February 13, 2018

Independent Contractor or Employee? (Or, am I like an Uber driver?)

INDEPENDENT CONTRACTOR OR EMPLOYEE?
            Are you an independent contractor or an employee? How do you find out and why does it matter anyway?
"Independent contractor" and "employee" are not just insignificant names or labels in Maryland. This distinction is legally important and just calling someone by one name or the other,or reporting earnings on a Form 1099 instead of a Form W-2, does not make them what they are called. The specifics of the work must be looked at. A  multi-pronged test is used under both Maryland and federal law to determine whether you are an independent contractor or an employee. These terms are explained in a complex web of Maryland and federal case law, statutes, and regulations. This article does not answer specific questions, but gives a general guideline of the factors applied in determining whether you are legally deemed to be an independent contractor or an employee. Some of these factors are: control, hours, work location, pay schedules, expense reimbursement, tools and materials, training, continuing relationship, reporting, benefits, supervision, level of flexibility, and hiring and firing.
In general, an independent contractor is likely to have more control over his or her work and more flexibility to work when and where he or she likes, with less supervision and accountability on the daily steps of the work involved. Often, an independent contractor can schedule their own hours, may work offsite, and may not have a typical boss or supervisor. An independent contractor is responsible for getting the specified work done in the manner that they choose. This, however, does not mean that they lack accountability. An independent contractor still has a specified job to do and a deadline by which to have it done. Independent contractors may be paid hourly or per project. They typically do not receive benefits such as health insurance, disability insurance, unemployment insurance, sick leave, or vacation pay.
In contrast, an employee, in general, has much less control and flexibility. Typically,an employee has a boss or supervisor, specified hours, and parameters set by an employer on how and when work should be done, to the employer's standards.  While many employees work in an office, some tele-commute or work remotely, but are still under the control of the employer. Employees may be entitled to receive benefits including health insurance, life insurance, disability insurance, unemployment insurance, pension or profit sharing, and sick and vacation leave.
So why does it matter whether you are an employee or independent contractor? First, employees are protected by a variety of wage and anti-discrimination laws that do not necessarily apply to independent contractors. Another ramification of the classification as an independent contractor or employee is that an employer is required to withhold certain federal and state taxes, such as Social Security or "FICA" taxes, worker's compensation and unemployment taxes, and other payroll taxes, from an employee's paycheck. An independent contractor, however, does not have these taxes withheld and instead must file and pay quarterly tax returns and pay estimated tax with Maryland and the Internal Revenue Service. If an employer improperly classifies a worker as an independent contractor when the person is actually an employee, the employer can be liable for back withholding taxes and even fines and penalties.
An overall summary of these issues can be found on the Maryland Department of Labor, Licensing and Regulation website at:
and at the Maryland Workers' Compensation Commission website at:
                For federal tax status, the IRS has published helpful information on the factors taken into consideration by the federal government in evaluating whether one is deemed to be an independent contractor or employee:

                                                               The Uber Case     
           In addition to many of the challenges faced by Uber worldwide, a recent hot issue has arisen in the US as to whether Uber drivers are employees or independent contractors. State courts have come to different conclusions. Maryland has not considered this issue in the Uber context, but it stands to reason that this issue is one with nationwide appeal. 
           Recently, a California Labor Commissioner decided that Uber's classification of its taxi drivers as independent contractors is wrong. In 2014 an Uber driver in California named Barbara Ann Berwick filed a wage complaint in California, seeking reimbursement for business expenses -- gas and bridge tolls. Some other states considering this same issue found that people working for Uber were, in fact, independent contractors. In the California case, Uber refused to reimburse these expenses arguing that Berwick was an independent contractor, not an employee entitled to such reimbursement. 
           The California Labor Commissioner awarded Berwick these expenses, finding that Ms. Berwick was an employee under a detailed "economic realities" test under California law. The Commissioner noted that Uber provided iPhones to its drivers, monitored and required certain ratings for all drivers, and had sole discretion to set and negotiate the prices customers would pay. The Commissioner also found that Berwick's job did not require a special skill. In addition, in weighing these factors, the Commissioner found that Uber had a large degree of control over its drivers, thus making them employees, with the full protections to which employees are entitled. 
          While Maryland is not bound by a California decision, it can be persuasive. The Uber issue is a prime example of the varied factors and interpretations used in determining whether one is an independent contractor or employee.

What Should a Maryland Employer or Employee Do?
When accepting a position or hiring, it is critical to keep in mind that whether you call someone an independent contractor or an employee has significant ramifications. Simply calling a person an independent contractor will not legally make it so. Misclassifications can cause independent contractors to miss out on key employment benefits and protections and can result in penalties for an employer, including payment of back taxes, fines, and other penalties.
For people working in the construction, home improvement, and landscaping areas, Maryland law provides some protection against misclassification by employers. The Maryland Workplace Fraud Act of 2009, which was amended in 2012, sets requirements for the classification of a person as an independent contractor or an employee. This was enacted because too many people in these jobs were automatically told they were independent contractors, when they might have legally been employees entitled to employment law protections and benefits.
Because the classification of a worker as an independent contractor or employee requires a careful analysis of many factors, it is wise to obtain legal counsel and speak to an accountant when you are unclear on this important issue.

January 30, 2018

FRANCHISE LAW IN MARYLAND

                Franchise law is complicated. According to the Maryland Attorney General, Maryland is one of about 15 states that requires "registration" of franchise offerings.
                  
                What is a franchise?  Maryland Annotated Business Regulation Code,  Section 14-201 defines it as follows:
        
                (1) "Franchise" means an expressed or implied, oral or written agreement in which:

                (i) a purchaser is granted the right to engage in the business of offering, selling, or distributing   goods or services under a marketing plan or system prescribed in substantial part by the franchisor;

                (ii) the operation of the business under the marketing plan or system is associated          substantially with the trademark, service mark, trade name, logotype, advertising, or
                other commercial symbol that designates the franchisor or its affiliate; and

                (iii) the purchaser must pay, directly or indirectly, a franchise fee.

                (2) "Franchise" includes an area franchise.

                "Franchisor" means the person offering to sell a franchise. The term "franchisee" means the person buying a franchise.

                There are many laws and regulations in effect to require fair dealing and full disclosure regarding proposed franchise sales and purchases. In addition to the laws governing franchises set forth above, there are many regulations that you must comply with under Maryland's Code of Regulations ("COMAR"). Currently, these regulations are set forth in over 116 pages and can be found at  http://www.oag.state.md.us/securities/SecuritiesAct.pdf.  For more information, see the following links from the Maryland Attorney General's Office:
Information on Renewing and Amending a Franchise Registration

                 A Franchisor also has to comply with Federal laws and regulations of the Federal Trade Commission.

                As if selling or buying a franchise isn't complicated enough, there are many potential issues that can come up  including: registration, renewal, advertising, civil enforcement, criminal penalties, record keeping, liability and releases, false or misleading prospective information or statements, material changes and notice requirements, registration, escrow requirements, disclosure forms, and other financial and legal issues.

                Given the complexity of franchise law, it's wise to hire a knowledgeable attorney to assist you, whether you plan on buying or selling a franchise.

January 16, 2018

Do I Owe Self-Employment Tax?

                If you are "self employed" you must pay "self employment taxes." According to the IRS, you are self employed if you are a sole proprietor, independent contractor, member of a partnership, or are otherwise in business for yourself, including part-time businesses. 

                The term "self employment tax" or "SE tax" is somewhat a misnomer, as there are not taxes, per se, that are called self employment taxes. The term instead refers to certain taxes that are generally paid by a combination of an employer and an employee. If an employee is employed by an employer, the employer and employee are each liable to pay half of Social Security and Medicare taxes which are based on the amount of wages paid to the employee.The current rates for SE taxes (Social Security and Medicare) are: "6.2% each for the employee and employer, unchanged from 2015. The social security wage base limit is $118,500, unchanged from 2015.The Medicare tax rate is 1.45% each for the employee and employer, unchanged from 2015. 

                If you are self employed, you are required to pay both the employer and employee share of SE taxes.  Thus, self employed individuals must pay a combined total of 15.3% of net income for these taxes (on income up to the limit).  And, since there is not an employer that is paying wages in a paycheck subject to tax withholding, you are required to pay estimated quarterly taxes.  These taxes are owed on the net profit from business income. In order to determine any net profit you subtract qualified businesses expenses and deductions from your gross income to get the net profit. If you have a net loss of income, you will not owe taxes.

               Because tax laws are complicated and changing, it's wise to seek advice from a business attorney and an accountant with expertise in areas affecting self employed individuals. As an overview, the IRS Small Business/Self Employed website has helpful information and tax document links, found here: https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Publications-and-Forms-for-the-Self-Employed
               




January 9, 2018

Do I Need a Lawyer for a Contract Review?

The contract might seem incredibly simple. You found a great form online, you’ve gone over the details several times and it looks like you might be able to come to a final agreement. Good intentions have been expressed on both sides. However, as the saying goes, “business is business.”
You might be dealing with a family member or a friend you’ve known for years, but that’s not enough to guarantee peace of mind. There could be legal ramifications if you choose to draft your contract without the assistance of a lawyer. In fact, doing it without a lawyer could lead to problems down the line.

You might choose to go with a verbal contract. They are allowed, but can be difficult to enforce in court. If it’s on paper, you have something on record, and that’s the key if a dispute ever arises. It’s also strongly recommended that you have a lawyer review your contract. Although you’ll find plenty DIY (do-it-yourself) opportunities, your best course is to seek the help of a Maryland business lawyer who can help you craft the right contract for your needs.

Here are some basics to consider when putting your contract together.

Have a Plan
In most cases, it’s fine to create an outline of what you’d like your contract to be. Whatever specifics you want in the contract should be included.  You will need to ensure that all terms are put the contract, even those seemingly innocent verbal agreements. Additionally, if your business partner resides in a different state, it’s a good idea to decide which state’s law will apply to the contract (you’ll have to choose which state). Leave nothing to chance. Have your attorney work with you to create a plan that works best for you.

When Things Don’t Work Out
Nothing’s ever perfect and even the best plans can be waylaid. That’s where a detailed contract can come into play. It gives you insurance against a worst-case scenario if your business venture doesn’t work out. The contract can spell out exactly the way you’d prefer to resolve any differences, whether it’s through mediation or arbitration. Your dispute doesn’t have to always be solved in court.

Protect Your Intellectual Property
When it comes to creative ventures, as much as you’d like to ignore the business aspect, the reality is that a well drafted contract will save you a headache (and legal fees down the road). If you’re engaged in a publishing business, whether you’re writing the next great novel or inventing a new technology, you need to take protecting your intellectual property very seriously. Even if the contract seems straightforward, you should always have an attorney review the document.
  
It’s About Your Best Interests
No matter how you decide to move forward with your business venture, having a contract is the first step to protect you and cover your bases if something goes wrong. More importantly, a contract is essential to keep your best interests covered, and a skilled Maryland business attorney can deliver the content (and protection) that you need. A contract review attorney can help steer you in the right direction, so everyone involved can rest easy and feel confident.  

Katherine Taylor is an experienced Maryland business attorney who has reviewed, drafted and litigated hundreds of contracts. Go to www.taylorlegal.com for more information. 

December 19, 2017

How Do I Sell My Small Business?

            You own a small business. It may have been a good experience or a headache but for whatever reason, you've decided to sell it. You've never done this before and aren't sure what's involved.

            The first thing is to carefully analyze your business from every angle. Get all of your business documents organized. These could include financial records, profit and loss statements, accounts receivables, tax returns, transferable leases, contracts and agreements, pending orders, furniture and equipment lists, warranties, covenants not to compete, and consulting or management agreements, among many other possible things particular to your business. If the business operates as an LLC, make sure you have your articles of organization and any operating agreement available. If the business operates as a corporation, make sure all of your governing documents are in one place and up to date.

            Before you attempt to sell your small business you want to have a clear handle on what you are selling and be able to present it accurately and to your best advantage. Doing the above organization will help you ensure that you have covered each aspect of your business.

            Early on, you will need to decide whether you will be selling the assets of the business or whether you will be selling the ownership interests (LLC interests or corporation stock). You should consult with a tax professional at this point because the type of sale can affect your tax situation. This can be tricky. Since there are tax ramifications in the sale of a business, you not only want to be sure that you sell your business for the right price, you also want to know what, if any, tax liability you will have after the sale closes.

            Next you want to be sure that you have accurately valued your business and/or the assets of the business. You will likely need to hire a business appraiser. Often a broker is hired to help in this process. A broker will be able to develop a marketing plan and sales strategy.  You will want to be sure you have research supporting the value of your business and your sales price, with supporting information tailored to your type of business and location. 

            It is likely that the sale of your business will be more complicated than you think. You should have a purchase agreement or letter of intent for the proposed purchaser. With this is hand, you know you have a prospective buyer but you are not done yet. You need to do your "due diligence,' meaning to check the finances and representations of the prospective buyer to see if you wish to move forward with this buyer. If not, the whole process starts again.

            Once you have found a buyer that meets your criteria, you will want to have a detailed contract for the sale of your business drawn up. This is a critical document with all the important terms and details of sale. Therefore, it is very important that it is accurate, complete, and covers all areas. Not doing so can invite costly litigation or disputes after the closing. It's wise to have an attorney draft the contract. You'll want an attorney you are comfortable dealing with to do this, and one who understands your business and objectives in the sale.

            If you sell the ownership of the LLC or corporation, after the sale the entity will continue under new ownership and you, as the former owner, can enjoy the fruits of your years of labor. If, however, you sold only the underlying asset of the business, then after the sale of assets you will continue to own the entity. A knowledgeable business attorney can also help you file necessary legal documents to dissolve your business. For example, if you own a corporation, it you may need to file articles of dissolution. This is an important step to ensure that there is no lingering liability or obligation for you as owner.
           

            

December 12, 2017

WHAT IS AN S CORPORATION?

             Exactly what is an S corporation and what types of businesses may be interested in being an S Corp?  First, it is very important to understand that an S Corp is a FEDERAL TAX STATUS of a corporation and not a type of entity. What does this mean? This means that when you form a corporation in Maryland (or any other state), you do not form an S Corp per se. In Maryland, you will form a regular corporation and then file an S Corp election with the IRS. (The Articles of Incorporation and/or the Organizational Meeting minutes will state that the corporation's owners will elect S Corp status.)

             So, why would my corporation choose to be an S Corp? Under IRS regulations, because a corporation is a separate legal entity, it must usually file a tax return and pay taxes on its taxable income. However, the IRS regulations allow certain small businesses to be treated for tax purposes as if they were being run by the owners themselves without a separate entity. Under Subchapter S of the IRS regulations (this subchapter is where the name "S Corp" comes from), a corporation can elect to have the IRS disregard the corporation as a separate taxable entity and allow the taxable income or losses of the business to be reported on ("flow to" or "pass through" to) the owner of the business in proportion to their ownership shares. This prevents "double taxation" of corporate income because the income is taxed only at the owner level rather than at the corporate level as income and then again at the owner level as dividends.

            Aside from the avoidance of double taxation, an S corporation offers flexibility regarding
how earnings are paid to its owners, whether they are paid as salaries (subject to FICA and other taxes) or as distributions, not subject to these taxes. An S corporation must file a tax return but the
shareholders, not the S corporation,  pay taxes on profits on their individual tax returns. 

            The I.R.S. has very specific criteria that must be met before an S corporation election is
approved. To be eligible a corporation must:

            1. timely file Federal Form 2553;

            2. have no more than 100 shareholders, who meet the specified I.R.S. definition of "shareholder;"

            3.  have no nonresident alien shareholders; and

            4.  have only one class of stock.

            5.  and not be an "ineligible corporation" under the I.R.S. Code.

            The following links provide more information on the required form and criteria in order
to be a qualified S corporation: https://www.irs.gov/pub/irs-pdf/f2553.pdf.

            Before attempting to file these forms, however, you first must incorporate in
Maryland and file the required documents with Maryland's State Department of Assessment
and Taxation ("SDAT"),  found at http://dat.maryland.gov/businesses/Pages/Maryland-Checklist-for-New-Businesses.aspx.  Maryland requires that any corporation provide the following information: name of corporation, purpose for which the corporation is formed, the addresses of the principal place of business and resident agent, the issuance of stock shares and the par value, the number of directors pursuant to the bylaws (which  can be increased or decreased), and the name of the directors and successors who shall act until the first meeting or until their successors are chosen.

            Once the corporation is filed, the next step is to file an I.R.S. Form 2553 to elect S
corporation status.  After both of these steps, if all criteria has been met, an S corporation is
valid.

            Once the S corporation is formed there are legal requirements going forward. The most important requirements relate to the number of shareholders and the type of person or entity that can be a shareholder. S Corps are also limited to certain classes of stock they can issue. For this and other reasons, many tech startups planning to look to venture capital investment should not elect S Corp status. 
  
            Since there are many considerations in evaluating what type of business entity is best for
your  business, and once you decide that, how to go about meeting the requirements for both
setting up and then maintaining your business, an attorney can be one of you most valuable assets.

December 5, 2017

DO YOU WANT TO FORM A MARYLAND SMALL BUSINESS?

            Are you considering starting a small business in Maryland? If so, it is important that you select the right type of entity and comply with Maryland requirements. A Maryland business attorney and accountant can be helpful in guiding you through the necessary steps. As a broad overview, take note of the following tips.

            1. What type of entity should my business be?  This depends on many factors.
Maryland recognizes the following business entities: sole proprietorship, general partnership,
corporation and limited liability corporation. Sole proprietorships and general partnerships do
not require the formation of an entity. Instead, Maryland simply requires registering such
businesses with the State Department of Assessments and Taxation and paying personal property
assessments.  In contrast, corporations and limited liability corporations must be properly
registered business entities with the State Department of Assessments and Taxation. Regardless
of the type of entity, certain businesses in Maryland also require a business license.

            2. Do I need a Business Name? The name of your business can be critical.  You want a
name that suits your business and can be used effectively in marketing. However, for a
corporation, you must ensure that the name you select is available in Maryland and then file
required forms with the State Department of Assessments and Taxation.  If you have a trade
name or trademark, you should also considering registering them. Trade names can be registered
with the Maryland Department of Assessments and Taxation. Trademarks can be registered with
the U.S. Trademark Office. An experienced Maryland business attorney can assist with this.

            3. How are taxes paid? All businesses must pay Federal and Maryland taxes. New
businesses should obtain an "EIN," or taxpayer information number from the IRS. This is needed
for withholding and tax payments. Your new business should also obtain a Maryland Combined
Registration Number from the Maryland DLLR if the business will have employees.

            4.  Are there zoning considerations? Where you locate your business is
another key consideration. You must comply with local zoning laws to be sure that your business
can be located in the area you select. If you plan to run your business from home, you must be
sure that there are no zoning restrictions for home-based business.

            5. Do the founders need an agreement in writing?  Absolutely yes! If there is more than one founder, you must have an agreement - called an operating agreement for an LLC and a shareholders' agreement for a corporation. This is something that many founders forego, but not having a well drafted agreement can cost many headaches, a lot of money and even spur lawsuits later on. 

            These are some initial things to consider when planning a new business.  This list, however, is not exhaustive. There are many considerations. Selecting the right entity and carefully following Maryland's requirements can make a big difference and get your business off to a strong start.

Katherine Taylor is an experienced Maryland small business attorney who has drafted hundreds of operating and shareholder agreements. Go to www.taylorlegal.com for more information.