New York Small Business Law

Why your Personal Credit Score is Crucial for your Business

Find the answer in this recent article in the New York Enterprise Report:  "It's not Personal, it's Business."  The article also describes the differences between your personal credit and your business credit and why maintaining both in good standing is crucial.

**This post is for informational purposes only and does not constitute legal advice**

Business Entity Overview

CCH has a good overview over the business entities available to the business owner.  Be mindful, though, that choice of entity is influenced by your state laws.  For example, the overview states that corporations are usually cheaper to form than LLCs.  This is not true in New York.

Usual price tag for forming a limited liability company in New York (City): $1300, excluding legal fees.

Usual price tag for forming a business corporation (or s corporation) in New York: $195, excluding legal fees.

**This post is for informational purposes only and does not constitute legal advice**

Must Read for hungry Startup Entrepreneurs: How not to Hand out Equity

Learn how a young startup died an early unnecessary death due to a faulty capital structure in "A Fatal Paper Cut."

Great post, but IMHO, bad title.  Had I not found it through Ask The VC, I would have never read the post based on the title.

Don't sweat your B Plan

Don't think you are doomed to failure, if you neglect to craft the perfect business plan.  Apparently, appearance and credibility is more important than a business plan, as reported by this research report:

"The researchers also found that whether or not an entrepreneur had created a business plan for their start-up venture had no bearing on the success of that venture. Newberg speculates that perhaps investing a lot of time creating the perfect business plan document takes time away from executing the ideas described in the document. He also suggests that entrepreneurs may become too attached to their initial conceptions or misconceptions once they are formalized by inclusion a business plan. Because things change so rapidly for an emerging venture, it is important to be flexible, Newberg explained.

**This post is for informational purposes only and does not constitute legal advice**

Why Independent Contractors are Gold for Small Business

1.  Tax and Payroll Savings

Compared to employees, independent contractors save small businesses a lot of hassle, taxes, and paperwork.  A small business does not have to do payroll for independent contractors; it does not have to pay social security and Medicare taxes, unemployment taxes or provide workers compensation and disability insurance.  These taxes and insurances really add up, as well as the cost for preparing all necessary paperwork and complying with the tax and reporting requirements.

2.  Limited Liability Exposure

A small business may not automatically be responsible for damage caused by an independent contractor, whereas wrongdoing of an employee is often directly imputed to the small business employer, even if the employer had no fault in the wrongdoing of the employee.

In addition, many anti-discrimination and similar laws do not apply to independent contractors, only to employees.

So why would any small business ever hire an employee?  Very simple, the decision whether their "hired help" is an independent contractor or employee is not up to them.  There are numerous legal tests and court cases available to determine whether a worker is an independent contractor or employee.  Very, very generally speaking, the more control the small business has over the worker in terms of hours worked, equipment used, power to terminate, and other aspects of the working relationship, the more likely it is that a worker would be classified as an employee.

To make matters even more complicated, the various state and federal agencies and courts have different tests that may result in different classifications.  In other words, while the IRS may be o.k. with your worker's status as an independent contractor, New York courts may have a different opinion when having to decide whether a tort was committed by an independent contractor or an employee, i.e. whether the small business should be made liable for the tort without any wrongdoing of its own.

To learn more about the IRS' ideas about independent contractors/employees, look here.

Independent Contractors explained by the New York State Department of Labor.

**This post is for informational purposes only and does not constitute legal advice**

Startupping

Check out Startupping, the new

"one-of-a-kind community resource created for Internet entrepreneurs by Internet entrepreneurs. It is a place to share information, ask questions, and tap into the experience of others who have built and are building web businesses. Read blog posts about startup issues, participate in our discussion forums, and view our wiki resources, including sample term sheets and a glossary."

Does your Lawyer have a Blog?

Probably not.  Even though blogs, or blawgs (get it...?), seem to be more common nowadays, very few business lawyers have them.  In my area of practice I can only think of two other (small) business law blogs that really try to talk to the small business owner:  Rush Nigut's Rush on Business and Nina Yablok's BizBlawg (Nina: you should really try to post more often, every time you do, your posts are great).

Please let me know if you've come across any other small business law blogs.

All the best,

Imke Ratschko

P.s. I almost forgot the mother of all small business blogs:  BizzBangBuzz by Anthony Cerminaro

Do I need a Federal ID Number for My Sole Member LLC?

No, for federal income tax purposes a sole member LLC is normally considered a "disregarded entity."  Unless you hire employees, you can use your social security number for all purposes.

However, for security reasons, you may want to get Federal Tax Identification Number (also known as Employer Identification Number or Employer ID Number) in order to reduce the number of people who have access to your social security number.  In addition, it is a good idea to keep the LLC's business strictly separate from your personal affairs in order to protect the LLC's limited liability shield.  Having your SSN on all of your LLC's bank accounts and other documents could give the impression that your personal affairs and your business are not separate.

You can get your Federal Tax Identification Number and more information here.

How to save Taxes with an S Corporation

One of the main reasons for choosing an S corporation over a limited liability company is the possibility to save self-employment taxes.  Members of an LLC have to pay 15.3% self-employment tax on their share of the LLC's income (for the first $94,200).  Shareholders of an S corporation can split the S corporation's earnings into salary and distribution of dividends.  As a result, they only have to pay self-employment tax on the salary.  However, the IRS is on to them and has gotten more aggressive in demanding that you pay yourself a decent salary.  In other words, if you are a cosmetic surgeon in private practice, you won't get away with declaring 30,000 as salary and 500,000 as distribution of dividends.

Talk to your accountant to get his or her opinion on your tax situation.

Stephen L. Nelson, accountant in Redmond, Washington, explains better than I ever could how you could save taxes using an S Corporation.

Think of your Agreements as Marketing - Six Things to Avoid

Have you ever thought that the contracts you hand out to your customers are another part of your marketing strategy?  If not, think again.  Everything you present to your potential customers (i.e. market) is marketing.  Here are six things that can damage your otherwise perfect marketing script:

1.  Agreements that are too long.  Almost every agreement can be shortened.  ("Unless you are going to pay me to read your never ending agreement, I am not going to hire you"). 

2.  Agreements that are full of "fine print."  Use a decent sized type font. 

3.  Agreements that are disorganized.  Price in the beginning, payment terms in the middle and payment due dates at the end of the agreement is confusing, results in missing or duplicative terms and leaves your customers irritated and suspicious ("don't make me think").

4.  Agreements that are full of legalese or have sentences like this one:

The parties hereby and herewith agree that any and all, heretofore and hereinafter existing, documents, including but not limited to, papers, letters, briefs, postcards, white sheets made out of trees, received by one party, its subsidiaries, affiliates, partners, agents or secretaries shall be forwarded to the other party by certified mail, return receipt requested, double stamped, blessed and notarized.

I made this up, but you get the picture.  Nobody likes it, it is rarely necessary, so get rid of it.

5.  Agreements that have a rude and suspicious tone to them.  Granted, you are trying to prevent disputes and cement rights and obligations.  Still, an agreement can be phrased so that it doesn't sound like the other party is already guilty of having breached all of the terms under the sun.  In other words, if you already have a right under the law to sue for damages if your customer breaks your equipment or whatever, why state it again in your agreement.  It will irritate the customer.

6. Agreements that look like you bought them for $9.95 at AgreementsOnline.com.  In other words, your agreements should tell your story.  The story of your particular deal with your business partner.  The drafter of the $9.95 version has never heard of you, your business or your deal.