Choosing a business form may also impact employment obligations

The choice of business entity can have far-reaching implications. In addition to affecting how a business might be taxed or whether owners might be subject to personal liability, a business form also impacts employment benefit obligations.

Previously, California law did not require partners to pay separate workers’ compensation premiums. Instead of taking out separate insurance policies, a partner might simply use his or her personal medical policy to cover any on-the-job injuries. However, state lawmakers recently revised the workers’ compensation system. Now, only 15 percent owners of a corporation, partnership or LLC in California are exempt from taking out separate workers’ compensation policies.

The price of workers’ compensation insurance may be costlier than readers imagine. A benchmark calculation in California is $3.24 for every $100 of a company’s earnings. If 10 partners in a partnership each expected a $100,000 salary, the partnership might pay about $32,400 for a worker’s compensation insurance plan. That’s a relatively significant new cost.

Our California law firm focuses on business law. Many of our clients come to us with ongoing business law issues, such as contract negotiations or disputes. Yet we have also helped clients who are choosing among different business forms.

As this example illustrates, it is important to understand the financial and tax consequences of each business form. Depending on a company’s goals in the short and long term, the costs and liabilities of one particular organizational model may make more sense than others. If you need help with your entity formation, our attorneys can provide detailed and comprehensive counseling.

Source: TownHall, “California Starts New Year Attacking Small Business,” Bruce Bialosky, Jan. 1, 2017