Do I Own a Business, or Do I Own a Job?

I’d like to draw your attention to the concepts of two authors: Robert Kiyosaki (the author of the famous book Rich Dad, Poor Dad) in his book The Cash Flow Quadrant, and Michael Gerber in his book The E-Myth Revisited.

In The Cash Flow Quadrant, Kiyosaki draws a chart with four quadrants, labeled E, S, B, and I. The initials stand for Employee, Self-Employed, Business owner, and Investor.

Teachers golf lessons

Teachers golf lessons (Photo credit: Companygolflessons)

For most of my clients, the crucial distinction is between S and B. Many of my clients are self-employed. They have a particular set of skills — let’s say a graphic designer, or a golf teacher, or even an attorney. And they make a living selling those services to others. The advantages are many. Often they have no employees, little or no overhead, and they love the work. The disadvantage is that the business is entirely dependent on that person.

Michael Gerber, in his books, identifies this sort of person as a “technician” (a hair stylist, an IT specialist, a chef) having “an entrepreneurial seizure” (when they say to themselves “I can do this on my own better than my boss is doing it.”).

At this point, Gerber would say, you don’t own a business, you own a job. Owning a business is different. The business does not depend on your participation.

Here’s an example: you and your wife buy a 7-Eleven convenience store. You hire a manager, who hires employees. You pay a franchise fee and your manager buys supplies from the company. You get all financial reports. But you don’t work in the business. You’re not pulling counter duty.

If your economic model is entirely dependent on your skills and talents, you don’t own a business, you own a job. If so, you are at risk and you’d better have plenty of legal protections and a bunch of disability insurance.

But that’s another blog post.

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The Dangers of Interns, and of Not Paying Your Friends to Help Your Business

Linda has just formed an LLC.  She has a great new idea for a business.  She has no money as she has no clients yet, but her friends love her and want to volunteer their services. She has vaguely promised them some sort of eventual profit or ownership percentage when the company becomes more successful.  Or even better, she has found a college student who wouldn’t mind “interning” (otherwise known as working without pay) who will help her run her errands in return for a line on a resume or a referral letter.

Student

(Photo credit: CollegeDegrees360)

Linda has a problem.  Most unpaid internships are illegal and violate the minimum wage and overtime laws.  The United States Department of Labor has put out a fact sheet that delineates the test for unpaid interns.  Here are two particularly sticky tests for Linda:

  1. The intern does not displace regular employees, but works under close supervision of existing staff;
  2. The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded.

In other words, Linda should be paying her intern at least minimum wage.  She’s getting all the benefit.  By having an intern, she is able to not hire an employee, and she’s certainly getting an advantage.

The same thing is true for her friends that she has offered some eventual piece of the profits.  First, the terms of the deal should be in writing so that everyone understands exactly what they are giving and what they can expect to get in the end when the business is successful.  Second, without an agreement, this is just another form of unpaid labor that is likely to lead to violations.

How will this end up being a huge problem for Linda?  One of the unpaid workers files a claim against Linda, for unemployment benefits; for worker’s compensation if they get hurt on the job; for another employee harassing them.  Linda is facing huge fines for not properly paying her employees and for not paying the proper taxes.

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Employee or Independent Contractor? You Don’t Get to Choose.

My client, Marylou, has just started a small business.  In this case, we formed a corporation for her dry cleaning business.  Marylou is the new president of ABC Startup Dry Cleaning, Inc.  She barely has enough money to pay rent and buy equipment, but she can’t run a dry cleaning business by herself.  Marylou needs to hire people.  She needs someone to do her bookkeeping and someone to run the machinery.  One of her great new ideas to expand the business she just started is to hire a delivery person to pick up and deliver clothing to busy clients.  Finally, the whole store needs repainting to look fresh and new.

dry^cleaning

(Photo credit: rjs1322)

Marylou calls to ask me if I can draft independent contractor agreements for all these workers—the bookkeeper, the delivery person, the machine operator and the painters.  She would like it if they were independent contractors instead of employees because she does not want to pay all the accompanying taxes and paperwork that are required when hiring an employee.  As an employer, she would have to withhold taxes and her employee’s portion of Social Security and Medicare taxes.  The best way to do that is to hire a payroll service, another expense to add to the list of already long list of expenses her new business has generated.  She’d also have to pay and file for Worker’s Compensation and Unemployment taxes on an employee’s wages.  Independent contractors are responsible for their own taxes.  Additionally, Marylou doesn’t want to be responsible for her driver’s liabilities, in case he gets into an accident.  An employer is legally responsible for the negligence of her employees, but not her independent contractors.

I advise Marylou that while she can certainly hire a painting company as an independent contractor, and a bookkeeping service, she may have more trouble with claiming the workers running the dry cleaning machinery as independent contractors.  Should they get hurt on the job, should she fire them, they will seek Worker’s Compensation or Unemployment Insurance and a Department of Labor audit will carry very heavy fines and penalties.  This is true for administrative staff too.  While the advantages of claiming the people who work with you are independent contractors instead of employees can be great, the penalties for being wrong are harsh.

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The Best Way to Buy a Small Business

Bob, one of my business clients, wants to own a coffee shop. He calls me and tells me he has found one for sale—and in the perfect location.  That coffee shop is owned by a corporation.  The corporation is really just the owner and his wife, but the corporation is the legal owner of the coffee shop.

English: Smokey Coffee Shop in Amsterdam

(Photo credit: Wikipedia)

I suggest to Bob that we are best off structuring the small business purchase as an “asset purchase sale”, as opposed to a stock purchase.  That means we are not purchasing the business itself, but only the assets of the business.  For example:  Bob wants to buy the chairs, table, the coffeemakers, the goodwill, the recipes.  By making his purchase this way, he will avoid most of the liabilities of the coffee shop he is buying.  The current coffee shop may owe money to suppliers, taxes,  a lawsuit for food poisoning suit or a former employee suing the coffee shop. There are some tax advantages to structuring the deal this way too.  Win-win for Bob, right?

So why would anyone want to do a stock purchase (buying the coffee shop itself or the entire corporation)?  I tell Bob that if he wants ease in transferring title, there’s a certain expense in starting fresh, and if Bob needs to save a few thousand bucks, then buying the stock would be the way to go.  It might eliminate the need to transfer permits, employee agreements and leases, although even with a stock purchase, there might be costs.  I warned Bob, permits are often personal to the owner and not the business. If the coffee shop Bob is buying has a liquor license. Bob would not be able to just take that over, he would have to be personally vetted by the liquor authority here in New York.  Despite a corporation owning the coffee shop, the current owner probably has a personal guarantee clause in his lease, and the lease would have to be renegotiated anyway.

Bob agrees an asset purchase is the best alternative, the coffee shop owner understands that any purchaser will only want assets and not stock, and we are off and running on the first step to making Bob’s dream a reality.

 

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Would You Like to be Partners with your Partner’s Spouse?

I have a business acquaintance named Fred, and Fred has a partner named Janet. They make a great team. Fred is a classic entrepreneur type, ready to go off in six directions at once as soon as an idea hits him. Janet keeps his feet on the ground. She’s great at systems, finances, and Fred loves having her as a partner. Together they have built a successful business.

Husband Wife Friends

(Photo credit: GoodNCrazy)

As far as Fred is concerned, Janet is perfect, except for one thing. She has a husband, Albert, who is a jerk. Over the years, he has held one job after another and doesn’t succeed at any. Fred suspects there may be a drinking problem. Occasionally, not often, Fred has overhead Janet crying in the bathroom. He has never talked to her about it, not wanting to intrude on a family matter.

Then one day, the unthinkable happened. Janet was returning from lunch on a rainy day. As she stepped into the crosswalk, a speeding car slammed on the brakes, skidded, and…Janet was killed in the accident.

Fred, meet your new partner, Albert. It was a real mess. Fred didn’t have the cash to buy-out Albert and pay Albert 50 percent of what the firm was worth. In any case, without Janet, it wasn’t clear at all what that value might be. At the same time, Fred felt he could not work with Albert. Fred visited a few banks, but nobody wanted to lend him the money to get rid of Albert.

All this could have been avoided if Fred and Janet had a “buy-sell agreement” as part of their partnership.  They could have purchased insurance on each other’s lives so they wouldn’t have to be partners with the other one’s spouse, or even worse, their partner’s children.  An agreement would have valued their business properly, so there was no long court battle as to what the business was worth to each of them.

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Small Businesses Bouncing Back

New hires, expansion, growing demand, increasing sales. According to this article in the Boston Globe last week, all signs are pointing to renewed growth for small businesses.

Sixty-five percent of all new jobs are created by small businesses, according to the Small Business Administration and have added almost 1.3 million jobs over the past year.

Although Hurricane Sandy was a disaster for Nassau County, Long Island and the surrounding areas, it has spurred on growth by small businesses tied to the housing market—home repairs, remodeling, landscaping. Nationally, home sales have reached their highest level in years.

Great news for all of us!

Do You Have Perfect Pitch?

The elevator speech, so named because you should be able to describe your business and get the listener to want to hear more in the time an elevator ride takes, is a skill every small business owner needs to know.

 

There are numerous articles on the internet about how to best craft a short statement.  One such article, How to Tell Your Business Story in 60 Seconds or Less, appeared last month on Enterpreneur.com.  The author suggests a four-step approach to your pitch, by answering the following questions:

 

1. What do you do?
2. What problem do you solve?
3. How is your product or service different?
4. Why should I care?

 

The elevator speech comes in handy at any networking opportunity–conferences, business meetings and casual conversation with everyone you meet.

S-Corp or C-Corp? What’s the Difference?

When you first form your corporation, it comes into existence as a C Corporation.  If you do nothing more, your corporation will remain a C Corporation.

 

A C Corporation becomes an S Corporation only when special tax treatment is sought by filing Form 2553 with the IRS.

http://www.irs.gov/pub/irs-pdf/f2553.pdf

Although a small business lawyer can advise you on the choice of entities, choosing whether to elect S Corporation status is best discussed with your accountant.  This is a tax decision, and a tax professional should review your entire financial picture before you make this decision.

New York State S Corporation Status

 

New York State also requires you file a form to be treated as an S Corporation under State Rules.  This form CT-6 Election by a Federal S Corporation to be Treated as a New York S Corporation.

 

http://www.tax.ny.gov/pdf/2007/fillin/corp/ct6_707_fill_in.pdf

New York City S Corporation Status

However, New York State does not exempt S Corporations from all NYS corporate taxes.  Again, you should check with your accountant prior to making this decision

Interestingly, New York City does not recognize S-Corp status at all. If your small business has income from New York City, you will need to pay New York City’s General Corporate Tax.

 

 http://www.nyc.gov/html/dof/html/business/business_tax_gct.shtml

 

 

Four Corners of a Contract, Demystified

What is the Four Corners Rule?


The “Four Corners Rule” states that if the language is not found within the written words of the contract, then outside evidence will not be considered.  This includes any oral agreement you’ve made.

How Does this Work?


So, for example, you’ve agreed to buy widgets from a manufacturer.  Your contract states that you will buy 100 widgets for $100, and the company must deliver those widgets to you within 30 days.  Before the 30 days is over, however, you find widgets for $80. You call the manufacturer to complain, or renegotiate, and the manufacturer verbally agrees to lower the price to $80.  Widgets delivered, you pay $80, and then you get sued for the remainder.  Your phone conversation will not change a written contract.  It can change an oral agreement, but not a written one.  If it is not written within the four corners of the contract, you lose.

Get it in Writing!!


Any renegotiation of any of the terms of a written contract must be in writing.

Long Island Small Businesses and the Onerous MTA Payroll Tax

I confess, I only incorporated my business this past year.  For a solo attorney such as myself, there aren’t as many reasons to incorporate as there are for other businesses.  I have malpractice insurance that covers most of my liability, and a corporation or LLC formation would offer little in the way of additional protection.  So, I was quite surprised when my accountant sent me a form and invoice for the MTA tax.

The tax is formally known as the Metropolitan Commuter Transportation Mobility Tax (MCTMT).  Besides the cost of paying the tax, there is no simple way of tacking on the tax to your other tax filings.  Aside from the usual federal and New York state tax forms, these additional forms must be filed quarterly.

This tax is imposed on certain employers and self-employed individuals engaging in business within the Metropolitan Commuter Transportation District (MCTD). Specifically, the tax applies to (1) employers required to withhold New York state income tax from employee wages and whose payroll expense exceeds $2,500 in any calendar quarter, and (2) individuals with net earnings from self-employment allocated to the MCTD that exceed $10,000 for the tax year (according to the Department of Taxation and Finance, this includes partners in partnerships and members of a limited liability company (LLC) treated as a partnership).

The small business owner cannot withhold any of the tax from the employee’s compensation.

The recently elected Governor Cuomo has come out  in opposition to this tax, calling it “onerous.”

Small businesses on Long Island pay $3.40 for every $1,000 of payroll. If you are a small Long Island business, you are probably not using the LIRR to commute, and your customers are probably not taking the MTA to see you.

This tax is burdensome to Long Island small businesses and is not proportional to their use of the MTA.