WHERE TO INCORPORATE YOUR SMALL BUSINESS

Introduction

Many California business owners have heard and read that Delaware is the best state in which to form their entity due to their business-favorable laws. In particular, Delaware has historically offered:

• the most favorable franchise tax rules and been the most pro-management from a legislative and judicial perspective;

• broader protection for board members against derivative suits (lawsuits initiated by shareholders on behalf of the corporation);

• less legal protection for minority shareholders than California (e.g., cumulative voting is not required and staggered boards are allowed); and,

• limited statutory protection against hostile takeovers.

However, despite the ease and potentially favorable factors that point to Delaware as a destination for business formation and incorporation, there are some factors that California business owners, especially those who own small businesses, should consider before jumping on the Delaware bandwagon.

Cost Comparison Between California and Delaware

It currently costs $89 to file articles of incorporation in Delaware. The required annual report filing fee for all non-exempt domestic corporations is $50, plus taxes. The minimum Delaware corporation tax is $175 for corporations using the Authorized Shares method, and a minimum tax of $350 for corporations using the Assumed Par Value Capital method.

In contrast, the fee for filing articles of incorporation in California is $100. There is also a requirement to file an initial report within 90 days of incorporation which provides detailed information about your company and includes a fee of $25. In addition, the state requires the filing of an annual report along with a filing fee of $25. Most corporations will also pay a minimum annual franchise tax of $800 to the California Franchise Tax Board.

LLCs in Delaware are a little different. LLCs are $90 to form and are not required to file an annual report. However, they are required to pay an annual tax of $300.

LLCs in California do pay less than corporations in most cases. The formation fee is $85 and the 90 day Statement of Information fee is $20. Unlike California corporations, LLC’s must file a report with the state every other year rather than every year, along with a fee of $20. And the annual minimum tax payable to the Franchise Tax Board remains at $800.

While it may appear, from the outset, that Delaware is the preferable place to form your business based on a cost analysis, if your company does business in or from California, it must be registered in California whether it was formed in another state or not. This means that companies who conduct any business in or from California will remain subject to the filing fees charged by the California Secretary of State’s office, and must pay the minimum franchise tax of $800. Furthermore, a Delaware corporation operating in California must maintain a registered agent in Delaware (in addition to having one in California), which generally costs a minimum of $100 per year.

As you can see, if your company does business in or from California, incorporating in Delaware substantially increases the costs of formation and annual reporting. Click on the following links for the Secretary of State’s office of California and Delaware, respectively https://www.sos.ca.gov/business-programs/business-entities/ and https://corp.delaware.gov/.

Corporate Laws

The corporate laws of Delaware are very well developed and, as mentioned previously, business friendly, especially for businesses that have a national customer base and also for venture capitalists. However, it is important to consider how your business will be structured before determining the optimal state in which to incorporate. For example, if your business is structured as a single-member LLC, the business-friendly laws of Delaware are unlikely to be of any benefit to your business.

Other factors to consider are your business goals, where you will conduct business, and where you will bank. If you plan to bank and do the lion’s share of your business in California, then the decision is usually fairly straightforward, you would be better off ,in most cases, to incorporate in California. And, as previously discussed, if your business will generate California source revenue, or is operated from California, it must be registered in California.

If a California based business is incorporated in Delaware, lawsuits against the business may be filed and litigated in Delaware. While the outcome of such lawsuits could potentially be more favorable in a Delaware court, there is no guarantee that will occur. And, if your business is located outside of California, litigating a lawsuit in Delaware obviously becomes more expensive and inconvenient for a California based business owner since there will be significant costs associated with that scenario, like traveling to and from Delaware. As a result, you may incur extensive expense without any real benefit.

The good news, and another reason to choose the California versus Delaware option for forming your business, is that California has now incorporated a large portion of the Delaware General Corporations Law into its statutes and regulations thereby bringing many of the benefits of filing in Delaware to California.

Conclusion

With some exceptions, large corporations, not small or medium-sized businesses operating in California, will typically benefit from incorporating in Delaware or another state outside of California. When you are considering the type of business entity or structure to utilize for your business, or the most favorable state in which to incorporate, contact our trusted Business and Corporate Attorneys at the Gehres Law Group for a complimentary consultation. We’re confident that you’ll be glad you did.

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CALIFORNIA EMPLOYMENT LAW UPDATE 2019

Even though we are well into 2019, it is important for employers to be aware of and understand the importance and ramifications of the changes to California’s employment law landscape, which can affect their day to day operations. Some highlighted changes in California law are discussed below. The experienced employment law attorneys at Gehres Law Group are ready to assist employers in navigating the sometimes confusing and ever-changing employment laws in this State.

Wage Law Changes

First up is a reminder that California’s minimum wage went up to $12.00 per hour for employers with 26 or more employees, and $11.00 per hour for employers with 25 or fewer employees.  Minimum wage increases will continue at the rate of $1.00 per hour until January 1, 2022 for larger employers, and January 1, 2023 for smaller employers. See California Labor Code Section 1182.12. Higher rates may be in effect for employers located in certain cities which have enacted their own minimum wage rates.

Exemptions for agricultural workers relating to overtime and other working conditions have been repealed or changed.  Beginning January 1, 2019, agricultural employees must receive overtime at one and a half times the employee’s regular rate of pay for all hours worked in excess of nine and a half hours in one workday or 55 hours in one work week.  The overtime threshold is reduced by one-half hour per day or five hours per week every year until January 1, 2022 when the threshold matches the eight hours per day/40 hours per week requirements applicable to most other workers. The double-time threshold will be set at 12 hours per day beginning January 1, 2022. The timeline for compliance is delayed by three years for small employers–those with 25 or fewer employees.

The labor code was also amended to clarify that an employer may ask applicants their salary expectations for the position applied for. The law also authorizes employers to make compensation decisions based on employees’ current salaries, only if any wage differential is justified by one or more specified factors, including a seniority system or a merit system. See California Labor Code Sections 432.2 and 1197.5.

Under the State’s paid family leave law, employers are now allowed to require employees to take up to two weeks of earned, but unused, vacation leave before, and as a condition of, employees receiving paid family leave benefits.

Although not set into effect yet, beginning January 1, 2021 California’s existing paid family leave program will expand to employees who request time off related to their own active duty military service, or that of a close family member.  Current law only provides partial wage replacement to employees who take off due to the serious illness of themselves or a family member, or to bond with a new child.

Finally, employers are now required to provide copies of an employee’s payroll records within 21 days of the employee’s request. This new law involves a change in the language to ensure that employers understand they are required to make and provide the copies itself, as opposed to making the records available for the employee to copy.

Sexual Harassment

A new law in California requires employers with five or more employees to provide sexual harassment training to their employees by January 1, 2020, and then every two years after that. Specifically, employers must provide supervisors with two hours of training and nonsupervisory with one hour of training. Previously, only employers with 50 or more employees were required to provide the training. The new law also requires the Department of Fair Employment and Housing to develop compliant sexual harassment training courses.

An amendment to the FEHA made clear that a single incident of harassing conduct is sufficient to create a triable issue of hostile work environment, if the conduct interfered with an employee’s work performance or, otherwise created an intimidating, hostile, or offensive work environment.  The law explicitly overrides the prior standard for hostile work environment set by the 9th Circuit in Brooks v. City of San Mateo, 229 F.3d 917 (9th Cir. 2000), which held that a single incident of sexual harassment did not support a cause of action.

Also, as a part of the amendments to the FEHA, California Government Code §§12900 – 12996, employers are now clearly liable for any unlawful harassment by non-employees, not just sexual harassment as was the previous case. Non-employees include applicants, unpaid interns or volunteers or persons providing services pursuant to a contract in the workplace. With few exceptions, employers are now prohibited from requiring or inducing employees to release a claim or right under FEHA or require employees to sign non-disparagement agreements which prevent the employee from disclosing information about unlawful acts in the workplace, including sexual harassment.

Finally, FEHA now authorizes courts to award prevailing parties in civil actions, under the FEHA, reasonable attorney’s fees and costs including expert witness fees. It restricts courts’ ability to award reasonable attorney’s fees and costs to prevailing defendants to only those times when the court determines the action was frivolous, unreasonable, or groundless when brought, or that the plaintiff continued to litigate after it clearly became so.

Other Discrimination and Accommodation Issues

Lactation accommodation rules were also modified for 2019. Existing law requires employer to provide a location, other than a toilet stall, to be used for lactation (or at least make reasonable efforts to do so). The location should be permanent, unless the employer is unable to provide a permanent location and the temporary location is private and not used for other purposes while being used for lactation.  There is some flexibility for agricultural employers, allowing them to comply by providing an air-conditioned cab of a truck or tractor. See California Labor Code Section 1031.

The statutes governing employee criminal background checks and hiring/employment decisions under The Fair Chance Act were also amended. Except in specific situations, employers have previously not been permitted to use in hiring or employment decisions, information disclosed an employee concerning the employee’s participation in a pretrial or posttrial diversion program or concerning a conviction that has been judicially dismissed or ordered sealed. The new law makes changes to the specific situations when the general prohibition does not apply. These exceptions to the general prohibition include situations where (1) the employer is required by law (State or Federal) to obtain information regarding the particular conviction of the applicant, regardless of whether the conviction has been expunged, judicially ordered sealed, statutorily eradicated, or judicially dismissed following probation, (2) the applicant would be required to possess or use a firearm in the course of his or her employment, (3) an individual with a particular conviction is prohibited by law from holding the position sought, regardless of whether the conviction has been expunged, judicially ordered sealed, statutorily eradicated, or judicially dismissed following probation, or (4) the employer is prohibited by law from hiring an applicant who has that particular conviction, regardless of whether the conviction has been expunged, judicially ordered sealed, statutorily eradicated, or judicially dismissed following probation.

If your business is in need of further clarifications, updates or just a review of your employment practices and policies, please contact our experienced Employment and Business Law attorneys at the Gehres Law Group PC for a consultation.

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