Archive for the ‘Small Business’ Category

While it’s an article of faith for most lawyers, we are not fans of billing our clients by the hour.  We come right out and say it on our firm website: billing by the hour makes clients worried about calling their lawyer and makes lawyers less efficient.  Since that is not the kind of relationship we want with our clients, we avoid billing by the hour wherever we can.

Now it’s easy, and fun, to bash lawyers.  But, what about all the other businesses that charge by the hour?  What about web designers and freelance engineers, or business consultants?  Does the same reasoning apply to non-lawyers?  “6 Reasons to Stop Charging by the Hour,”  an article in yesterday’s Small Business Trends, strongly argues that hourly billing is a bad practice that all businesses should curtail or eliminate.

Some of the author’s reasons match ours: hourly billing erodes the lines of communication and rewards inefficiency.  But there were a few other reasons we didn’t touch on:

1. It Limits Your Income Potential: If you bill by the hour, your income will never be greater than the number of hours in the day (unless you raise your rates, which comes with its own backlash).

2. It Creates a Negative Cash Flow Cycle: You have to work the hours before you can send a bill, meaning it could be months between the time you perform the work and time you get paid.

3. It Adversely Affects Your Business’ Valuation: Since an hourly billing business’ profits are nothing more than the hours worked by its employees, the business itself has no predictable future profits.  The employees, not the business, have future value.  This makes sales, mergers and financing transactions more difficult.

To be fair, there are plenty of folks out there who are hourly billing adherents.  We just don’t think their arguments make much sense.  What do you think?


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The Rhode Island government has created an online information clearinghouse for all the assistance programs available for those who suffered from our recent historic flooding.  Rhode Island Flood Recovery contains resources for both individuals and businesses who sustained damage.  It includes links to assistance provided by or through the Federal Emergency Management Agency.

If you, your loved ones or your business were affected, we hope that you can find comfort in the fact that you don’t need to face the aftermath alone.

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Back in January, we wrote a piece called “Detecting and Preventing Fraud.” In it, we warned of the special vulnerabilities of small businesses to fraud (especially employee fraud), the extensive damage fraud can cause and gave some tips about how to prevent it.  We think it’s a subject worth covering again, and so we’re happy to point you to a new post from the New York Business Law Blog titled “4 Ways to Protect Your Small Business From Fraud.”

We know it’s tax season and you’ve probably had enough quality time with your accountant to last you for a while – we’re quite certain our accountant has had more than enough of us.  But, as we wrote back in January and the linked article supports, having your accountant perform both regular and random audits can prevent a fraud and serve to save you a pile of time, money and grief in the long run.  The article also recommends establishing an anonymous reporting system, since most fraud is uncovered by fellow employees, and employees are more likely to report anonymously.

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Earlier today, Secretary of State Mollis issued a statement reminding Rhode Island corporations to file their annual report with the Secretary of State’s office on or before March 31.  The reports technically are due March 1, but the law allows a 30 day grace period for filing.  Failure to file before March 31 subjects the corporation to a $25.00 fine for late filing (the fee to file the report on time is $50.00).  If the corporation fails to file a report at all, the Secretary may revoke the corporation’s Certificate of Organization or Certificate of Authority.  The annual report may be filed online, by mail or in person at the Secretary’s offices at 148 West River Street in Providence.

Next week’s deadline applies only to for-profit corporations.  Other business entities file at different times.  Non-profit corporations must file annual reports in June, and limited liability companies (LLC’s) must file between September 1 and November 1.

For those who do not wish to file online, a blank annual report form is available on the Secretary’s website.  The website also contains a “Top 10” list of the most common reasons why reports are rejected by the system.  As always, if you have any questions about preparing or filing the report, feel free to contact us.

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Finally, the debate is over and Congress passed a health insurance reform bill.  Whether or not the Senate passes the companion reconciliation bill passed by the House of Representatives, insurance reform is now the law.  There are plenty of folks willing to tell you why the new law is the best thing since sliced bread or the worst thing since nails on chalkboard (a USA Today columnist took both sides and said that while the reform bill “stinks,” the status quo “stinks worse”), but that’s not why we’re here.  We want to talk to you about what the bill means – and does not mean – for small business owners.

First off, small business owners do not have to buy insurance for their employees.  If your small business has fewer than fifty employees, there is no obligation or penalty for failing to provide insurance.  If a small business has more than fifty employees, then there is a penalty per employee, per year (depending on what the Senate does, the penalty will be either $750 or $2,000).  But, while that number sounds scary – it is a bit misleading – more than 95% of all small businesses have fewer than fifty employees and more than 97% of businesses with more than fifty employees already offer coverage to their employees.  So, this fee will hit a tiny fraction of small businesses (We couldn’t find any hard numbers showing Rhode Island employers that might fit into this classification).  And, the businesses it does hit will be able to exclude their first thirty employees from the penalty calculation.

So, small businesses are not required to buy coverage, but the bill provides subsidies for those who choose to do so.  Small businesses are eligible for tax credits of 35% of their employees’ premiums this year, expanding to 50% over the next two years.  After that, beginning in 2014, small businesses will be able to buy coverage on state exchanges, where small businesses will be able to pool together to use their combined purchasing power to get rates more in line with those paid by big businesses.

There is a lot of information – and, sadly, a lot of misinformation – out there about the bill and its effects.  In addition to the pieces linked above, Small Business Majority wrote a good summary that is worth your time.  As always, if you have any questions, feel free to contact us.

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Following up on our earlier post about classifying workers as employees or independent contractors, various media outlets are reporting on a major government initiative to crack down on employees that wrongly characterize their employees as independent contractors.  According to a New York Times story, this year’s proposed budget contains a major investment for the I.R.S. and the Labor Department to enhance investigation and compliance procedures.  The budget anticipates a $7 billion windfall from the effort.

The article goes on to note that some states already have begun their own enforcement procedures (in addition to, not in place of, federal efforts).  California authorities won $13 million last year from a company that misclassified janitors, and is now seeking more than $4 million from a construction company.  The Illinois Labor Department fined a home improvement company more than $300,000.   The article notes that a Harvard study found that 4.5% of all workers in Massachusetts were misclassified, and a Cornell study found that 10% of New York workers were misclassified.

As we stated earlier and these reports make clear, the government is serious about this issue and can secure astronomical penalties against employers.  Be sure to protect yourself and classify your employees properly.

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In an earlier post about IRS wage reporting requirements, we talked about the different requirements for your business’ employees and/or independent contractors.  In that post, we promised that we’d explore the differences between the two classifications.  Today, we’re making good on our word.

Your business may hire both employees and independent contractors.  You pay both classifications of workers and, in turn, both classifications provide you with labor.  So, who cares what you call them?  Well, your Uncle Sam cares.  For your employees, you almost always have to withhold income, Social Security and Medicare taxes, not to mention paying unemployment benefits.  For independent contractors, you don’t have to withhold any of those taxes.

So, why not just call everyone an independent contractor and forget about all the payroll headaches associated with withholding?  There are, of course, serious penalties for incorrect classifications.  If you classify a worker as an independent contractor and the IRS determines that the worker should have been classified as an employee, you will have to pay the government all of the taxes you should have withheld and, as a kicker, you have no right to recover those costs from the worker – effectively meaning you would have paid that worker’s taxes twice.  And that’s just if you make a mistake – if the IRS determines that you intentionally misclassified the worker, you will owe the government double what you should have paid (and you still can’t collect anything back from the worker, meaning you will have paid that worker’s tax liability three times).

Now that you know you don’t want to classify a worker incorrectly, either innocently or on purpose, how are you tell the difference?  Sadly, this is the hard part.  In 2001, the Rhode Island Supreme Court said: “the test as to whether a person is an independent contractor is based on the employer’s right or power to exercise control over the method and means of performing the work.”  If that sounds fuzzy to you, that’s because it is.  There is no hard and fast rule, except that your preferred label does not matter – just because you and a worker sign an independent contractor agreement does not make that worker an independent contractor.

What matters is how the relationship works in practice.  The IRS published an article with some helpful guidelines.  Three aspects of the employer’s “control” are examined:

  1. Behavioral control:  Does the employer instruct the worker to perform the work in a particular place or at a particular time?  Does the employer dictate the sequence of work?  Does the employer evaluate the worker based on the work process or just the result?  Does the employer provide training?
  2. Financial control: Does the employer or the worker pay for the worker’s business expenses?  Is the worker free to market services to other potential employers?
  3. Relationship control: Is the worker expected to perform a discrete task or to perform tasks as needed?  Is the worker expected to work for a specific period of time, or is the hiring open-ended?  Is the worker entitled to receive benefits from the employer?

This is not an exhaustive list of factors, and no one factor is determinative of the outcome.  To classify workers correctly, it’s important for businesses to assess the entire working relationship in light of the concept of control.  The more control the employer exerts over the worker, the more likely it is that the worker will be considered an employee, subject to withholding.

To the extent you’re still not sure (and who could blame you), you can file IRS Form SS-8 to seek a binding determination from the government, or seek the advice of an attorney.

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