San Diego Business Lawyer Blog

Maintaining corporate formalities is critical for California businesses that have elected to incorporate. Often small business owners wrestle with the decision to incorporate and after considerable deliberation opt for incorporation largely because they seek to limit personal liability. When a corporation is properly maintained, stock holders are generally not liable for the debts and other liabilities of the corporation.

Unfortunately, too often new small business owners burdened with the day to day operations of bringing a new business on line fail to heed their attorney's advice regarding corporate formalities and let them slip by the wayside. Others resort to self-help incorporation tools to reduce costs and simply fail to appreciate the importance of maintaining corporate formalities. More importantly, these young entrepreneurs move forward believing they have formed legitimate corporations and are therefore protected from personal liability. By commingling assets, using corporate assets for personal use, failing to adequately capitalize the corporation to meet current and anticipated debts, failing to hold annual meetings and keep written records (minutes), and/or failing to properly document corporate actions, the new corporation starts to look more like the alter ego of the new business owner and less like a corporation.  

This is not to say that young corporations must do everything perfectly.  Courts are unlikely to sanction piercing the corporate veil for minor technicalities.  When making the "piercing the corporate veil" decision, courts look to the totality of circumstances including whether there was fraud or other circumstances that would make insulation from liability unfair to a creditor.  The problem for the young corporation and its stock holders is that creditors are quick to take advantage of whatever technical violations they learn of.  The attempt to pierce the corporate veil itself creates a significant hardship for the targeted shareholder/owner of the corporation.  To avoid any risk, the best precaution young corporations can take is to diligently comply with all corporate formalities.

When starting a new business, San Diego's entrepreneurs are often confronted with a myriad of business and legal issues that they didn't anticipate when originally formulating their business plan. As they consider overhead, business formation, taxes, the need for an attorney and accountant and other expenses, somewhere along the line they learn they have to pay a self-employment tax. While some business owners are familiar with the concept - others ask, "Why do I have to pay this?"

So what is the self-employment tax? The new business owner will be comforted to know that the self-employment tax is not a tax paid only by the self-employed. Rather, the self-employment tax is the social security and Medicare tax that everyone pays. Those employed by others see these taxes withheld from their paycheck and in most cases without realizing that their employer is also paying a portion. The self-employed individual, on the other hand, must pay the entire amount. Essentially, your employer alter ego is paying the portion of your social security and Medicare taxes that would otherwise be covered by your employer in the conventional employer/employee relationship.

In the United States, an individual is considered self-employed for tax purposes if that individual operates a business as a sole proprietor, a partner in a partnership (including general partners in LLCs), or an independent contractor. The social security and Medicare taxes (the self-employment taxes) typically withheld from most wage earners are the equivalent of the combined contributions of the employer and employee under the FICA (Federal Insurance Contributions Act) tax structure. Under the FICA tax structure, employees and employers make equal contributions to both Social Security and Medicare. As stated, the self-employed individual pays the entire amount to Social Security and Medicare. Currently, self-employment tax in the United States is 15.3%. This rate consists of two parts: 12.4% for social security (capped after the first $106,800) and 2.9% for Medicare.

Having to pay the self-employed tax can be disconcerting. However, there are some advantages. Namely, the self-employed individual can deduct up to half of their self-employment tax from their adjusted gross income. Perhaps in the future, tax laws will be amended to further encourage entrepreneurs by reducing the self-employment tax. Until then, it must be considered part of the cost of doing business.