How to Navigate the Maze of Licenses, Taxes, Insurance
For most business owners, licenses, permits, taxes and insurance are the four evils of doing business. They are boring, tedious and confusing to deal with, and most small businesses hate them, says Debra Esparza, director of the USC Business Expansion Network.
“It puts you back inside the box, and most entrepreneurs want to work outside the box,” she said.
Not to mention that federal, state, county and city requirements often overlap or seem to conflict, that legitimizing a business costs money and that there’s no one place to get everything you need.
For these reasons, many business owners decide not to deal with any of it. They go into business without the proper licenses and permits, with inadequate insurance coverage and without the proper bookkeeping to report and pay taxes, Esparza said. Up to 30% of the business owners who seek help from USC BEN lack a business license, she said.
Business owners who fail to get the proper documents risk penalties and fines. They also risk harming consumers, for whose protection most of the licensing, permitting and operating regulations are designed. For example, county health regulations prohibit pie makers from baking in home kitchens and using automobile trunks for deliveries.
“A lot of people think the government’s intent is to intrude in business or get a cut of taxes, but [regulations] almost always stem from public safety or quality-of-life issues,” Esparza said.
Here are some basic documents start-up businesses need:
* City Business License:
Usually issued by the city clerk’s office, business licenses allow an individual to do business in that city. In addition to a flat fee, they often include annual taxes based on a percentage of gross receipts. The taxation rate typically varies by industry.
“Generally, a business license is required in every city you do business in, not just the city where the business is located,” Esparza said.
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For example, a chain of bicycle shops headquartered in Los Angeles, but with shops in West Hollywood, Santa Monica and Inglewood, will need business licenses in all four cities.
Likewise, an air-conditioning business in Norwalk that does most of its business in neighboring Cerritos also will need a business license for both cities.
Home-based businesses increasingly are required to get business licenses, as are businesses run part time by individuals who hold full-time jobs.
* Permits:
Because most permits address how a business must be operated, business owners typically find them more intrusive and troublesome than business licenses, which simply give permission to operate, Esparza said. Yet ignoring these regulations can put business owners at risk for large fines and even closure.
City, county, state and federal governments may all require various types of permits. The most common permits are:
* Health permits issued by county governments to regulate eating establishments.
* Environmental permits issued by city, county, state or federal governments to regulate use of pesticides or water; substances released into the air or water by the business; or types of chemicals that can be used in the business and many other issues.
* Work permits issued by state or federal governments for employees.
* Dumping permits issued by city, county, state or federal governments to allow disposal of waste.
* Insurance:
Insurance protects your business against disasters, accidents, deaths and lawsuits, among other things. Insurance covers:
* Assets (the building and material goods of your business), which can be protected by fire, earthquake, flood and general loss insurance.
* Individuals who run the business are protected by key person insurance, which provides money to run the business on the death of the chief executive, sole proprietor or other important person in the business. Workers are protected by workers’ compensation and unemployment insurance, both state-administered funds. Partnership insurance allows the surviving partner to buy out the portion of the business owned by a deceased partner.
* Operations are covered by business interruption insurance, which pays money if a natural disaster stops or impedes operations for a time. Liability insurance provides coverage in the event of a lawsuit arising from an accident in the business, or if a business product harms someone. Directors and officers insurance protects your management team advisors against lawsuits arising from decisions they make that others may contest in court. Malpractice insurance or errors and omissions insurance is sold to professionals such as doctors, lawyers and engineers. It pays a benefit in the event the insured person inadvertently harms someone in the course of doing business.
* Taxes:
Taxes help pay for the infrastructure--including roads, sewers, police and fire protection--that allows businesses to operate in a safe environment. A prudent business owner will work to minimize taxes but knows they cannot be avoided, Esparza said. They need to be budgeted as a regular cost of business.
Cities, counties, state and federal governments collect taxes. They include:
* Asset-based taxes such as those on business real estate, business inventory and vehicle taxes.
* Taxes on individuals in the company, such as state disability insurance collected for every employee, and payroll taxes for the employer’s share of employee Medicare and FICA (Federal Insurance Contributions Act or Social Security) contributions.
* Operational taxes such as retail sales taxes collected by cities and states, and hotel occupancy taxes collected by some cities. In addition, corporations are taxed on their income, just as individuals pay federal and state income taxes.
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Many of the city, county, state and federal requirements can be difficult to understand, Esparza said. Even with a checklist and dutiful intent to get through all the requirements, a small-business owner may find the whole process confusing.
The following can help:
Business Start-up Kits can be obtained from the California Chamber of Commerce, P.O. Box 1736, Sacramento, CA 95812-1736, ([800] 331-8877, or https://www.calchamber.com/). More than a dozen small-business development centers operate in Southern California. See https://www.latimes.com/smallbiz under Resources, Training.
USC Business Expansion Network is at 3375 S. Hoover Blvd., Suite A, Los Angeles, CA 90007; (213) 743-1726.
Governor’s Business Revitalization Center, 3650 W. Martin Luther King Blvd., No. 246, Baldwin Hills, CA 90008; (213) 290-7100.
California Permit Assistance Centers:
San Fernando Valley, 4717 Van Nuys Blvd., Sherman Oaks, CA 91403; (818) 756-7572.
Orange County, 300 N. Flower St., 1st Floor, Santa Ana, CA 92705; (714) 834-2840.
South Orange County, 23151 Lake Center Drive, Lake Forest, CA 92630; (714) 461-3560.
Ontario, 2151 Convention Center Way, Suite 203A, Ontario, CA 91764; (909) 391-0723.
Riverside, 4080 Lemon St., 2nd Floor, Riverside, CA 92501; (909) 275-1883.
Certified Public Accountants, financial consultants and attorneys.
Esparza recommends that would-be entrepreneurs attend a general start-up session to get a general idea about regulations that apply and then engage professionals as part of a business team.
When it comes to red tape, “most businesses flounder miserably,” she said. “Instead of each business owner becoming an expert in this, turn to other experts for help.”
Exercise: Consult a start-up guide or book, enroll in a start-up class or consult an expert to find out what red tape you need to deal with.
To view charts that show taxes and permits a small business might have to deal with, visit today’s lesson on-line at https://www.latimes.com/smallbiz
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“Entrepreneurship 101” is a tutorial on how to choose, start, finance, plan and grow a business. The program, written by Times staff writer Vicki Torres, was developed by Debra Esparza, director of the USC Business Expansion Network, a community and economic development project. USC’s BEN has counseled more than 5,000 small-business owners in the Los Angeles area over the last six years, helping them with financing, business planning, accounting, marketing and other issues. The tutorial can also be found on The Times’ Small Business Web site at https://www.latimes.com/smallbiz.
