Has your “small” business suddenly gotten huge? While that’s great news, the hard truth is that with business growth comes increased potential for liability. Want to know some common pitfalls? Here goes.
Pitfall (1): To LLC or Not to LLC: Sole Proprietorship or Partnership
If the kind of business entity you’ve formed is a “Sole Proprietorship” or “Partnership,” then creditors and parties you’ve injured can potentially reach beyond your business assets to your personal assets. For example, if your plumbing business is a partnership and you accidentally cause damage to a client’s house doing a plumbing fix, that client can seek to reach your personal assets like your personal bank account and residence.
Pitfall (2): Inconsistent Titling of Vehicles or Real Property
Even if your business is organized as an “LLC” or other type of corporate entity, if your vehicles and real property are not titled under your company’s name, then like pitfall (1), creditors and parties you’ve injured can potentially reach beyond your business assets to your personal assets. For example, if you hit someone in your “company vehicle” but that vehicle is titled to you as an individual, that injured party could potentially reach your personal assets. Likewise, if your business is located in a building that is titled under your personal name, a person who is seriously injured on the premises may be able to reach your personal assets.
Pitfall (3): “Independent Contractor” vs. “Employee”
The idea of avoiding payroll taxes, group health plans and workers’ compensation insurance are just a few of the reasons many small business employers like the concept of calling people that work for them “independent contractors” versus “employees.” The first thing you should know if this sounds like your business is that titles don’t matter. In other words, just because you call a worker an independent contractor doesn’t mean they are one under the Federal and state Department of Labor standards. It all comes down to how much you are controlling their work, among other factors. The liability you’re exposed to for mis-characterization? Back taxes, instatement of employee benefits (potentially including payment of overtime), and more.
Pitfall (4): Unwittingly Illegal Pay Structures
Many small business owners get a lot of free advice from well-meaning people. But it isn’t always good advice, and in many cases following bad advice opens small businesses up to huge liability that stretches back years. For example, an accountant tells a small business owner that his delivery drivers, whose weekly work hours fluctuate (sometimes they work 40, sometimes they work 50), don’t need to be paid at the federal overtime rate of time-and-a-half. While there’s a degree of truth to this statement, the Fair Labor Standards Act (a federal law) requires employers to make specific calculations on a weekly basis and much more in order for the exception to the overtime requirement to be proper. The potential liability for doing this incorrectly? Two years of overtime owed, doubled. (Three years if the court finds the employer did it “willfully.”)
Let MHC Law help your small business avoid these pitfalls through our “Business Wellness Check.” For an affordable flat fee, we’ll review:
1. Your insurance policies
2. Titles of all personal and real property
3. Employment contracts
4. Employee manuals
5. Employee classifications (independent contractor v. employee, exempt v. non-exempt)
6. Corporate formalities and procedures
7. Contracts related to services provided