Starting A New Business
It is hard enough to start a business today without having to deal with crises or unexpected costs resulting from inadequate planning or a poor legal infrastructure. Many start-up businesses find themselves in trouble within the first few months or years of operation. This is due to many things, including:
• Failing to properly set up the business
• Inadequate attention to tax planning
• Inattention to commercial lease terms and customer contracts
• Insufficient agreements and systems for payroll, employee contracts, employee manuals, worker’s compensation insurance, independent contractor agreements and procedures, and other legal requirements
• Inadequate attention to patent, copyright and trademark issues
Shareholder Agreements; Operating Agreements
Two or more owners going into business together should address their shareholder/owner issues at the outset rather than facing bigger problems when one owner leaves the business later without adequate planning. Whether a business is established as a C-corporation, S-corporation, limited liability company, or partnership, the owners need an agreement between themselves that spells out how they will work together and what will happen when one of the owners leaves the business. This can be done through a well-drafted shareholders agreement (for corporations) or operating agreement (for limited liability companies) that adequately addresses and defines the important components of the business relationship between the owners.
Together with a solid business plan and good tax planning, having a well-drafted shareholders or operating agreement is the single most important step towards a solid foundation for a new business owned by two or more people.
Employees or Independent Contractors?
Many small businesses in Colorado control their costs by using independent contractors instead of employees. By doing so, they shift the cost of employment taxes, workers compensation and other government benefits to their work force. The Internal Revenue Service and the Colorado taxing authorities, all of whom have audit authority, place a high priority on auditing business taxpayers to determine whether “independent contractors” actually are “employees” for which the company should have paid employment-related taxes. If the audit concludes that the workers have been misclassified as “independent contractors,” but really are “employees,” employment (payroll) taxes will be assessed against the business retroactively for the audit period. For most businesses, the tax assessment is an unanticipated, unfunded liability that threatens the owners’ ability to remain in business.
This issue can arise even if the IRS or a state agency has not randomly selected a business for audit. For example, many Colorado workers who are laid off for lack of work or other reasons are applying for state unemployment benefits on the company’s account because they cannot find new work, even if they were considered to be independent contractors. If the business does not object to benefits being paid, other former workers also will apply for benefits. In addition, the Colorado Department of Labor and Employment, which administers the state’s unemployment benefits program, may note that the business does not have an “employer” account and may begin an audit to determine why not. If, instead, the business objects to benefits being paid to an “independent contractor,” a hearing may be held to determine the worker’s correct status. The agency may start an audit based upon the fact that the company’s “independent contractors” are applying for unemployment benefits and the hearing examiners have determined that the workers actually are employees.
For that reason, it is essential to answer the question of whether a business has employees or independent contractors at the outset instead of trusting to luck that the business will never be audited. If the business decides to use independent contractors, it is essential that written agreements be used and that the other factors bearing upon the proper characterization of a worker as an independent contractor are observed so that no problems arise during a future government audit resulting in disastrous tax assessments.
The attorneys at Underhill & Underhill, P. C. work with new and established business owners to ensure that the businesses the firm helps to form are properly advised regarding these key operating requirements, so that the business is built upon a solid legal foundation.
Areas of Expertise:
• Advising on the selection of the appropriate legal form (corporation, LLC, partnership, etc.) and creation of the necessary formation documents
• Consulting on business tax and financial issues
• Shareholder, buy/sell and operating agreements
• Key employee contracts, manuals and policies
• Independent contractor agreements and documentation sufficient to withstand government audits
• Issues with landlords, investors, partners, suppliers and employees
