San Diego Business Lawyer Blog

In California, post employment non-competition clauses are generally unenforceable. The prohibition of such clauses stems from the state's strong public policy favoring freedom of employment and competition, and there can be little doubt that savvy California businesses are aware of this. Yet businesses in San Diego and throughout the state routinely include non-competition clauses in their employment contracts, especially those with upper management. Businesses likely feel justified in including non-compete language because they know it is legal in nearly every other state in the country. In addition, many businesses have legitimate concerns regarding the protection of trade secrets. Companies invest in the creation of customer lists, customer loyalty, and in methods and procedures for maintaining and building a customer base, and they want to protect their investment.

Most employees don't intend to steal their former employer's secrets. They are simply interested in taking advantage of employment opportunities. The problem arises because of the difficulties in distinguishing between a former employee's inappropriate use of trade secrets and that same employee's utilization of personal skill and experience for the new employer. Competitors often solicit business from the same customer pool and use similar mechanisms to seek out and maintain a customer base. Who can say for certain that the former employee isn't soliciting clients consistent with the new employer's standard operating procedures? Whatever the case, California has chosen to err on the side of competition.

Employers, on the other hand, have chosen to err on the side of inclusion. Despite their illegality, businesses still include non-compete clauses in their employment contracts. Most prospective employees are unaware of California's employment laws and are unlikely to consult an attorney, and employers know that in most cases their employees will honor non-compete agreements upon the termination of their employment.  Moreover, employers merge non-compete language with trade secret language. If a former employee chooses to go to work for a competitor, employers will look past the non-compete language and allege theft of trade secrets. California courts have long recognized a "trade secrets" exception to the prohibition on non-compete clauses. By alleging theft of trade secrets, employers reduce the risk of having the case dismissed early for failure to state a cause of action, and increase the pressure on the former employee now faced with prolonged and costly litigation. Sometimes, the new employer will absorb the cost, but not often.

There is anecdotal evidence that California's competitive friendly approach has been successful. Some argue that the success of Silicon Valley compared to other technology corridors is in large part due to California's competitive environment. Whatever position one takes, recent developments make it clear that California businesses should exercise caution when including non-compete language in their employment contracts. California Labor Code § 432.5 makes it a misdemeanor to include illegal terms in an employment contract, and Labor Code § 2699 provides for a private right of action for any alleged violation of California's Labor Code and provides for a penalty for each violation of up to $200 per employee per pay period. With 25% of the penalty going to the prevailing plaintiff, employees concerned about non-compete clauses have an additional incentive to bring such actions. Moreover, a recent case casts doubt on the continuing validity of the trade secret exception. In Dowell v. Biosense Webster, Inc., the appellate court found a non-compete clause unenforceable and questioned, but did not rule on, the "continued viability of the common law trade secret exception to covenants not to compete."

Considering these developments, employers and their business attorneys should at the very least take care to ensure that non-compete language is narrowly tailored to address the protection of trade secrets. Including broader non-compete language risks liability under California law.

At one time or another, every San Diego business owner questions how well their business is protected from risk, liabilities and infringement. Should they incorporate, form an LLC or partnership? Does the current business entity offer the best tax advantages? Are their personal assets protected? What are their rights and obligations under leases and contracts? Are key contracts enforceable should there be a dispute? Can existing contracts be improved? Are trademarks, logos and business names protected from infringement? Could they be infringing on others' trademarks? Is there any legal exposure to the company from its website and blog? Is insurance adequate? Do insurance policies meet regulatory requirements for the business or meet the minimum standards agreed to in a lease agreement? Is the company in compliance with government regulations pertaining to employees? Do they need to consult an attorney? The list is as long as businesses are prolific. For most new and growing businesses, addressing every potential legal issue is cost prohibitive. However, an attorney evaluation summarizing and assessing areas of concern is within reach for most businesses. Once an assessment is provided, business owners can better prioritize and plan for the future.

Virtually every car owner at one time or another has taken their car in for service. Most often, the service includes a check up of every major component of your car. Brakes, fluid levels, suspension, tires and electronics are all examined and in the end you are provided a list of recommended repairs and maintenance. Some of the suggested repairs stem from visual inspection and others are derived from manufacturers' mileage triggered recommendations. It's not uncommon for folks to prioritize perhaps electing to have the front brakes replaced and a tune up performed while putting off the replacement of shocks, hoses, and the water pump. Ultimately, whatever decision the consumer makes regarding actual repairs, the cost of the examination is relatively small and the examination alerts the owner of potential trouble spots.

A business lawyer can perform the same kind of affordable analysis for your business - they can evaluate your business profile from top to bottom, provide an assessment of the current state of affairs, highlight areas of risk and other areas requiring attention and make recommendations regarding priorities. This type of evaluation can generally be performed for a flat fee which would be determined by the size of your business. Once completed, the business owner (like the automobile owner above) can prioritize. Whatever decision the business owner makes, at the very least, he or she has been alerted to potential trouble spots and can plan to address those concerns as time and economics permit.

Most people don't think about zoning laws when they first decide to start a business out of their home, and most home-based businesses never hear from local governments about zoning violations even where they are clearly in violation of local zoning laws. The reason why is that most home-based businesses are stealthy. Modern technology allows entrepreneurs to conduct virtually all aspects of a business' operations (short of manufacturing and direct sales) without leaving the computer. Employees can work from their own homes, products can be delivered via on-line companies and services can be provided off site. So long as signs aren't posted, traffic isn't increased beyond what is normal for residential neighborhoods and excess noise isn't a factor, no one notices that a home-based business even exists. In fact, a neighbor's complaints are generally the only thing that ever puts a home-based business on a local government's radar.

So what's all the fuss about zoning laws? Although most home-based businesses are stealthy, some business owners are looking to more visible home-based options. The recession has encouraged many would be entrepreneurs to consider starting a business, and one of their first major cost decisions is location. For a small business requiring employees, product assembly and manufacturing, customer visits, vendor deliveries or any combination of the preceding, understanding local zoning ordinances is critical. Otherwise, they risk being shut down. 

Some localities forbid home based offices completely. Others allow home based offices for professionals such as lawyers, doctors and accountants. Even the most liberal of localities will allow home based businesses only under certain circumstances, and the zoning laws can vary greatly from municipality to municipality. Generally, they have the following in common: they require that the business be only incidental to the home as living quarters taking up less than a certain percentage of the home's overall space; they require that all employees of the business reside in the home; they require that increased vendor and customer traffic is not beyond what is normal for the residential neighborhood; they prohibit the use of equipment that creates a nuisance such as noise, vibration or fumes that are detectable outside of the home; they prohibit the use and storage of hazardous materials; they prohibit the warehousing of business inventory; and they prohibit any changes to the outside appearance of the home (including signage).

If you are considering a home based business that for any reason will be noticed by neighbors, it's important to know the zoning laws in your locality. The easiest way to check your local zoning laws is at the main branch of your public library. You can also contact your local Planning or Zoning office. However, it's probably better not to put yourself on their radar. It may be better to have a friend in the neighborhood call and check for you. You can also try contacting the city clerk's office or your local Chamber of Commerce, or check your city's home page online. If you live in or are considering moving to a planned community with a homeowner's association, the CC&Rs (covenants, conditions and restrictions) are likely even more restrictive than those set forth above.

Continue reading "What You Need To Know About Home-Based Businesses and Zoning Laws" »

Avoiding Litigation - Part One sets forth three pre-conflict practices useful in reducing your business' risk of litigation. Of course, avoiding all conflict is virtually impossible. However, conflict does not inevitably lead to litigation. In fact, more than 90% of all conflict is resolved before reaching the courthouse steps. Below are three practices useful in avoiding litigation after conflict has arisen:

Act Fast. The worse thing anyone can do is ignore a potential conflict. If you receive a letter, phone call or personal visit from an unhappy customer, vendor or client, respond immediately. In most cases, the problem will not go away because you chose to ignore it. The problem will more likely get worse. Communication is a powerful tool that can diffuse even the most heated dispute. The faster you act, the more easily the problem will be to resolve. Being responsive often puts the other side off guard. They are poised for a battle and when you call to offer a solution, they're not quite sure how to respond. If you are behind on a debt, offer a payment solution that is workable for you. Offering a payment solution you can't ultimately adhere to is worse than ignoring the problem. If you cannot fully perform, offer creative alternatives. Whatever your response, it will be better received if it provides options. If there is disagreement about your rights and obligations under an agreement, offer to sit down and discuss the issue. Don't be rigid. Explain your beliefs politely but be sure to leave the door open for a compromise. Conflict and anger breed more conflict and more anger. In the end, you don't have to agree to anything. However, open and conciliatory communication opens the door to a wider range of potential resolutions. Acting fast is no less important where you are seeking redress. If you are owed a past due debt, don't rest on your laurels. The fact that there is no doubt about the debt doesn't guarantee payment, especially without litigation. It remains costly for you to sue. Instead, contact the debtor and ask whether there is a problem. Offer to work with them to resolve the debt as quickly and as efficiently as possible. They will appreciate your offer, and likely never forget it. If it appears your efforts at informal resolution are ignored, try asking an attorney to write the other side a letter. A litigation attorney can concisely set forth the legal realities for the other side and can usually do this at a relatively low cost. Be sure your attorney understands your commitment to resolving the matter without the need for litigation.

Be Willing To Compromise. No matter the strength of your bargaining position, litigation is expensive. For new and growing businesses, it is prohibitive. Large businesses and corporations can more readily afford a legal battle, but there is little benefit to litigating a matter that could have been informally resolved at a much lower cost to the company. Even where larger concerns are at issue such as fear of opening the floodgates to repetitive litigation, looking to a compromise may help avoid worst case scenarios. Think about the prospect of litigation. What will it cost you in terms of aggravation, time, money and goodwill? Take a hard look at the matter before you and consider alternatives that might be acceptable to you - weigh the costs of the compromise against the aggravation, time, money and goodwill you will exhaust during a court battle. These costs cannot be overstated. Compromise may be the single most important practice in avoiding litigation. It is also the hardest practice for most businesses to swallow.

Continue reading "Avoiding Litigation - Part Two" »

Litigation!  The word has many connotations, most of which are pejorative.  The "litigation happy" label is ubiquitous.  In the business world, "litigation" has a much more pragmatic import.  It remains a useful tool for San Diego business seeking legitimate recourse but simultaneously is the source of unease.  While a full proof method of avoiding litigation may be impossible, there are six simple practices businesses of all sizes can follow to reduce the risk of litigation.  The first three pre-conflict practices are set forth below.  The remaining three post-conflict practices are set forth in Avoiding Litigation - Part Two of this article.  

Get It In Writing.  Ideally a contract attorney will assist with the drafting and negotiation of all contracts.  However, this may not be practical for many businesses, especially for new and growing businesses or those that routinely contract with vendors and customers.  If an attorney is cost prohibitive, drafting basic instruments yourself to memorialize your agreements is a pragmatic alternative.  The internet provides a wealth of helpful instruction, sample contracts and anecdotal information from other business owners.  The paramount concern is mutual understanding.  Although you may not recognize all the legal complexities of contracting, a writing that memorializes your agreement at the very least reminds each side of the representations made.  Be sure that everything discussed orally is in writing.  Don't take anything for granted.  If the person you are contracting with is resistant to a detailed agreement, there is reason for concern (see "Use Common Sense" below).  Faced with a written agreement, even the most difficult of parties will often concede critical points.  Getting it in writing without the assistance of an attorney can be a pragmatic alternative which is better than no writing at all.  However, consultation with a contract attorney remains the best way to ensure that an enforceable contract is in place to protect your business' interests.  

Use Common Sense.  Learn to recognize repeat problem areas either with customers or vendors.  If a vendor is repeatedly late with deliveries or a customer owes you money or either is constantly complaining, it's generally a sign that those types of problems will continue.  Don't ignore obvious perils.  When your gut tells you something is fishy, it's probably not worth the frustration to go forward no matter how appealing a customer's business or how economical a vendor's products or services may be.  These are the folks that are more likely to create conflict with you and others.  If you offer a service or invite customers into your place of business, don't be oblivious to hazards.  No matter how busy you are, immediately address anything that might cause even the slightest mishap.  There is no substitute for common sense.  There is no rule book for you to follow.  Your job is to be aware.    

Treat Everyone With Respect.  This is difficult for some people.  Entrepreneurs and successful business men and women are generally driven focused people with a clear vision.  They are intelligent, savvy and direct with little patience for distraction, excuse or delay.  Unfortunately, this personality trait is not always conducive to building strong enduring relationships.  Your customers, vendors and clients are part of a diverse population comprising varying degrees of motivation, intellect, knowledge and patience.  Some communicate better than others, and some are simply nicer than others.  They all have one thing in common - they consider the deal between you and them to be very important.  Whatever the personality trait, treating even the most difficult people with respect reduces the likelihood that they will go back to their office or home complaining about how they were treated.  This in turn reduces the likelihood of conflict.  It's the difficult people that will most likely lead to conflict, so for this very reason they are the ones you should be most careful with.  In colloquial terms, "suck it up".  Stay polite and considerate, and be apologetic (not apathetic) when you cannot accommodate them.  It won't cure every potential conflict, but it will reduce their occurrence.  If you think you are incapable of this type of patience, insulate yourself using management and staff who have these skills.  The ultimate reward is the goodwill respect garners over time - a priceless commodity for your business.  

These seemingly obvious rules are too often overlooked.  A little common sense and respect go a long way even for the largest corporations.  And don't forget - get it in writing.  Avoiding Litigation - Part Two sets forth the three post-conflict practices that are conducive to reducing your business' risk of litigation.

Parts One and Two of this article focused on the factors new and growing San Diego businesses weigh when considering whether or not to hire their first employees. Part Three focuses on the important task of developing an employee policy. Regardless of the stage any San Diego business finds itself in, ensuring that new and existing employees understand what is expected of them in any given situation is critical for effective management. A clear and unambiguous employee policy minimizes costly miscommunication and conflict between employees, management, vendors and customers.

Some argue that companies could or even should wait until the second or third employee before developing a written policy because new and growing businesses have other priorities and little time to spend on a formal employee handbook. This is a pragmatic view which undoubtedly appeals to many entrepreneurs. However, forward looking businesses will draft some sort of written employee policy for its very first employee.

Whether a handout a few pages long or a detailed handbook prepared by attorneys and a fully staffed human resource department, a good employee policy will contain a number of important features: it will be written in clear and unambiguous language (preferably at a 5th grade reading level with each policy set forth on a separate page); it will address key employment issues such as health, safety and other government regulations (State and Federal), employee theft, and company expectations regarding performance and conduct; it will address anticipated problem areas such as internet use, outside email contact, phone procedures, customer contact and media contact; it will set forth a disciplinary policy; it will hold all employees to the same standards; and lastly but by no means any less important, it will highlight company benefits and quality of life. Businesses should avoid a tedious written policy that creates an impression that the company will be stuffy and unyielding. The employee policy should articulate standards prospective employees can understand while simultaneously stressing the company's appealing attributes.

Continue reading "New and Growing San Diego Businesses - Hiring Employees Part Three" »

In today's climate, San Diego businesses are loath to suffer any negative publicity.  Instead, they are looking for an edge wherever they can find it.  Whether businesses know it or not, the internet is filling an important customer service role.  Websites like Yelp.com and Amazon.com provide actual consumer reviews on a wide range of products and local services.  More and more, the average consumer turns to the internet first for information and first hand customer insight.  Whether looking for a car wash or an San Diego attorney, review sites on the internet are a powerful tool allowing consumers to look inside a company's windows before trying out its goods or services.  For instance, a modern consumer with car trouble today might do a search on Yelp.com for a trustworthy automotive repair shop in San Diego County.  He or she would find out rather quickly that Advantec Auto Repair comes highly recommended (reviewed by 98 customers with a perfect rating of 5 Stars out of 5 Stars by all 98 customers).  This is precisely the confidence builder that the savvy consumer is looking for before trusting their car to a mechanic.
 
If your business provides a service in San Diego, odds are there are already some reviews on Yelp.  You may be surprised (pleasantly or to your consternation) at what people have to say.  Either way, internet review sites are here to stay and managing this new facet of customer service must be part of any business' marketing arsenal.  "Managing" does not mean you get to go in and change the reviews.  It does mean that you will have to pay closer attention to customer service and customer satisfaction.  No business can afford to ignore negative publicity, especially during a recession.  If reviews are negative even in the slightest, a business owner needs to act immediately to cure whatever deficiencies might exist including making necessary changes to how he or she does business.  It's true that some reviews may be vindictive and unwarranted.  In such cases, business owners are allowed to post their own response.  However, this is a good idea only in unique cases because it most often appears defensive and disingenuous.  The better solution to an unwarranted negative review is to work toward an increase in the number of positive reviews which in turn increases the business' overall average rating on Yelp.  One negative review against 75 positive reviews carries little weight.  Encourage your customers to share pleasant experiences with others on Yelp.  

While restaurants, products and retailers remain the most critiqued of all categories, it is only a matter of time before every business is under the internet microscope, including doctors, lawyers, banks, investment companies, real estate agents, dentists, cell phone companies and individual professionals.  Go on line today and see what people are saying about your business.  If you don't find your company on Yelp, add your business.  This allows you to provide accurate information about your location, phone number, website, pricing and other facts such as whether you accept credit cards.  By adding an inbound link to your website, it also has a positive impact on your site's optimization.

In many industries, the need for foreign workers and an intimate familiarity with United States immigration policy has existed for decades. Large corporations, particularly those in information technology, have in-house attorneys and human resource departments that have developed systems to handle the processing of foreign employees. For these corporations, the question whether or not to hire foreign workers is an easy one. It's a "been there, done that" scenario. When a department head decides a qualified foreign employee exists for a position they have been unable to fill domestically, the corporate wheels are set in motion to sponsor that worker for a temporary working visa or for permanent employment in the United States. These companies are familiar with the steps necessary to sponsor foreign workers for the various U.S. Visas, including obtaining labor certification for permanent employees.

The decision is much more difficult for smaller businesses interested in hiring foreign workers. Often, new and growing businesses are presented with an unexpected opportunity to hire a foreign worker. Their first impulse is to shy away from the prospect no matter how appealing. Unfamiliarity with immigration policies, fear of excessive legal expense, government red tape and uncertainty overwhelm the small business owner. Business owners should take a pragmatic approach understanding first that United States policy is to admit foreign workers only where it does not come at the expense of U.S. citizens willing and able to take the same position at the prevailing wage. Thus, cheap labor shouldn't be a consideration. Instead, businesses should weigh the need to fill a particular position with a foreign candidate against the costs associated with sponsoring that worker. Costs include attorney fees, filing fees, costs associated with advertising for qualified domestic workers to fill the position and delay in bringing the prospective employee on board. If the employer values the qualifications of the prospective employee enough (often a subjective consideration), paying an immigration attorney to start the process may be a cost effective option.

Consulting a San Diego immigration attorney is the best first step. An immigration attorney will walk the prospective employer through the process explaining the necessary steps, the time it will take to complete those steps, and the associated cost.

Credit card companies' decisions to unilaterally lower credit limits can have a severe impact on start up San Diego businesses.  During recessions, high unemployment rates drive many to consider going out on their own.  As they contemplate the decision, young entrepreneurs often factor in their credit worthiness.  Start up costs and monthly expenses loom heavy.  In addition, the young business owner worries about personal expenses.  If possible, they set aside funding to help pay personal expenses six months out or more providing breathing room while the business has an opportunity to grow.  Credit worthiness provides comfort during these initial months and impacts a business' future ability to obtain company credit.

Today, many young entrepreneurs with a history of responsible financial planning and credit management are unexpectedly finding themselves with lower credit scores despite exceptional credit histories.  Credit companies are reevaluating credit reports and lowering credit limits based on high balances on other revolving debt despite the fact that their customers have stellar records with them.  The negative impact is twofold: first, needed credit lines disappear; second, credit scores are lowered making it more difficult to look elsewhere for alternative credit lines particularly in the midst of this current credit crunch.  For the entrepreneur, this can be devastating.  

While many argue the practice is legal, there can be little doubt that there is something inherently wrong with it.  There are alternative ways for credit card companies to reduce their risk profile - namely higher standards for new applicants.  Penalizing good customers is a tough model to stand behind while maintaining even a modicum of goodwill.  More importantly, credit customers rely on the good faith of the companies they decide to pay interest to.  They had other options at the time they selected which card to apply for and use.  They cannot go backward and elect a different company (one of the many credit card companies today that are not engaged in the practice of lowering limits).  And worse, their current options are limited because of the lower credit score.  Other creditors are raising interest rates instead.  While not very pleasant for customers, it is far less impacting than reducing lines of credit and lowering credit scores.
 

Continue reading "San Diego Start Ups Affected By Credit Companies' Decisions" »

Part One of this article focused on making the decision to hire employees and the costs of doing so.  Part Two provides a brief overview of the numerous Federal and California State laws and regulations governing employers.  It is important that businesses become familiar with these laws as they contemplate hiring their first employees.  Minimum wage, Social Security and Medicare, tax forms and withholdings, workers' compensation, eligibility to work in the United States and other labor laws are all important considerations.
 
As businesses look to hiring employees, their first consideration is cost.  Wage is of course the largest component of employment costs, and in California the minimum wage is $8.00 per hour.  This is the minimum wage cost prospective employers face.  In addition to the employee's wage, the employer is responsible for paying an equal contribution to the employee's Federal Social Security and Medicare payments.  This is the same payment individual business owners pay as their self-employment tax.  Currently, the combined tax is 15.3% of the employee's wage (12.4% for Social Security and 2.9% for Medicare) of which the employer is responsible for half.
 
Once a decision is made to hire, businesses are required to ensure that the employees they hire are legally eligible to work in the United States.  Each new employee is required complete a Form I-9, "Employment Eligibility Verification", and present their Social Security card.  It is recommended that employers take photo copies of the Social Security card for future reference and proof of documentation.  If for any reason, a prospective employee doesn't have a Social Security card, the employer should ask that they obtain one as soon as possible
 
Employers are also required to withhold taxes from the employee's pay.  The amount of tax withheld is determined by the employee's W-4 form which is provided to the employee by the employer.  The employee identifies his or her tax status and desired number of exemptions which the employer uses, along with state and federal tax withholding tables, to calculate withholdings.  At the end of each year, the employer reports the employee's income and total amount of withholdings to the IRS and the California State Franchise Tax Board via a W-2 form which is also provided to the employee for his personal tax return.

Continue reading "New and Growing San Diego Businesses - Hiring Employees Part Two" »

Eventually the day comes when every new San Diego business owner asks the question "Is it time to hire my first employee?" The prospect is exciting and often serves as a catalyst for business growth. For some, the right time is when business operations begin to negatively affect personal life. Most business owners face a number of challenges requiring long hours and considerable energy eventually leaving little time for family and friends. For many business owners, living a healthy, active life style and spending quality time with family and friends is invaluable. For others, the sheer volume of day to day operations leaves them with no choice. Either bring one or more employees on board to assist with operations or suffer inefficiencies and loss of profit. Still others see the present high unemployment rate as a time for bargains. Whatever the reason, when the time comes to seriously entertain hiring employees, business owners must carefully consider numerous issues including compensation, employee benefits, hiring practices, compliance with state and federal law and development of a company employee policy.

Before hiring that first employee, a business must have adequate revenue in order to maintain solvency and respectable profit margins. Cash flow, not fixed cash, is a key factor in determining whether a business can hire that first employee. To make this determination, the business owner must first decide what constitutes a fair wage. What constitutes a fair wage takes into account both what the employer can afford and what is commensurate with the job requirements and expectations. The employer must also consider whether to provide employee benefits. Medical coverage, retirement plans, paid holidays and vacation policies all come at a cost to the employer, but also serve as an additional incentive to prospective employees. The cost of advertising for the position is an additional short term consideration. If the business doesn't have the necessary "cash flow" to bring on a new employee, the business might consider other options like outsourcing important tasks. Accounting tasks for instance can be outsourced at a reasonable cost.

Finding the right candidates for the new position requires good strategy and a little common sense. Business owners must attract qualified employees. Salary, benefits, the business environment and other perks, the quality of the business itself and how the position is advertised for all have an impact on prospective employees. Newspaper advertisements, periodicals, websites like Monster.com and recruiting companies are all excellent tools. References from friends or industry colleagues are also effective ways to recruit employees. Before moving forward, the employer should put himself in the shoes of the prospective employee. A thoughtful consideration of what best enhances the business' appeal to prospective candidates assists the employer in anticipating employee preferences. The goal is to attract the best and brightest candidates and to ultimately choose the right fit for your business. The first few employees play a major role in the growth and developmental of any new business, and help define a business' relationship with clients and customers during its formative years.

Parts Two and Three of this article will explore compliance with Federal and California State government regulations and the development of a company employee policy. It is imperative that employers are knowledgeable of the numerous federal and state laws concerning hiring practices and other labor issues. Business owners may want to consider seeking legal advice from a San Diego business lawyer when developing employment policies. In the end, hiring new employees is rewarding. Business owners contribute to a lower unemployment rate as their businesses grow and long and rewarding associations are developed.

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.