Business Entities
by Edward (Ned) R. Hearn
One of your first thoughts as a musical artist, whether solo or a group, as you decide to take your business seriously, is likely settling on a name or where you might get gigs. It probably isn’t about how to organize your business affairs. But the cost of planning to minimize problems is much less than the cost of trying to cure those problems after they have materialized.
Four forms of business can be used to organize your music business affairs: (1) sole proprietorship, (2) partnership, (3) corporation, or (4) a limited liability company. Each of these forms has special features that should be examined when making a decision about how to organize your business, including expenses, personal liability, and taxes. Seek professional advice to determine the best form for your particular situation before investing too much time and money in your enterprise.
Sole Proprietorship
A sole proprietorship is a business conducted by one individual, who is the sole owner. If you have your own business for the purpose of making money, whether by making or selling records, writing and publishing songs, operating a recording studio, or performing solo, you have a proprietorship business, and this material applies to you.
A proprietorship is the simplest form of business to start because it generally requires no contracts to organize (contracts require at least two people), so only a few special papers have to be prepared. These papers include a fictitious business name statement, commonly called a DBA (“doing business as”), which identifies you as the owner by your name and address and the name under which you are doing business. Note, however, that a DBA generally needs to be filed only if you use a name other than your own to do business. That statement must be filed with the county recorder located in your local county courthouse. After filing with the county recorder, you must publish a legal notice statement of your doing business. Inquire at your county recorder’s office to find out which local newspapers publish the notices and have the least expensive legal notice rates. Certain local governments may require the proprietor to obtain a separate business license or that license may be covered by the fictitious business name filing. Your county recorder’s office can fill you in on this.
If you sell goods at retail, you will need a permit issued by the appropriate tax authority (see more in the section titled, “General Business Obligations”).
You, as the sole proprietor, are the only one who makes decisions on how the business should operate and what its focus should be. With a proprietorship, you enjoy all the profits but must absorb all the losses. Employees do not participate in the ownership. A proprietor who has employees must withhold income and social security taxes, unemployment, and other insurances required by state and federal law and must submit the withheld sums to the appropriate government agencies. While a proprietorship usually has fewer regulatory and record-keeping requirements than a partnership or corporation, you must focus on the reports to be filed with the local, state, and federal taxing authorities. If you are going to hire employees, be certain to contact each of those authorities to obtain the required forms and instructional booklets that tell you what to do. A good bookkeeper or accountant will be able to assist you with that part of your business. These requirements are discussed in more detail later in this chapter.
As a proprietorship, you are responsible for your acts and, in general, the acts of your employees. If, for example, you or one of your employees should injure someone in a car accident while promoting your record to radio stations, you would be responsible for compensating the injured party. A judgment against you would enable the judgment creditor (the person who won the suit and to whom you owe the money) to look to all your assets, both business and personal, to recover on the judgment. You should obtain insurance to cover the liabilities that can occur in running a business.
The entire income of a proprietor is taxable income, but business expenses and losses are deductible from income. Proprietors, as self-employed individuals, must file quarterly estimated income tax returns and prepay anticipated taxes with the Internal Revenue Service and state tax authorities. The estimated tax is based on a projection of expected income during your first year of business and thereafter on your prior year’s taxes. You should consult an accountant who has a tax orientation to assist you in these matters.
Partnerships
If your band of one or your one-person record or publishing company has grown to two or more people that share profits and losses, and you plan to stay in business for a while, you have a partnership. A partnership is defined as an association of two or more individuals conducting a business on a continuing basis as co-owners for profit. Usually, the relationship among the partners is governed by a written partnership agreement that details the rights and responsibilities of each partner. Although you do not need a written contract to be considered a partnership, obtaining one is recommended. If there is no written partnership agreement, state statutes control the relations of the partners with each other. The partners can be individuals, other partnerships, corporations, limited liability companies, or any combination of these. Each partner contributes property, services, or money to the business of the partnership. Partners also may loan property, money, or services to the partnership.
The Case of Deep Purple
What happens when a group disbands but its product still sells? One example of potential issues that can arise involved the group Deep Purple, which had not been performing as a band for many years. Its records, however, still sold. One of the original members of the band formed a new group. None of the other members of the new group had been members of the original Deep Purple.
The new group began to perform under the name Deep Purple. The corporation, owned by the original members of Deep Purple and their management, still owned the rights to the name Deep Purple. They sued the new Deep Purple to stop them from performing under that name and were awarded damages of $672 thousand; compensatory damages (actual damages suffered by the corporation) were $168 thousand and $504 thousand was for punitive damages.
Since then, the authorized Deep Purple has re-formed and resumed performing and recording. This situation is one of many that can happen when a group disbands.
General Partnership
In a partnership, each of the partners has an undivided equal interest in all of the partnership property, unless, by contract, they provide for their interests to be unequal. Essentially, each partner owns the assets in common with the other partners and has a duty to each of the other partners to take care of that property and to not dispose of it without the consent of the other partners.
Each person who is a partner may act on behalf of the partnership and that act binds all of the partners in the partnership. Each person in the partnership is liable for the business obligations of the partnership that any partner incurs. In other words, if your partner signs a business commitment to pay for advertising for the business, you as a partner are responsible with the other partners for making payment. On contract actions, the creditor can sue all of the partners, but cannot single out any one partner to sue exclusive of the others. A tort claim (inflicting harm on another person or property) for injuries is different.
If, for example, a partner runs a car into a person at a venue where the band is setting up to do a gig in the normal course of partnership business, each partner is severally (individually) liable and the store owner could sue any individual partner or all the partners in the partnership.
Partners’ personal assets can be taken by creditors of the business only after all partnership assets have been taken and personal creditors of the individual partners have satisfied their claims out of the partners’ personal assets. For example, business creditors must exhaust all of the property and money of the partnership before they can look to an individual partner’s car, stereo, or instrument, and the person that individual still owes for the car, stereo, or instrument has to be paid before the business creditor can claim any of these prized items. Some states’ laws will allow certain “necessary” property of the debtor to be exempt from creditors’ claims, such as food and clothing.
Death or withdrawal of a partner (or some other specified event set out in a partnership agreement) will dissolve the partnership. By written agreement, however, the partners can provide that the partnership will continue despite a partner’s death or withdrawal. In that case, the agreement establishes distribution rules to determine how the withdrawing partner will be compensated (called a buy-out) and how the partnership will continue without the deceased or withdrawn partner.
As with a proprietorship, a partnership must file a fictitious business name statement (if all the partners’ surnames are not in the partnership name) and publish a DBA statement in a local county newspaper. You also must file a Form SS-4 with the Internal Revenue Service to obtain an employer identification tax number for the partnership even if you do not employ anybody. These forms can be obtained by calling, faxing, writing, or emailing your regional Internal Revenue Service center or more easily by filing for the tax identification number at www.irs.gov. The performing rights organizations ASCAP, BMI, SESAC, and Global Music Rights ask publisher members to include their employer identification tax numbers on their membership applications. You must also secure any required local licenses and permits.
In a general partnership, all partners participate in the control of the business. Partners may agree among themselves to assign specific duties according to ability. Voting on business decisions may be equal or may be weighted according to capital contribution (money and property contributed to the partnership) or on some other basis. Partners equally share profits, losses, and risks unless they agree, in writing, to a different division.
On dissolution of the partnership, the partnership’s assets are liquidated (turned into cash) and its creditors are paid first. The balance of the liquidated assets, if any, is distributed to the partners, first to repay loans by any of the partners to the partnership, second to return any money or assets contributed by the partners, and, finally, to the partners according to how they share profits.
When There Are No Written Partnership Agreements
A frequently raised issue is how to structure business arrangements among band members. Whenever two or more musicians form a band, they have formed a general partnership. Although having a written agreement at some point is important, most struggling bands cannot afford to hire a lawyer to prepare one for them. If this is the case, the members of the band should work out answers among themselves. Communicate with each other. Seek professional help. Follow your instincts on what seems fair and reasonable to you. Determine at what point your band should make an effort to have a written agreement. Planning your business properly in the beginning is far less expensive than resolving problems after the fact, especially if the resolution takes the form of expensive litigation. If you cannot reach an agreement, maybe that is a sign you should not be in business together.
Legal Presumptions
If the members of a band have formed a partnership by working together but do not have a written agreement, state statutes presume that certain conditions apply to the band’s arrangements. These conditions are that each partner (a) has an equal vote in partnership affairs and that a majority vote determines partner decisions; (b) owns an equal share of the partnership assets, including equipment purchased by the band, the name of the band, and income and other assets, such as sound recordings and co-authored songs; (c) shares equally in the partnership’s profits and losses; and (d) is responsible for the acts of all the other partners performed in pursuing the partnership business. If a partner, for example, delivers the band’s independently produced recording to record stores for sale and in the course of making a delivery has a car accident, then all of the partners are liable for any damages.
Leaving Members
When a group has no written agreement and a partner leaves the partnership, whether willingly or at the demand of the other partners, then the band’s partnership terminates automatically. The band has a responsibility to pay all of the debts of the partnership and, if necessary, sell the partnership’s assets to do so. If thereafter the remaining members of the partnership wish to continue performing as a band, they may, but in effect, they form a new partnership and start over. If the band’s creditors cooperate, the band may be able to avoid having to liquidate assets as long as the remaining band members continue paying the creditors. You need to work out with departing members their continuing responsibility to make payments owed or to receive payments due. If you do not want to deal with a dissolution and liquidation under these circumstances, you need a written partnership agreement.
Taxes
At income tax time, the partnership files an informational tax return (Federal Partnership Return of Income Form 1065) that describes losses or profits, but the partnership itself pays no taxes. Rather, the losses or profits are passed through to the individual partners for reporting on their individual tax returns (thus, a partnership is often described as a tax conduit) and again, unless the agreement provides otherwise, losses or profits are shared equally. As with a proprietorship, the partners must file quarterly returns and personal income tax prepayments.
Joint Venture
A joint venture is a form of business relationship that consists of an association of two or more people, partnerships, corporations, limited liability companies, or some combination thereof, for the purpose of accomplishing a single or limited series of business transactions for profit, rather than carrying on a continuous business. A joint venture is a partnership with respect to all the applicable rules discussed above, and the terms of the relationship should be governed by a written agreement. Examples of a musical joint venture include recording a single album, producing one video, or promoting a particular concert.
Limited Partnership
A limited partnership functions as a financing vehicle to raise capital to fund identified business goals. It consists of a least two people, corporations, partnerships or some combination thereof. A limited partnership requires at least one general partner, whether a person, another partnership, or a corporation, and one or more limited partners as investors. The limited partners contribute capital, but take no part in managing the business and have no liability beyond the amount of money that each contributed to the partnership and any profits owed to them under the limited partnership. Should a limited partner become involved in the management of the business, then he or she would lose this limited liability status. Generally, a limited partnership is for an established duration and must be set out in a written limited partnership agreement. State and federal securities laws that regulate investments apply to limited partnerships and a discussion of these laws is found in the chapter titled “How to Set Up a Money Deal.”
Partnerships: Critical Written Agreement Decisions
Acquired Property
When a band acquires property, such as a sound or lighting system, each of its members assumes a share of that system’s cost and ownership. Partners should be aware of their payment responsibilities and what happens if somebody leaves the band. For example, will the departing member have to continue to make payments? Do the remaining members have any obligation to pay the departing member for that member’s interest in the equipment based on its market value or the money paid by the departing member, if the band is going to keep that equipment?
Name
If the band becomes well known and its name is recognizable to a large audience, who will have the rights in the band name if the band breaks up or an individual member leaves the band, but the remaining members continue in business with each other? Partnership agreements generally state that the group, as a whole, owns the name. A provision should be included in the agreement stating that if any member leaves the group, whether voluntarily or otherwise, that member surrenders the right to use the band name, which will stay with the group’s remaining members. Any incoming member would have to acknowledge in writing that the name of the band belongs to the partnership and the new member does not own any rights in the band’s name greater than the partnership interests, if any, allocated to that new member.
The partnership agreement could provide that none of the band members may use the name if the group should completely disband, or that any one of the members could buy from the others the right to use the name at a value to be established by binding arbitration with expert testimony, if the members cannot agree on a price among themselves.
Leaving Members
Prior to signing long-term contracts such as recording or publishing agreements, the band should determine how to resolve several issues regarding the rights of departing and new band members, such as concerning services already performed or commitments that have to be met under those agreements, and the sharing of recoupable costs for projects predating and postdating the leaving and new band members.
Song Rights
Can the departing member take his or her songs when leaving the group? If the songs were co-written with remaining band members, the band can continue to use the songs and record them, as can the departing member, but each will have to report to the other their respective shares of income earned from such usages. When the departing member is the sole author of certain compositions, the band could be prevented from recording them, if they had not already been released on commercially distributed records, and from performing them if they had not yet been licensed to a performing rights society like ASCAP, BMI, SESAC, and Global Music Rights. Sometimes bands form a publishing company as part of the partnership’s assets, which will control what happens when a writer member leaves the band. Usually the band will continue to be able to use the songs as will the departing member.
Corporations
At some point in your career, you may decide it is time to incorporate, either because you have reached a high income level or because you wish to protect your personal assets from the claims of your business creditors. Frequently, successful entertainers form what in the entertainment business is known as a “loan-out” corporation. In other words, you have yourself incorporated and that corporation agrees to make your services available to other parties (for example, record companies) in any particular deal.
What does it mean to be a corporation? Corporations differ substantially from proprietorships and partnerships. A corporation is an artificial, separate, legal entity recognized by state law, the formation of which is regulated by procedures established by state law. Ownership of a corporation is obtained by buying shares of stock for value. A corporation can be owned by one or more people (including a partnership) or other corporations. A corporation can be owned privately (that is, the stock is not traded on the stock market) or publicly (the corporation’s stock is sold on the stock market and is held by the public at large).
The corporation is a separate legal entity with a life apart from the individuals who own and operate it. Corporations raise capital by selling shares. The issuance of shares in the corporation is a security subject to state and sometimes federal securities laws. Like an individual or a partnership, a corporation can own, buy, or sell property in its own name, enter into contracts, borrow money, raise capital, and do the various kinds of activities a proprietorship or partnership can do.
The corporation’s shareholders elect a board of directors to govern the corporation. The board of directors, in turn, hire officers (such as a president and treasurer) as employees to manage the corporation. In loan-out corporations, the officers and directors usually are the individuals that form the corporation and are the shareholders. If the corporation is formed by one person, then that person is the sole shareholder and usually holds all of the officer positions and is the sole director.
The corporation bears the business risk. The shareholders’ liabilities are limited to the amounts invested in the corporation and their share of the profits. Those who invest usually are issued shares (stock).
The corporation must file annual tax returns and pay taxes on profits. After taxes, profits can be retained for operating capital or distributed to shareholders as dividends, which are taxable as income. Profits are shared among shareholders in proportion to their ownership participation (that is, the percentage of total shares they have). Unlike in partnerships, profits and losses are not passed on from a corporation to the individual owners of shares, except in a Chapter S corporation.
With a Chapter S corporation, the shareholders get the benefits of a partnership by having profits and losses passed through to them for tax purposes, while they retain the benefit of the corporation’s limited liability status. Losses passed on to shareholders cannot exceed the amounts the shareholders invested.
A corporation is brought into existence by filing a document known as the articles of incorporation (or charter or articles of association in some states). There is a fee for filing, plus a prepayment of an annual minimum franchise tax payment. For example, filing in California costs $100 and the prepayment of the annual tax is currently $800.
Forming a corporation, however, costs more than this because of attorneys’ fees to organize the corporation and prepare shareholder and buy/sell agreements concerning the stock issued to the shareholders. In addition, there may be local fees for permits and business licenses.
Shares of publicly held companies are generally transferable from one owner to a subsequent owner on the open market. With nonpublic corporations, there is no ready market for the shares, and the shareholders have to seek out specific buyers. Also, the law often restricts the sale of shares and requires that certain procedures, established by state and federal statutes, be followed before they can be sold. Also, shareholders may have agreements among themselves or the corporation may have provisions in its bylaws that put limitations on a shareholder’s transfer of stock. This complex area requires professional counsel on securities, tax, and accounting issues and is too involved a topic to examine here. You will need professional advice when it comes time to focus on these considerations.
Bylaws—the rules that govern a corporation’s operation—are adopted at the beginning of the life of the corporation. Generally, a corporation’s officers are empowered to operate the daily affairs of the corporation, subject to approval or disapproval by the board of directors, which in turn answers to the shareholders. The board of directors holds periodic meetings to review the acts of the officers. The shareholders hold periodic meetings to review the board of directors.
Voting among shareholders is based on the number of shares owned—generally one vote per share. Shareholders are sometimes divided into different classes, some of which may be nonvoting. Some corporations’ bylaws provide for “cumulative” voting for the directors. In other words, a shareholder can multiply the number of his or her shares (e.g., 100 out of 500) by the number of board positions (e.g., three) and apply all of the total (300) to one candidate on the board and thereby increase that shareholder’s assurance of placing a representative on the board who would be more inclined to keep that shareholder’s interest in mind.
The corporation’s existence is perpetual unless the shareholders vote to terminate the corporation or the corporation cannot continue financially. On dissolution, creditors such as banks, trade creditors, employees, and taxing bodies are paid first. Then shareholders receive a return of capital (that is, they get back what they paid for their shares if the dissolved corporation has sufficient funds), and, finally, remaining assets and profits, if any, are distributed to the shareholders in proportion to their shares in the corporation.
Limited Liability Companies
A limited liability company (LLC) has elements of both a partnership and a corporation. It can be advantageous for entertainers that work in a group, such as a performing and recording band. Discuss with your attorney the pros and cons of structuring your business as an LLC, instead of as a partnership or regular corporation (usually a Chapter S).
In an LLC organization, the owners (members) have an interest in the LLC and are parties to a contract, known as the operating agreement, which details the rights and duties of the members and provides the guiding rules for the LLC. Some state statutes require the operating agreement be in writing. Generally, a written operating agreement, just like a written partnership agreement, better serves the interests and needs of the members regardless of statutes.
There are two types of LLCs: member-managed, in which members, by statute, have the authority to make management decisions; and manager-managed, in which the members are not the agents of the LLC and have authority to make only major decisions, leaving the authority of day-to-day management decisions to the managers. For the most part, bands that organize as an LLC should be member-managed.
LLCs provide limited liability (as do corporations) and a greater and more flexible freedom to establish ownership and management relationships, as in partnerships, based on the contract of the members, which is known as an operating agreement. LLCs are treated in the same way as partnerships for tax purposes, and they are currently a more preferred form of business for performing and recording groups.
The members of the LLC are not individually liable for the organization’s obligations and liabilities. This condition also extends to the relationships among members. Although general partners, in a partnership, have an obligation to contribute to the partnership and indemnify other partners for losses and obligations incurred in carrying on the business, no such individual obligations exist for members in an LLC. Generally, the LLC will be required to indemnify a member for obligations that members incur in carrying out LLC business. But if the LLC does not have sufficient assets to fully indemnify the member, the member may not look to other members’ individual assets for contribution, unlike a partner in a general partnership who may look to the other partners for contributions.
Under most LLC statutes, members have the right to withdraw at any time and demand payment for their interest, unless the operating agreement provides for limitations on voluntary withdrawal. This right to return an interest to a member of the LLC is similar to the rule that applies to partnerships. Some state statutes limit members’ rights to withdraw or to demand that the LLC or its members purchase their interests, unless the members have agreed otherwise. Consequently, like a partnership (or like shareholder agreements with a corporation), the operating agreement among the members of the LLC should specify the conditions under which the LLC is obligated to purchase the interests of a leaving member. A member’s disassociation from the LLC due to death, bankruptcy, dissolution, or some other event will cause the dissolution of the LLC unless the remaining members consent to continue the business. Structuring the operating agreement so that an LLC does not dissolve upon the disassociation by a member is especially helpful when the organization holds title to property, like copyrights or rights to income, such as advances and royalty payments under a recording agreement. These rights might be adversely affected by the dissolution and reformation of the business that technically accompanies the withdrawal of a member.
The need to get professional counsel when you begin your own business cannot be stressed too strongly. Your lawyer or accountant will help you determine which form is best for your situation and, thereafter, will monitor the operation of your business to decide whether you should switch to another form as your needs change.
Loan-Out Companies
Successful musicians and bands sometimes establish a separate corporation or LLC called a loan out-company, the assets and expenses of which are separate from any other corporation or LLC the artists have formed. The purpose of a loan-out company is to “loan out” the artist’s services to another party, mainly in the complex rights and payment and liability exposure issue situations that are created by touring and live performance events. The loan-out company can enter into contracts. So, for example, a talent agent might contract with a concert promoter on behalf of the agency’s artist, through the artist’s loan-out company. The loan-out corporation or LLC receives the income and pays a salary to its employees—namely, the musician or band that created the loan-out company.
Legal Obligations of Employers
As an individual involved in the music business, you may find it necessary to hire others to work for you. It is important, for example, to retain the services and advice of a good accountant, especially one with tax experience to track income and expenses. If you hire employees, you must satisfy certain state and federal legal obligations levied on employers. This section briefly identifies those obligations and others of which you should be aware. If you start your own business and hire employees, consult an attorney or accountant or at least with the appropriate government officials, to make certain the federal and state laws regarding wages, benefits, hours, compensation, insurance, taxes, licenses, and other matters are satisfied.
Employers’ Tax Obligations
Becoming an employer requires a host of form filing. One of the first things you must do is obtain an employer identification number (SSN) from the Internal Revenue Service. This number must be shown on all federal tax returns, statements, and other documents. Application for this number is made on Form SS-4, which may be obtained from and filed with the IRS, most easily done online at www.irs.gov. Sole proprietors have the option of using their social security numbers.
Generally, employers must withhold federal income and social security taxes as well as state income taxes and other state taxes from the wages they pay to their employees. Contact your nearest IRS office and the local office of your state taxing bureau to obtain the necessary information on the procedures for withholding such taxes.
The employer must have all employees complete the employee withholding allowance certificate (Form W-4). If the employee had no federal income tax liability for the preceding year and anticipates no liability for the current year, the employee withholding exemption certificate Form W-4E should be completed. These forms should be returned to your local IRS office. Based on the information contained in the W-4 forms and in tax tables (which should be included in the information you receive from the federal and state taxing authorities), you can determine the amount of income and social security taxes to be withheld from each wage payment and the amount of the employer’s matching contributions for social security taxes.
The withheld income and social security taxes are deposited along with federal tax deposit form 8109 at an authorized commercial bank depository, which commonly are paid online with banks acting as the collecting agent or the Federal Reserve Bank in your area. The deposits are required on a monthly, semimonthly, or quarterly basis, depending on the amount of the tax involved. Form 941, which describes the amounts withheld, must be filed on a quarterly basis.
The employer must furnish to each employee two copies of the annual wage and tax statement form W-2 for the calendar year no later than January 31 following the end of the calendar tax year, including a federal copy, state copy, city copy (for certain jurisdictions that impose a city income tax, like New York City), and employee record copy. If the service of the employee is terminated before year-end, the W-2 form must be submitted to the employee not later than thirty days after the last payment of wages to that employee. This W-2 form is an informational one for the purpose of advising the employee how much tax money was withheld and may be combined with state and city withholding statements. It must be used by the employee in filing annual income tax returns.
Remember that if you are the person responsible for withholding taxes on behalf of employees (yourself or others), you may become personally liable for a 100% penalty on the amount that should have been withheld if you fail to comply with these obligations. Note also that the employer may be subject to federal and state unemployment taxes and to withholding on state disability insurance taxes. You should consult your accountant or local IRS office, state unemployment compensation bureau, and state disability insurance office to find out the details on unemployment taxes and disability insurance. Generally, the procedures for withholding money for these programs are similar to those for withholding federal and state income taxes and social security taxes.
If you hire independent contractors who are responsible for making their own tax payments, it should be clear that they are operating their own businesses, have been retained by you to perform services, are not under your control or direction, and will be performing the same or similar services for others. Such contractors should provide you with completed W-9 forms. Also, you should file a 1099 form with the IRS by February 28 of each year identifying the independent contractors and the amounts paid for their services in the preceding year. Examples of independent contractors include someone to set up and engineer the sound for a showcase concert; a producer to oversee and produce a recording of the masters for your albums; and an arranger to arrange your original compositions for your album. The IRS is particularly interested in independent contractors you retain who perhaps should be treated as employees, so be sure to review with your accountant the current rules and regulations that distinguish employees from independent contractors.
Other Employer Obligations
Most employers are subject to state workers’ compensation laws. These laws impose liability on the employer for industrial accidents that employees sustain regardless of the employer’s negligence. Workers’ compensation liability insurance provides a schedule of benefits to be paid to employees for injuries or to their heirs if the employees are killed in an accident. Obtain sufficient workers’ compensation liability insurance from an authorized insurer or a certificate of consent from your state’s director of industrial relations if you are going to self-insure. Generally, you can obtain insurance coverage through the local office of your state’s compensation insurance fund or through a private licensed workers’ compensation carrier.
Both state and federal laws require minimum obligations on the employer concerning wages, hours, and working conditions. Contact the Department of Labor, Department of Industrial Welfare, or Department of Industrial Relations in your state as well as the U.S. Department of Labor for detailed information. Both state and federal laws also require than an employer refrain from discrimination in hiring and in the conditions of employment. You must be careful to comply with these laws.
General Business Obligations
As a business, you have certain additional obligations. We will not go into detail here, but will simply identify problem areas and advise you to either consult your local, state, and federal authorities or an attorney.
If you engage in retail sales to consumers, you must comply with state sales and use taxes. Generally, the consumers pay this tax, but the seller is obligated to collect the tax. On the seller’s failure to collect, he or she will be obligated to pay the sums to the state that should have been collected from the consumer. Also, as a seller of retail goods, you must obtain a seller’s permit from the local office of your state taxing authority. In California, that would be the State Equalization Tax Board. If you sell your product to a distributor who will in turn sell to retailers or if you sell directly to a retailer, then you need to obtain a resale tax exemption certificate from the state to avoid having to pay sales taxes on what you sell to a retailer or the distributor.
Note that in most states businesses must pay personal property tax on certain items of personal property the business owns or possesses at a certain time in each calendar year. You must file a property statement with the county assessor within the period of time state law requires. Check with your accountant or state’s business property tax department to obtain the necessary information to enable you to comply with the state’s laws on such taxes.
It is advisable to obtain casualty and public liability insurance. Consult with local insurance agents for advice on this matter. Many trades, occupations, and businesses are required to obtain state and sometimes local business licenses. Again, consult with your local and state authorities to determine what your obligations are.
It should be clear from the items discussed here that starting a business involves numerous filings and much record keeping. These requirements are unquestionably a burden, particularly for a small business. Although it’s possible to ignore them and “fly below radar” for awhile, the odds are against doing it for long. The more successful the enterprise, the sooner it will become visible.
The recommended approach is to comply from the outset. If the requirements seem confusing or you do not have sufficient business experience to feel confident that you have undertaken all the proper steps, have an accountant, businessperson, or lawyer look over what you have done and advise you. Once your bookkeeping and reporting systems are established, they are not difficult to maintain.
