Opening a business in California- Part 5 Insurance for Your Business.

Opening a business in California- Part 5 Insurance for Your Business.

This is the fifth in a series of articles written for the purpose of assisting persons who intend to start a business in California.  It is designed for the small business owner who may not be familiar with California law or procedures. 

In this article, I will describe the process of finding and buying that will secure your company from liability. It is very important to be prepared for this potential insuring your business will protect both your assets and your business assets from liability. But choosing the right insurance can be a challenging task, especially for persons not familiar with the American commercial insurance industry. This article is intended to help you choose the right insurance for your needs.

I. Buying insurance.

When buying insurance, start by setting up some priorities that are most important for your company. First, check what coverage is required by state law and by your landlord (if you rent) and then tailor your coverage to these requirements. You also need to identify what your other business insurance needs will be. An insurance agent can help advice you. You and your insurance agent can discuss the best way to get the coverage you need, at the lowest cost. Keeping your cost low is important at the outset of your business since there will probably be many cash demands and few sources of cash inflow. Another way to keep the cost of insurance low is to purchase it through group plans that are often available through trade associations or other similar business organizations. Many trade associations and business groups such as the Chamber of Commerce provide members the benefit of purchasing insurance at group rates. Explore alternative trade associations for lower rates and a possible fit with your business.

To gain a better perspective on the amount of coverage your small business needs, take a look at your industry. Review the recent legal actions and settlements in your field. Talk to peers and find their level of coverage. Using your peer feedback and industry research, determine the average legal costs and settlement to set your coverage limits. If you find out what amount of coverage is enough for your business you can lower the premium by increasing the amount of your deductibles. The difference if you decide to choose $1000 instead of $250 as a deductible might save you 10-15% from your premium.

Another good way to lower your insurance costs is to find out what safety or security features serve to lower the rate. Sometimes even installing deadbolt locks or a sprinkler system may lower your rate significantly.

Before deciding on which insurance to buy, shop around, ask your business partners or even friends if they can recommend something. It is not a good idea to buy the first insurance that you have been offered. You might be able to buy comprehensive package which is specially tailored for your type of business.

Some firms choose to self-insure. This means that you don’t buy insurance but just maintain a special fund to cover likely loses or liabilities. Although it may seem like a good idea this could be a risky solution.

II. Types of insurance.

1.     Property coverage.

This type of insurance covers the property where you run your business. If you own the building where your company is located than you definitely need such coverage. The insurance can cover not only the building itself but also additions, furniture, machinery, equipment, outdoor fixtures and work in progress. Most property insurance is written on an all-risks basis, as opposed to a named peril basis. The latter offers coverage for specific perils spelled out in the policy. If your loss comes from a peril not named, then it isn't covered.

Make sure you get all-risks coverage. Then carefully review the policy's exclusions. All policies cover loss by fire, but what about such eventualities as hailstorms and explosions? Depending on your geographic location and the nature of your business, you may want to buy coverage for all these risks.

Typically property insurance is written in one of three forms:

·       Basic Form- this includes losses by lightning, explosion, windstorm, smoke, etc.

·       Broad Form- coverage contains everything that’s on Basic Form and adds protection from other perils like falling objects or breakage of glass.

·       Special Form- this is the most common form and affords the best protection. Instead of listing specific perils this type of policy simply covers all risks of physical loss unless the policy specifically excludes or limits loss.

When choosing the amount of coverage, remember that you only need coverage for the building and not for the land so you don’t need to insure the total value of your real property. Especially in California where land value is extremely high this might save you a lot of money.

   Another two options that you can get with your insurance are: “Replacement Cost Coverage and “Ordinance or Law Coverage”. Replacement cost insurance will pay you enough to replace your property at today's prices, regardless of the cost when you bought the items. It's protection from inflation. (Be sure your total replacements do not exceed the policy cap.)

Ordinance on law coverage requires the insurance company to not only replace the building but also pay for legally required upgrades when you own an older building and it will require some special renovation to fulfill building codes or other legal requirements.

Make sure the full value of an item is insured and check the terms for reimbursement. Just because you may have $1 million in coverage doesn't necessarily mean the whole amount is going to be applied in a given category of property. Also, if your company has a variable growth pattern, you may want to adjust your coverage annually.

2.     Liability Insurance.

This type of insurance protects you against liability from lawsuits or other claims up to the amount of the policy limit plus usually the cost of defending lawsuit. The price you'll have to pay for liability insurance depends on the size of your business and the specific risks involved. The good news is that liability insurance isn't priced on a dollar-for-dollar basis, so twice the coverage won't be twice the price.

There are few different types of Liability Policies:

A.    Product Liability Insurance- covers liability for any injuries caused by products you design, manufacture or sell. Product Liability Insurance covers you against unforeseen circumstances. Bad workmanship or defective products are not covered.

B.    Comprehensive General Liability (CGL) Insurance- coverage insures a business against accidents and injury that might happen on its premises, as well as exposures related to its products. For example, one of your clients slips on wet floor while visiting your office and breaks his leg. A CGL policy covers his claim against you. But let's assume that your company is a window manufacturer, with hundreds of thousands of its windows installed in many homes and businesses. If something goes wrong with them, general liability covers any claims related to the damage that results. CGL policies tend to have a lot of exclusions. Make sure you understand exactly what your policy covers and what it doesn't. You may want to purchase additional liability policies to cover specific concerns. For example…

C.    Errors and Omissions Liability (E&O) - this type of policy protects you in case you are sued for damages resulting from a mistake in their work. So if you are designing windows and for example the window leaks because of your design you may be protected by this type of insurance.

D.    Vehicle Insurance- this type of policy should cover cars and trucks you own but also employees’ cars and trucks when those vehicles are used for business purposes. Many states set minimum liability coverage, which may be well below what you need. Make sure you get enough coverage. If you don't have enough coverage, the courts can take everything you have, and then attach your future corporate income, thus possibly causing the company severe financial hardship or even bankruptcy.

E.     Workers’ Compensation Insurance- workers' compensation, which covers medical and rehabilitation costs and lost wages for employees injured on the job, is required by law in all 50 states. Each state has a law setting out what an employer must provide for workers’ compensation benefits. This type of policy is only required for employees, not for independent contractors.

When talking about Liability Insurance it’s important to mention the insurance company’s Duty to Defend.  Most policies state that the insurer has an obligation to defend the insured in a suit brought by a third party. For occurrences covered by the policy, a defense must be provided even if a suit is found to be groundless or false. Make sure the insurance you purchase contains this duty to defend.

3.     Other Types of Insurance.

There are also other types of insurance and depending on your location and other factors you might consider choosing one of these:

·                           Coverage Against Employees’ Theft- covers you if your employee steals from you.

·                           Crime Coverage- protects your company against burglary and robbery but also other thefts and loss or disappearance of property.

·                           Business Interruption Insurance- When your business property is damaged or destroyed this coverage will pay lost income while your business is closed as well as expenses you incur in order to keep your business going. 

·                           Disability Insurance- sometimes called "income insurance," can guarantee a fixed amount of income, usually 60 percent of your average earned income, while you're receiving treatment or are recuperating and unable to work. Because you are your business's most vital asset, many experts recommend buying disability insurance for yourself and key employees from day one.

III. Making a Claim.

When one buys insurance, one hopes that it will never have to be used. However, frequently the need to make a claim arises and there are many important things to remember about. To make a claim you need to:

·       Notify your insurance company immediately when you experience a loss, or have a lawsuit filed against you or your business. You should also notify the police of a theft or accident immediately.

·       Read your insurance policy to make sure what your responsibilities to the insurance company are.

·       Make a list of damages and any items lost, stolen or destroyed.

·       If possible, find receipts or proof of ownership for all your lost, stolen or destroyed items.

·       When facing a lawsuit from a third party, gather any information you may have on the incident or reason for the lawsuit.

·       Send written notice by certified mail to have verifiable proof of the date that you notified your insurance provider regarding a claim.

When you have filed a claim, be prepared to do battle with your insurance company. If you feel your settlement offer is not fair, schedule a time to talk with the claims adjustor and contact the customer service division of the insurance provider. Negotiating with your insurance company is always a good start to reaching a better settlement. Although, if you are completely dissatisfied with the final result, you may hire an attorney to help you with the negotiations, and if necessary to pursue a lawsuit or arbitration against insurance company.

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CHRISTOPHER A. KEROSKY of the law firm of KEROSKY PURVES & BOGUE has practiced law for over 25 years and has been recognized as one of the top lawyers in Northern California for 10 years by “Super Lawyers” www.SuperLawyers.com .   He graduated from University of California, Berkeley Law School and was a former counsel for the U.S. Department of Justice in Washington D.C.  His firm has offices in San Francisco, Los Angeles and 7 other locations in California. 
WARNING: The foregoing is an article discussing legal issues. It is not intended to be a substitute for legal advice. We recommend that you get competent legal advice specific to your case.

OPENING A BUSINESS IN CALIFORNIA: Part 3 Obtaining a Federal Tax I.D. Number

OPENING A BUSINESS IN CALIFORNIA: Part 3

Obtaining a Federal Tax I.D. Number

This is the third in a series of articles written for the purpose of assisting persons who intend to start a business in California.  It is designed for the small business owner who may not be familiar with California law or procedures.  In the last article, I discussed registering one’s business with the County by filing a fictitious business name statement.  In this article, I will describe the process of getting a federal employer identification number and opening a bank account. 

Third Step: The Federal Employer Identification Number.

The federal employer identification number (EIN) is a 9-digit number assigned to  corporations, partnerships, sole proprietorships estates, trusts and other entities for tax filing and other purposes.  As a business, an EIN is necessary before you can hire employees, pay taxes and even open a bank account.  Moreover, the federal employer identification number is often easier to get than a social security number and some foreign nationals use it instead of a social security number.   Although not approved by the government, it is sometimes used as a way around the difficulty that non-citizens who are self-employed and cannot obtain social security numbers.

The federal employer identification number is your business’ form of identification with the government.  It is the number listed on the federal tax return for your business.  It is also listed on the employee payroll reports the business files with the federal government, if you have employees.  And you may wish to give this number – rather than your social security number – to the bank to associate with your business bank accounts.

A business entity needs only one EIN, no matter how matter different types of business it does or locations it has.  However, if a sole proprietor or partnership incorporates, it needs to obtain a new EIN.

Contrary to many mistaken beliefs about employer identification numbers, they do not result in higher taxes or any special fees for businesses who obtain them.  The process of getting one is free and does not require a lawyer.  Moreover, they are required by law for most businesses.  Partnerships, LLCs, and corporations need employer identification numbers whether they have employees or not.  Only sole proprietors with no employees do not need employer id numbers because they can use their own Social Security number instead.

The federal employer identification number is obtained through the Internal Revenue Service (IRS).  There are three ways to get the EIN: on line, by fax or by mail. 

To get the number on line, simply go to www.irs.gov/businesses.  Click “Employer ID Numbers” under “Topics”.  Follow the easy instructions stated there.  You can obtain a EIN immediately. 

The IRS has also set up an easy system whereby you can get your employer identification number by phone.   You simply call the special IRS telephone number set up for this purpose.  You need to prepare the application form in advance – it is IRS Form SS-4.  The person calling must be authorized to sign the form or be an authorized designee of that person.  When you call the IRS, you simply provide the pertinent information from the IRS form and you will get your federal employer identification number immediately, over the phone.  Then you simply send in the completed SS-4 form or fax it to the IRS Service Center with the employer identification number filled in on the form.

As mentioned above, the federal employer identification number is sometimes used by immigrants in business here who cannot obtain a social security number.  As most foreign nationals know, the U.S. Social Security Administration has greatly limited the ability of non-citizens to get a social security number now.  Permanent residents can get them, as can persons on temporary visas which provide the right to work in the U.S. during the pendency of the visa.  But for persons on temporary visas, the card states: “Valid Only with work authorization”.  Persons here on tourist visas, business visas and most student visas cannot get a social security card, as of course, those persons who are here without status. 

The EIN can be obtained by persons who have a business here in lieu of a social security number.  This is often used by persons without a social security number to open a business, open a bank account and pay taxes.  While the government does not condone this behavior, it is widely done.

 In short, the federal employer identification number is an easy-to-obtain, useful and even necessary tool for any business in California.  It should be one of the first steps you take when starting your business.

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CHRISTOPHER A. KEROSKY of the law firm of KEROSKY PURVES & BOGUE has practiced law for over 25 years and has been recognized as one of the top lawyers in Northern California for 10 years by “Super Lawyers” www.SuperLawyers.com .   He graduated from University of California, Berkeley Law School and was a former counsel for the U.S. Department of Justice in Washington D.C.  His firm has offices in San Francisco, Los Angeles and 7 other locations in California. 

A GUIDE TO OPENING A BUSINESS, Part 2

By Christopher A. Kerosky, Esq.

Last month, I began publishing a series of articles on the process of starting and managing a business in California.  This is intended to provide the reader with a step-by step guide through the primary tasks necessary to legally register your business and start operations in this state.

Here’s Part 2 on Registering your business name.

Second Step: Registering your trade name or “fictitious business name”.

Once you’ve set up a business and named it, you may wish to open a bank account and start making money.  Opening a bank account itself  is a simple process in California; essentially, you go to the bank, spend an hour or less with an account officer of the bank, and fill out some forms required, and in a few days, your first set of checks come in the mail.  However, there are several steps required before the bank will allow you to open an account.

One is you need to let the government know what name you are using.    That is, if you are not using your own name in the business, but rather a trade name or “fictitious name”, it may be necessary to register that name with the County in which you do business.  Sole proprietors and general partnerships are not registered with the state, and so it is necessary for them to file “fictitious business statements” with the County to inform the public of the owners or “principals” of the company.  If corporations and limited liability corporations are only using their actual registered name, then they do not need to file fictitious business statements but those using a different name in the course of their business also must file.

So, for example, if your name is Bill Gates and you open a sole proprietorship known as “Bill’s Software”  in San Francisco, you need to file a fictitious business statement in City Hall, San Francisco, which lets the government and the public know that Bill’s Software belongs to you.   Likewise, if one is a corporation named, say, “Microsoft”, but it wants to do business using the name “Bill’s Software”, then it must file a fictitious business statement telling the world that this corporation is using that trade name.

This name is then referred to by the phrase “doing business as”; for example, Bill Gates doing business as Bill’s Software, or in the case of a corporation, “Microsoft dba Bill’s Software”. 

There are very specific rules for when you need to file a fictitious business statement and when you do not.  If you use your entire first and last name, “Bill Gates’ Software”, then you do not need to file.  If you use only your first name or initials, like “B.G. Software” , then you have to file.  If you have a partnership using the last names of the partners, let’s say “Gates and Jobs Computer Equipment”, there’s no need to file.  However, if it’s any other partnership name, even one using the first names – such as “Bill and Steve’s Computers” -- then it will be required to file. 

Of course, every business owner believes their business name is original and unique.  However, if it is not, when one attempts to file the fictitious business statement, the county will not allow use of the name.  Before a business owner can register a fictitious business name, a search of the county database of registered names will be done to make sure the name is not already taken.  If your name is Bill Gates and you get the idea to do business in California as “Apple Computers”, you can be pretty sure that you won’t be allowed to do so.

          After filing it with the County, you need to publish your fictitious business statement in a “newspaper of general circulation”.  The County office gives you an approved list.   There are certain legal or specialty newspapers who do this more cheaply than the big newspapers.  The purpose of this is to give formal notice to the world, or at least the subscribers of that newspaper, that you have started your business using the name chosen.

          These county fictitious business records are important for many purposes.  They give consumers a way of making complaints about business owners that may not be otherwise identified.   Certainly if a lawsuit against a business needs to be filed, especially if that business is not a corporation and does not use the owner’s name, one needs to know who the owner is and where to serve him the legal papers.  Lastly it serves to ensure that two or more businesses are not using the same name in the same county for their business.

          It is necessary for small business owners to go through this formality.  For one, business owners break the law by not registering their trade names, and theoretically risk being closed down by the County (at least temporarily).  But there is also the risk that after one has invested time, money and hard work in building up the reputation of a name, if it is not registered, the name may be taken and used by someone else who may benefit from all of your hard work and effort.

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CHRISTOPHER A. KEROSKY of the law firm of KEROSKY PURVES & BOGUE has practiced law for over 25 years and has been recognized as one of the top lawyers in Northern California for 9 years by San Francisco Magazine “Super Lawyers” edition.   He graduated from University of California, Berkeley Law School and was a former counsel for the U.S. Department of Justice in Washington D.C.  His firm has offices in San Francisco, Los Angeles and 7 other locations in California. 
WARNING: The foregoing is an article discussing legal issues. It is not intended to be a substitute for legal advice. We recommend that you get competent legal advice specific to your case.

A GUIDE TO OPENING A BUSINESS, Part 1

By Christopher A. Kerosky, Esq.

The following is a series of articles on the process of starting and managing a business in California.  It is designed for the small business owner who may not be familiar with California law or procedures.  I will attempt to provide the reader with a step-by step guide through the primary tasks necessary to legally register your business and start operations in this state.

First Step: Choosing a Proper Business Form and Registering Your Business.

One of the most important and sometimes most difficult decisions is the proper legal form for your business. There are four basic legal forms, each described below: the sole proprietorship, the partnership, the corporation and the limited liability corporation (LLC).

Generally, the decision should be made with reference to several factors: simplicity and cost of organization; control and decision-making; taxes; and responsibility for the debts and other potential liabilities of the business.  In another article, I deal in depth with the differences between each, but I will describe the basic differences here. 

A sole proprietorship has the advantage of simplicity, requiring less registration and paperwork.  Also, the income of the business is treated as income of individual for tax purposes, which makes tax return preparation a bit easier.  However, there is no protection from personal liability for the owner.  The debts of the business are treated as debts of individual, including liability due to accident or injury.  

A partnership also does not require formal registration or continuous meetings and minutes, as with a corporation.  However, a written agreement between partners is strongly advisable.  Like a sole proprietorship, the income of the partnership are not separately taxed.  But, again, the partners are not shielded from liability.  There are now limited liability partnerships (LLPs) which do provide limited protection for liability, although not as complete as with a corporation or LLC.

Corporations and Limited Liability Corporations are very similar.  Both require corporate documents to be drawn up, usually by a lawyer.   Both require registration with the state described below. 

With corporations, certain legal documents must be kept on an ongoing basis, such as shareholders meeting minutes, records of stock transactions. Formation of an S corporation requires an additional filing with the IRS.  With LLCs, the ongoing paperwork is not as demanding. 

With both LLCs and S corporations (used by most small businesses), income is treated as the  income of its shareholders just like a sole proprietorship.  With larger C corporations, income of business is not treated as  income of individual for the tax purposes. Only dividends paid to shareholders [or salary paid to employees] is treated as income. On the case of payment of dividends, this can subject the company to double taxation under certain circumstances.

One of the principal advantages of LLCs and S corporations is that the debts of the business are not treated as the debts of individual partners. A corporation can go bankrupt even while its shareholders remain solvent.  Most importantly, the shareholders are shielded from the liability of the corporation as long as the corporate formalities are followed.

Once you have decided which business form you will use, it may be necessary to register your business with the state of California.  Corporations or LLCs need to file special registration papers with the California Secretary of State.  For corporations, the necessary papers are called Articles of Organization.  Limited liability partnerships file a Limited Liability Partnership Registration form. 

The Secretary of State must approve all names before they can be registered.   The main criteria that the Secretary of State’s office applies is that they ensure that your proposed name is not already taken by another entity of the same type.  A business entity in California may not use a name that is already registered to another existing business entity of the same type.   Before you file your registration documents with the Secretary of State, it is worth it to check your potential names to see if they are available.  If they are, you can immediately reserve one of them.  You can do so through the Secretary of State’s office in person or at the telephone numbers or websites listed below. 

California Secretary of State Offices

Name check phone number is 916-653-6814

Online at www.ss.ca.gov. 

Sacramento Headquarters

1500 11^th Street

Sacramento, CA 95814

(916) 657-5448

Los Angeles Branch

300 S. Spring Street, Room 12513

Los Angeles, CA 90013

(213) 897-3062

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CHRISTOPHER A. KEROSKY of the law firm of KEROSKY PURVES & BOGUE has practiced law for over 25 years and has been recognized as one of the top lawyers in Northern California for 9 years by San Francisco Magazine “Super Lawyers” edition.   He graduated from University of California, Berkeley Law School and was a former counsel for the U.S. Department of Justice in Washington D.C.  His firm has offices in San Francisco, Los Angeles and 7 other locations in California. 

WARNING: The foregoing is an article discussing legal issues. It is not intended to be a substitute for legal advice. We recommend that you get competent legal advice specific to your case.