You and your co-owners should draft a buy-sell agreement—also known as a “buyout agreement”—to lay out the rules and procedures to follow when one or more owners leave.
A buyout agreement protects business owners when a co-owner wants or has to leave the company and protects the owner who's leaving. If a co-owner leaves, a buyout agreement acts as a sort of "premarital agreement" to protect everyone's interests—setting the price and terms for a buyout.
Every day that value is added to a business without a plan for future transition, the owners' financial risk increases. An agreement will reduce uncertainty and can help avoid uncomfortable negotiations between the owner who leaves and the owners who remain.
Additionally, if a company doesn’t have a buy-sell agreement in place, it’s at the mercy of its state’s laws. Your state’s laws might not correspond with the future you or the other owners see for your business. For instance, some states require a partnership to dissolve when a partner leaves. If you don’t want the default rules of your state to decide your business’s fate, you’ll need an agreement that says what’ll happen.
A buy-sell agreement can be either a separate agreement or a section within a company’s governing document. This agreement is a legally binding contract among a business’s owners that provides the rules and procedures for:
Let’s take a closer look at each of these buyout agreement topics.
Broadly speaking, there are two situations in which an owner will leave a company. Either the owner will voluntarily leave or be forced out—either by the other owners or by outside circumstances.
An owner might decide to leave for different reasons such as:
Typically, a buy-sell agreement will provide rules for how and when the owner must provide notice of their intent to leave to the other owners. Everyone will hopefully walk away relatively pleased.
But sometimes an exit is a little messier—particularly when the owner is being forced to leave the company. A buy-sell agreement usually lists circumstances that will “trigger” a forced buyout that requires an owner to give up their share of the business.
These circumstances usually include:
When an owner is forced to give up their ownership in the company, they might put up a fight. Having a buy-sell agreement that clearly lists out the circumstances that require an owner to surrender their interest can help eliminate much of the back-and-forth between the owners.
In addition to covering the circumstances under which an owner can or must leave the company, your buy-sell agreement should address who can buy the departing owner’s interest.
Generally, you have three options for who can buy the departing owner’s share:
Your agreement should specify who can or must buy the business. Many companies will require the departing owner to first offer their interest to the other owners or to the company in what’s known as the “right of first refusal.” Then, if the other owners or the company decide not to purchase the interest, the departing owner can offer their share to someone outside of the company.
When creating a buy-sell agreement, you and your co-owners should decide which option would work best for you. With larger companies (particularly corporations with shareholders), it might not be as important to require owners to offer their share back to the company or other owners. With smaller companies where the owners are actively running the business together—like partnerships and limited liability companies (LLCs)—it often makes sense to require the departing owner to offer their share to the other owners.
If you require the departing owner to offer their company share back to the other owners or to the business, you should specify whether the other owners or the company have to buy it. Requiring the other owners or the business to buy the share simplifies and speeds up the buyout process. On the other hand, not requiring the purchase can open the business and its owners to outside business opportunities.
An owner is leaving the business and you’ve established who can purchase their share. But how do you determine how much money should the departing owner get for their share?
It can be hard to settle on a price in a buy-sell agreement before your business has even gotten off the ground. You probably don’t know how successful the business will be or what its true value is.
Fortunately, you don’t have to put a specific value on the price of an owner’s share if you don’t want to. Instead, your buyout agreement can state that the value of an owner’s share will depend on the company’s value.
Usually, the price for an owner’s share is determined by:
Once you put a price on the business’s value, you can calculate the departing owner’s buyout share. Usually, the departing owner will receive an amount proportional to their ownership share. For example, if a business is valued at $100,000 and the departing owner owns 30% of the business, they’d probably receive $30,000 for their share.
But an owner’s buyout can depend on other factors that the owners have agreed to. For instance, sometimes an owner’s distribution (profit) share doesn’t equal their ownership interest. Likewise, an owner’s buyout price doesn’t have to match their ownership interest.
When an owner leaves, what becomes of the company? Generally, there are two outcomes: the company ends (dissolves) or continues. While the answer might be obvious to some, it’s still worth spelling out in the buy-sell agreement.
Usually, whether the business should end or continue after an owner departs depends on the company’s business structure. For corporations and LLCs, the company usually continues on without the owner or with a new owner in their place. LLCs and corporations are more resilient to ownership changes. With their limited liability and flexible management structures, it’s usually not hard to find an immediate or eventual replacement owner.
For example, suppose Buzz, Woody, and Andy own the LLC, Pizza Planet, LLC. For the pizza joint, Buzz develops the recipes, Woody takes care of the marketing, and Andy handles the accounting. One day, Andy decides to retire and sells his share of the company back to Woody. Instead of the company ending, Buzz and Woody can hire an accountant to take over Andy’s responsibilities and business can go on as usual.
But for general and limited partnerships (and limited liability partnerships), a partner’s withdrawal can mean the end of the company. Some partnerships require their company to wind up and dissolve if a general partner exits because a general partner’s role in the business is so critical to the business’s operations.
For instance, returning to our Pizza Planet example, now suppose Buzz is a general partner and Woody and Andy are limited partners who don’t help run the business. Buzz decides to retire. Because Buzz made the pizza and managed the staff—and was the face of the restaurant—it’d be difficult for Woody and Andy to carry on the business without him.
If you don’t include what happens to your business when an owner exits, your state’s laws will step in to provide the answer. Be sure to include this determination to avoid your business prematurely ending.
Buyout agreements can be for any business with more than one owner. The main types of buy-sell agreements are:
While these buyout agreements all contain many of the same elements, they can differ in their rules and procedures. For example, a shareholder buyout agreement might provide a different method for determining a share’s value than a partnership buyout agreement. Or different events might trigger an LLC owner buyout than a shareholder buyout.
As mentioned earlier, a buy-sell agreement might actually appear as a provision within the company’s governing document. If you want to take this route, business owners often put a buyout provision in one of the following documents:
As you’re negotiating your buy-sell agreement with your co-owners and considering the potential issues that might crop up down the road, you might have a few questions.
In some states, yes, and the former spouse can succeed in getting it, too. In community property states, all earnings during marriage and all property acquired with those earnings are considered community property—owned equally by husband and wife. When property is divided during a divorce, each spouse can claim a right to all community property. So, if the owner’s business share is considered community property, their former spouse might have a claim on it.
Even in non-community property states, a spouse could argue for a partial interest in the business, because marital property laws generally require property to be divided equitably during divorce.
To avoid this prospect, a good buy-sell agreement requires the former spouse of a divorced owner to sell any interest received in a divorce settlement back to the company or the other co-owners. The ex-spouse will usually be compensated based on the valuation method specified in the agreement.
Potentially. In the worst-case scenario, a bankruptcy trustee, who’s appointed to oversee and manage the bankruptcy, could liquidate the business (sell its assets) to pay the bankrupt owner's debts. However, usually, a trustee can usually only sell the entire business if it’s structured as a partnership and the trustee has the court’s permission. Otherwise, typically only your share of the business is at stake.
Regardless of your business structure, to head off the possibility of your company getting tied up in bankruptcy court, the owners can sign a buy-sell agreement that requires a co-owner who faces bankruptcy to notify other co-owners before filing. Usually, under the terms of this agreement, the owner filing for bankruptcy must sell their interest in the company back to the other owners before they file. After severing ties with the owner, the business can proceed.
Requiring an immediate 100% lump-sum cash payout can prevent even the most successful company from buying back a departing owner's interest. Having flexible payment terms built into a buy-sell agreement, created in advance, can help.
For instance, the agreement can provide for a down payment of 20% to 30% of the buyout price. The remaining amount can be paid out in installment payments for three to five years at a reasonable rate of interest defined or specified in the agreement.
Separately, it’s common for a company or its owners to take out life insurance policies on each owner. Assume the co-owners of a business have taken this step, naming either the business or its owners as the beneficiaries of the policies. If one owner dies, their share of the business passes to their heir or estate. But the company gets life insurance proceeds that it can use to purchase the deceased owner’s company share. Again, the procedure for this type of buyout would need to be included in the buy-sell agreement.
In the past, family or intergenerational businesses (like family LLCs) sometimes successfully used buy-sell agreements to lower (or altogether avoid) estate taxes when an owner died. An intergenerational business is one where at least one co-owner plans to leave their interest to heirs who will remain active in the business.
The key to this estate planning strategy was to choose a conservative price or valuation formula for the business in the buy-sell agreement. The IRS then used that relatively low valuation when calculating whether federal estate tax was due, and how much.
But for buy-sell agreements entered into or modified on October 9, 1990 or later, the rules are more stringent. For example:
(26 U.S.C. § 2703.)
In other words, there’s no longer as much leeway in valuing the family business to avoid estate tax.
Fortunately, not many people need to worry about federal estate tax. In 2023, only estates worth more than $12.92 million ($25.84 million for married couples) will trigger the federal estate tax. (In 2026, if no further legislation is passed, this threshold amount is set to essentially halve, but it’s still a fairly high threshold for most Americans.) Some states also impose separate state estate taxes at a lower threshold, but the tax rate is much lower than the federal estate tax.
If it seems likely that you’ll owe estate tax when you die, consult a business attorney who’s experienced with estate tax. And if you already have a buy-sell agreement dated before October 9, 1990, think twice and consult an attorney before modifying it, since you risk losing some of the valuation leeway that still applies to these older agreements.
Yes. You should have a short sentence in your agreement that says the agreement can be changed by a written amendment with the owners’ approval. As your business grows or new owners join, you might notice issues or opportunities you missed before. You’ll want to have an agreement that you can reasonably change to reflect these new discoveries.
For example, suppose the ROFR clause in your agreement doesn’t apply when an owner dies, meaning a deceased owner’s heirs can join your company as owners. One of your co-owners dies and leaves their interest to their nephew who immediately starts making poor management decisions, putting the business into serious debt. You might want to alter your agreement to have the ROFR clause extended to the owners’ estates so you can avoid this kind of situation in the future.
If you’re starting a business and you’re looking to create a buy-sell agreement, talk to your co-owners. You’ll need to sit down with them and discuss the terms of the agreement. In all likelihood, this conversation will be much friendlier now than when someone leaves. If you and the other owners are on the same page about most or all of the buyout terms and you have some experience writing legal agreements, you can probably draft a buy-sell agreement yourself.
If you’re interested in further guidance and in a buy-sell agreement that you can fill in, check out Business Buyout Agreements: Plan Now for All Types of Business Transactions, by Bethany Laurence & Anthony Mancuso (Nolo).
If the owners are in disagreement or you’re not sure which terms are best for your particular situation, you should consult a small business attorney. They can help you negotiate terms with your other owners and draft an agreement for you. They can also advise you on the potential tax implications of your buyout agreement and suggest alternative terms to the ones you’re considering.
]]>With this new age of smart applications, it’s getting harder to tell what’s human-made from what’s AI-generated. That lack of distinguishability is what makes AI so interesting and controversial for humankind. As we become more accustomed to AI, small business owners, like others, are looking for ways to implement these tools to achieve what they couldn't before due to human constraints like time and money.
"Artificial intelligence" is the broad term used for technology that performs a task or solves a problem that previously required human intelligence. AI can be used for a large range of purposes, from finishing your sentences to writing a novel. The simplest example is the ability of your smartphone to suggest the next word in your text message.
The application in your phone has created a database of sorts of the words you commonly use (or that commonly follow other words). That’s how it knows to suggest “Berkeley” if you often send a message to your friend, suggesting lunch in Berkeley; and it might also suggest “me up” after you write “pick.” The app doesn’t use magic or thought—it uses data.
We use many other more sophisticated types of AI. You can pay your bills by phone using prompts from an automated voice. There, the software application uses a series of pre-programmed questions and responses, such as “Do you want to pay with the credit card on file?” to guide you through the process.
Siri is another instance of AI; when you ask for the name of the best Italian restaurant in town, Siri canvasses online reviews and distills them into a few sentences. The pop-up messages on websites, offering to help you, are nothing other than a response to what you have done so far on the site (or haven't done). The app figures out what you need by placing you among the thousands of users who've already visited the site (and ended up buying something).
As you can see, AI isn’t always the stuff of science fiction movies. It’s often as simple as a collection of information that the application consults when asked a question.
Yet newer, more sophisticated applications, like ChatGPT, can write a screenplay, design a clothing line, or respond in a way that’s sometimes indistinguishable from talking to a human. These newer applications, known as generative AI, can learn and improve as new data is added; but the more they learn to do, the more questions are raised about what they should be doing.
The use of sophisticated apps raises questions as to the app’s accuracy and, in some contexts, the ethics of using it. The sections below explore the challenges of using apps for various tasks in a small business.
AI applications fall into one of three categories, from the simplest to the more complex:
Let’s look more deeply at each of these increasingly sophisticated uses.
Small businesses have been using AI to book appointments, order items from a menu, take payments, and answer customer questions like, “When will my order ship?” These uses are fairly noncontroversial, with the possible exception of the ubiquitous “How can I help you?” pop-up. Many people find these pop-ups intrusive and they don’t trust them to really know what the customer wants or needs.
AI can help with both simple and complex marketing tasks such as:
Scheduling and implementing follow-up strategies, like drip campaigns. Let’s say a customer visits your website and requests an e-book or other information you offer. You can use an AI application to automatically send additional emails to the customer tailored to their area of interest.
Targeting specific groups of customers. AI can identify and group customer segments, to allow you to customize messages for each segment based on their preferences and needs.
Writing blog or social media posts, landing pages, and emails. AI can automate messaging such as emails for prospecting new business. It can also sort and direct responses to the appropriate person or department for follow-up.
If you don’t have the time or staff to write your own website blogs or social media posts, AI can write them for you. Some applications are even able to generate topic ideas.
Analyzing advertising responses and customer surveys. If you’ve ever used customer surveys to uncover problems with your products or services, you know that getting responses is only half the battle. The other half is analyzing the responses and identifying ways you can improve. AI can analyze and categorize responses, to help understand what’s going right or wrong with your systems or products.
When you advertise on social media like Facebook, you're already receiving AI analytics. They tell you how many people clicked on your ad and give you other information to help you evaluate the effectiveness of your advertising.
A number of AI applications are designed to let salespeople focus on selling instead of paperwork. They can accomplish tasks such as:
Prospecting for new business and generating leads. AI can reduce or eliminate the time it takes to chase down leads by sending outreach emails and categorizing and prioritizing responses for the sales team.
AI applications allow your sales team to focus on buyers most likely to make a purchase in the near future and to deploy strategies to follow up with longer-term prospects.
Qualifying buyers who respond to outreach campaigns. AI can ask potential buyers simple questions, like whether they're looking to make a purchase in the near term or how much money they expect to spend on a purchase. The answers to these questions help the sales team to prioritize the calls they make and reduce the chances that they’ll spin their wheels needlessly on buyers who aren't the right fit for your products.
In general, AI applications that handle back-office and administrative tasks are designed to eliminate the need for manual data entry. They can:
Monitor and manage inventory. Automating inventory management gives businesses real-time information on merchandise that needs to be replenished and reorders that should be processed, so they don’t miss out on sales opportunities.
Store and sort customer information. Applications can route customer information to the proper files and update databases, by making changes to customer addresses and the like.
Process orders and invoices. AI can automate your business’s processes, from requisition to invoicing, and integrate these procedures with accounting and inventory management software.
Process and issue refunds. Using AI to process and issue refunds eliminates the need for a person to monitor and respond to phone inquiries, and usually shortens the lead time for processing refunds.
Review documents for missing or incomplete information. If your business relies on numerous forms that you and your customers must review and sign, AI can replace the need to manually review the forms by alerting you when a document is incomplete.
Before you begin interviewing vendors who supply AI software, it’s a good idea to learn the terms the technology industry uses. Once you’ve clearly defined what you want the technology to do, these terms will help to refine your online search for the best suppliers for your needs.
While AI can, in some areas, replace human workers, this technology is most often used to free up time for workers to focus on more essential aspects of their jobs.
For example, salespeople can use AI to manage their prospect database and update it for each customer contact, freeing up time to contact the most likely buyer prospects and close sales.
Some additional reasons to use AI include:
Providing faster customer service. Automating processes like placing orders and handling returns means customers don’t have to spend time waiting on hold for a live representative.
Reaching more customers. Suppose you want to notify your customers of a new product you’re introducing. Automating your email system allows you to send more emails than a human worker can in the same amount of time.
Avoiding mistakes, oversights, and miscalculations. Using AI will eliminate the mistakes that typically occur when you're manually entering information for databases and recordkeeping. Automated systems can accurately track inventory and reorder promptly to avoid running out of stock.
Improving productivity. Using AI for marketing analytics helps to understand where your advertising dollars are producing the best returns.
Performing tasks you don’t have the resources to accomplish. AI can help small businesses make use of social media when they have neither the time nor human resources to manage these types of campaigns.
No matter how much you spend on AI, it’s likely not going to be a standalone solution for your business’s every need. To succeed, even the best AI solutions will require human intervention at some point in the process.
For example, AI that generates leads for your business won’t do a lick of good if the sales team doesn’t make follow-up calls to the most likely buyers.
AI that analyzes the results of your marketing reports won’t help you decide where to best put your advertising dollars if no one reads the reports the automated system provides.
AI that is premised on an outdated data scoop will not give you accurate results.
Likewise, when AI isn’t able to handle more complex customer inquiries or complaints. You won’t generate much customer goodwill if you don’t include an option to talk with a live agent.
When you're purchasing AI tools, you must first decide on the tasks you want the software to accomplish. Each application is designed for a specific purpose, and, in some cases, for a specific industry. For example, automated ordering software designed for restaurants is different than software designed for ordering wholesale merchandise.
The companies that offer software you already use are a good place to start when you want to add AI capabilities. These same companies might offer AI tools you can add on, or they might partner with other companies that offer AI software. When you start your research with vendors you already use, you’ll also be certain that the new tools you purchase are compatible with your existing software.
Your research should also explore the degree of technological expertise required to use the application and the training and support the vendor offers.
Like many IT solutions, AI is sold in off-the-shelf applications for hundreds of dollars or less, or you can customize solutions for hundreds of thousands of dollars.
The more complex the chore that you want AI to complete, the bigger the tech stack (series of technologies stacked one over the other) required to build the app. Accordingly, those apps are more expensive than a simple tool that auto-fills a repeat customer’s orders.
Email management software is the least expensive of AI applications. Vendors typically offer the software for a monthly subscription at costs that range from $10 a month to a few hundred dollars a month.
The cost of chatbots varies widely, depending on the capabilities you want.
When you're budgeting for the cost of implementing AI, remember to include the technical support and training you’ll need in addition to the software licensing fees.
It’s also a good idea to pay attention to the integrations a vendor offers (the ability of one company’s software to interact with software from other companies). Choosing a vendor that offers numerous integrations allows you to expand your AI capabilities by adding new software down the road when your needs change or expand.
Following common sense rules, such as involving human oversight into your use of AI, can help avoid common problems associated with AI. As noted earlier, it’s important to give customers the option of talking to a real human, so they don’t become frustrated when an automated response doesn’t solve their problems.
However, the most serious problem with AI, and the reason it's become so controversial, is that the technology is quickly advancing to a point where it'll be difficult, if not impossible, to distinguish between images and information that are computer generated and those created by humans.
It won’t be long before AI technology is able to generate a completely lifelike avatar that can be used to sit in for the human it was designed to replicate on a video conference. Imagine the consequences if one of these avatars is substituted for the CEO of a powerful organization and provides shareholders, the press, or others with false information.
Left unchecked, AI can be used by bad actors to steal identities, bully the unsuspecting, spread misinformation and fake news, or release propaganda for political or competitive purposes.
Even when no harm is intended by the user, AI can make mistakes. A mayor in Australia recently threatened a defamation lawsuit if the developers of a popular AI application didn’t quickly fix an erroneous report that named him as a participant in a bribery scandal. He was, in fact, the whistleblower who reported the criminal activity to authorities.
One of the most widely recognized flaws of AI is its tendency to fabricate information when it doesn’t have all the data it needs. The result can be libelous as exemplified above, misleading, or just plain weird.
In one instance, an AI program used by the Los Angeles Times became confused and reported that a large earthquake had just occurred in Santa Barbara. It turned out that the earthquake in question took place in 1925.
AI can be one of your business's greatest assets or a serious liability. As you choose which AI processes to invest in and start incorporating them into your daily operations, it's important to continuously monitor their performance and your business's. Remember that these applications are tools to help you run your company—they're not meant to take your place. At the end of the day, you'll need to make the final business decisions.
]]>How and how much you pay yourself as a small business owner depends on a host of considerations, from your business entity to your business’s finances and IRS rules.
Depending on their business entity, owners pay themselves by taking an owner’s draw (a portion of profits) or by taking a salary.
Taking an owner’s draw means withdrawing your pay from your business’s net profit, which is the amount left over after you pay your expenses from your revenues.
Before dipping into your net profits, you should allocate a portion to reinvest in your business, and keep some funds as a cushion for unexpected expenses. After that, you can withdraw all or a portion of what’s left of your profits to pay yourself. The amount will depend on your financial needs and wants.
You can arrange to draw your pay as you need it or on a fixed schedule, such as weekly or monthly; and you can vary the amount of each withdrawal based on your profits or your personal needs in that period.
Business owners who use this method must pay the IRS their estimated income and self-employment taxes (Social Security and Medicare) each quarter. The amount of tax you’ll pay is based on a percentage of the income your business earned in that quarter, not a percentage of the owner’s draw you took (more on how taxes are calculated below).
If you have ever been an employee, working for someone else, you’ll recognize this method: Your business will pay you a fixed amount on a set schedule, such as weekly or monthly. Federal and state income taxes, and Social Security and Medicare taxes will be deducted from your paycheck.
Sole proprietorships can use only the owner’s draw method, because the business and owner are one and the same under this business structure. The IRS doesn’t consider sole proprietors to be employees, so they can’t be paid a salary.
Partnerships also must pay themselves using an owner’s draw (referred to as a "distributive share" when it’s a partnership). Like sole proprietors, partners in this business structure aren’t considered employees by the IRS and they can’t receive a salary.
Partnership draws typically track the partners' ownership share in the business. For example, if two partners share equal ownership of the partnership, they equally distribute the profits as draws. However, partnerships have great flexibility in distributing their profits.
For example, one owner could get 75% of the profits and the other 25%, even though they are each equal owners of the partnership. Partnership profits can be distributed according to each owner’s collection of revenue or receipts, shared equally, shared according to each owner’s percentage of ownership, or based on a combination of methods. For example, draws could be based partly on ownership percentages and partly on collections.
Partners also have the option of being paid "guaranteed payments," also called partners' salary. These are treated the same as employee wages. They can be a set amount—for example, $1,000 each month—or based on the partnership's profits. (You can learn more in our article on how partnerships are taxed.)
Limited liability company (LLC) members pay themselves according to the way they've chosen to be taxed.
By default, LLCs with one member (owner) are taxed like sole proprietorships. Accordingly, single-member LLCs pay themselves using a draw. However, single-member LLCs can elect to be taxed as S-corporations by filing the necessary paperwork with the IRS. In this event, the member becomes an employee of the LLC and is paid a salary plus shareholder distributions (similar to an owner's draw).
Multiple member LLCs are taxed like partnerships by default, but they can also elect to be taxed as S-Corporations. In this event, they become employees of the LLC. (For more, read our article about how LLC members are taxed.)
S-Corporation owners who are actively engaged in running or managing the business must be paid a salary. However, the IRS allows these owners to take shareholder distributions in addition to their employee salary. Such distributions are free of payroll tax.
C-corporation owners actively engaged in running or managing the business are employees of the business and must also use the salary method for paying themselves. These owners, who are shareholders of their corporation, can also take shareholder dividends of the corporation's profits in addition to their salary. C-corporation dividends are free of payroll tax, just like for an S-corporation, but they're not a deductible expense for the C-corporation. So, a C-corporation gets taxed twice—the corporation pays a 21% corporate tax on the profits and the shareholders pay tax on it at their personal tax rates—as high as 37%.
You should think about how you want to pay yourself when you choose how to legally organize your business. If you run your business as a sole proprietorship, partnership, or LLC (that files taxes as a sole proprietorship), you'll have to use an owner's draw. If you choose the corporation form, you must be paid an employee salary. You’ll want to weigh the relative advantages and disadvantages of both methods, based on your business needs and the taxes you’ll incur with each method.
The main advantage of an owner’s draw is flexibility. You can adjust the amount of money that you take from your business, depending on your profits and your needs. This method is typically very helpful for startups with inconsistent cash flow. You won’t be locked into taking a set amount of money out of your business when it can least afford the expense.
One disadvantage of using an owner’s draw is your pay will likely fluctuate from one month or one quarter to the next, and you’ll have to budget carefully to cover your personal expenses. You’ll also have the responsibility of keeping careful records of the money you withdraw and paying your income taxes quarterly. The IRS requires you to pay taxes on your income as you earn it, and you can be penalized if you owe a large sum at the end of the year.
If you pay yourself an employee salary, you’ll get a consistent income to cover your personal expenses, and your income taxes will automatically be deducted from your paycheck. You won’t have to worry about making quarterly tax payments to the IRS.
However, if your business misses its targets for a given period, the fixed expense of a regular salary can eat into your cash flow and leave you unable to pay other expenses.
You can find information on the average salaries paid to those with the same or similar job responsibilities to yours (although not specifically for small business owners) on a number of websites including Payscale and the U.S. Bureau of Labor Statistics.
However, when you're the owner of the business, deciding how much to pay yourself isn’t as simple as knowing what others with similar job responsibilities earn.
Some sole proprietors, partners, and LLC members (who file taxes as sole proprietorships) don’t pay themselves anything when the company is a startup. Others simply don’t generate enough profits to pay themselves what they’re worth.
As a practical matter, you’ll want to pay yourself enough to cover your personal expenses. If your personal expenses exceed the amount available from your business profits, you’ll have to find a way to reduce your expenses or use savings or another source of income to cover your personal needs.
The IRS sets guidelines for paying both employees and owners of corporations, because under IRS rules, corporations can deduct salaries as a business expense. If the IRS determines that your salary is excessive, it might not allow the company to deduct it.
The amount you pay yourself as an owner-employee of a corporation must:
Some of the guidelines the IRS uses to determine a reasonable salary include:
The IRS uses many more guidelines to determine whether a salary is reasonable. It’s a good idea to review all of them before setting your salary.
Sole proprietorships and partnerships must pay income and self-employment taxes on their business’s net income, not on how much the owners pay themselves.
Nor do owners’ draws count when calculating the business’s net profits. Owners’ draws can’t be counted as a business expense. In fact, draws don’t count at all when you are calculating your tax bill as a sole proprietor or partnership.
Example: Let’s say you're a sole proprietor whose business revenues for the year total $60,000. After deducting business expenses like rent, utilities, and supplies, your business earned $50,000. You’ve determined that your federal income tax rate is 10%. (Tax rates vary for each individual, based on their taxable income. Taxable income depends on numerous factors like whether you take the standard deduction or itemize your deductible personal expenses such as mortgage interest, property tax, and charitable contributions. A tax professional can help you determine your taxable income.)
In this example, the business owner would pay 10% of $50,000 or $5,000 in income taxes, regardless of how much they paid themself. (A partnership works the same way except each partner pays taxes based upon their distributions.) The owner also must pay self-employment taxes (Social Security and Medicare taxes) on net self-employment income--a combined 15.3% tax.
It doesn’t matter whether the owner takes $5, $5,000, or any amount in draws. The owner’s draws don’t reduce your tax bill, and you’ll still pay $5,000 in income taxes plus $7,650 in self-employment tax. (Read more about how sole proprietorships are taxed.)
Another thing to keep in mind is that sole proprietorships, partnerships, almost all LLCs, and S-Corporations are "pass-through entities" for tax purposes. They pay no taxes themselves. Instead, all the profits they earn pass through the business and are taxed on their owner's personal tax returns at their personal income tax rate, not the corporate tax rate. C-Corporations are separate entities for tax purposes with their own corporate tax rate, which is a flat 21%.
Single-member LLCs that don’t elect to be taxed as corporations must pay taxes the same way as the sole proprietor described above. When an LLC has more than one member, each member pays taxes based on partnership draws plus any guaranteed payments.
If you're an owner-employee of an S-corporation or a C-corporation, you’ll pay income taxes on the salary you received from the business. However, the business can deduct your salary and the portion of Social Security and Medicare taxes it pays on your salary from its taxes.
]]>If you owned a brick-and-mortar store, you’d probably use security measures like keeping your most valuable merchandise under lock and key and stashing your day’s receipts in a locked safe. You might even keep a guard at your entryway to make sure no one walks out with your goods.
Cybersecurity for small businesses isn’t much different. It aims to protect your computing devices, systems, data, and digital financial assets from unauthorized access and criminal use.
The cybersecurity industry breaks down cyber threats into two general categories:
A “cyberattack” is a deliberate attempt to compromise servers, computers, or mobile devices. The result can be (and often is) data theft for financial gain. But some cyberattacks are committed for the purpose of damaging or disrupting a system, rather than stealing data.
A “data breach” occurs when sensitive or valuable data is exposed to unauthorized individuals or groups. Data breaches can result from vulnerabilities in computer systems or networks—using unencrypted emails to transmit customers’ credit card information is one example. They can also occur when employees are careless or don’t understand the importance of protecting digital data.
Here’s an example of how a data breach can result from human error: Suppose an employee takes a company laptop home and leaves it in the car. A thief breaks into the car overnight and steals the laptop. The laptop contains valuable customer data that’s now exposed to outsiders and can potentially be distributed and sold to bad actors.
As you’ll see discussed later, it’s important to understand the ways data breaches can occur to plan a cybersecurity strategy and insure your business against liability from cybersecurity incidents.
According to a research study by the Identity Theft Research Center, 73% of small businesses reported they were targets of cybersecurity incidents. Those numbers have been growing annually. Small businesses are even more vulnerable to some types of cybercrimes than large enterprises.
Despite their size, small businesses pose greater opportunities for cybercriminals than their larger counterparts. Small businesses typically have fewer security measures in place than large enterprises so they’re easier to access. But they nonetheless store valuable customer data like credit card information and social security numbers that cybercriminals can sell for profit.
Small businesses can also serve as a gateway to the bigger fish that cybercriminals can’t normally reach directly. Because large corporations do business with smaller businesses, their computer networks are often connected. By accessing a small business’s network, cybercriminals are often able to use the connections to sidestep security measures and infiltrate the networks of larger companies.
Small businesses are subject to the same cyber threats that larger businesses face. Small businesses are even more likely than larger businesses to be the targets of certain cybercrimes, like phishing.
Some of the cybersecurity threats to small businesses include:
Malware: “Malware” is an umbrella term for software used to infect computers with a virus, ransomware, or spyware. Malware typically infects computers when a user downloads content, clicks on an ad that looks legitimate or opens an attachment that’s embedded with the malicious software.
Phishing: Phishing can infect your system when a user receives an email that appears legitimate but is fake. The user is persuaded to click on an attachment in an email or a link to a URL that contains a virus. By clicking the link, the user inadvertently downloads the virus to the company’s computer system.
Ransomware: In a ransomware attack, an individual, group, or even a nation-state, gains access to a computer system and usually either locks legitimate users out of the system or threatens to expose the data in the system. The embezzlers then demand payment in exchange for releasing the system back to its rightful owners.
DDoS: “DDoS” is an acronym for “distributed denial of service.” The criminals intentionally overload an email system or website with so many requests that the system shuts down.
Inside attack: These attacks are usually committed by disgruntled former employees. They use their former administrative privileges to access confidential information by sending users in the system fake messages that appear to be coming from a legitimate source.
Password attack: Just like they sound, password attacks are used to enter computer systems by obtaining passwords. Bad actors can obtain passwords by guessing a password, either by trial and error or using applications designed to try numerous passwords. More sophisticated password attacks use electronic programs that track a user’s keystrokes to uncover passwords.
Man in the middle (MITM) attack: This tactic involves a third party who gains access to a digital exchange between legitimate parties. It usually occurs when you’re using an unsecured public Wi-Fi network.
Scareware attack: In a scareware attack, a pop-up appears on the computer notifying the user that the system is infected with a computer virus. In reality, no infection exists. But the user is then directed either to a link or a website to repair the problem, and the phony solution is actually the method for transmitting the virus.
The above are just some of the ways bad actors steal information, and it’s safe to say that new methods are discovered regularly.
Cybercrimes can have serious financial fallout. They can also hurt your business’s reputation and expose your business to regulatory penalties and legal action.
Financial consequences. Cybercrimes can cost a business anywhere from a few hundred dollars to millions of dollars. Depending on the type of attack, a business might incur costs to make repairs to its IT systems, restore critical data and software, compensate customers for their losses, and pay regulatory fines. An attack also often leaves your business’s computer systems inoperable for a period of time, so you can’t process any sales and you lose business.
Damage to your business’s reputation. Cyberattacks and breaches often make headlines. News of a cyber incident can spread quickly to your customers, eroding their trust and affecting their willingness to do business with you.
Legal repercussions. Your business can be hit with civil lawsuits following a data breach. Depending on the scope of the problem, you can also face class action lawsuits that can result in multi-million-dollar settlements. Regulators such as the Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB) can also impose sizable fines on businesses that fail to notify customers of data breaches.
There’s no shortage of technology available to protect your small business from cybercrimes. But technology alone won’t offer all the protection you’ll need. Some preventive measures simply involve instituting good practices and procedures, and others involve just plain common sense.
Here are some cybersecurity strategies to consider:
Use anti-virus software and hardware. Software like firewalls will help keep unauthorized users from accessing your computer systems. Anti-malware software can identify malicious traffic and alert you when intruders have gained access to your systems.
Consider encryption software. Encryption software scrambles data you store or transmit and makes the information unreadable to anyone but those authorized to receive it. Encryption software can be especially helpful in preventing data theft in businesses that receive and send sensitive data (like financial or medical information).
Back up your data. Use a reputable cloud-based storage solution or external hard drive to keep a copy of your important data so that you can still access the data you need if your system is compromised.
Employ strong password requirements and multi-factor authentication. Passwords are the keys to the information stored on your computers. Boosting your password security will help ensure that those keys don’t fall into the wrong hands. Require passwords with at least 12 characters including upper- and lower-case letters, numbers, and symbols. Consider adding a second authentication method, such as requiring users to insert a code that’s sent to their phone or email, to gain access to certain information.
Secure your Wi-Fi network. Keep your router hidden and password-protect access to your network.
Don’t forget remote workers. If your employees work remotely, make sure that the network they use is secure as well. A virtual private network (VPN) can keep your employees connected to your business without compromising security.
Provide cybersecurity training for employees. Training is essential to help both reduce the human error that can cause breaches and reinforce the cybersecurity systems you put in place. Focus on instruction related to handling sensitive data, spotting malicious emails, avoiding suspicious websites, and exercising caution when browsing the internet. Some businesses choose to block access to non-work-related websites altogether.
Keep mobile devices under lock and key. Securely store laptops, company phones, and other mobile devices when not in use.
Consider dedicated computers for payment processing. If your business regularly takes payments online, consider using dedicated computers for processing payments. Implementing this measure prevents these single-purpose computers from being compromised by other activities such as browsing the internet.
Conduct regular access audits. Make sure you promptly remove former employees from your systems, deactivate their passwords, and retrieve all company-issued electronic devices.
Many of the tools listed above come with a cost, usually a monthly subscription charge. But the cost of installing cybersecurity tools can far outweigh the expense of repairs, lost business, and legal settlements if your system is breached.
Cyber insurance policies help pay for financial losses from cyberattacks and data breaches.
Cyber insurance policies vary, and most companies build a policy based on their particular risks. It’s a good idea to conduct a risk assessment to understand the coverage your business needs before shopping for a cyber insurance policy.
Consider the types of data you store and your business’s vulnerabilities. Insurers offer first-party coverage that covers losses to your own business and data, and third-party coverage to protect your business from losses that involve customers, vendors, and others.
Like other insurance policies, cyber insurance policies have limits. Consider your business revenue to assess the potential financial impact of a cyberattack or data breach to determine the coverage limits you’ll need.
Cyber insurance policies can include coverage for:
Check your business policy to determine whether it offers any cyber coverage. Business policies typically offer only minimal protections for cyber incidents. But your business policy coverage will help you determine the supplemental coverage you’ll need.
International, federal, and state laws regulate what personal information your business can collect, how you can use that information, and your obligations to report data breaches.
Laws in the U.S. are a patchwork of regulations, so it’s important to familiarize yourself with the laws that apply specifically to your business. Check your state’s regulations as well as federal legislation and industry-specific rules and standards. (If your business collects personal information with the help of AI, you should also be aware of the evolving data privacy laws around AI.)
All 50 states impose notification requirements for security breaches and impose financial penalties for failing to do so. A number of states have their own privacy laws, and you can expect more states to follow.
Keep in mind that online privacy has become a hot-button issue among consumers. Consider creating a privacy policy for your company and posting it on your website and in other digital communications.
Existing privacy laws can offer some guidance for conducting business online and crafting a privacy policy:
If you’re not sure where to start, you can always consult a local business attorney about the steps your business should be taking to protect itself and its customers. A lawyer can identify the privacy laws relevant to your business. They can also review your company’s privacy policy and help you come up with best practices for your small business.
]]>Many small business owners think only of the money they’re spending and the tax write-off they’re getting when they tally up the pluses and minuses of donating to charity. But giving back can also give your business unexpected returns.
In addition to the tax benefits (discussed later in this article), a charitable giving program can help small businesses gain brand recognition, improve employee retention, and get more sales.
Here are some of the ways donating to charity can make a difference in your business:
Attract more customers. The size and stature of a company are no longer the only things consumers consider when they make buying decisions. They want to do business with companies that share their values. A charitable giving program shows you care about your community. It raises awareness and draws customers to your business.
Aid in promoting job satisfaction and retaining employees. Employers and employees don’t often view the workplace in the same way: Bottom-line improvements might energize a small business owner, while workers are more likely to focus on things like getting recognition for a job well done. But a common cause between the two groups closes some of that gap. A charitable giving program that brings social purpose to a job function can help you motivate workers and improve job satisfaction—an important factor in employee retention.
Enhance your brand. Supporting charitable causes gives your business an identity; it also builds brand awareness and sets you apart from the competition. When you sponsor charitable programs, customers can tie your brand to a mission, spurring conversation around your company.
Expand your professional network. By supporting charitable organizations, you’ll get an opportunity to network with professionals you might never meet otherwise. You’ll also get the opportunity to rub elbows with prominent community and business leaders who often sit on the boards of nonprofits.
Think about your charitable giving program as part and parcel of your business model and find ways to integrate the charity into your day-to-day business.
Your donations don’t have to be monetary. You can donate products, services, or time such as:
When you make monetary donations, consider ways to incorporate customer incentives into your giving programs. For instance:
A small business can also make socially responsible improvements to its operations to attract and engage customers.
For example, a manufacturing company might reduce the product packaging it uses to promote sustainability, or it could source products from minority-owned businesses to promote social and economic equity.
The best charitable giving programs are personal. They reflect causes you, as the business owner, are genuinely interested in. Choosing a cause that has a meaningful connection to your business will help attract customers and strengthen your branding efforts.
These are some examples of ways to align your small business with a charitable cause:
You can also engage your employees in selecting a charity. Their ideas are likely to reflect the community you serve so their interests can help you identify causes your customers care about.
Once you've decided which charitable cause you want to connect with, you'll need to select a charity that aligns with that cause. For instance, if your cause is wildlife preservation, then you need to sort through the various animal charities to find one to support.
Here are some ways to screen a charity.
Verify that the charity you select is tax-exempt. The Internal Revenue Service (IRS) allows you to claim a tax deduction only for donations to bona fide, tax-exempt charity organizations. Charities qualified for tax-exempt status are categorized as 501(c)(3) organizations and listed with the IRS. Use the IRS tax-exempt organization search tool on the agency's website to verify the charity’s tax-exempt status.
Research the charity’s mission and financial condition. The charity’s website should clearly state its mission, services, and the audience it serves. Make sure the charity has the financial wherewithal to accomplish its goals. Check to see how much of its funding goes to the actual services it provides rather than to administrative expenses. Websites like GuideStar, Charity Navigator, and Charity Watch provide financial statements (tax-exempt organizations file IRS Form 990), and other valuable information about the charity’s operations.
Meet with the charity’s leadership team. Especially if you plan to develop an ongoing relationship with a charity, it’s a good idea to meet with its management to assess its commitment, capabilities, and fit with your business.
Check the internet for negative press about the charity. By thoroughly vetting any charities you donate to, you’ll ensure the charity is legitimate and avoid scams and scandals that can taint your business’s reputation.
As a general rule, you can deduct cash donations and donations of property or equipment to 501(c)(3) organizations on your federal tax return. You can also deduct travel expenses related to work you do with a charity.
However, the value of the time you or your employees spend doing volunteer work isn’t tax deductible. Neither is paid time off you give employees to do volunteer work.
Limits and conditions apply to all types of donations. So you should consult the IRS website or a tax professional when taking charitable tax deductions. Keep in mind that the federal deduction you’re allowed might be reduced if you receive a state or local tax credit for it.
How you deduct cash donations will depend partly on your business structure.
Pass-through businesses: Pass-through entities like sole proprietorships, partnerships, and limited liability companies (LLCs) are allowed certain deductions on their personal income tax. Because owners of pass-through entities pay individual taxes on their share of the business’s income, any deduction will reduce their personal income tax, not their business taxes.
Pass-through businesses that itemize deductions can generally deduct cash contributions up to 60% of their adjusted gross income. You’ll report these contributions on Schedule A of your personal federal tax return. Some deductions are subject to limits of 20%, 30%, or 50%.
While charitable contributions are generally noted in a pass-through entity owner's personal return, this is not always the case. Sole proprietorships and other pass-through businesses can deduct charitable contributions on Schedule C of their business tax return when the contribution yields a business benefit. For example, a sole proprietor who owns a sporting goods store might get a revenue boost from sponsoring a local children’s baseball team because the sponsorship is likely to attract more shoppers to the store.
Corporations: A corporation can deduct contributions of cash, property, or investments —usually up to 10% of its taxable income —as a business expense.
To claim a tax deduction for cash donations, you’ll need receipts detailing the amount and date of the contribution.
Property and equipment include items like automobiles, real estate, and intellectual property.
To take a tax deduction for property or equipment you donate, you’ll need to establish a dollar value for your contribution. In general, you can deduct the lesser of either:
You’ll need accurate records for any business asset donations you claim, including documentation of their original value and other costs associated with their purchase. Consult the IRS website or a tax professional for detailed information on valuing property and taking a tax deduction for your non-cash donation.
For non-cash contributions of $250 or more, you’ll need a letter from the charity recognizing the donation.
You must file IRS Form 8283 for property contributions of more than $500. For vehicle donations that are more than $500, you must attach the IRS Form 1098-C you received from the organization. You must provide both an acknowledgment and Form 8283 for contributions with a value of more than $5,000.
It’s not necessary to file IRS Form 1099 for charitable contributions.
While you can’t deduct the value of your time volunteering, you can deduct the cost of travel required for charitable work. Standard IRS mileage rates for the year in which you’re filing apply.
Instead of writing a check at year-end, structure a program that keeps your efforts front and center throughout the year. A continuing effort will keep you on customers’ radars and keep employees motivated.
When you make monetary donations, consider framing your donation as a percentage of sales rather than the dollar amount. Studies show consumers regard donations that represent a portion of sales as more valuable than the actual dollar amount you give.
Here are some of the ways you can show your ongoing commitment to giving back.
Let people know what you’re doing. Tell your charitable giving story on social media, your website, and your newsletter. Report news of the charities you work with and the results they’re achieving. Remember to ask permission from the charity if you want to use its logo or other branding materials.
Keep your charities in the loop. Stay in touch with your chosen charities and keep them updated on your efforts and your plans. Consider inviting the charity to business events you hold. They’ll welcome the opportunity to network with your clients and employees and meet new potential donors, and you’ll foster long-term relationships.
Get employees involved. Ask employees about the charities they’d like to support. Organize a volunteer day and give employees time off to donate their time to a charity organization.
The impact you make with your charitable giving program doesn’t depend on the amount of your donation. To get the best results, be thoughtful about the charity you choose and keep your efforts consistent.
]]>Think of fair hiring as equal employment opportunity compliance 2.0. Fair hiring practices are grounded in legislation. Federal employment laws, such as Title VII of the Civil Rights Act of 1964, make it unlawful to discriminate against job applicants because of their race, color, religion, sex, national origin, age, disability, and genetic information.
Fair hiring goes a step further than workplace discrimination laws. It aims to not only prevent discrimination against protected groups, it seeks to foster workplace diversity by providing a level playing field for all job applicants.
Fair hiring strategies take unconscious and unintentional biases out of the hiring process to ensure that all applicants get equal consideration based on merit.
Federal antidiscrimination laws currently identify the following protected groups and prohibit employment discrimination against them.
It’s important to note that legislation and case law are always evolving. For example, Title VII now includes protections for the LGBTQ+ community pertaining to discrimination based on gender identity and sexual orientation.
In addition to Title VII, laws directly and indirectly related to hiring include:
The Pregnancy Discrimination Act (PDA) makes it unlawful to discriminate on the basis of pregnancy, childbirth, or a related medical condition.
The Americans with Disabilities Act (ADA) requires employers to make reasonable accommodation to allow workers with disabilities to do their jobs.
The Age Discrimination in Employment Act (ADEA) prohibits discrimination against those who are at least 40 years old.
The Equal Pay Act requires employers to give men and women equal pay for equal work.
The Immigration Reform and Control Act (IRCA) prohibits discrimination based on citizenship or national origin.
The Civil Rights Act of 1866 protects against discrimination based on race or ethnicity.
The Genetic Information Nondiscrimination Act (GINA) prohibits the use of genetic information for employment decisions.
Any business with 15 employees or more is subject to Title VII regulations. The U.S. Equal Employment Opportunity Commission (EEOC) enforces these laws, and companies that fail to comply risk stiff fines and penalties.
As a business owner, you also risk expensive lawsuits if a job candidate who believes they’ve been discriminated against takes you to court. Even a lawsuit that settles will be expensive, and more so if you lose your case at trial.
Besides avoiding negative legal consequences, fair hiring practices can advance your business’s performance in several ways.
Fair hiring fosters innovation. People naturally gravitate to others who are like them. In business, this tendency often means that the people doing the hiring choose applicants who share their experiences and backgrounds. All that sameness leaves little room for the introduction of new ideas and approaches that the homogeneous workers might not have considered.
Fair hiring practices, on the other hand, lead to a diversified workforce and contribute to an environment where fresh ideas and viewpoints can flourish. This fair hiring outcome is one reason companies with a diverse mix of employees have been found to be more profitable than those that don’t actively seek to employ a diverse workforce.
Fair hiring reduces turnover. One of the biggest drivers of employee turnover is job satisfaction (or the lack thereof). Employees who feel well suited to their jobs are likely to be more engaged and less likely to quit. Fair hiring focuses on matching a job candidate’s experience and skills to job responsibilities. As a result, employees tend to have greater job satisfaction, and employers spend less time and money filling job openings.
Achieving hiring standards that are truly neutral requires paying attention not only to who you hire, but also the way that you hire.
Job descriptions, job advertising and posting language, interview questions, and the actions of the team members responsible for recruiting and hiring all play a role in achieving a fair hiring standard.
Here’s how.
Make sure your employment application is free from questions that require an applicant to reveal non-job-related information, such as their age or race. Many states also have Ban the Box laws that prohibit questions about an applicant’s criminal history and arrests.
All too often, business owners shortcut the process of developing detailed job descriptions and ask for candidates who are “a good fit with company values,” or “know how to get things done.” Instead, job descriptions should describe the specific behaviors, skills, and knowledge needed for the job.
For example, suppose your job description says you’re looking for a candidate who’s a “good fit” for a company that puts customer service above all else. In your job description, you might include requirements for not only customer service experience, but also a belief that customer service is a highly important business objective.
Your job description should focus on the practical benefits a qualified candidate will bring to your company rather than whether someone fits in with the company culture. Opting for this type of job description could expand and diversify your pool of applicants and help you find the right person to fill the job.
Aside from obvious no-nos like using salesman instead of salesperson or other gender-specific pronouns, look out for language that might exclude otherwise qualified candidates.
For example, suppose you own a consulting firm and you’re looking for an entry-level data analyst. The job requires a business degree but you’re willing to train on the job and don’t need someone with prior work experience in data analysis. You decide to write a job posting asking for a recent college graduate with a degree in business. You like the idea of giving a chance to recent college grads who are famously faced with the dilemma of needing work experience to land their first job.
It sounds well-meaning enough. But what if someone with a business degree is looking to make a career transition? Worse yet, what if that someone is 40 years old or older (a protected class under anti-discrimination laws)? Your ad could be considered discriminatory.
Keep in mind, too, that different cultures might view traits you deem positive as negatives. Using words like “aggressive” or “ambitious” might dissuade some individuals from applying for your job because it’s an unattractive trait in their culture. These individuals might have the same drive and desire to climb the corporate ladder that you’re looking for; it’s just that they exhibit those traits in different ways. And isn’t that cultural difference exactly what your fair hiring practices are designed to achieve?
To avoid these cultural pitfalls, consider using a phrase like, “proven track record exceeding sales goals” instead of “aggressive, go-getter.” Or, use the phrase “career-minded project manager seeking a management-track position” instead of “ambitious project manager.”
While it’s always helpful to spend a few minutes at the start of the interview making applicants feel comfortable, it’s important to quickly move on to strictly job-related questions. Lawyers and judges will presume that you’ll use the answers to questions you ask during your hiring process, so keep non-job-related questions out of the interview.
By establishing standard questions for each position, you’ll ensure that all applicants will get the same shot at your job opening and be evaluated based on the same criteria.
Using a uniform set of interview questions can also help you to score applicants’ responses. A scoring system that assigns a value to each interview question keeps all applicants on an even footing. This standardized analysis also allows you to make the best hiring decision because it incorporates both strengths and weaknesses into a single score.
Instead of having one person conduct interviews, assemble a diverse team of interviewers charged with reaching a consensus on job candidates. The different points of view represented by the team will help weed out biases, especially unconscious ones that a single interviewer might have.
Consider using one of the available artificial intelligence programs to remove names, photographs, year of college graduation, hobbies, and other similar, non-job-related references before you review resumes. These identifiers can trigger biases and assumptions that derail your fair hiring goals. You can better prevent unconscious biases by removing identifying information completely than trying to disregard it after you’ve already learned the information.
Skill assessments are another tool to evaluate candidates objectively. When a job requires skills like writing, bookkeeping, coding, or proficiency with software such as Excel, testing will save time by screening out applicants before you spend time interviewing them.
Be careful, however, because the EEOC and courts can hold employers liable for pre-employment skill testing that’s not job-related or that’s administered improperly.
Pre-employment tests can’t be the only assessment method used for evaluating job applicants, and they must not have a disproportionate impact on any protected group. You must also ensure that all applicants get the same instructions, time limits, and conditions for taking tests.
All those involved in recruiting and hiring should receive training in employment laws, as well as best practices for fair hiring (including recordkeeping requirements).
As businesses more widely adopt artificial intelligence (AI) tools, many employers have turned to AI to assist in hiring.
AI holds the allure of streamlining the hiring process, especially when it comes to screening resumes using keywords tailored to experience requirements. However, the use of this technology is increasingly coming under state and federal scrutiny. AI that isn’t well trained or is fed bad data can perpetuate stereotypes and result in discriminatory hiring practices. How will the regular employer know?
Employers should take note of EEOC guidelines meant to ensure that the use of AI doesn’t disproportionately impact protected groups. They should also monitor state and local laws that are increasingly targeting these practices.
Legislation in New York City, for example, requires employers using AI for hiring to conduct regular, independent bias audits. The law also requires employers to notify candidates when they use AI tools in the selection process. (N.Y.C. Loc. Law 144 of 2021 (2023).)
In addition, Illinois and Maryland have enacted laws to limit the use of facial recognition software in video interviews for employment.
It’s not unreasonable to assume that other states and localities will follow suit.
Navigating antidiscrimination laws can be complex, but when it comes down to it, fair hiring practices are little more than sound business strategies.
Focusing on the background, skills, and knowledge needed to get a job done is certain to yield a more qualified employee than haphazardly defining job requirements and prioritizing irrelevant characteristics like where an applicant went to school. Lawful hiring practices don’t just reduce liability for employers, they also increase your business’s competitive advantage.
If you're working on fair hiring practices for your business and you have compliance questions, consider talking to an employment expert like a human resources specialist or employment lawyer. They can review your hiring practices or help you create new policies that comply with federal and state laws.
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Customer complaints don’t have to be bad news. They can help you to win more customers and provide insights about where your business might be falling short.
When you think of complaints as opportunities, you can use them to:
Provide cost-free insights into your business. When you strip complaints of the emotions like frustration and anger that sometimes accompany them, you’re left with feedback about your products, services, and business practices. While it’s true that some complaints are baseless and have more to do with “operator error” than your business or its products, some might be legitimate, exposing an area where you could improve. Your customers’ insights can help you to identify areas that need improvement without spending money on customer surveys, focus groups, or consultants.
Build customer relationships and customer loyalty. One study done by the Harvard Business Review based on data from Twitter showed that customers are more likely to continue buying from companies—and might even spend more on future purchases—when customer service representatives personally respond to their complaints, comments, and questions.
Attract more customers. Customers who believe your business addressed their complaint fairly are likely to share their experience with others, and the word of mouth they generate can bring more customers through your door.
It’s easier to address complaints when they’re lodged in person or over the phone, rather than in an email, on your website, through social media, or in an online review. You can learn the customer’s name, see or hear their tone and attitude, elicit additional information, and respond directly.
Customers don’t always voice their complaints directly, however. When a complaint comes in an email, on your website, through social media, or through an online review, it’s important to move the conversation to a personal level. Provide a contact name and phone number the customer can use to reach your business directly. (See below for more on responding to complaints received digitally.)
The seven steps that follow do more than correct mistakes. While your ultimate goal is to make things right in the customer’s mind, you’ll often have to first deflect the anger and frustration customers are feeling to make them receptive to finding constructive solutions.
Regardless of how you receive the complaint, the steps to resolving it are the same.
When you incorporate these steps into your company’s complaint resolution process, you’ll be able to address complaints without a lot of disruption to your business.
Many customers are uncomfortable voicing a complaint in person or by phone. Instead, a customer will register their frustration or disappointment by writing a bad review or a negative comment online.
Monitoring social media regularly and responding to online reviews will help you to manage your company’s brand and reputation.
Customers can post reviews of your business on numerous online platforms, including:
In addition, sites specifically targeted to your industry might collect reviews. Some examples are HomeAdvisor for contractors, builders, and home repair services; and OpenTable for restaurants.
Customers can review your business on Facebook only if you maintain a Facebook business page. They can, however, post reviews of your business on many other sites, regardless of whether you maintain an account on the site—and even when you never asked to be listed on the site.
Yelp is one example. Yelp maintains a directory of local businesses that customers can review. You’re not required to claim your business listing, but doing so can help you manage the information posted about your company and allow you to respond to reviews.
Most small businesses don’t have the resources to monitor the many sites that collect reviews. Alternatively, you can choose to monitor the sites that your customers are most likely to visit, or you can hire an online reputation management service to do the monitoring for you.
You should respond to online reviews whether they’re good or bad. Acknowledging positive reviews boosts your reputation as a company that cares about its customers. Use the opportunity to thank the customer and reinforce your commitment to customer service.
Rather than addressing the details of a negative review online, use your response to encourage the customer to contact you directly. As noted earlier, it’s much easier to resolve a customer complaint by talking it over person-to-person.
Because online reviews rarely provide a customer’s contact information, you’ll first have to post a written response. Your response should:
Remember that others besides the complaining customer will be reading your posted response, and they’ll likely form an opinion about doing business with your company from it.
Each website has its own policies for managing reviews. As a general rule, none allow you to remove reviews directly. Even when a review is fake, you’ll usually have to go through a process of flagging it and alerting the site administrators, who’ll decide whether to take it down.
Reporting fake reviews. Most websites post their procedures for reporting fake reviews. You’ll need to specify the review you want to be investigated and detail the reason you think the review is fake. Some platforms require you to provide evidence in addition to describing the reason you believe the review is fake.
How can you spot a fake review? Fake negative reviews often omit details describing what was wrong with the experience or item. They often include many exclamation points. Many websites will allow you to see other reviews the reviewer has posted by clicking on their names. If a competitor is behind the fake review, chances are you won’t find other reviews by that same reviewer, or, more tellingly, you might find that a single reviewer has posted negative reviews only about other businesses in your industry.
Requesting a bad review be removed. Websites will never remove a bad review just because you disagree with it. You can request a negative review be removed only when it doesn’t comply with the posting policies of the website where it appears.
Yelp, for example, will consider removing a bad review when you can show that the reviewer had a conflict of interest, the review doesn’t describe the customer’s experience with the business, or when it includes offensive language.
Keep in mind that a bad review won’t necessarily turn customers away. Nobody’s perfect, and many customers are skeptical of businesses that have only good reviews.
When it comes to online reviews, the saying, “The best defense is a good offense,” applies. By encouraging customers to post reviews about your business, the good reviews will outweigh the bad. Consider including a link to online websites like Google Business Profile on your website, advertising, electronic receipts, and other marketing collateral, with a message such as, “Tell us how we did.”
You can minimize complaints by instituting policies and procedures that make the terms and conditions of your sales clear at the outset.
Here are some strategies to employ:
Create a customer complaint procedure. Your policy should include guidelines for documenting and reporting complaints, your policy on response times, and the procedure for solving problems.
Create a return or exchange policy. Institute a clear and reasonable return or exchange policy for the products you sell. Include the time frame allowed and conditions under which products can be returned or exchanged. Post the policy prominently in your store, on your website, and on your sales contracts and receipts.
Use written contracts when applicable. When you provide services, such as catering, construction, and graphic design, use a written contract to clearly define the work you’ll perform. By detailing the scope of the work to be performed (and, in some cases, what isn’t included) in your customer agreement, you’ll avoid misunderstandings that can later lead to customer complaints,
Implement a process for flagging repeat problems. Sometimes a complaint signals a larger problem with your company’s products, services, or operations—a problem that potentially affects other customers. By tracking complaints, you’ll be able to evaluate and address broader issues where your business might be falling short and fix problems before they become customer complaints.
You might not be able to resolve every complaint to the customer’s satisfaction, but you can keep dissatisfied customers from sullying your reputation, or worse, filing a lawsuit in small claims court by treating each complaint with respect.
Don’t ignore customer complaints. Ignoring customers who complain can escalate problems and cause even more disruption to your business. Customers who believe they weren’t treated fairly will tell others about their experience and discourage other customers from doing business with you.
There’s also the chance that a customer who believes they didn’t receive the products or services promised will seek a resolution in small claims court. By addressing complaints at the outset, you’ll have control over the resolution and avoid the time and expense of a court proceeding.
Don’t deny there’s a problem. In many cases, customers want nothing more than an acknowledgment that they were inconvenienced, disappointed, or disrespected. Minimizing or denying the problem outright will only serve to worsen the situation.
Don’t make it difficult for customers to complain. Transferring a complaint call from one team member to another—and forcing a customer to repeat their complaint to two or more people—adds to customers’ frustrations and makes them less receptive to resolutions.
Do respond to complaints quickly. Ideally, you should respond to customer complaints within 24 hours. When you take more than a week, you’ll have a tough time earning the customer’s trust.
Do train customer service representatives and give them the authority to resolve issues. Dedicate team members responsible for handling customer complaints and give them the authority to resolve issues, including using their judgment to make exceptions to your policies.
When a customer complains, it’s usually a last resort. Typically, they’ve already tried to resolve a problem and the company hasn’t responded. By the time they complain, the issue that caused the problem in the first place is compounded by aggravation and anger.
By putting procedures in place for resolving customer complaints, you can address customers’ concerns when they’re first brought to your attention and take full advantage of the opportunities a complaint presents.
]]>If your Washington business has just one employee, even if that employee is part-time, you’re generally required to carry workers’ compensation insurance. However, there are a variety of narrow exceptions to carrying workers' compensation insurance, such as:
For a complete list of exceptions, check the L&I Employers’ Guide.
In addition, business owners, such as members of LLCs, corporate officers, partners in partnerships, and sole proprietors, usually are not required to be covered by workers’ compensation insurance. However, there are some limitations on this exception.
The Washington State Department of Labor & Industries (L&I) is the primary state agency that handles workers’ comp claims. Most of the law for WC insurance is contained in Washington’s Workers’ Compensation Act (Title 51 of the Revised Code of Washington). In addition to the Act, there are also administrative rules (Chapter 296-17 of the Washington Administrative Code) that cover workers’ compensation in Washington.
In Washington, you typically will obtain workers’ compensation insurance through an insurance pool called the Washington State Fund. You apply for coverage by filing a business license application with the Washington Department of Revenue. There is also an option to self-insure, but this may not be practicable for smaller businesses, in part because it requires that a lot of money be set aside to cover potential claims.
You are responsible for ensuring that an injured employee immediately gets required medical care for a doctor or hospital of the employee’s choice. This includes providing transportation, such as an ambulance, if necessary. For initial treatment, the employee may see someone outside the L&I Medical Provider Network. However, additional or ongoing care must come from providers in the network. For most injuries, employees must make a claim within one year. For a few types of injury or illness, an employee has two years to make a claim.
The injured employee should report the injury to you as soon as possible. In cases where a medical provider is involved, the provider will give the employee a Form F242-130-000, Report of Accident (Workplace Injury, Accident or Occupational Disease), known by the abbreviation ROA, which the employee completes and submits to L&I to start the claims process. Often this filing will be done online.
You will receive a request for information form from L&I. You should complete it and return it as soon as possible. Include your copy of the ROA. Beyond these initial steps, there are subsequent steps to the WC claims process, not covered here.
If you don’t think your employee’s workers’ comp claim is valid, state that on the request for information form that you return to L&I . Then, within 60 days of a decision by L&I to accept the employee’s claim, you can file a protest through L&I’s Claim & Account Center webpage.
Disputes about the validity of claims initially are adjudicated by L&I. If you are unhappy with L&I’s decision, you can file an appeal with the state Superior Court within 30 days of the decision. You can then further appeal the matter to the Court of Appeals.
If you don’t carry workers’ compensation insurance you may be subject to various penalties and fines. There are also penalties for not paying WC premiums on time and not filing required WC reports. A few penalty rules are contained in Section 296-15-266 of the Washington’s Administrative Code.
There are many other workers’ compensation requirements for Washington employers that are not covered here, such as putting up posters about workers’ compensation coverage where employees can see them. The Nolo website has a section devoted to workers’ compensation. In addition, the L&I website also contains many useful resources.
]]>A diversity, equity, and inclusion (DEI) policy is an action plan that assists and guides companies in recruitment, hiring, promotion, and other human resource management functions. It aims to build a workforce that reflects the demographics of the larger community and a workplace that offers equal opportunities to all, regardless of their backgrounds, lifestyles, and beliefs. Companies whose DEI policies are known to the public sometimes gain a marketing edge over competitors, as customers gravitate towards companies whose social stances they admire.
DEI policies focus on three key values:
Diversity. The workforce should reflect the full range of demographic groups, including race, ethnicity, gender, culture, sexual orientation, and socioeconomic status.
Equity. The company’s processes and programs, such as training and team building, should ensure equal access to opportunities for all employees.
Inclusion. The work environment should be designed to enable employees and customers to feel welcome, seen, and heard. It should honor and respect differences in backgrounds, beliefs, appearances, and communication styles.
Your business might need to take further steps for your policy to be meaningful and effective. For example, a company might use specific channels to recruit people with physical disabilities. But the business won’t be successful at increasing the number of people with disabilities in its workforce if it doesn’t provide ramp access to the facility.
Unlike employment laws, which mandate rules for hiring, staffing, and compensating employees, DEI policies are voluntary (although having one might assist an employer to defend against a discrimination lawsuit). These policies also tend to focus on the whole work experience, not just the hiring process.
Here’s the difference between what your company must do and what it can do: Suppose the hiring manager at a wholesale distribution company faithfully applies employment laws like Title VII of the Civil Rights Act of 1964 (which prohibits employment discrimination based on characteristics like race and gender) by, for example, giving equal consideration to all applicants for its sales positions. Nevertheless, a staffing analysis shows that women represent only a tiny fraction of the sales force.
The hiring manager reviews hiring records and realizes that many of the women who were qualified and offered a position nonetheless turned down the position because it required a lot of travel. These women were unable to meet the travel requirements due to family responsibilities.
To attract more women to its sales jobs, this company might include an initiative in its DEI policy that restructures sales territories to create more positions that require little or no travel, thereby opening up sales opportunities to a larger number of women applicants.
The goal of a DEI policy is to create a workforce that reflects the larger community and a workplace that recognizes and embraces individual differences. The policy can focus on any number of characteristics, including:
You might not be able to specifically cover all of these characteristics in your employment practices. In your DEI policy, you should aim to promote equal access and opportunities for everyone. But the specific programs you implement can be designed to address recruitment and hiring based on a particular characteristic.
Making your business diverse, equitable, and inclusive is more than the latest management trend. A well-executed DEI policy can also give you a competitive advantage and improve your company’s performance.
Let’s look at the advantages of having an effective DEI policy.
Once you’ve decided to create a DEI policy for your business, you need to take the appropriate steps to put one in action. Look at your company’s current culture, set goals for your business, and make plans to meet these goals.
Before you can begin to formulate a DEI policy, you’ll need to consider your company’s current practices and challenges, and what you want to accomplish.
When you have a good understanding of what your company looks like at present, decide how you want it to look in the future.
Set objectives. Set clear, measurable objectives for what you want your policy to accomplish. Do you want to increase eligibility for promotions among certain groups of employees? Do you want to solicit feedback about company operations from team members? Do you want to focus recruiting efforts on disadvantaged groups? Do you want to add products that target the needs of certain groups of customers? Don’t be afraid to put specific numbers in your DEI policy. For example, you could say that your goal by the end of the year is for leadership positions to be made up of at least 50% women. Just make sure that these numbers are reasonably attainable.
Create an action plan. Create a plan of action for each objective, including the quantifiable results you want to achieve. For example, if you want to solicit feedback about company operations, you might establish monthly meetings where team members can share their thoughts. If you want to increase eligibility for promotions, you might assign coaches who regularly meet with those employees.
Resources and templates are available from sources such as the Society for Human Resource Management. When you use a template, make sure you tailor it to your company and your DEI objectives.
Don’t just distribute your policy by email and expect employees to read it. Hold a company meeting and consider following up with smaller group meetings where employees can feel free to comment and express concerns.
Diversity training, whether online or (better) in person, serves two purposes: It's an occasion for employees to voice their concerns, hopes, and expectations for the workplace. Secondly, those voices are themselves the people who can convert these views into action. For the training to be effective, everyone needs to feel safe to speak out and everyone must be open to learning.
Choose a trainer from inside or outside the company. Remember that biases can be unintentional and unconscious. You’ll need trainers who are able to encourage free and open dialogue, so managers shouldn’t be in charge of training their direct reports. Instead, consider hiring an outside consultant or using your in-house HR specialist, if you have one. A professional trainer can help to create an environment that fosters open discussion and provides constructive feedback.
Include managers as well as team members. Team members might not have authority over others, but their attitudes and actions can seep into the company culture.
You need to evaluate the impact of the goals you set and the initiatives you carry out. Otherwise, you won’t know whether your policy is making a meaningful difference in your company’s experience and translating into measurable results.
Set up a timetable. Assess and measure your progress periodically and revise your procedures as needed. For example, if your action plan calls for hiring employees from certain demographic groups like women or people of color, make sure you record and track the gender or racial makeup of your new hires. Review your progress on a quarterly or bi-annual basis, depending on the frequency and the number of employees your company hires.
Determine the core issue. If your results don’t meet the goals you initially set, find the reason for this lower-than-anticipated performance. Do you need to revisit the program itself or should you try different ways to carry out the plan?
Report results. Remember to keep employees as well as managers apprised of your progress.
Creating change in organizations takes continual reinforcement, especially when it comes to company culture. You’ll need patience and vigilance in equal measure to put your diversity, equity, and inclusion policy into practice.
]]>Here are some basic facts that you need to know about workers’ comp insurance in Ohio as a business owner and employer.
If your Ohio business has at least one employee, you’re generally required to carry workers’ compensation insurance. There are exceptions to the workers' compensation requirement for:
In addition, business owners, such as sole proprietors, partners in partnerships, and members of limited liability companies, are not required to be covered by workers’ compensation insurance in Ohio.
The Ohio Bureau of Workers’ Compensation (BWC) is the primary state agency that handles workers’ comp claims. Most of the law for WC insurance is contained in Ohio’s Workers’ Compensation Act (Chapter 4123 of the Ohio Revised Code). In addition to the Act, there are also administrative rules that cover workers’ compensation in Ohio.
Ohio is one of four states where workers’ compensation insurance is provided through the state itself rather than through private insurance companies. You can apply for WC insurance from the state by completing the BWC’s Form U-3, Application for Ohio Workers’ Compensation Coverage, online. There is a minimum $120 application fee.
Apart from coverage through the state, there is also an option to self-insure, but this may not be advisable for smaller businesses, in part because it requires that a lot of money be set aside to cover potential claims.
Apart from getting medical care, the injured employee should notify you of his or her injury. The employee, the employee’s medical provider, your business’s managed care organization, or you as the employer must report the injury or accident to the BWC. This initial report, a Form FROI, First Report of an Injury, Occupational Disease or Death, An injury report can be filed on paper or online.
Beyond filing the initial report, there are also subsequent steps to the WC claims process, not covered here.
You can reject an employee’s workers’ comp claim. Otherwise, the BWC makes an initial decision about the claim. If you either reject the claim or wish to dispute the BWC’s decision, the dispute initially will be referred to the Industrial Commission of Ohio (IC).
The IC is a state agency specifically intended to resolve WC disputes through a series of hearings. There can be as many as three levels of hearings, depending on how far you or the employee wishes to appeal the matter. The first hearing is held before a district hearing officer (DHO) within 45 days after you appeal a BWC order. The second hearing is held before a staff hearing officer (SHO) if you or the employee appeals the DHO decision. The third hearing is held before the IC Commissioners’ Panel if you or the employee appeals the SHO decision.
Beyond IC hearings, you can appeal decisions to the Ohio state courts, starting with the Court of Common Pleas, then to Appellate Court, and ultimately to the state Supreme Court.
If you don’t carry workers’ compensation insurance you may be subject to various penalties. For example, if an employee makes a claim to the BWC while you are without coverage, and the BWC accepts the claim, you must reimburse the BWC for all costs. In addition, the injured worker can sue you directly for all damages and expenses related to the injury.
If you fail to make timely premium payments to the BWC, you may have to pay other penalties that could be as much as 15% of the premium amount. There are also penalties for failing to file required payroll reports with the BWC on a timely basis.
Check this BWC webpage for more information.
There are many other workers’ compensation requirements for Ohio employers that are not covered here such as putting up posters about workers’ compensation coverage where employees can see them. For more information, see the Nolo website section on workers’ compensation and the BWC’s online guide for employers and employees.
]]>If your Minnesota business has just one employee, even if that employee only works part-time, you’re generally required to carry workers’ compensation insurance. Limited exceptions apply to workers in private homes who earn less than $1,000 in a three-month period, certain farming situations, and some cases where an employee is a family member. In addition, business owners, such as members of LLCs, certain corporate officers, and sole proprietors are not required to be covered by workers’ compensation insurance.
The Minnesota Department of Labor & Industry (DLI) is the primary state agency that handles workers’ comp claims. Most of the law for WC insurance is contained in Minnesota’s Workers’ Compensation Act (Chapter 176 of the Minnesota Statutes). In addition to the Act, there are also administrative rules (Chapter 5520 of the Minnesota Administrative Rules) that cover workers’ compensation in Minnesota.
In Minnesota, workers’ compensation insurance is available through private insurance companies. If your business is unable to obtain coverage through a private insurer, you can get coverage through so-called assigned risk-pool insurance. There is also an option to self-insure, but this may not be advisable for smaller businesses, in part because it requires that a lot of money be set aside to cover potential claims.
Depending on the circumstances, an employee may have 14 days, 30 days, or even 180 days to notify you of an injury. As soon as you are notified, you should immediately report it to your workers’ comp insurance carrier. Use Form FR01, First Report of Injury. You must complete this form within 10 days of being notified. If the injury is “serious” — or results in death — you must file the report within 48 hours. The insurer, in turn, must file the report electronically with DLI. You must also provide a copy of the form to your injured employee and retain a copy for your records.
Beyond these initial steps, there are subsequent steps to the WC claims process, not covered here.
You or your WC insurer may choose to deny your employee’s workers’ comp claim. If that happens, you or your insurer must send a notice of denial of liability to the employee within 14 days of being notified of the injury. The employee then has the option to file a Form EC04, Employee’s Claim Petition, with the DLI.
The DLI will then hold an administrative conference to try to informally resolve the dispute. If you cannot reach an agreement, the DLI will make its own decision. At that point, if you don’t like the decision, you can appeal it and have a hearing before a workers’ compensation judge. The hearing is more formal and can include submission of evidence and testimony of witnesses. From that point, you can then appeal to Minnesota Workers’ Compensation Court of Appeals, and, ultimately, to the state Supreme Court.
You are subject to various penalties if you fail to carry workers’ compensation insurance as required. This includes:
There are many other workers’ compensation requirements for Minnesota employers, such as putting up posters about workers’ compensation coverage where employees can see them, that are not covered here. However, the Nolo website has a section devoted to workers’ compensation. In addition, the DLI website also contains many useful resources.
]]>Most Michigan businesses with employees are required to pay for workers’ compensation insurance (WC or workers’ comp insurance). The insurance provides compensation to employees who suffer work-related injuries. Here are some basic facts that you need to know about workers’ comp insurance in Michigan as a business owner and employer.
Generally speaking, if your Michigan business has even one employee, you’re required to carry workers’ compensation insurance. More specifically, the following types of employers must carry workers’ compensation coverage:
In addition, some business owners, such as sole proprietors, partners in partnerships, and corporate officers of small, closely-held corporations are not required to be covered by workers’ compensation insurance.
The Michigan Workers’ Compensation Agency (WCC) is the primary state agency that handles workers’ comp claims. Most of the law for WC insurance is contained in Michigan’s Workers’ Worker’s Disability Compensation Act (Chapter 418 of the Michigan Consolidated Laws). In addition to the Act, there are also administrative rules that cover workers’ compensation in Michigan.
In Michigan, workers’ compensation insurance is available through private insurance companies. There is also an option to self-insure, but this may not be advisable for smaller businesses, in part because it requires that a lot of money be set aside to cover potential claims.
Unless there is a dispute, employee injury claims often are handled between your business, your insurance company, and the employee, and the WCA is not involved. However, if an injury results in an employee disability of seven or more days, a so-called specific loss, or a death, you must report the injury to the WCA using Form WC-100, Employer’s Basic Report of Injury. Injuries that require medical treatment but don’t result in at least seven days of disability do not need to be reported.
If and when you begin paying benefits to an injured employee, you also must file Form WC-701, Notice of Compensation Payments. Beyond these initial steps, there are subsequent steps to the WC claims process, not covered here.
If you or your insurer thinks your employee’s workers’ comp claim isn’t valid, and benefits are denied, the employee can file an Application for Hearing. You should receive a copy of the Application and then, within 30 days, you must file a written response. If you now choose to accept the claim, you or your insurer will file Form 100, Employer’s Basic Report of Injury. However, if you continue to dispute the claim, you or your insurer will file Form 107, Notice of Dispute and Form WC-251, Carrier’s Response.
After these various forms are filed, the next step usually is informal mediation conducted by a WCA representative. After that, if the matter remains unresolved, it moves to a hearing before a magistrate. Beyond that, there is an option to appeal to the Michigan Compensation Appellate Commission and the Michigan Court of Appeals.
If you don’t carry workers’ compensation insurance, an injured employee can sue you for damages in civil court. In addition, the WCA can prohibit your business from having any employees until you have WC insurance. Furthermore, you may be subject to a fine of $1,000, imprisonment for a period ranging from 30 days to six months, or both, with each day that you go without workers’ comp insurance considered a separate offense. Many of the penalty rules are contained in Section 418-461 of Michigan’s Workers’ Disability Compensation Act.
There are many other workers’ compensation rules for Michigan employers, such as putting up posters about workers’ compensation coverage. The Nolo website has a section devoted to workers’ compensation. In addition, the Michigan Workers’ Compensation Agency website also contains many useful resources including useful FAQ pages.
]]>Employers must follow their state's requirements for paying unemployment taxes, reporting new employees, and responding to unemployment claims. Your state's unemployment agency will provide you with more information on your duties, which typically include:
Unemployment taxes. Most employers will have to pay both federal and state unemployment taxes, which fund unemployment insurance programs. The rate depends on the amount of wages, the number of employees, and also the number of charges to the employer's unemployment account.
Reporting. Typically, employers must report all new hires to an employer registry, a workforce tax agency, or both.
Responding to Claims. If a former employee files an unemployment claim, the unemployment agency will notify the employer and give them a chance to respond and contest the claim.
Unemployment benefits are cash benefits to help eligible individuals who lose their job. The amount and duration of the benefits depend on the state where the employee worked and the employee's wages.
To be eligible for unemployment, you must be able and available to work. In addition, if you were at fault for losing your job, meaning that you quit or were fired, you typically can't collect unemployment.
Check with your state's unemployment agency to determine the process for filing for unemployment. The steps might include:
Be sure to review your state's ongoing reporting requirements. Your state might require you to check in about your job search, or maintain a job search log and provide it upon request.
Below are links to each state agency that handles business employment matters, including unemployment insurance tax, employee reporting requirements, and other employee-related matters.
Alabama
Alaska
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Generally speaking, an essential service is one that is necessary for public health and safety. If the government deems the business essential, it may continue to operate while shelter-in-place orders are active. In most areas, the government will not require an essential business to obtain a certificate or verification; the business can simply continue to operate.
However, even essential businesses should implement policies that will protect the health and safety of the community. This might include reducing hours, encouraging social distancing with staff and customers, adopting hygiene and sanitation policies, and allowing employees to work from home when possible. Be sure your sick and family leave policies are in compliance with the law, and that ill employees are encouraged to stay home to self-isolate.
While federal, state, and local governments differ as to the definition of “essential,” a number of businesses are typically included on everyone’s list. Essential services generally fall into one of the following categories:
If the government does not list a type of business as essential and the business does not provide goods or services to an essential company, it is non-essential (though it might still be allowed to operate; see the section below). Government resources might list particular businesses that are non-essential. These typically include:
One locality may deem a type of business essential, while a different locality might consider the same service non-essential. If you operate any of these businesses, be sure to check your city and state regulations. Examples of businesses that might or might not be on the “essential” list of a moratorium or order include:
If you violate the regulations by operating a non-essential business, your business might face penalties. In some areas, you could be charged with a misdemeanor, which means potential jail time and fines. But read on to see whether your non-essential business might still be able to carry on.
You might be able to operate a non-essential business without violating the law, as long as doing so will not result in people violating the shelter-in-place orders. For example, you and your employees might be able to operate the business from home. An accountant could continue to prepare tax forms from home; a yoga teacher might offer classes online instead of in a studio, and a lawyer could offer consultations and prepare documents from home.
Some owners of non-essential businesses have engaged in the following “work-arounds” to the problem of shuttered doors. These owners have lost sight of the purpose of shelter laws, by doing the following:
It is important to check with your local government agencies, including state, county, and city government websites, to see what regulations may apply to you. Some areas do not provide as much guidance as others, and it can be difficult to determine if your business is essential. You can check with other similar businesses in your area to see how they are interpreting the rules. However, if the other business is wrong, this is no defense to violating the regulation and you could still face a penalty. If in doubt, it is best to contact a government official.
Finally, understand that these regulations are changing frequently as time goes on. Be sure to check back for updates, such as when the orders might be lifted, and additional regulations that could apply to your business.
]]>Rather than something you do after you’ve completed the work, invoicing clients for payment is part and parcel of completing your assignment. The invoicing process actually begins when you and your client first agree to the assignment, and it ends when you submit an invoice for the work and receive payment. The contents of your invoice shouldn’t be a surprise to your client. Done right, it should tie together all the elements you’ve already discussed and included in your service agreement in a way that makes it easy for your client to process and send you payment.
At the same time that you and your client discuss the work you’ll do, ask the client about its payment process, including the department name and names of individuals that pay the bills. Ask if the company has preferred payment methods (such as by check or electronic funds transfer), and terms (How long does the company have to pay your invoice?) Prepare for the discussion by asking yourself and your client these questions:
Will you require a deposit? Many freelancers and independent contractors ask for an initial deposit before beginning work. Deposits are customary for some independent workers, such as general contractors, because they must hire workers (who will be paid as the job progresses), and they often incur up-front expenses like buying materials before the work starts. Many freelancers (like web developers and graphic artists) require deposits because of the time that passes between starting and completing a project. Explaining the reasons you are asking for a deposit can help build trust with your client.
What types of payments will you accept? Some types of payments might be easy for you but not for your client. It’s a good idea to offer several payment options (check, credit card, payment services like PayPal, and so on), to learn your client’s preferences, and accommodate them when possible. Making it easy for clients to pay you can help you get repeat business.
Who pays the invoices for your client? In some companies, the contact person a freelancer works with is not the person who pays the bills. Some companies require the person who ordered the service to approve the invoice first, and forward it to the person whose job it is to pay it. Other companies ask you to forward invoices directly to the person who pays the bills. Knowing where and to whom to send invoices will help you get paid faster and follow up if payments are late or missed.
What payment terms will you establish? Payment terms tell the client when payment is due. Some of the commonly used terms are:
Your industry might customarily use a particular term of payment, such as 30 days, but you can also set your payment terms based on your own needs. You should also decide whether you want to offer incentives for early payment. For example, you might require payment 30 days from receipt of the invoice, but offer a small discount if payment is made within 15 days. You’ll also want to decide whether to charge a late fee if payment is late. Letting your client know your terms at the outset will help you avoid problems and delays in getting paid.
You can use the template available here (one of the many free invoice templates available online), or you can purchase an invoicing system or create your own invoice. Whichever method you choose, you’ll want to include the following information in your invoice:
A heading that identifies your company. If your company has a logo, it should appear at the top of your invoice along with your name, company name, address, phone number, email address, and website address if you have one. It’s a good idea to use a font and size that makes this information stand out so that the person who receives your invoice can easily identify it.
Your client’s name and contact information. As discussed earlier, addressing your invoice to the right person and department can be key to getting paid quickly. Use a specific person’s name and department, whenever possible, along with the mailing or email address and a phone number.
The date of the invoice. The date you sent the invoice will usually be different from the date you completed the work, but you’ll need the date the invoice was prepared because it marks the start of the time period that you’ve allowed for payment.
Payment due date. It’s a good idea to include the payment due date right below the date the invoice was prepared so that your client readily sees it. You can include incentives for paying early and consequences for paying late near the end of the invoice, as you’ll see in the payment terms section below.
The invoice number. Assign a separate and unique identifying number to each invoice you send--even if you are invoicing a company you have invoiced before. Choose a numbering system that will allow you to number each invoice consecutively. You can start with the number, “1” or choose a numbering system that shows your optimism about your new business. For example, you might choose to number your first invoice “001” to build in the possibility of issuing hundreds of invoices as your business grows. In this example, your tenth invoice would be numbered 010; your one-hundredth invoice will be 100 and so on. Including the current year in the invoice, such as 2021-1, is another way to number invoices.
The purchase order number (“PO”) if one was provided. When the company you are working with uses purchase orders (a document issued by buyers that details the items to be purchased), include the P.O. number on your invoice.
A description of services provided. The description of services provided should match the description used in the service contract. Your description should be concise, but it should also be complete and itemized so it’s easy to see the breakdown of services and the charges for each. For example, a website designer would include the number of pages and the titles of each page created. If the designer also bought or provided photography or other artwork such as graphs, those items should be listed on a separate line. When charging hourly for assignments, itemize the number of hours worked and the hourly rate. For example, if you worked 20 hours and your fee is $50 per hour, your description would include a line that reads, “20 hours at $50 per hour.”
The total due. The way you list the total due will depend on what was negotiated at the outset. If your assignment includes several components with a separate fee for each, such as the example above of the invoice for the web designer, you would list the development of web pages with the charge for that service on one line, the artwork you bought or developed with the charges for that service on a second line, and add up the two charges as the total due on a third line. If you agreed to a flat rate for the project, your invoice would list that amount at the end of the services breakdown.
If you’ve previously received a deposit, make sure you list it as a separate item and deduct it before you enter the total due.
Payment terms: This can be a simple statement, such as, “Payment is due 30 days from receipt,” or a list of the incentives you are offering for paying early and fees you will charge for paying late as described earlier.
A thank-you note. Always end your invoice with a note of thanks to show that you appreciate the business.
It’s customary to send the invoice when you’ve completed the work. You might also consider a monthly invoicing cycle for long assignments performed over several months or more. Here too, you’ll want to first have a conversation with your client about the billing cycle you use and the way you allocate the fees. When freelancers haven’t yet established a relationship with a client, they sometimes send the invoice along with the signed client service agreement. But sending the invoice at so early a stage can pose problems when the work you’re asked to do or materials you’re asked to use change over the course of the assignment. Keep in mind too that some clients might not look favorably on getting an invoice before the work is completed, and doing so might actually jeopardize your efforts to build a relationship.
If you choose to send your invoice upon completion of the work, make sure you do so promptly. Waiting weeks or longer before sending an invoice sends a message that collecting your fees isn’t a priority, and if the delay is long enough, the client might forget about the work that was done or worse, spend the budgeted money on something else!
It’s customary to send invoices by e-mail in today’s world. If you’ve created your invoice in a word document, you’ll want to save it to a PDF format before sending so that it can’t be altered.
It’s important to set up a system that allows you to record prompt payments and follow up on late payments promptly. Keeping your invoices together in a computer file organized by date can help alert you when payments are past due. Automated invoicing systems like QuickBooks have built-in reminder features.
If a due date arrives and you haven’t received payment, you should act promptly by calling the client or resending the invoice, marked “past due,” or, for a softer touch, “Have you forgotten? Your payment is due now.”
Your relationship with – and knowledge of – the client will usually help you decide how many reminders to send before taking additional action.
]]>Even if your business does not use social media, your employees likely do. Most Americans use social media daily, but many small businesses do not have social media policies in place. This is dangerous because the impact of social media is tremendous. One bad post can cause irreparable damage to your business. Your business needs a social media policy.
A social media policy provides guidelines for your business’s social media use. It governs your company’s official channels of communication and sets guidelines for employee use of social channels.
Your social media policy should be clear, concise, and written in plain language. Review and update your policy frequently to reflect current social media practices.
A well-drafted policy helps protect your company’s online reputation, reduces legal and security issues, and gives employees guidance on what to share about your business in their professional and personal accounts. There are many ways a social media policy benefits your small business.
Social media is pervasive. Many people share their entire lives with friends and followers, often without thinking. This includes your employees. The policy reminds employees that responsibility to the company does not end at the end of the workday. Anything employees post has the potential to impact your business.
A social media policy clearly establishes who owns social media accounts and content. It also communicates clear expectations about who can post what on behalf of the company. You should also identify who can use the company name in social media handles to help avoid legal disputes down the road.
A social media policy allows you to preserve your brand identity. When you limit who can post on behalf of the company, you control the message. You don’t have to worry about diluting your brand or confusing customers with off-topic messaging.
Your social media policy also controls the graphics used to represent the company. Identify specific images, fonts, colors, logos, or tag lines used by your business. Explain how to use these files properly.
You pay employees to do a specific job, not chat with their friends. When employees use social media during work hours, they are wasting your time and productivity suffers.
Identify when and how employees may use social media during business hours. If you plan to monitor social media activity, state your intention in the policy.
There are many social media risks. Accounts can be hacked, taken over, frozen, or deleted. A social media policy helps protect against security breaches that threaten your business.
Identify who handles passwords, software updates, and account security. Monitor unattended social accounts and be aware of imposter accounts. Encourage employees to verify links and websites before downloading files. Prohibit participation in games and quizzes, which are commonly used to access confidential data. Alert employees to phishing schemes.
The primary goal of a social media policy is to prevent a public relations crisis. Proper training on the policy and best practices is key. Make sure your employees understand the risks in posting controversial opinions on social media and encourage them to alert you to potential problems.
Your policy should include a management plan to deal with any problems that may arise.
Many companies review candidates’ social media profiles before making a hiring decision. Reviewing candidates' public profiles is permissible, but the social media policy should explain how you use social media in hiring decisions. State that you do not base hiring decisions on religion, political affiliation, or sexual orientation.
You may also need to fire an employee for social media posts that are illegal, unethical, or violate your code of conduct. A clearly stated social media policy allows you to discharge employees who break the agreement. Include specific examples of conduct that violates company policies.
Your social media policy should identify who can post on behalf of the company. It may designate specific roles, like daily posts and engagement, customer service, or security, for each employee.
Employees should understand their own roles and know where to go for help. The policy should also state who handles education and training.
Your social media policy also covers positive comments and endorsements of your business. The Federal Trade Commission, which governs online advertising, requires transparency when people promote things online.
When employees post positive comments about your business, they must disclose their relationship to the company. Provide employees with guidance on how to disclose their relationship with your business. Unless they have a business handle, they should make the disclosure in the body of the post.
A well-crafted social media policy provides guidance for complying with copyright laws when using third party content. It also includes details about safeguarding customer privacy and confidential business information.
Your social media policy should remind employees that anything they post on their personal accounts has the potential to impact your business and their employment.
Hate speech, racial slurs, harassment, and threats of violence may be illegal and/or violate your company’s code of conduct. Employees need to know they are responsible for these posts, whether they occur on company or private accounts.
]]>Depending on the type of business, you have many varieties of insurance to consider. Your options will depend on a number of factors, including :
With these factors in mind, there a few basic types of insurance most businesses should consider.
General Liability Insurance: General liability insurance protects you if your business causes bodily injury or property damage. This includes injury that occurs at your location, but also injury that results from your goods or services.
Property Insurance: Property insurance protects the property of your business, including equipment, computers, and inventory, in case of events like theft, fire, or vandalism.
Commercial Auto Insurance: If you have a vehicle that is used in your business, your personal insurance may not cover commercial use. Commercial auto insurance will ensure you have coverage if you or any of your employees get in an accident.
Data Breach and Cyber Liability Insurance: In case there is a data security breach, this covers costs such as litigation and settlement fees if you are sued.
Disaster Insurance: Disaster insurance covers loss resulting from catastrophic natural disasters, such as tornados, earthquakes, and hurricanes. Note that property insurance may exclude specific natural disasters, and you must have this additional coverage for protection.
Business Owner’s Policy: This is a policy that bundles other types of insurance, such as property and general liability, into one policy for lower rates and your convenience.
Commercial Umbrella Insurance: Umbrella insurance provides additional coverage on top of your other insurance, in case you have to exceed your liability coverage.
If you have one or more employees, you may be required by state law to obtain additional coverage. In some states, you may not be required to have this insurance if you have fewer than three employees, while other states require insurance even if you have only one part-time employee. If you fail to have proper coverage, you may face penalties, including stiff fines.
The first to consider is workers’ compensation insurance, which pays for an employee’s medical bills, rehabilitation, and lost income should they get hurt while on the job. Depending on your state, you may be required to purchase this through the state, or you may obtain it from a private licensed insurance company.
The second requirement is unemployment insurance. This provides income to employees who are laid off through no fault of their own. Unemployment insurance typically works differently from other types of insurance, in that payments are often made to the state as a tax. The amount you must pay will likely be a percentage of gross wages paid, the number of current employees, and the number of claims by prior employees.
Certain professions require you to carry additional insurance in order to be licensed in the state. For example, attorneys and doctors may be required by state law to have malpractice insurance. If you fail to carry this type of insurance, you may be penalized by the state licensing agencies, or lose your license to practice in the state.
For other professionals, such as bookkeepers and consultants, professional insurance is not a legal requirement but still recommended. You may see this referred to as errors and omissions insurance. It protects your company against claims made by customers who relied on professional advice or services provided by you or any of your employees.
There are many factors that will go into calculating the cost of your insurance. For instance, you may be able to negotiate a lower monthly premium by having a larger deductible, which is the amount of money you must pay before the insurance kicks in. Similarly, having an overall lower policy limit will likely reduce your monthly premiums. It is important to take time to research the recommended coverage amounts for your profession, and the value of your business assets, to ensure you have proper coverage.
Insurance companies will likely look into a variety of factors when coming up with a quote. The location of your business, length of service, and whether or not you’ve had any prior claims may increase or reduce how much you will have to pay each month.
Remember that you can shop around and ask for quotes from different companies before committing to any policy. After you have insurance, it is important to review your coverage periodically as your business grows.
]]>Just like the liability coverage on your auto policy protects you from having to pay out of pocket for damages or injuries if you cause a car accident, general liability insurance covers the cost of damages or injuries caused by your business.
General liability insurance protects your personal and business assets if someone outside your company is injured or suffers property damage because of your business, its operations, or its products. The insurance pays the costs associated with the damage or injury.
These policies, also called business liability insurance and commercial general liability insurance, kick in when a customer reports an incident—called filing a claim—against a business, and a company is found to be responsible for what happened. General liability insurance typically pays for medical and legal expenses, monetary losses and property damage or losses, though the exact coverage will depend upon the policy you buy.
People often think of general liability insurance as something retailers need because slip-and-fall claims in stores like groceries are among the most common. But mistakes and accidents can occur at many different types of businesses.
Some highly publicized examples include infections caused by dirty equipment at nail salons and the e-coli outbreaks that caused food poisoning at restaurants. Other examples would include a customer who trips on an office stairway and breaks a leg or is injured during a fire on your premises. Or your software prototype damages a client’s operating system, or an employee of your construction company drills through a pipe and causes a flood.
Certain business structures like sole proprietorships and partnerships are especially vulnerable because a liability claim would put the owner’s personal assets at risk. But a limited liability company (LLC) also needs to protect business assets like equipment, inventory, and even monies due from customers. And if the owners of an LLC slip up in the rules for separating their personal assets from their business, a liability claim could put their personal assets at risk as well.
General liability insurance pays the costs that result from injuries or damages including:
The injury or damage doesn’t have to occur on your business premises for general liability insurance to come into play. Suppose that you own a construction company, for example, and a stockpile of two-by-fours falls injuring a client on a walk-through of the job site. Or you visit a client’s offices to demonstrate a new piece of software, and your coffee spills onto the client’s computer and breaks it. These incidents would be covered, though some policies also place geographic restrictions on coverage.
Just like your auto policy, your general liability coverage will have dollar limits on what the insurance company will pay, and some situations might not be covered depending on the policy you purchase.
It’s important to read your policy carefully because many different situations may not be covered, or you may need to add another type of policy to be fully protected. General liability insurance policies typically don't cover:
Employees and independent contractors. General liability insurance covers damage done by your employees to others like a worker who breaks a pipe while installing a washing machine for your customer. But it doesn’t cover employees who are injured on the job, and it usually doesn’t cover independent contractors injured while working for you. Independent contractors who cause damage or injury to others while working for you won’t be covered by most general liability insurance policies either.
Situations that might be anticipated. General liability insurance doesn’t cover situations that might be expected based upon the business you own. If you own an ice skating rink, for example, your policy probably won’t cover you if a skater falls and breaks a leg because it’s reasonable to expect that kind of injury would occur at a skating rink.
Situations where you didn’t follow government regulations. If your client is injured by falling debris on a job site and you haven’t provided a hard hat, for example, your insurance company is likely to deny the claim.
Auto accidents. Even if your employee is driving for work-related reasons, general liability insurance won’t cover injuries or damages from auto accidents.
Certain professions like CPAs. Protection against damages caused by the services and advice given by professionals like accountants and consultants is covered with professional liability insurance rather than general liability policies.
Some of these situations are covered by other types of insurance, and in some cases are required by states--like workers’ compensation insurance to protect employees injured on the job.
General liability insurance policies can differ based upon the timing of the injury or claim.
Occurrence policies cover injuries and damages that occur during the time the policy is in effect, no matter when the claim is filed. Say your customer fell in your store but didn’t report the incident for months, and your policy has since lapsed. You would still be covered for the claim if the injury happened while your policy was in effect.
Claims-made policies base coverage on when a claim is made. It doesn’t matter when the injury or damage occurred as long as the claim was filed during the time your policy was in effect.
Suppose you own a hair salon and your customer claims that you provided a color treatment that made her hair fall out. Now let’s say she was one of your first customers when you opened your salon in January, and you didn’t get around to buying your insurance policy until March. Your customer’s hair loss was gradual, and she didn’t fully realize the problem until March, and it took her another month to find an attorney and file a claim. If your hair salon was found responsible, a claims-made policy would cover you even though you didn’t have the policy when the injury occurred because your policy was in effect when the claim was filed.
The cost of a general liability insurance policy can range from about $300 to $1,000 per year, depending on many factors including:
Just like customers in one city pay different auto insurance rates from customers in another city, general liability insurance costs differ based upon where you do business. And just like an auto insurer might charge more to insure a luxury car than an economy car, general liability insurance might cost more for certain businesses because insurers believe their risk or the potential cost of claims is higher.
Construction companies and other businesses that perform work at other locations are generally thought to carry the highest risk. Information technology companies, real estate brokerages, and similar services are likely to be at the lower end of the scale.
The amount of coverage you choose will depend upon the assets of your business and the potential costs of a claim. A dry cleaning business that loses a customer’s suit, for example, doesn’t have nearly as much at stake as a construction company that makes a mistake building a home.
Many insurance companies offer a package of policies called a business owner’s policy that discount rates when you bundle two or more types of coverage like general liability insurance with workers’ compensation insurance.
]]>In almost all cases, if your Maryland business has just one employee, you’re required to carry workers’ compensation insurance. An exception applies for agricultural employers with less than three employees or an annual payroll not greater than $15,000. Business owners, such as sole proprietors or partners in partnerships, also don’t need to be covered by WC insurance.
The Maryland Workers’ Compensation Commission (WCC) is the primary state agency that handles workers’ comp claims. Most of the law for WC insurance is contained in Maryland’s Workers’ Compensation Act (Title 9 of the Maryland Code). In addition to the Act, there are also administrative rules that cover workers’ compensation in Maryland (Title 14, Subtitle 09 of the Code of Maryland Regulations).
In Maryland, workers’ compensation insurance is available through private insurance companies. If your business is unable to obtain coverage through a private insurer, you can get coverage through the Chesapeake Employers Insurance Company (CEIWC), which is the state’s WC insurer of last resort. There is also an option to self-insure, but this may not be advisable for smaller businesses, in part because it requires that a lot of money be set aside to cover potential claims.
An injured employee should report his or her injury to you immediately. In addition, the employee is responsible for filing Form C-1, Employee Claim Form, through the WCC’s online filing system. You, the employer, are required to file Form SF-1, Employer’s First Report of Injury (FROI), with your workers’ comp insurance carrier and the WCC. You can get the form through the WCC’s online filing system. You file the form within 10 days of being notified, orally or in writing, of the injury or accident.
You also should forward employee medical bills to your insurer for payment. If you are not contesting the claim, you or your insurer must start paying benefits within 21 days.
Beyond these initial steps, there are subsequent steps to the WC claims process, not covered here. The WCC has a helpful flowchart you can consult for further information.
After a claim is filed, you will receive a copy of a Form C-30 (claim form) and a Form C-40 from the WCC. Form C-40 will contain a consideration date. You must file so-called contesting issues (or, simply, issues) prior to the consideration date. This triggers the claim dispute process.
Initially, disputed claims are handled through hearings conducted by the WCC. If you are not happy with the WCC’s decision, you can appeal to a local circuit court within 30 days of the WCC’s decision. From there, you can also appeal to the state’s Court of Special Appeals.
If you don’t carry workers’ compensation insurance you may be subject to a fine of up to $10,000. In the case of corporations, individual corporate officers may be directly liable to the state for fines. Some of the penalties and fines are contained in Subtitle 11 of Maryland’s Workers’ Compensation Act.
There are many other workers’ compensation requirements for Maryland employers, such as putting up posters about workers’ compensation coverage where employees can see them. The Nolo website has a section devoted to workers’ compensation. In addition, the Maryland Workers’ Compensation Commission website also contains many useful resources.
]]>Prior to the Tax Cuts and Jobs Act (TCJA), which took effect in 2018, employees who worked at home for the convenience of their employer could get a tax deduction. This was a miscellaneous itemized deduction that could only be claimed by employees who itemized their personal deductions on IRS Schedule A. And it was available only if, and to the extent, it and any other miscellaneous deductions exceeded 2% of the employee's adjusted gross income.
The TCJA temporarily eliminated all miscellaneous itemized deductions, including the deduction for employee home offices. The deduction is scheduled to return in 2026. Thus, unless the law is changed, employees who are working at home in 2020 due to the coronavirus pandemic don't get a tax deduction for those costs.
All is not necessarily lost for employees forced to work at home. They can ask their employer to reimburse them for their home office expenses. In some states employers are required by state law to reimburse their employees for their necessary job expenses. These include California, Illinois, Iowa, Pennsylvania, Montana, and New Hampshire.
In addition, the federal Fair Labor Standards Act (FLSA) prohibits employers from requiring employees from paying for job-related expenses if doing so would cause the employee’s wage rate to fall below the minimum wage or overtime compensation rate.
Even if such reimbursement is not required by law, the employer may be willing to provide it anyway. It can only help with employee morale and productivity in this time of crisis. Moreover, such a reimbursement can be tax free to the employee and fully deductible by the employer.
The tax law permits employers to reimburse employees for legitimate job-related expenses, including home offices that meet the requirements for the home office deduction.
To qualify for the home office deduction, the employee must regularly and exclusively use a portion of his or her home for work--it need not be a whole room. And the home office must be for the employer's convenience. Employees forced to work at home due to the coronavirus qualify.
An employee may be fully reimbursed for any items purchased just for the home office, such as a computer, monitors, printer, internet service, or other equipment. But, if the employer later converts any of these items to personal use, he or she would presumably have to pay tax on their value.
The employee can also be reimbursed for a portion of the expense of maintaining his or her home. The employee must calculate what percentage of the home is used as the office--this area must be used exclusively for the office. The employee can be reimbursed for the home office percentage of rent or mortgage expenses, depreciation, utilities, and other costs of maintaining the home.
Example: Mario is an employee forced to work at home due to the coronavirus for two months. He exclusively uses 10% of his apartment as his office. He pays $2,000 in monthly rent and utilities. His employer reimburses him $400 for the two months. The $400 is tax-free to Mario and deductible by his employer.
To be tax-free, such reimbursement must be made under an “accountable plan.” An accountable plan is a set of procedures that ensures that employees don’t get reimbursed for personal expenses. In brief, the employee must:
Such a plan need not be in writing. If the employee fails to follow the rules, any reimbursements must be treated by the employer as employee income subject to tax. Thus, the employer must include the amount as taxable wages on the employee's W-2.
There's another way an employer could make tax-free reimbursements of an employee's home office expenses. They could be characterized as qualified disaster relief payments. A provision of the tax law (IRC Sec. 139) allows employers to make tax-free payments to employees to to reimburse or pay them for reasonable and necessary personal, family, living, or funeral expenses they incur due to a national emergency. The coronavirus pandemic has been declared such an emergency.
Such qualified disaster payments would certainly include reimbursing employees for any out of pocket expenses incurred in setting up a home office, such as equipment, internet, cell phones, and other expenses. Could they also include a portion of an employee's mortgage or rent? This is not entirely clear. This provision of the tax law has been rarely used.
One advantage of qualified disaster relief payments is that they need not be made under an accountable plan. Indeed, virtually no recordkeeping is required by the IRS.
]]>If your company is using volunteers or considering doing so, there are certain interests that you might want to protect, even from those who are contributing services to your business free of charge. On the one hand, you don’t want to offend or alienate people supporting your business in any way, particularly if they’re doing so without being paid. This article, however, discusses certain topics you might want to address, even with respect to volunteers. If any of the matters below are of particular importance to you, then either you or your legal counsel should prepare a standard agreement for each volunteer to sign and return (the Volunteer Agreement).
It’s pointless to have a volunteer sign a contract that can’t be enforced. In order to be legally binding, every contract needs both parties to receive something of value, often referred to as consideration (see Consideration: Every Contract Needs It). This is usually a non-issue, because most contracts involve the exchange of cash for either a good, a service, or a right. However, because volunteers aren’t paid, your contract must first establish that they’re receiving some benefit in exchange for their services.
As an illustration, here’s a description of the consideration received by volunteers who worked for a for-profit life coaching business:
“The Parties hereby acknowledge and agree that the Volunteer shall derive substantial benefits from the Volunteer’s performance of the Volunteer Services, including, but not limited to, (i) administrative and support training in a professional environment, (ii) marketing experience, (iii) complimentary attendance at Company events, and/or (iv) training in writing skills and other creative disciplines.”
Feel free to be thoughtful and creative when preparing this section of the agreement. Your description of the benefits derived by the volunteer should be as detailed, expansive, and substantive as possible, which will make it easier to demonstrate that the parties have validly exchanged valuable consideration in good faith.
As with regular employees, volunteers commonly have access to your company’s non-public, confidential information that your company might want to protect, for numerous reasons. Even nonprofit entities have incentives to protect their confidential information (for example, customer lists, suppliers, financial information, employee data, know-how, processes, and so forth) from being misappropriated by the private sector and others.
Furthermore, your particular industry might have additional legal requirements regarding the protection of confidential information. For example, if your business is in the healthcare sector, then it might be necessary for your Volunteer Agreement to incorporate specific references to the protection of patient information under HIPAA guidelines.
For further guidance on including a nondisclosure provision in your Volunteer Agreement, see Sample Confidentiality Agreement (NDA).
It’s possible that in the course of their service, volunteers might improve or create new processes, or even inventions, that benefit your business. This is of particular concern in the technology industry, where businesses want to be 100% certain of owning all intellectual property rights connected to anything created by their personnel. If this issue is of concern to you, then your Volunteer Agreement should also include a proprietary rights provision whereby your volunteers automatically (and irrevocably) assign to your company all intellectual property rights that might attach to their work product. For further information on this topic, see How to Protect Your Intellectual Property Rights in Works Created by Contractors.
Furthermore, your agreement can require volunteers to return all company property in their possession (for example, documents, equipment, keys, memos, disks, and so forth), either prior to the cessation of their services or within a certain amount of time thereafter. See Nolo’s article How to Protect Company Property in an Employee Separation Agreement for further discussion on this topic.
As with regular employees, volunteers often cultivate close, positive working relationships during their time with a company. You might be anxious that volunteers could possibly take advantage of those relationships by soliciting your employees, contractors, or other representatives after they depart. If you have any such concerns, then include a standard non-solicitation provision in your Volunteer Agreement. See Nolo's article, Standard Non-Solicit, Non-Disparagement, Proprietary Rights, and Return of Company Property Provisions for Contracts.
Due to the unique nature of working for a company without compensation, volunteers are commonly treated as a cherished commodity; as such, one would think that they’d be less likely to disparage the company after their departure than would a regular employee. However, because no one can predict the circumstances surrounding the exit of any particular person, whether they’re a paid employee or a volunteer, feel free to include a non-disparagement provision that mirrors the guidance provided in Nolo’s article How to Protect Your Company’s Goodwill in an Employment Separation Agreement.
As with the hiring of independent contractors, your Volunteer Agreement must make it clear that volunteers aren’t considered “employees” for legal purposes, and that your company will not be responsible for paying any taxes on behalf of any volunteer. Here are some sample clauses:
Status. Nothing in this Agreement creates or shall be construed to constitute an employment relationship, partnership, joint venture, or agency relationship between the Company or its affiliates, on the one hand, and the Volunteer, on the other hand, or entitling the Volunteer to control in any manner the conduct of the business of the Company or any of its affiliates.
Tax Returns. The Volunteer shall file all tax returns and reports required to be filed by the Volunteer on the basis that the Volunteer is a volunteer rather than an employee. The Volunteer shall pay in full all applicable taxes in connection with the Volunteer’s performance of any Volunteer Services under this Agreement, including federal, state, and local income taxes. The Company shall not pay any unemployment or workers’ compensation taxes or premiums on behalf of or regarding the Volunteer.
Each of the topics above relating to prohibitions on the volunteer’s future conduct (confidentiality, assignment of proprietary rights, non-solicitation, and non-disparagement) are often collectively referred to as “restrictive covenants.” Given that volunteers work for no compensation, you’ll have to get creative in including consequences and penalties in your Volunteer Agreement that are persuasive enough to motivate the volunteer’s full compliance with these provisions.
If you don’t have a corporate attorney to assist you in preparing your Volunteer Agreement, then see How to Draft a Letter Agreement or an MOU and Ten Tips for Making Solid Business Agreements and Contracts for direction on how to draft your own contract.
Note that, ideally, you should have each volunteer sign your Volunteer Agreement prior to commencing any work for your business. Admittedly, presenting such an agreement to volunteers can be a sensitive topic, given that they’re donating their efforts to your company. However, always remember to present the agreement in as casual and routine a manner as possible. If necessary, simply explain that it’s a standard, administrative document that all volunteers must sign. And if things get really uncomfortable, feel free to blame it on your lawyers — that usually works.
]]>Federal law requires businesses to report cash payments of more than $10,000. Most, but not all, businesses are subject to this requirement. If you are a landlord, attorney, jeweler, auto dealer, loan shark, or nearly anyone involved in selling goods or services, you’ll need to report cash payments of more than $10,000.
To meet the reporting requirement, you must complete Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business. Form 8300 requires the payor’s name, tax identification number, address, and identification form, among other items. You must file Form 8300 within 15 days after receiving the payment.
In addition to lump sum payments over $10,000, you also need to be on the lookout for installments of cash payments totaling more than $10,000. For instance, Mr. Moneybags comes in to your jewelry store to purchase a $12,000 watch. He gives you $4,000 to hold the watch that day. Two weeks later, he comes with an additional $4,000, and then pays the balance two weeks after that. Even though you received the money in a series of payments, it totals more than $10,000 so you must file Form 8300.
Cash doesn’t just mean American dollars and cents, either. Cash includes foreign currency as well. In some circumstances, cash can also include cashier’s checks, bank drafts, traveler’s checks, and money orders. It does not include, however, a check drawn from someone’s personal bank account.
Why does the IRS care if someone pays cash? Of course, it’s not a crime to pay for something in cash. There could be legitimate reasons for doing so. But the federal government wants to keep track of large cash payments to combat money laundering and other crimes. Sometimes, individuals paying large sums of cash are engaged in illegal activities, like drug dealing or tax evasion.
There are two ways to file Form 8300. You can complete a paper copy and mail it to:
Internal Revenue Service, Detroit
Computing Center, P.O. Box 32621,
Detroit, Ml 48232
If you mail Form 8300, make sure you send it certified mail so there is proof it was timely filed. Alternatively, you can file Form 8300 online using FinCEN’s Electronic Filing system. It can be accessed here. Whether you mail a paper copy or file online, make sure to keep a copy of exactly what was filed and when.
If you intentionally do not file a correct Form 8300 by the deadline, the penalties are severe. You can be hit with a penalty that is the greater of $25,000 or the amount of cash you received and were required to report. The maximum penalty is $100,000.
There are also potential criminal penalties for willfully not filing or for willfully filing a false Form 8300. The government can fine you personally up to $250,000 or $500,000 if your business is a corporation. If that’s not enough to discourage filing false reports, the government can also sentence you up to five years in prison.
Even if you are merely negligent and not willful, the IRS can impose penalties. The penalty for not filing timely is $250 per return. If you file, but the information is not complete or it’s not correct, the IRS can still impose a $250 penalty. So make sure you are not only filing Form 8300 timely but also that all the information contained in the form is complete and accurate.
In addition to filing Form 8300 15 days after receipt of the cash, there is also an annual filing requirement. You are required to provide a written statement to each person for whom you completed a Form 8300. The written statement needs to include: the name and address of your business, a name and contact person for your business, the total amount of cash received for the 12-month period, and a statement letting the person know you reported it to the IRS. The annual filing is due on January 31 of the year following the cash payment.
It’s not enough to simply file Form 8300 timely and complete the annual filing requirement. You must also keep careful records of what was filed and when. The IRS audits Form 8300s like they do any other tax form. If your records are insufficient, you could open yourself up to severe penalties.
For more information on Form 8300, see the IRS website.
]]>If your North Carolina business has three or more employees, you’re generally required to carry workers’ compensation insurance. Exceptions apply in the following cases:
Other exceptions also may apply. There also are special rules for trucking companies. In addition, business owners, such as members of LLCs, partners in partnerships, and sole proprietors, are not automatically counted as employees and are not required to be covered by workers’ compensation insurance. Corporate officers may choose to be excluded from WC coverage but still are counted as employees for the purpose of determining whether a business has at least three employees.
The North Carolina Industrial Commission (IC) is the primary state agency that handles workers’ comp claims. Most of the law for WC insurance is contained in North Carolina’s Workers’ Compensation Act (Chapter 97 of the North Carolina General Laws). In addition to the Act, there are also administrative rules that cover workers’ compensation in North Carolina.
In North Carolina, workers’ compensation insurance is available through private insurance companies. If your business is unable to obtain coverage through a private insurer, you may be able to get coverage through the state’s assigned risk pool, which is administered through the North Carolina Rate Bureau. There is also an option to self-insure, but this may not be advisable for smaller businesses, in part because it requires that a lot of money be set aside to cover potential claims.
When an employee is injured on the job, he or she should give you a completed Form 18, Notice of Accident to Employer and Claim of Employee, Representative, or Dependent. You are required to provide a blank Form 18 to the employee for him or her to complete. As the employer, you must complete Form 19, Employer’s Report of Employee’s Injury or Occupational Disease to the Industrial Commission (Form 19 often is more simply known as a First Report of Injury or FROI). In most cases, your workers’ comp insurer will then file the completed form electronically with the IC. A copy also must be provided to the injured worker.
You should file Form 19 within five days of learning of the injury. Beyond these initial steps, there are subsequent steps to the WC claims process, not covered here.
You or your WC insurer may choose to deny some or all workers’ comp benefits to an employee. If there is a dispute regarding injuries or compensation, the matter will automatically be referred to mediation through the IC. If mediation doesn’t resolve the dispute, you may have a hearing before a deputy commissioner of the IC. Beyond that, you may then appeal to the full Commission, and, ultimately, the North Carolina Court of Appeals and Supreme Court.
If you think an employee is engaging in workers’ compensation fraud, you also may choose to contact the IC’s Fraud Investigative Unit.
If you don’t carry workers’ compensation insurance, you may be subject to various financial penalties, as well as criminal charges (misdemeanor or felony), and potentially also prison time. Some of these penalties are laid out in Section 97-94 of the Workers’ Compensation Act.
There are many other workers’ compensation requirements for North Carolina employers that are not covered here, such as putting up posters about workers’ compensation coverage where employees can see them. For more information, see the Nolo website section on workers’ compensation and the North Carolina Industrial Commission website.
]]>The board of directors has a fiduciary duty to protect the best interests of the company and its shareholders. Certain significant transactions can have profound effects on the company, its operations, and its profitability. Board approval of these transactions ensures that there is a process by which the directors examine, discuss, and assess the pending transaction to the extent necessary to make an informed decision and vote accordingly. Furthermore, it is always possible that a transaction that seemed advisable (or noncontroversial) at the time it was approved could ultimately result in some adverse consequence for the company or a conflict with a shareholder; in this instance, the board’s prior conscientious consideration and approval of that transaction could serve as a shield to potential liability. In other words, it’s better for the board to be safe than sorry.
Determining what constitutes a significant commercial transaction does not involve any particular magic. This can vary by industry or by the individual company involved. However, using the ordinary course standard, management should have a pretty good idea of whether a corporate action (such as entering into a contract) would be consistent with the company’s regular conduct. The board might also identify a transaction as significant if it requires an unusually large expense; commitment; or disposition of assets, or if it involves a potential conflict of interest. Commercial agreements such as property leases, loan agreements, purchase or sale agreements, service agreements, supply agreements, licensing agreements, manufacturing agreements, outsourcing agreements, and any contracts with affiliated parties (shareholders, directors, or officers, for example) often fall into these categories.
While some contracts might not technically require board consent under state law, they could still be significant enough for their approval to be beyond the corporate powers of the company’s officers, employees, or other representatives. For example, there may be provisions in the company’s bylaws or in the individual employment agreements of certain officers that allow such persons to conduct day-to-day business on behalf of the company, but also require them to seek board approval for switching suppliers, taking on new clients, committing to a large project, or any other transaction that those documents deem to be important enough to require board approval.
When considering a significant agreement, the company’s management (including any relevant legal representatives) should present the board with any draft contracts and ancillary documents that the company will be expected to become a party to in connection with the entire transaction. In addition, the relevant departments should provide the directors with any pertinent company information (including financials, projections, or other reports) that would be germane to their analysis. The directors should have all information at their disposal so that they can make an informed decision.
Unless your board of directors has allocated the approval of significant commercial contracts to one of its committees or subcommittees, then it can go ahead and provide its consent through various means. One option is for the board to approve the agreement at a regularly-scheduled meeting; another is for the board to call a special meeting specifically for this purpose. In either case, the board will have to comply with notice and recordkeeping requirements under state law.
A more convenient alternative could be for the board to provide its consent in writing, since no physical meeting would be required. However, before the board pursues this option, the company or its legal counsel should carefully consult the company’s bylaws and the corporate statutes in your state to determine whether or not the consent must be signed unanimously and can be executed in counterparts. For any transaction approved by a written board consent, the company should ensure that its management has provided the directors with all relevant documents and information that they would have otherwise received in connection with a regular or special meeting. Furthermore, the text of the written consent should contain as much relevant background and detail as possible in order to substantiate the board’s final determination.
For examples of board resolutions approving various corporate actions (including entering into commercial contracts), see The Corporate Records Handbook.
The company should also determine whether or not any corporate governance documents or contracts require shareholder consent for significant commercial transactions. The company and its counsel should review the articles of incorporation (called a certificate of incorporation in some states), stockholders’ agreements (if any), and loan documents (if any), together with any outstanding promissory notes, options, warrants, or other relevant contracts, for any provisions that would mandate shareholder approval for these agreements. In such cases, the board could streamline the process by coordinating to have all information and materials relating to the proposed transaction presented to both the shareholders and the board concurrently; then, the board and the shareholders could simultaneously either vote for or against the transaction at the same regular or special meeting, or sign a joint written consent of the shareholders and the board in favor of the same.
]]>The nature and objectives of your business will determine the legal expertise that is most valuable to you. For example, if you own a technology company, then you might be satisfied with a corporate attorney or firm that specializes primarily in intellectual property rights and licensing, even if they have little expertise in other areas of corporate law. If you run a more generic manufacturing or service business, then you might merely need a contracts expert to assist you with client negotiations, drafting and finalizing agreements, maintaining proper corporate records, and so forth.
To better define your company’s legal objectives, you can ask yourself the following:
Clearly defining your company’s needs allows you to proceed with your attorney search in a more productive manner.
The best way to narrow your search for a lawyer is to share your company’s specific needs with a former or practicing lawyer, a trusted friend with experience hiring lawyers, or (ideally) someone who is both a lawyer and a friend. Competence, diligence, and trustworthiness are critical factors to consider when selecting legal counsel, and getting a referral from a reliable friend or attorney can maximize your chances of finding a lawyer with those qualities.
Ideally, you should get more than one attorney referral from your trusted source or sources. Unless your business is involved in a criminal or civil proceeding, your referrals will most likely not be litigation attorneys. While most people think of lawyers in the terms of what they see on TV (judges, juries, and courtroom drama), the fact is that courtroom litigators make up only a minority of all the different types of practicing attorneys. The best legal counsel to assist you in the day-to-day operations of your business, or with any specific business matter, will more likely be a transactional corporate attorney, who might not have any litigation experience at all.
Transactional lawyers have the business acumen to advise you in all aspects of business dealings, including forming your business, operating your business, developing a business plan, implementing business strategies, buying or selling a business, effectuating an initial public offering, winding down your business operations, and much more. Lawyers who specialize in mergers and acquisitions (M&A attorneys) can be particularly useful, even if there are no acquisitions contemplated in your company’s foreseeable future. This is because M&A attorneys must have a working knowledge of multiple business considerations, including accounting matters, corporate governance, intellectual property, real property, environmental matters, insurance, and tax. This allows them to readily identify the expertise that is needed for your particular situation and either address the issue themselves or recommend the right legal expert for you. That being said, you should have confidence that your trusted source will recommend one or more attorneys to best suit your particular needs.
You can try to find a lawyer by searching online but you need to be careful and do some of your own research when choosing this way. One thing to keep in mind is that business lawyers specialize in numerous subcategories of expertise, so you need to make sure you find one that is the right fit for your needs. There are some helpful online lawyer directories, like Nolo.com, where you can search for a lawyer by location and practice area.
After you’ve received attorney recommendations, you should then research each attorney and their law firms. The firm’s website should include the lawyer’s educational background, areas of expertise, years in practice, and any notable publications or transactions. More and more often, lawyers and law firms also have a social media presence that you can peruse, whether it be on LinkedIn, Facebook, Twitter, or the like. You can also review the website of an attorney’s relevant state bar association for additional information. The state bar website should verify that the attorney is currently licensed to practice law and indicate whether or not the attorney has any disciplinary history. Lastly, you can conduct a simple Google search of the attorney’s name to find out any other relevant details, whether positive or negative.
With each recommendation, you should set up an initial consultation so that you can share the full scope of your legal needs with your prospective counsel. If possible, you should conduct this first meeting in person, and the attorney should offer to do so at no charge (note that if you ultimately hire the attorney, you should review your first invoice to confirm that it does not include a charge for your initial consultation).
The introductory meeting should serve many purposes. You should fully explain your business goals and the role that you expect your attorney to fulfill. You should ask as many questions as necessary to determine whether the attorney exhibits the requisite competence and sincere enthusiasm to adequately address your business concerns. People often describe their business as their “baby” because it often feels like the company itself is an additional member of the family. You need a lawyer who will treat your business like a member of your immediate family. Furthermore, you should have a rapport with your attorney that allows you to talk to them not only as a friend and trusted confidant, but also as a customer who expects a premier level of service. Respect breeds respect — and results. You both should use the meeting as a way to manage expectations. From your perspective, you should be sincere and direct about your general management style and the amount of time and attention you’ll require from your counsel. Similarly, your candidate should give you as much detail as possible about how their attorney-client relationship typically works, how much they will be personally involved in the process, how much they might delegate to others, and so forth.
If you feel that your initial consultation with an attorney is going well, do not hesitate to bring up the topic of fees. This is a critical element that can either make or break a potential attorney-client relationship, and it’s best to lay the cards out on the table early. Attorneys and law firms can propose a variety of fees structures, with sole practitioners likely having the most leeway and creativity. Depending on your company’s needs, you can usually choose between a flat fee (either on a monthly basis or for a specific transaction) or an hourly fee. Note that litigators often agree to contingency fees whereby they risk working for free, but then earn a percentage of your civil award if your case is successful. However, this fee structure is generally inapplicable to transactional law representation. Also note that it is standard for attorneys to require a retainer prior to commencing any work for the company, so you should not take offense when the lawyer requests this. However, you can always take into consideration how aggressive the attorney is about the retainer, the amount of the retainer, and whether or not the attorney is willing to provide any initial services as a trial run prior to requiring any retainer.
At the end of the day, choosing the right attorney for your business is more of a feeling. If you have any apprehension about a particular candidate, then continue your search. This is why it is optimal to consider multiple recommendations from your trusted sources and then choose the legal counsel who is the best fit for you and your business.
]]>In certain circumstances, fiduciary duties may also apply to controlling stockholders who possess a majority interest in or exercise control over corporate business activities, but not to other ordinary shareholders. A breach of a fiduciary duty may result in personal legal liability for the director, officer, or controlling shareholder. State statutory law, judicial decisions, and corporate articles of incorporation and bylaws may also impact a person's fiduciary obligations to a corporation.
Here are the key fiduciary duties owed to a corporation and its stockholders.
The fiduciary duty of obedience recognizes that officers and directors have different responsibilities in a corporation. To fulfill this duty, officers and directors must carry out their duties within the scope of their delegated authority under the law and the applicable corporate governing documents.
This duty may be of particular concern for nonprofit corporations where officers and directors are tasked with carrying out their duties in compliance with their organization’s charitable purposes. For example, an office or director may violate their duty of obedience by failing to comply with donor restrictions on pledges or permitting nonprofit resources to be used for non-charitable purposes.
Officers and directors owe a duty of loyalty to a corporation and its shareholders. They are expected to put the welfare and best interests of the corporation above their own personal or other business interests. Conflicts of interest, efforts to compete with the corporation, or making secret profits from corporate business dealings are typical examples of disloyalty. Under the corporate opportunity doctrine, officers and directors may not secretly divert or take advantage of business options for their own personal profit.
For example, officers and directors may confidentially learn about a lucrative development opportunity being offered to their real estate corporation. Officers and directors must not secretly profit from this situation or act upon it in a manner that harms corporate interests. In some states, officers or directors may take advantage of certain opportunities if the corporation has waived its interest to such dealings in its governing documents or appropriate prior disclosures have been made to the board of directors. Violations of this duty may result in officers or directors being sued and required to turn over their secret profits to the corporation.
In a corporate environment, both officers and directors are expected to use appropriate care and diligence when acting on behalf of their corporation. They should exercise reasonable prudence in carrying out their duties to achieve the best interests of the corporation. An officer or director may be held personally liable for failing to exercise reasonable or ordinary care under the circumstances. For example, a lack of due care may be shown when an officer or director fails to undertake a reasonable review of a corporate matter, to regularly attend board meetings, or to adequately supervise staff which ends up damaging the corporation.
Under the business judgment rule, an officer or director may not held liable for business decisions made in good faith and with reasonable care that turn out to harm corporate interests. The courts will defer to erroneous business judgments, provided that the officers or directors did not show gross negligence in their review and decision-making process. Without this rule in place, many individuals would be unwilling to serve as officers and directors and business people might be reluctant to take commercial risks that could benefit a corporation in the long run.
This fiduciary duty is closely aligned with the duties of care, loyalty, and obedience. Under this duty, officers and directors must act with honesty, good faith, and fairness when handling corporate obligations. This continuing duty runs through their daily tasks and operation of the corporation.
Candor in business discussion is important between officers, directors, and shareholders so that they may assess material risks and make informed decisions. Full and fair disclosure of material facts is essential before seeking board or stockholder approval of major corporate business transactions, such as a mergers with or acquisitions of other companies. As part of their duties of loyalty and care, officers and directors should also disclose any potential conflict of interest that may arise between their individual interests and those of the corporation.
]]>If you’re already running your own small business, you know that there are constant challenges to your ongoing success. It’s easier to meet those challenges, and ensure your business continues to grow and thrive if you have solid information about basic business activities. From taxes, insurance, and contracts through financing, marketing, websites, and being the boss, here’s a list of 85 ideas to help you keep your business running smoothly.
Taxes and Bookkeeping |
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Step |
Description |
Resource |
1 |
Learn the rules for paying estimated taxes. |
|
2 |
Find out the details of federal employment taxes. |
Tax Savvy, by Frederick Daily |
3 |
Learn about the various federal tax deductions related to salaries and business expenses. |
Deduct It! Lower Your Small Business Taxes, by Stephen Fishman |
4 |
Familiarize yourself with the basics of business taxes for your legal form of business (Partnership, LLC, S Corporation). |
Tax Savvy, by Frederick Daily |
5 |
Get small business guides from the IRS. |
|
6 |
Learn about depreciation and Section 179 of the IRS Code. |
Deduct It! By Stephen Fishman |
7 |
Find out what to do if you owe money to the IRS. |
|
8 |
Familiarize yourself with the audit process. |
|
9 |
Consider hiring a bookkeeper or accountant if your business has grown big enough or you need someone else with the right expertise. |
Legal Guide for Starting & Running a Small Business, by Fred S. Steingold |
10 |
Know what financial records to keep--and for how long. |
How Long Should You Keep Business Records? |
11 |
Learn how to handle your taxes if you are operating at a loss. |
Tax Savvy, by Frederick Daily |
12 |
Become aware of the key tax issues for employers. |
The Employer's Legal Handbook, by Fred Steingold |
Insurance |
||
13 |
Find out about possible ways to save money on your business insurance. |
Obtaining Busness Insurance |
14 |
Know how to make a claim if you suffer a loss. |
Small Claims Court and Business Disputes |
Contracts and Leases |
||
15 |
Make sure your contracts are legally valid--and try to write them in plain English. |
|
16 |
Learn how to amend an existing contract. |
|
17 |
Get the best possible new lease when moving to a new location. |
Signing a Lease or Rental Agreement FAQ |
18 |
Avoid creating or signing unfair or illegal contracts. |
Unenforceable Contracts: What to Watch Out For |
19 |
Learn the basics of your state's business contract laws. |
Contracts, by Richard Stim |
20 |
Become more familiar with business-to-business contracts. |
Contracts, by Richard Stim |
21 |
Find out what you need to do when the time comes to sign a contract. |
Ten Tips for Making Solid Business Agreements and Contracts |
22 |
Investigate whether it’s better to buy or lease business equipment. |
Business Equipment: Buying vs. Leasing |
Loans, Financing, and Cashflow |
||
23 |
Learn about ways to cut costs if your business is short of cash. |
|
24 |
Find out how to increase your business's cash flow. |
|
25 |
Learn how to keep your cash in your business. |
|
26 |
Find out how to collect on your debts. |
|
27 |
Find out about alternative ways to borrow money. |
Alternative Ways to Borrow Money When Your Business Needs It |
28 |
Learn about ways to deal with bankrupt customers. |
|
29 |
Figure out if you should pursue a bankrupt customer. |
|
30 |
Know more about why you should pay your bills on time. |
Why Businesses Should Pay Their Bills on Time if at all Possible |
31 |
Lower your energy costs. |
|
32 |
Familiarize yourself with the rules for late fees and finance charges. |
|
33 |
Obtain financing from loans or equity. |
Raising Private Money: Gifts, Loans, and Equity Investments |
34 |
Look at various, less traditional sources for raising money. |
Alternative Ways to Borrow Money When Your Business Needs It; Peer-to-Peer Lending (P2P) for Small Businesses |
35 |
Make sure to document money you receive. |
Promissory Notes |
36 |
Know how to extend credit but still get paid. |
Invoicing Customers and Extending Credit |
37 |
Learn the laws about consumer credit. |
Consumer Credit Laws and Your Business |
38 |
Familiarize yourself with options for collecting what you're owed. |
Illegal Debt Collection Practices |
39 |
Learn about your state's debt collection laws. |
What to Expect When Your Debt Goes to Collection |
40 |
Be prudent about using credit cards and checks. |
Credit Repair, by Margaret Reiter |
Marketing and Working with Customers |
||
41 |
Draft an effective business plan. |
Write a Business Plan |
42 |
Find out how to increase customer recommendations. |
|
43 |
Be clear on your business's target market. |
|
44 |
Try to do some market research. |
|
45 |
Improve and grow your business image. |
|
46 |
Figure out the best marketing strategy for your particular business. |
|
47 |
Find ways to advertise through e-mail without sending out junk. |
|
48 |
Use your website to market you do and what you sell. |
|
49 |
Learn which types of list advertising are effective for your business. |
|
50 |
Create ads that stay within the law. |
|
51 |
Create a social media policy that really works. |
|
52 |
Show potential customers what's special about your business. |
Your Business Image: Ten Ways to Build and Market It |
53 |
Innovate by learning to produce--and copy--good ideas. |
|
54 |
Know how to target the right customers. |
Define a Target Market for Your Small Business |
55 |
Be creative in your marketing. |
Marketing Without Advertising, by Michael Phillips and Salli Rasberry |
56 |
Learn the legal ins and outs of warranties. |
Breach of Warranty Cases in Small Claims Court |
Selling Goods & Services |
||
57 |
Figure out the best way to sell your products -- retail, wholesale, or consignment. |
|
58 |
Understand the basics of consumer protection law. |
|
59 |
Understand the basics of consumer credit laws. |
|
60 |
Know the law on shipping products and giving refunds. |
|
61 |
Decide whether it’s better to lease or buy your business equipment. |
|
62 |
Learn when and how to invoice your customers, and whether to extend credit. |
|
Websites and eCommerce |
||
63 |
Learn about what terms and conditions should be posted on your website. |
|
64 |
Make sure to get proper permission when you use other people's work. |
Getting Permission to Publish: Ten Tips for Website Managers |
65 |
Familiarize yourself with search engine optimization and get more traffic to your site. |
|
66 |
Know who owns a website created by independent contractors. |
|
67 |
Learn the proper way to license and get paid for your creative work. |
Licensing Artwork: Negotiating and Monitoring Royalty Payments |
68 |
Familiarize yourself with the best ways to license your work. |
|
Legal Matters |
||
69 |
Find out how to handle business disputes and small claims cases. |
|
70 |
Learn about the mediation process. |
|
71 |
Know whether you need to hire a lawyer. |
|
72 |
Learn about your state's Small Claims Court rules. |
Everybody’s Guide to Small Claims Court, by Ralph Warner |
73 |
Find out how to change the legal form of your business. |
|
Having Employees and Being the Boss |
||
74 |
Find out the right way to advertise a job and handle interviews. |
The Job Description Handbook, by Margie Mader-Clark |
75 |
Create an effective employee handbook and know how to discipline employees for infractions. |
Create Your Own Employee Handbook, by Amy DelPo and Lisa Guerin |
76 |
Ensure you're meeting requirements for record-keeping and payroll withholding. |
The Manager’s Legal Handbook, by Lisa Guerin and Amy DelPo |
77 |
Decide on what kinds of employee benefits you want to offer. |
Employment Law: The Essential HR Desk Reference |
78 |
Be prepared for health and safety inspections. |
OSHA: Complying With Workplace Health and Safety Laws |
79 |
Understand illegal discrimination. |
The Manager's Legal Handbook |
80 |
Approach terminations the right way--avoid wrongful discharge lawsuits. |
Illegal Reasons for Firing Employees |
81 |
Understand employer recordkeeping requirements. |
The Manager's Legal Handbook, by Amy DelPo and Lisa Guerin |
82 |
Consider not showing off in front of your employees. |
|
83 |
Try not to overwork yourself. |
|
84 |
Work with, not against, the best competition. |
|
85 |
Respond quickly when bad things happen. |
The Manager's Legal Handbook, by Amy DelPo and Lisa Guerin |
More Information
Even 85 good ideas may not be enough for your particular business. Nolo has many great resources that can give you the additional information you need. Check out the following products and more on Nolo’s Small business Products page:
Legal Guide for Starting and Running a Small Business, by Fred S. Steingold
The Small Business Start-Up Kit: A Legal Guide, by Peri H. Pakroo
Tax Savvy for Small Business, by Frederick W. Daily
Running a Side Business: How to Create a Second Income. by Richard Stim and Lisa Guerin
Quicken Legal Business Pro (software)
And, if your business has employees, check out the Nolo article “If Your Small Business Has Employees: 40 Things to Know” — or get Nolo’s best-selling book for employers, The Employer's Legal Handbook: Manage Your Employees & Workplace Effectively, by Fred S. Steingold or The Manager’s Legal Handbook, by Lisa Guerin and Amy DelPo.
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