What Does California AB5 Mean for Business Owners?

Let me just start this by saying, I’m not your lawyer. If you have an attorney and are concerned the below information may impact your business, please contact your lawyer and discuss how you can address. If you don’t have a lawyer and have concerns, now would be a good time to start interviewing. But nothing below is going to give you the exact solution for YOUR particular business and is general information. That being said, here’s what I think after following this for a while:

         Ever since the Dynamex decision came down in 2018, the business community has been abuzz with how the test will apply to them. Will their industries be affected? Were there any possible exemptions?

         ICYMI, the Dynamex decision completely upended the entire way independent contractors were handled; effectively reclassifying all workers to employees, unless they could meet a certain test that was wildly different from the test previously used to determine classification of workers. That test is known as the ABC Test. Effectively, it states that all workers are considered employees by default, unless the hiring company can meet a three-part test:

  1. The worker is free from the control and direction of the hirer in performance of the work (both if in writing and in practice);
  2. That the worker performs work that is outside the usual course of the hiring entities’ business; and
  3. That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

The part of this test that had companies freaked were prongs B and C of the test. Nobody was more freaked than those participating in the “gig” economy. Companies particularly like Uber and Lyft already had ongoing cases in the courts. But, they were hanging their hats on falling outside prong B and that the test didn’t apply to them.

         California has answered back with AB5 passing the Assembly, and heading to Governor Gavin Newsom’s desk for signature as early as tomorrow. AB5 aka “An act to amend Section 3351 of, and add to Section 2750.3 to the Labor Code, and amend Section 606.5 and 621of the Unemployment Insurance Code, relating to employment, and making an appropriation therefor” (that’s a mouthful), introduced by Assembly Member Lorena Gonzalez, seeks to address the rise of worker exploitation by clarifying how the Dynamex case will apply to those in the “gig” economy.

         The bill (which can be read in its entirety here), in essence says that the ABC Test will apply, unless there’s already a statutory exception from employment status, and also clearly exempts certain occupations. These exemptions are:

  • licensed insurance agents;
  • certain licensed health care professionals;
  • registered securities broker-dealers or investment advisers;
  • direct sales salespersons;
  • real estate licensees;
  • commercial fishermen;
  • workers providing licensed barber or cosmetology services; and
  • others performing work under a contract for professional services, with another business entity, or pursuant to a subcontract in the construction industry.

If your business falls outside of these exemptions, then the ABC Test will apply. However, if a court rules in an individual case that the ABC Test doesn’t apply, then the Borello standard applies. This is a much less stringent standard and is also known as the “economic realities” test.

         In arguing that the ABC Test doesn’t apply, companies like Uber and Lyft are claiming that the work performed is outside the usual course and scope of their business, as they do not provide rides, they provide technology.

         So, how does it apply to me? Will I get in trouble right away if my workers have been misclassified this whole time? Well, not necessarily. The bill has stated that it will not be applied retroactively. Unless you already have an ongoing suit prior to the enactment. So long as you aren’t already in litigation, you can clean up your business practices by January 1, 2020. Yep, it goes into effect come January 1.

         There’s more. If you took action to reclassify your workers from ICs to employees already, and you believe your workers don’t meet the ABC Test, it’s unfortunately too late for you. You can’t use AB5 as a reason to reclassify workers from employees back to ICs.

         If a business falls outside of one of the exempted professions (commercial fishermen and manicurists have exemptions, but only until 2022 and 2023), a business would be wise to evaluate all independent contractor relationships it currently has, review all of their agreements, and determine whether the work being performed meets the ABC Test. This should be done with the understanding that misclassifying workers carries with it high litigation risk and severe financial consequences if you fail in court. If, however, a court determines the ABC Test does not apply, only then will the looser Borello standard apply. For many businesses, the cost of a potential employment lawsuit far exceeds the costs of re-classifying its workers.

         The case law still remains to be fleshed out. Until then, businesses should start housekeeping in preparation of 2020.


An Internet Lawyer’s Top 3 Business Tips

We are all new to the online era of business and figuring out how to do it well comes with a lot of trial and error. I am offering my top 3 business tips to help your business thrive in internet culture.


1. Prepare as if your business will succeed. A lot of new business owners I know approach their businesses as though they don’t need something, because they’re “not there yet.” One example I would use is creating a formal business structure for your company. By the time you “need it,” your business is likely pretty far along, and changing the structure, setting up new bank accounts, getting your EIN changed over, are all things that take time and focus away from your business.

It’s like riding a bike and slamming on the brakes while you’re already riding down the hill. If it’s only you in your business, dissolving an entity is a pretty painless process. Plus, the added protection it provides you are pretty significant. I set myself up as a corporation not knowing whether I would be successful, or whether I could “afford it.” But, at the end of the day, I’d rather approach my business with success in mind rather than not doing something, because it “might” not work out. I would also add that caution when entering into a joint venture or partnership is also a huge component of your business’ overall success. Get something in writing if you’re going down that path. Immediately. 

2. Number 1 leads into number 2. Budget for professional services early on. I know this may sound pretty self-serving, but I’m not talking about just lawyers. I mean accountants, financial planners, and other professional services you may need. Chances are, these people are not free, and you cannot do everything yourself. When figuring out how much capital you need to “start” your business, consider tacking on an additional 2-3k for professionals. This isn’t an ungodly sum, considering many websites cost twice as much. Also, start vetting professionals early on.

Many attorneys, accountants, and financial planners will meet with you for no charge. I offer a 30-minute no-cost consultation to any prospective client. That way, you can determine how a professional structures their fees, whether you like them, whether you feel like you can trust them, etc. Additionally, it ensures you have someone in your corner “when” the need arises, and trust me, the need always arises at some point. Whether you’re facing a legal problem, an audit, etc. It’s always less expensive to help a client with whom I’m already familiar with. Damage control is often more costly than spending the money up front to prevent something from happening. 

3. Know your competition. As a branding and trademark attorney, I would be remiss if I didn’t mention this one. Hopefully, you’ll have an attorney on your side who understands your business and the brand you’re trying to build. Protecting that brand will become crucial to developing goodwill in your business, but it will be a real pain in the butt if you don’t know who else is out there doing something similar/identical to what you’re doing.

You’d feel pretty stupid if you decided to brand yourself as Facebook without knowing about Facebook. Not to mention, you’d wind up with a real headache from Facebook’s legal team. Before you start spending hard-earned dollars on branding, logos, business cards, and websites, hire someone to help you figure out whether you may run into issues with your proposed brand. Just because there isn’t a registered trademark with the United States Patent and Trademark Office, doesn’t necessarily mean you’re in the clear, either.

What is the fair use defense?

Many times, I get asked by clients if they can use someone else’s intellectual property because it’s “fair use.” This term gets thrown around a lot – as if it were some kind of legal permission slip to infringe upon another’s intellectual property without repercussion. Before you can even begin to unpack whether a fair use defense is available to you, it’s important you really understand what it is.


To be clear, if the unauthorized use of another’s intellectual property is deemed “fair use,” that doesn’t mean the use is inherently allowed. Instead, fair use refers to a legal defense afforded to someone who has been sued for, most commonly, copyright infringement. Simply put, the fair use defense permits the unlicensed use of copyright-protected works, even though that use of the work might not be allowed or even, expressly prohibited, by the owner.


Section 107 of the Copyright Act provides the framework for determining whether an unauthorized use would be classified as fair use by identifying types of uses: criticism, comment, news reporting, teaching, scholarship, and research. These are examples of activities that may qualify as fair use, depending upon further examination and evaluation. Typically, it is a judge who will make the final determination as to whether certain uses qualify as fair use. This defense creates a limitation to copyright protection that is intended to balance the interests of copyright holders and the ability to use creative works. Without this defense, any use of copyrighted material without permission or license by the owner could be deemed actionable infringement.


So, what does that mean to someone who doesn’t speak lawyer? Let’s use an example. Say you’re a teacher. You decide to show a movie in class today. You want to keep it somewhat educational, so you show the BBC program, Blue Planet. You grab the DVD (or I suppose it’s more likely to be through the Netflix app these days), pop it in, and play the film. The students are happy, and you are happy because you are able to catch up on grading some papers and get home at a reasonable hour. If you’re a teacher, I bet you can probably relate to this and are nodding your head. But, I bet not a lot of teachers would question the legality of doing what they did. Technically speaking, you violated someone’s copyright by playing the film. “What the heck? How did I do that?” you ask. Well, copyright is a very broad term that covers a lot of stuff. It’s more like a bundle of rights that protects everything from artwork to software. One of those rights is being able to make money off the stuff you create. In this example, the stuff created was the video you just showed to your class, and the one who created it is the BBC. Copyright lets them, and only them, use their movie in the ways they see fit.  If someone uses it without their permission, they can sue them for copyright infringement.


Why aren’t more teachers freaking out about showing movies in their classrooms? Because of the fair use defense. One of the uses covered as a “permissible use” of someone else’s material is for teaching. In this case, the teacher showed it for an educational purpose and wasn’t making any money off it. And BBC knows this kind of use is going to happen. Hence why it’s not going to go around suing people for doing this. They know if they do, the teacher is going to say it’s fair use and a judge will agree. This example is just one of many types of fair use that fall under the defense.


I know what you’re thinking. You’re thinking, “That’s great! So, I’m a teacher, and because of that, I can always show movies to students without worrying about a lawsuit.” And you’d be wrong. The reason fair use is so tricky, is because of the facts surrounding how the copyrighted material is used, matter. One little change in facts can take use from being squarely within the fair use defense to being infringement. And copyright infringement suits have big consequences. Most copyright infringement lawsuits provide statutory damages to the winner. This means that there is an amount of money literally written into the law that requires you pay a certain amount of money for every time you infringe. This can often be in the tens of thousands of dollars.


That’s why it’s so important to not take chances when it comes to using someone else’s intellectual property, especially if you are in the business of content creation/reproduction. People using social media apps like Instagram and Facebook to generate income and run businesses are becoming savvier when it comes to the laws on reposting/publishing original content. Earlier established accounts like @Fuckjerry and @thefatjew who made millions of dollars off using unlicensed copyrighted material to re-posting then sell may have been able to get away with that behavior when social media etiquette hadn’t been established. But, as for the legality, that behavior has never been legal. And you better believe businesses are now willing to sue to protect the content. That’s why simple attribution isn’t always enough. The context in which you use someone else’s content matters and the ramifications of unauthorized use can be huge. A seasoned intellectual property attorney can be helpful in helping you decide whether your intended use of someone else’s material is worth the risk.

(fair use image by: Electronic Frontier Foundation)

Tackling Domain Disputes

The Uniform Domain-Name Dispute-Resolution Policy (UDRP) is a process established by the Internet Corporation for Assigned Names and Numbers (ICANN). Established in 1999, it was set up to help people resolve domain name disputes. Since its inception, more than 60,000 domain complaints have been filed with the UDRP. Domain name disputes, specifically as it relates to unauthorized trademark usage has become a growing problem over the years. Often, companies will start out buying the most valuable top level domain name (TLD), such as a .com. But, they will frequently forego variations of that TLD due to budgeting constraints. As their brand grows, other users will sometimes snap up these other domain names and use the goodwill associated with the original company’s brand to generate revenue for themselves. Unapproved domain names such as these can be used to promote pay-per-click, competing for websites, inappropriate content, viruses, and even employment scams. All of these potential situations can end up damaging the reputation and/or goodwill of the legitimate business and brand owner. Without UDRP actions, a website owner is essentially stuck chasing a domain owner that can effectively dodge services and continue to wreak havoc. This is where the UDRP comes in handy.


The UDRP allows owners to file a complaint, and if successful, have a domain name transferred, canceled or suspended fairly inexpensively. The policies in place are typically favorable to the original trademark owners and are the oldest and most popular policies. When disputes arise, trademark owners have won more than 85% of their cases.

Prior to UDRP, the majority of trademark-based domain-name disputes had to be resolved by agreement, court action, or arbitration before a registrar would agree to cancel, suspend, or transfer a domain name. Disputes that arise from abusive registrations of domain names (For example, cybersquatting, where an individual holds the rights to a well-known name for no other reason than a potential resale profit) may be addressed by expedited proceedings. The trademark holder initiates this by filing a complaint with an approved dispute-resolution service provider.

To utilize the policy, a trademark owner should either


  1. file a complaint in a court of proper jurisdiction against the domain-name holder
  2. in instances of abusive registration submit a complaint to an approved dispute-resolution service provider


A trademark attorney experienced in UDRP complaints can help resolve these matters for you. For example, if someone is cybersquatting your domain, an attorney can locate the registrant and resolve their competing practices with determination. They can also sue under the Anti-Cybersquatting Consumer Protection Act (“ACPA”). They can also use ICANN and avoid litigation by, any person that alleges that a domain name is identical or confusingly similar to a trademark or service mark where they have rights. This also applies when the domain name owner has no legitimate interest in the domain name, and the domain was registered and is being used in bad faith.



While the frustration of a domain dispute can feel overwhelming, consulting legal advice can ease the process. Intellectual property legal counsel will advise you on the best course of action to protect and defend the assets you worked hard to create.


5 Employee Termination Tips

Terminating an employee is one of those uncomfortable topics that no employer wants to deal with, but every employer will likely experience at some point. It is common to encounter employees who are not the best fit and sometimes flat-out difficult to work with. Disgruntled employees can cause quite the mess for business owners, especially if terms were not explained clearly during hiring, or not addressed completely at termination. It’s important to remember that there is a difference between employment laws in your state vs federal employment laws, so always consult both and adhere to your state’s requirements. If in doubt, call your lawyer. Below are five general strategies to help you effectively terminate an employee.


  1. Know When It Is Illegal to Fire

The majority of states apply an at-will default employment status to employees (see below). While at-will status does allow you to terminate for pretty much any reason at all, you cannot under any circumstances fire an employee for an illegal reason. Generally, if you fire someone because of their age, race, gender, gender identity (in states like California), sexual orientation, religion or disability, the termination will likely be deemed illegal due to unlawful discrimination. Additionally, if you employ a certain number of employees, some states require you allow them to take a leave of absence for family, medical, or military purposes. This also goes for allowing your employees to vote, and you cannot terminate someone for reporting potentially illegal activity. This is called retaliation. Again, each state has its own set of regulations that interplay with the federal ones, so it’s important you either know how both work, or contact your attorney to make sure you’re not terminating an employee in violation of the law.


  1. Understand Whether Your Employees are At-Will or Not
    As previously mentioned, many states’ default employment status is “at-will.” “At-will” employment means an employer can terminate at any time, for any reason, or even without one. Every state (excluding Montana) allows employers the option of using this policy, and may even be the default without something in writing to the contrary. When making an offer of employment, it’s important to not put anything in writing that could lead an employee to believe they have an employment contract that supersedes the default at-will policy. An at-will policy allows the employer more flexibility in terms of terminating employees when it deems necessary.


  1. Document Performance Issues
    Even with an existing “at-will” policy, it can be crucial for employers to keep an accurate record of any and all performance issues and performance reviews at the time of occurrence. Creating a history of events to pull from when terminating will often help employers defeat any potential claims that the termination was unlawful. Performance issues can include but aren’t always limited to, absenteeism, tardiness, client service issues, behavior requiring disciplinary action and interventions. Keeping this kind of documentation in an employee’s file is a great way to stay protected and aid you in the actual termination process. Sometimes, significant performance issues warrant termination for cause, as opposed to at-will, which can be provided to the employee in writing.


  1. Understand Employee Rights Post-Termination
    Employees may be entitled to certain benefits, even after termination. This may include but is not guaranteed to include, a continuation of medical coverage, unemployment insurance, and a vested retirement plan.


If you have 20 or more employees, the federal law enforces COBRA. If you maintain a group health plan, you are required to provide coverage for spouses, dependents and the terminated employee. If you employ under 20 people, check with your state on the requirements. If an employee is eligible for unemployment insurance, you are often required by law to make them aware of their eligibility.



  1. Pay All Wages/Benefits Due to Terminated Employees
    Employers must pay employees their earned, unpaid wages when terminating them. You cannot simply refuse to pay the employee what they’re owed, because they no longer work for you. However, the laws regarding precisely when an employee needs to be paid vary depending on the state you are in. In some states, you are not required by federal law to give a final paycheck immediately at termination, sometimes including unused vacation days. However, in some states, like California, all earned, unpaid wages are due at the time of termination if the employer is the one terminating. If the employee gives no notice and quits, the employer has 72 hours to make the payment. This is why it’s always important you either know the laws yourself or have a specialist (like a lawyer or human resource worker) guide you on your state’s regulations.

Read the Fine Print: Why Contract Review is Crucial for Businesse

Contracts are an inevitable part of doing business. They protect both the business as well as the other party to the contract. When considering contracting with another party, it’s always advisable to consult an attorney and avoid DIY contracts. Sure, you can find templates online or skim read through a document and hope for the best, but chances are you won’t be entirely sure you’ve got a good contract, and that is not a risk worth taking.


Quality attorneys know how to create agreements that both communicate the specific intent of the parties as well as avoid any potential ambiguities. This helps create a solid understanding and prevents disputes over what the parties “really meant” later on down the road. This is critically important when being asked to sign a contract. If you don’t exactly know what certain provisions say, but you sign anyway, you will still be held to those provisions. Lack of understanding is not a reason to cancel or modify an agreement. More often than not, caveat emptor or buyer beware applies.


Having good legal counsel on board prior to the execution step is also important because it will help you better set each party’s expectations before it becomes time to sign. The last thing anyone wants is a bunch of eleventh-hour changes because you didn’t run it by your attorney first. An attorney has trained for the unexpected moments and can offer guidance relating to problem areas and ensure your interests are protected.


There are countless reasons why including your lawyer in the contract review process is important and helpful, whether you are presenting it to another party or are on the verge of signing yourself. A business attorney is seasoned in the world of contracts and the investment could save you from future legal disputes and potential loss.

Protecting E-books Through Copyright

One of the hottest trends in information consumption comes in the form of e-books. Almost every time you are online you see a new one surface regarding how to build an online business, a newly released memoir, or even a recipe book. With all this information readily available online – not to mention easy to copy – how do you keep your original content protected yet still available? Copyrighting your materials can help prevent theft from being a part of your story.


Writing any kind of book takes hours of hard work, research, and crafting. The minute it is posted to the internet, it is at risk for infringement. We see this issue frequently, and if you are posting content you created to the internet, it should be protected. The only way to solidify your ownership is by way of a registered copyright. Copyright is an incredibly complex area of the law. But very basically, it allows an owner (or his/her authorized representative) of original materials to exploit (publish, profit from, perform, print, record, etc.) that material.


An owner of the original material does not need to register his/her copyright. Copyright exists as soon as the original material becomes fixed in a tangible medium. However, federal registration solidifies that ownership. Registration creates a constructive notice and permits an owner to assert his/her ownership rights against another person (i.e., in court). Whereas simply claiming copyright ownership only prevents copying. In short, without registration, owners are left with very little “teeth” to bite back against people stealing from them. Moreover, a federal registration acts as proof that you, in fact, own the work, whereas, without it, you’d be required to prove (with evidence) that you created the work first (i.e., before the theft occurred). While this seems easy, sometimes it can be challenging, particularly if the competing works were published close in time.


Traditionally, publishing houses would register the copyright on behalf of the owner, per the publishing contract. However, now that self-publishing has become increasingly popular, it is often left to the owner to register the work(s) themselves. This isn’t always readily apparent or disclosed by self-publishing companies and can leave owners exposed without even realizing it.


Copyright disputes often become expensive very quickly. It pays to protect yourself early-on, as federal copyright registration is relatively inexpensive. Unsure about your original work? Consult an attorney that specializes in copyright today.

How to Avoid Discrimination in The Workplace

Discrimination is illegal in the workplace and something every employer needs to be aware of. There are both federal and state laws in place that address issues of discrimination and employers should take not to ensure they’re not getting themselves into any hot water. Generally speaking, employers should avoid discrimination based on sexual orientation, religion, disability, gender or ethnicity while hiring, firing, promoting, or determining compensation. Employment laws are tricky, and no one industry is treated identically to another. Similarly, federal and state laws often require different things, so it’s important to speak with a well-versed employment attorney to help your business made these crucial decisions. Below are some overall guidelines to help keep you out of trouble.

One of the first things you can do to get ahead of potential discrimination claims is to learn your Federal and state’s EEO (that’s equal employment opportunity) laws and general anti-harassment policies. Then make sure these policies are implemented somewhere in your business (preferably in writing). Train your Human Resources team on key policies so they can see them through from hiring to exiting. Implement a non-negotiable workplace standard and train all managers, supervisors, and entry level employees on the guidelines and hold every person accountable, including yourself. Promote an inclusive workplace environment where differences are approached with professionalism and respect. Also, it always helps to have an employment handbook for companies with any number of employees, so the policies are clear and everyone understands what they are. Make sure to do a review once a year to ensure you’ve kept up to date with any changes in the laws.

When hiring, implement practices designed to diversify your pool of candidates. If you are using an outside agency for hiring, make sure they do not search for candidates based on gender or ethnicity. If you make that request, both you and the employment agency would be liable in the face of a dispute. Create objective qualification standards for open positions and follow through to make sure they are applied for every single applicant. The same applies for promotions. When the opportunity arises, communicate with all eligible employees and communicate openly what the exact criteria is to avoid confusion.

When the time comes for annual performance reviews, make sure they’re based on job performance and pay close attention, so you can detect patters of potential discrimination. This means ensuring raises are not significantly higher for one person and significantly lower for another based on anything but their work ethic. You can set these standards from the beginning to keep these consistent amongst all employees.

There are so many ways to avoid discrimination, but the easiest is to talk about it. Host diversity and anti-discrimination training, open conversation and stay aware of what is happening in your business. It is important to keep your workplace safe and strong on its policies against discrimination. There is much more to gain by keeping your workplace open to all, and even more to lose by inviting in any discrimination.

Truth in Advertising on Social Media

The idea of a white lie or exaggeration might be acceptable when it comes to complimenting a friend’s unfortunate haircut but, there’s no grey area when it comes to false and/or misleading advertisement. Now that we are social media centered in our marketing and advertisement, avoiding posts that are misleading or just plain false is critical, and it also applies to those that post for you. We’ve compiled an easy to reference list that can help keep your posts on the truthful straight-and-narrow both now and in the future when introducing a new product or service to the internet.


Five ways you can avoid a false advertisement claim on social media:


  1. Keep it honest and avoid dramatics in your advertisement language, unless you can back it up with real evidence. Don’t fluff up a product or service and end up misleading consumers. If you are in the wellness community, be wary of making definitive statements without reliable medical backing. The recent Goop lawsuit is a great example showing the importance of marrying products and factual information.


  1. Utilizing influencers is a great way to gain exposure and grow your business. Monitoring your brand and policing what is said on your behalf is an important business practice. Statements made by influencers or consumers online who are representing you need to be true and not include misleading information. If endorsers are receiving a gift, payment or any incentive, it needs to be disclosed to followers. (When in doubt, hashtag it out. #ad #sponsored) It’s recommended to have a blogger policy linked on your website and keep endorsements updated.


  1. Document all efforts of guidelines and police false information. It’s a, “better safe than sorry” situation. If you see false advertising on your behalf, reach out with clarification and instruction on how to resolve this falsified information, and save this exchange. If you end up in a worst case scenario, you have records of your efforts and attempt to follow guidelines on your side.


  1. Avoid a defamation claim and don’t criticize competitors in efforts to boost your ratings. In light of apps like Yelp, we have become obsessed with reviews, whether they are negative or positive. You may feel tempted to knock your competitors down a peg by paying for negative reviews, but this is a form of false advertisement. If you do decide to proceed with a forum for consumers to review competitors’ products or services, monitor it closely. You can be liable for the information you did not create, so set guidelines and be certain reviewers are staying within them.


  1. Make sure your payment policies and guidelines stay consistent and easy to understand. For example: If you are requiring a monthly payment from consumers for $50.50, don’t surprise them with a hidden cost of $110 for annual membership fees, unless this is clearly stated from the beginning. This would classify as false advertisement and a quick way to get into trouble is taking money unannounced.



The key to keeping the truth at the center of advertisement is over-communicating guidelines to your employees and any endorsers. Make this your top priority. Protect your brand by doing your research and following up on who is representing it. These are simple steps to reduce your risk of lawsuits, defamation claims, or having regulators knock on your door.

Are You An LLC Or Some Other Business Entity?

A business entity formed for the purposes of housing a business, property, or even intellectual property. Business entities, like an LLC, are created or formed at a state level, often the applicable Secretary of State. They vary depending on your business structure, so it is important to know where your business fits. Generally speaking, there are four types of entities to choose from: 


 A Limited Liability Company, aka LLC, is a business entity recognized in all U.S. states. An LLC has some of the benefits of both a sole proprietorship and a corporation – from both a taxation as well as legal standpoint. It allows the owner to file a simpler tax return, and also limits the owner’s liability like a corporation.

When most people think about setting up a formal business entity, they almost always first think of an LLC, because of an LLC’s reputation of being “easier” overall to run. But, always consult your accountant or CPA before selecting this entity, as it may not give you the tax benefits you were hoping for. From a legal standpoint, an LLC does get you the limited liability most people want in a formal entity. 

Conversely, sole proprietorships are subject to unlimited liability. This means that in the event your business ever ends up in hot water from a legal perspective, all your assets – including the owner’s personal assets – are on the hook. On the other hand, most formal business entities carry the added benefit of “limited liability,” meaning that the owners of the company won’t be personally liable for any legal missteps the company makes. 

Sometimes LLCs are mistakenly referred to as “Limited Liability Corporations.” But don’t be confused, an LLC is not a corporation. They have completely different structures, ownership, and rules governing them.

An LLC is easier to form over a corporation because no by-laws or corporate charter is required. Also, LLCs are creatures of contract, meaning however the members -or owners- of an LLC agree to run the LLC will govern. Typically, this is handled by way of an operating agreement, effectively the governing document of the LLC.

Operating agreements are considered more flexible than corporate bylaws, which is why some prefer LLCs to corporations. Additionally, there are no meeting requirements imposed by statute like there are with corporations. Nevertheless, An LLC is still watched closely by state and federal agencies to make sure it is being operated separately from the owners’ personal financial and tax lives.

There are two types of LLCs: domestic and foreign. If you form an LLC in the state which you plan to conduct business, you are forming a domestic LLC. If your LLC does business in another state, but is registered in your home state, you may wish to register your LLC as a foreign LLC in the states in which you are transacting business aside from the home state. 


Corporations are businesses that are separate and distinct from their owners. Corporations are comprised of shareholders, and typically a board of directors, but it’s the shareholders who own the corporation. Shares can be held by a few individuals, or they might be offered for sale to the public, making them “publicly held”. Corporations are either non-profit or a for-profit business. They can also be formed for a specific short-term purpose. 

There are two basic types of corporations; those with stock and those without no stock. Corporations can also be C-corporations and S-corporations. Most people worry about setting up a corporation because of the dreaded “double-taxation.” However, S-Corporations (referring to Subchapter S of the tax code) are not subject to double taxation. If a corporation issues no stock, most likely it will be a non-profit corporation. Corporations are considered older, more traditional business structures.

They’re less likely to be audited by the IRS, and are often the preferred structure for investors. There are annual meeting requirements imposed by statute, but these are relatively straightforward and painless, depending on the number of shareholders.

Sole proprietorships

A sole proprietorship is an unincorporated business owned by one individual. It is the simplest form of business to start and operate. It is also the most popular form of ownership, with over 20 million sole proprietorships operating in the U.S. and Canada.

Unlike an incorporated business or a partnership there is no legal separation between the business and the owner for a sole proprietorship – the business is an extension of the owner and so the owner is personally responsible for any debts or liabilities the business creates.

If you operate your business under your own name, with no additions, you don’t even need to register your business name to begin operating. This is an ideal choice for business startups, self-employed contractors, part-time and home-based businesses. You own 100% of the business and get to make all the decisions. You’re also not required to hold shareholders’ meetings or take votes on management issues. Basically, you get full control! 

Unfortunately, some businesses, government agencies, and consulting groups will not work with unincorporated businesses suggesting their legitimacy or professionalism fall at a lower level. You can also run into difficulties raising capital or selling your business. As with anything in business, there are pros and cons. 


There are various types of partnerships: general partnerships, limited partnerships, limited liability partnerships and limited liability limited partnerships. In general, partnerships in business is similar to a personal partnership. Business and personal partnerships involve: pooling funds, sharing skills and resources and sharing in the rise and fall of business.

A business partnership is a specific kind of legal relationship formed between two or more individuals to operate a business as co-owners. Each partner is an owner of the business who have invested their time and/or capital in some way. Some partners work in the business, while other partners have limited participation, and even limited liability for the debts or lawsuits. 

Generally speaking, a partnership is not a separate entity from the individual owners. The income tax is paid by the partnership, but the profits and losses are divided and paid by partners based on their initial agreement. They are referred to as a pass-through business, meaning the profits and losses of the business pass through to the owners.

However, some types of partnerships need to be registered with the applicable secretary of state. Partnerships almost always use an agreement to clarify the relationship between the partners, the roles, responsibilities, and their respective shares in the profits or losses of the partnership. This is known as a “partnership agreement.”

Before you start a partnership, you will need to decide what type of partnership you want, and this can be tricky as the different types of partnerships impute different liability/participation to the partners. 

How do you know which one is right for you?

Whatever business entity you ultimately choose will shape your journey as a business, and choosing the best structure for your company requires time and consideration. Each business entity comes with its own pros and cons.  The key is to figure out which structure gives your business the proper advantages to help you achieve your personal and financial goals. 

A formal setup and proper partnership/corporate documents are vital to the structure and function of your business. Without knowing your options you could miss out on an opportunity to establish yourself best as possible, contributing to a long-lasting and successful business from the very beginning.