Starting And Managing Your Business 101:Regulations And Licensing

There are a variety of legal issues that should be kept in mind when starting a business. A small business is usually classified as a closely held corporation, partnership, or sole proprietorship. In a closely held corporation, a few stockholders own the shares. In a partnership two or more people agree to go into a business as co-owners. In a sole proprietorship, there is a single owner with no separate legal entity for holding or operating the business.

Regulations for starting a business differ by industry, state, and locality, but each business needs one or more federal, state, or local licenses or permits to operate. Certain businesses are subject to restrictions on the legal form that the enterprise must take. Professions are often unable to practice as regular corporations, but rather are restricted to the modified “professional corporation” format.

In addition to regulations on a business’s activity, it is possible for there to be legal obstacles restricting individuals from engaging in particular businesses. For example, a state permit or license requirement based on a particular educational background may be necessary. Some licensing requirements exist to prevent individuals with criminal or “undesirable” histories from participating in some activities. Requirements can exist on the federal, state, and local levels so it is important that you look into all of these if you are interested in starting a business.

Federal Requirements

Besides sole proprietorships, all other business types must apply for an Employer Identification Number (EIN). If you provide health insurance for your employees, you may also need a National Standard Employer Identifier (NSEI) for electronic health transactions. Although many businesses do not require a federal license or permit, if you are involved in any of the following activities, you should contact the responsible federal agency to learn about their specific requirements:

• Investment advising

Drug manufacturing
Preparation of meat products
Broadcasting
Ground transportation
Selling alcohol, tobacco, or firearms

State Requirements-Business Licenses

While many businesses do not need a federal license or permit, many types of businesses do need some type of business or professional license or permit from a state government. In California most cities and counties require a license to do business in the respective areas. Therefore, businesses should contact the business licensing section of that city government for specific rules and regulations. Keep in mind that if your business operates in more than one city or county, you may be required to have more than one business license. The business license fee varies with location and can be a flat rate, percentage of gross sales, or a combination of factors.

Companies may also be subject to local personal property taxes and thus need to register with the country assessor’s office. County government is responsible for levying and administering property taxes. The average property tax rate in California is 1.1%.^{^[1]} Business personal property (defined below) is generally taxed at the same rate as real property, but is not subject to special assessments. However, while real property is appraised upon change of ownership or new construction and adjusted by the Consumer Price Index, personal property is reappraised annually. Business owners should file a personal property statement with the county assessor every year detailing market value.

Personal property is defined as all property besides real property, which is land, mines, minerals, quarries, timber, and improvements on the land such as fences or fruit. Almost all tangible personal property is taxable unless exemptions exist. Tangible personal property is any property, but land and improvements that can be seen, weighed, measured, felt, or touched. Business personal property includes all supplies, equipment, and fixtures used in the operation of the business. Thus, these can include portable machinery and equipment, office furniture, tools, and supplies. Examples of nontaxable personal property are household goods and personal effects, noncommercial boats worth $400 or less, inventories, notes, corporate securities, shares of capital stock, solvent credits, bonds, and deeds of trust, mortgages, liquor licenses, insurance policies, club memberships, and copyrights.^{^[2]} Various permits may be required for parking and building occupancy as well. Most building owners will take care of fire safety regulations.

Occupations

Certain occupations also require state licenses. These include:

• Building contractors

Physicians
Appraisers
Accountants
Real estate agents
Private investigators
Funeral directors
Hairdressers
Auto mechanics

You can contact the state board governing your particular occupation for information regarding licensing requirements. Some occupations also require that you provide regular proof of “continuing education” to ensure that you are up-to-date with changes in your occupational field.

Licenses based on products sold

Most states require special licenses to sell liquor, lottery tickets, gasoline, or firearms.

Tax registration

In California businesses must register and obtain an employment identification number from the Secretary of State as outlined below:

• A general partnership must file a Statement of Partnership Authority (GP-1)

A domestic limited partnership must file a Certificate of Limited Partnership (Secretary of State Form LP-1)
A foreign-owned limited partnership must file a Foreign Limited Partnership Application for Registration (Secretary of State Form LP-5)
A domestic limited liability company must file the Articles of Incorporation (Secretary of State Form LLC-1)
A foreign limited liability company must file a Limited Liability Company Application for Registration form (Secretary of State Form LLC-5)
A limited liability partnership must file a Registered Limited Liability Partnership Registration (Secretary of State Form LLP-1)
A domestic stock company must file one of the three versions of the Articles of Incorporation: general stock corporation, professional corporation, or close corporation
A non-profit company must file one of the two versions of the Articles of Incorporation: Public Benefit, Mutual Benefit or Religious Corporations or Common Interest Development Corporations
A foreign corporation must file a Statement and Designation by Foreign Corporation (Secretary of State Form S&DC-General)

This requirement does not apply to a sole proprietorship. If you are engaging in retail sales, you will also need to obtain a sales tax license.

Trade name registration

Any person or entity that would like to carry on a trade of business under a name that does not include the owner’s last name and portray the nature of the business requires filing a Fictitious Business Name Statement. In addition, in order to open up more businesses under an existing LLC or corporation, you must complete a Fictitious Business Name Statement for any business name not listed in the Articles of Incorporation filed with the state. A Fictitious Business Name Statement must be registered with the county clerk of the county of the registrant’s principal place of business, not with the Secretary of State’s office. The statement must be filed within 40 days of the commencement of business or before the statement on file with the Secretary of State’s Office expires. Within 30 days after filing a Fictitious Business Name Statement, the registrant needs to publish the statement in a newspaper of general circulation in the county of its principal place of business, having the notice appear once a week for four consecutive weeks. Within 30 days of the last publishing date, the registrant must file an affidavit of publication with the county clerk’s office.

Employees

The Fair Labor Standards Act (FLSA), enacted in 1938, is a federal law with which all employers should be familiar. It requires employers to:

• Pay at least the current minimum wage to all covered and nonexempt employees for all hours worked

Pay at least one and one-half times the regular rate of pay of all covered and nonexempt employees for all hours worked over 40 in a week (In California, it is also necessary to pay at least one and one-half times the regular rate of pay of all covered and nonexempt employees for every hour over 8 in a day)
Comply with child labor standards
Comply with record keeping requirements

The Industrial Welfare Commission regulates wages and hours of nonexempt employees in California through 17 wage orders. Within the wage orders, an employer can find regulations relating to:

• Hours and days of work

Minimum wages
Reporting time paid
Licenses for disabled workers
Record retention
Cash shortage and breakage
Meals and lodging
Meal periods
Rest periods
Overtime pay

The wage orders have specific details for the following industries and occupations:

• Manufacturing

Personal services
Canning, freezing, and preserving
Professional, technical, clerical, mechanical and similar occupations
Public housekeeping
Laundry, linen supply, dry cleaning and dyeing
Mercantile
Industries handling products after harvest
Transportation
Amusement and recreation
Broadcasting
Motion picture
Industries preparing agricultural products for market, on the farm
Agricultural operations
Household services
Certain on-site occupations in the construction, drilling, logging, and mining industries
Miscellaneous employees

Companies with employees must register with the California Employment Development Department (EDD) for state income tax withholding and employment taxes. An employer is required to register within 15 days after paying more than $100 in wages for employment in a calendar quarter as well as whenever a change in ownership takes place. The employee pays the state income tax, yet the employer withholds the tax and pays it to the California Franchise Tax Board on behalf of the employee. The employee once again pays the State Disability Insurance (SDI) program, yet the employer withholds the wages and pays the SDI fund or a voluntary plan for disability insurance. The SDI withholding rate for 2011 is 1.2% for 2011. The taxable wage limit is $93,316 for each employee per calendar year and the maximum to withhold for each employee is $1,119.79. In addition, all employers need to pay into the State Unemployment Insurance Fund. New employers must pay a rate of 3.4% on the first $7,000 in wages for up to three years. There is a maximum of $434 per employee per year. After the creation of the Employment Training Panel (ETP) in 1982, employers are also required to pay the Employment Training Tax (ETT). All employers are assessed 0.1% of the first $7,000 of each employee’s wages.^{^[3]}

Local Requirements

As stated above in the Business Licenses section under State Requirements, nearly all businesses need a county or city license. Contact your city or county government offices to determine the specifics. Local permit requirements vary as well.

Conclusion: This article provides an overview of some of the basic legal requirements that should be kept in mind when starting a business. The California Small Business Development Centers may also be a good resource for more information.

For specific answers regarding your situation, please contact Berkeley-Oakland Walnut Creek Business attorney Richard Korb for a consultation at 510-524-0903

^{^[1]} “Registering for Permits.” California Governor’s Office of Economic Development. 2010. Web. <http://www.business.ca.gov/StartaBusiness/RegisteringforPermits.aspx>.

^{^[2]} California Property Tax. Sacramento: California State Board of Equalization, Aug. 2009. PDF.

^{^[3]} “Rates and Withholding.” State of California Employment Development Department. 2008. Web. <http://www.edd.ca.gov/payroll_taxes/rates_and_withholding.htm>.

[1] This is a continuation of a multi-part article on Starting A Business.

RICHARD E. KORB is a seasoned attorney with 30 years of business litigation and transactional (contracts) experience. Over his legal career, Richard has successfully litigated and resolved over 300 court cases in the fields of contract law, real estate, employment, unfair competition, bankruptcy and general civil law and he has drafted and negotiated over 250 contracts and licenses for large and small companies alike. Richard leverages his experience as a former partner in a 100-person law firm and chief counsel for a public software company to assist individuals and companies, from start-ups to multi-nationals, with a broad spectrum of legal matters. In addition to his legal practice, Richard is a court-approved mediator and serves on the Alternative Dispute Resolution (ADR) panel for both the Alameda and Contra Costs County Superior Courts. ©2011 Richard Korb

By: Richard E. Korb

There are a variety of legal issues that should be kept in mind when starting abusiness. A small business is usually a closely held corporation, partnership, or sole proprietorship. In a closely held corporation, a few stockholders own the shares. In a partnership two or more people agree to go into a business as co-owners. In a sole proprietorship, there is a single owner with no separate legal entity for holding or operating the business.This article provides an overview of some of the basic legal requirements that should be kept in mind when starting a business–regardless of formation.