Publications
The articles below were written by andrea Ralph in her "Ask an Accountant" series to help cannabis industry clients navigate the requirements to comply with local and state agencies as policy for this fast growing business sector develops.

Sole Proprietorship or Legal Entity: Which is Right for You?
It’s important to understand the difference between a legal entity and tax classification. So many people get confused by this. To be clear – when you go to the Secretary of State, you are going to set up a legal entity. The Secretary of State does not have anything to do with your tax classification. The IRS is the only place you can elect a tax classification.
The Secretary of State is where you formalize your business entity. You make it legal by giving it a name, paying fees to the State and selecting a registered agent. Once you are a legal entity, your information is posted on the Secretary of State website for everyone to see. Solicitors are just waiting for a new company to pop up. They will inundate you with confusing mail that looks like official bills. Beware! The top one is the Registered Agent – it will come in from everywhere and it will look official. They will want you to pay them anywhere from $250 to $750 to allow them to be your registered agent. The only qualification a registered agent needs is a physical address. Choose your accountant, attorney or trusted friend to act as your Registered Agent.
Before you go to the Secretary of State you will want to have decided on your tax classification. Have an idea of how you want to be taxed and match the legal entity type with that. This is where you will want to consult with your tax advisor or accountant to walk you through the details. When determining how to be taxed, the options are C-Corp, S-Corp, Partnership, Sole Proprietorship or disregarded entity. How do you know which way is the best way to be taxed? You will pay the least amount of tax as legally possible. That is why you want to coordinate with the tax accountant!
Generally, attorneys will assist you with the legal formation of your company. Their job is to put together an entity that will protect you, shield you, determine what will happen if something goes wrong, you sell the business, you retire or pass away. That’s what you want your attorney to do for you, with the hope you will only need them occasionally.
The accountant works with you on your financials, signing your tax returns and dealing with you year after year. Some work with you month in and month out. It makes sense that you would coordinate with that person on how to figure the tax classification.
Here’s another tidbit that often gets neglected in the formation of a company. In the state of California there is a minimum Franchise Tax Board fee of $800 that needs to be paid upon formation and then every year. These fees can increase based on your legal entity. The bottom line is that it is recommended to coordinate and consult with your accountant to come up with the best tax strategy for your business.
If you want to avoid all of the above, you can simply run your business as a Sole Proprietor. Keep in mind that the Sole Proprietor’s personal assets are not protected. If someone sues your company, they can go after your home, your car and any personal assets you own. The Federal and state taxes are paid directly through the personal income tax return. The Sole Proprietor files a Schedule C, is taxed at 15.3% for social security and medicare along with personal income taxes that will depend on if you are married or have other income and could be up to 32%.
Before making a decision, sit down with your advisors and determine what fits your needs best. We all work so hard and need to protect our personal assets, avoid paying unnecessary taxes, put more money back into our businesses and our families – legally.
By Andrea Ralph
TCAA Member and Professional Accountant
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What’s the Deal with Record Keeping?
Did you know if you are running a business, the IRS expects you to keep a set of books? Yes, bookkeeping is important for running a business.
I suggest QuickBooks software for anyone who wants to get started. If you decide to use QuickBooks online note they are not green friendly so be careful with the words you use and forget payroll services. If you purchase QB Desktop, generally you do not have to worry about anyone from QB getting involved with your business. Better yet, hire someone to at least start entering the receipts into the accounting software and hire someone to process payroll.
Payroll can get complicated. Even if you are not ready for the accounting software or payroll services, start an excel spreadsheet and create a “cash” account ledger – start recording every expense paid out and record every time you get paid. You MUST keep a copy of every receipt. Credit card statements, bank statements and printouts do not work when it comes to the IRS. Be sure to make copies of those thermal receipts; the best practice is to make a copy and keep them in a program that you trust. I suggest “drop box” or something similar.
If you are running a business you need to consider opening a bank account with an account that is used strictly for business and no commingling of personal funds. You may ask why can’t I co-mingle? There are several reasons but the most important is you will know your “business” numbers. What came in, what went out and what is left over. Every entry needs to be recorded and reconciled just like the cash account.
Before you open the bank account be sure to obtain a Federal identification number for your business. Have your accountant help you or for FREE go to irs.gov to apply for your business to have it’s own federal identification number. Anyone who owns a business can obtain a federal identification number and it keeps you from handing out your personal social security number to anyone. If you are incorporated already you will need your articles of incorporation from the Secretary of State, banking resolution and the federal identification number to open the bank account.
Which brings up the next subject…Are you going to operate your business as a sole proprietor? Or do you want to protect your personal assets and reduce any personal liability? Next time we will discuss the different entity types to consider for your business and we weigh the pros and cons of each one.
By Andrea Ralph
TCAA Member and Professional Accountant

What is Assembly Bill 5?
AB 5, signed by Gov. Newsom last year took effect January 1, 2020; AB 5 changes the criteria used to determine whether, by law, a person who performs work for you is an employee or an independent contractor for insurance, tax and all legal purposes.
Visit https://www.labor.ca.gov/employmentstatus/employers/ and take the ABC Test to determine if your worker is an employee or an independent contractor.
Under the ABC test, a worker is considered an employee and not an independent contractor, unless the hiring entity satisfies all three of the following conditions:
• The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
• The worker performs work that is outside the usual course of the hiring entity’s business; and
• The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
There is much more to this test – so visit the website mentioned above to be sure you are doing it right.
If all else fails and you cannot determine if your worker is an employee or an independent contractor and you want to cover yourself – You may request a written ruling by completing a Determination of Employment Work Status (DE 1870) from Employment Development Department. This DE 1870 is designed to analyze a working relationship in detail and serves as a written determination from EDD on employment status.
Don’t forget if you determine your workers are employees you are required by California law to have workers compensation insurance. There is a $10,000 fine for not having workers compensation or 60 days jail time or both. This website will answer your questions https://www.dir.ca.gov/dwc/faqs.html
Andrea Ralph
TCAA Member and Professional Accountant