally required to provide mandated minimum health care benefits to their employees. (10) Other Employee Leave Requirements. In addition to the above family leave and pregnancy leave requirements, employers need to be aware that California law also requires employers to grant leave or not retaliate against employees who take leave from work for any of the following reasons:
(11) Lie Detector Tests Prohibited. Under California law, an employer may not require an employee or job applicant to take any kind of lie detector test as a condition of employment or continued employment. In addition, if an employer requests that an employee or job applicant take any such test, the employee or applicant must first be given a written notification at the time the test is administered, explaining the person's rights to refuse such a test under the state law. Unlike the federal Employee Polygraph Protection Act, which exempts certain types of employers such as security or defense firms from coverage, the California law does not exempt any private sector employers. VI. STATE SOURCES OF HELP AND INFORMATION (a) Key State Agencies Contact Information. Unlike many 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 Economic Development Partnership (CEDP), which was formed by Gov. Schwarzenegger in 2005 as an interagency team to coordinate state government economic development activities. CEDP was established for the purpose of helping businesses in every stage of development. In addition to overseeing the California Small Business Development Center Program (see Section VI(b)), the CEDP has created the online California Business Portal, a resource for starting, expanding, or financing a business in California. See the link to the California Business Portal in Section VI(c). For more information about CEDP, contact its parent agency: California Business, Transportation and Housing Agency If you are having a hard time finding a particular state office on some matter, or get lost in a maze of voice mail prerecorded messages, try calling the State Information Operator between the hours of 8:00 and 5:00 on weekdays.. State Information Operator SECRETARY OF STATE. Contact the office of the secretary of state for information on:
California Secretary of State For information and trademark or trade name registration forms, contact: California Secretary of State 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 unemployment taxes and state income tax and SDI 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: State Board of Equalization For personal income tax or corporate franchise tax forms or information, write or call: Franchise Tax Board The Employment Development Department (EDD provides a booklet, California Employer's Guide, Form DE 44, which is available at no cost from any local EDD Employment Tax District Office in the state. Call the Tax Status Unit of the EDD (phone number and address listed below) to request Form DE 44 or other EDD forms and publications, or use the following phone number: (888) 745-3886 Also register with the EDD agency as an employer, for state income tax withholding purposes, as well as for SDI withholding and for unemployment tax, at your nearest EDD offices, which are located throughout the state. STATE LABOR LAWS. Contact the following agency about your obligations as an employer under various state labor laws, including:
Department of Industrial Relations The California Chamber of Commerce offers California labor law posters for California businesses, containing all 16 federal and California labor law posters that are required to be posted in the workplace. To order, go to: www.calchamber.com/Headlines/Pages/WorkplacePosterNeedsUpdatingRequiredNoticesKitAvailable.aspx 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. California Department of Consumer Affairs ...and California Business, Transportation and Housing Agency 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: California Employment Development Department FICTITIOUS BUSINESS NAMES. If you need to file and publish a fictitious business name statement in California, contact the following private agency, which can perform such services for you for a fee (and do a preliminary name availability search for you, for an additional fee): California Newspaper Service Bureau 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 Employee(s), Form DE 34, to the EDD at the following mailing address or fax number, when hiring or rehiring an employee: Document Management Group - MIC 96 Or, when retaining the services of an independent contractor, mail or fax your Report of Independent Contractor(s), Form DE 542, to the EDD at the following mailing address or fax number: Employment Development Department WORKERS' COMPENSATION INSURANCE. If you employ workers for whom you must supply workers' compensation coverage, contact the home office of the following agency for further information: State Compensation Insurance Fund STATE OSHA PROGRAM. For required CAL/OSHA posters for the workplace, information on both federal and state occupational safety and health laws that affect you as an employer in California, and regarding free CAL/OSHA safety consultations, contact: Division of Occupational Safety and Health (DOSH) For informational booklets and educational materials on compliance with CAL/OSHA health and safety requirements, contact: California Department of Industrial Relations STATE WAGE-HOUR LAWS. Contact the Department of Industrial Relations (see above address listings) or at the following address for information and required posters regarding California wage and hour and child labor laws: Department of Industrial Relations 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: Department of Fair Employment and Housing (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. Los Angeles Region SBDC (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 California 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 frequently, you might also want to search for other California government Web sites by using one of the popular Internet search engines, such as Google 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: Index of California state government agencies: California Business Portal (assistance in starting, growing, or financing a business in California): Franchise Tax Board (income tax forms, instructions and publications): California State Board of Equalization (SBE), which administers the sales and use tax and many other California taxes: California Secretary of State, Corporations Unit (filing and registration for corporations, LLC's, and partnerships): California Business, Transportation and Housing Agency, one of the main umbrella agencies for licensing in California: California Employment Development Department: California Department of Industrial Relations: (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. 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 are loan programs for which eligibility requirements are similar to those for SBA loans. There are currently 16 Financial Development Corporations and similar financing entities. You can obtain a list of them at their World Wide Web address on the Internet, as listed in the section of this publication (Section VI(c)) listing Internet sites, at the link for the California Business Portal. See the "Small Business Loan Guarantee Program" information page on the California Business Portal website, for the current list of Financial Development Corporations and similar entities and the contact information for each. For information about U.S. Small Business Administration financing programs in California, contact: U.S. Small Business Administration |
Copyright © 2009 Michael D. Jenkins
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