Business Insurance

Although having a limited liability entity such as a corporation or LLC will help to protect your personal assets in the event of significant liabilities to your business, you also don’t want the business you may have spend significant amounts of money and time building to be wiped out by those liabilities as well. This is where business insurance comes in. What you may not realize is that there are many types of business insurance that cover different liabilities:

– Workers’ compensation: You may be familiar with workers’ compensation, which covers medical/rehab costs and lost wages for employees injured on the job. If you have employees, you are required by state law to carry workers’ compensation insurance. Workers’ compensation insurance can cover different forms of liability: first, it obviously covers medical bills and lost wages for employees who suffer injuries on the job; second, it can cover liability to an employee’s family in the event of an employee’s permanent total disability or death due to workplace injuries; third, workers’ compensation can optionally cover liability due to employment practices, such as harassment or discrimination.

– General liability: As the name suggests, general liability insurance covers the general liabilities that covers the basic liabilities that businesses can incur, such as if customer slips in the bathroom of your restaurant, or some of the widgets you manufacture turn out to be defective. However, general liability insurance policies also have lots of exclusions, so you will want to read any policy carefully to ensure that a potential liability that may be more likely for your business is not excluded.

– Auto and property: If your business owns vehicles, or owns or leases property, you may want to obtain auto or property insurance. With respect to auto insurance, your state may have laws setting the minimum policy limits you may have; if you don’t have enough coverage, you may be subject to penalties or attachment of corporate income. Also pay attention to the specific perils that are covered in property insurance — if the location of your property is subject to an increased risk of certain kinds of perils (floods, for example) you will want to make sure that your property insurance policy covers it or you have additional insurance to cover it. You will also want to ensure that the value of the policy can cover replacement of your property in the event it is destroyed — if you only have a $1 million policy but it will take $2 million to replace your property, you have an issue.

– Umbrella: There is also a type of insurance policy that acts as an additional fall-back layer of protection, known as an umbrella policy. Umbrella policies typically pay out in the event that your liabilities exceed your existing policies.

– Business Interruption: This insurance helps to cover overhead and expenses during times when your business is out of commission (such as after a natural disaster).

– “Key Person”: Insurance that pays out upon the death, disability, or retirement of a founder or executive, which permits the company to buy back the founder’s or executive’s shares; this is particularly useful for smaller companies, so that the company doesn’t have “dead equity” or founders don’t have to be partners with the co-founder’s or executive’s family.

– Disability: Particularly useful for sole proprietors, pays a percentage of average earned income in the event of disability that prevents working on the business.

– Life insurance: If a small company (usually sole proprietor) takes out a business loan, the bank may require the company or proprietor to take out life insurance to cover the loan, with the bank named as beneficiary. Or entrepreneurs can take out life insurance for the normal reasons of providing their family with some income, so as to prevent creditors from taking the business.

Making Sense of State Sales Taxes for Internet Businesses

If your business does sales over the internet, you may think that you are not required to collect state sales taxes, or you may have forgotten about state sales taxes altogether. However, in certain circumstances, depending on state law, your business may be required to collect state sales tax on some or all of your sales.

The general national rule-of-thumb for determining whether an internet-based company is required to collect state sales taxes on sales to customers in a particular state is the “nexus” test — if a company has a “nexus” in a state, it is required to collect sales taxes. So far, the Supreme Court has only identified physical presence (i.e., offices, warehouses, employees) in a particular state as sufficient for establishing nexus within a state, although some state taxing authorities have put out guidelines and memoranda that seem to suggest that they consider “nexus” to encompass a broader category of contacts that just physical presence. However, as physical presence is the class of contacts explicitly identified by the Court as establishing nexus, the rule-of-thumb is that having a physical presence in a state will obligate an internet company to collect sales tax on sales to customers in that state.

If a company is not required to collect sales tax, customers are then required to pay the tax on their internet purchases — commonly known as a “use” tax. However, in practice many consumers neglect to pay this tax, and as a result states lose out on a not-insignificant amount of revenue. Consequently, some states have taken to passing what have popularly become known as “Amazon laws” — so-called because they target the lost tax revenue due to sales on websites such as Amazon.com. 

Most Amazon laws take on one of two forms. In the first form, an online-sales company is merely required to post a conspicuous notice on its order pages notifying customers that the company is not collecting sales tax and reminding those customers that it is therefore their responsibility to pay any applicable use tax. The second, stronger form of Amazon laws requires internet-sales companies to collect sales tax if three criteria are met:

– The company has a “click-through” arrangement with a resident (natural person or company) of the state. In a click-through arrangement, users/customers are redirected from the resident’s site to the company’s site to make their purchase.

– The resident is compensated for the click-through arrangement

– The company does a minimum amount of sales, which varies depending on the particular state

Finally, the U.S. Congress has for several years been considering a series of bills under the title “Marketplace Fairness Act” that would require online retailers to collect state sales tax in every state, provided that states comply with certain guidelines for streamlining the calculation and collection of sales tax. While there is currently a version of the bill in the Senate Finance Committee, previous versions of the bill have yet to even make it through both houses of Congress.

Mass. Permits Enforcement of Arbitration Agreements By Third Parties

Last month, the SJC reaffirmed an aspect of Massachusetts arbitration law that permits a party to enforce an arbitration agreement against a party that signed the agreement, even though the enforcing party was not a party to the agreement. In Machado et al. v. System4, the SJC upheld the right of System4 to compel the plaintiffs to arbitrate their claims, based on an arbitration provision in franchise agreements the plaintiffs had with another entity, NECCS, which plaintiffs alleged existed solely to do the business of and was the agent of System4. 

The SJC ruled that because the plaintiffs’ claims arose out of the franchise agreements (specifically, the plaintiffs alleged that under the franchise agreements, System4 and NECCS misclassified them as independent contractors. The SJC held that the plaintiffs could not fairly attempt to seek relief relating to the franchise agreements, yet at the same time deny and attempt to avoid the arbitration clause in the same franchise agreements, given especially that the plaintiffs had in their allegations lumped together both System4 and NECCS, the other party to the franchise agreements.

It would be interesting to see how Massachusetts courts would apply this precedent in cases where there is not such a close link between the non-party defendant attempting to enforce arbitration and the actual party to the arbitration agreement. Most states and federal law in the realm of arbitration holds that arbitration is favored, but can only be enforced where the parties have agreed to arbitrate. Could plaintiffs be compelled to arbitrate if they argue that they never agreed to arbitrate against the defendant, even if the plaintiffs’ claims arise out of an agreement with an arbitration provision, but the defendant has a more tenuous link with the other party to agreement than existed between System4 and NECCS?

Further reading: http://hr.cch.com/ELD/MachadoSystem4041415.pdf

Is Money Raised in Crowdfunding Taxable?

Many startups that run crowdfunding campaigns fail to consider that the money that they are raising may be taxable. Money generated from crowdfunding campaigns is usually classified in one of two ways: income, or a non-taxable gift. Income, of course, is taxable. Generally speaking, if a user is provided with a reward whose market value is generally comparable to the size of the contribution, the contribution will be considered income. However, if a contribution is provided without the promise of any reward, or the reward is minimal compared to the size of the contribution (i.e. a t-shirt for a $100 donation), then the contribution will be considered a gift. The first $14,000 of gifts in any year made to any person or entity other than the donor’s spouse will be exempt from federal gift tax. Therefore, if your crowdfunding campaign is essentially conducting pre-sales of your company’s products or services, the money contributed will likely be considered taxable income. In addition, if you are conducting a “pre-sale” crowdfunding campaign, the transaction may also be subject to sales tax. Every state has different sales tax laws, so you will need to confirm where your contributors are located to know what your obligations are. Some states put the onus on paying the tax on the purchaser if the seller does not collect the tax; other states require the seller to collect the tax. Other states’ laws will not require a sales tax on the transaction. The general rule of thumb is that sales tax must be paid on internet sales where the seller has a physical presence, but some states have much broader internet sales tax statutes. Therefore, if you are conducting a “pre-sale” crowdfunding campaign, you should consult with a tax advisor who can help you understand your tax obligations and help you to set up collection and remittance of taxes.

What Does S-Corp Taxation Exactly Entail?

If you’re an entrepreneur trying to structure your startup, you may be reading about LLCs, C-Corps, and S-Corps, and trying to figure out which one is best for you. If you’re looking to start a small, personal business, you may have heard or have been told that S-Corp would be the best choice for you, but you may be wondering what a S-Corp structure actually means. First things first, S-Corp generally refers not to the legal structure of the business, but how the business is taxed. A S-Corp is taxed under Subchapter S of the Internal Revenue Code. Although many business that are taxed under Subchapter S are structured as corporations, LLCs can also be elect to be taxed under Subchapter S. Companies that wish to seek Subchapter S taxation must meet several requirements, including: – Only one class of equity (i.e. no preferred stock classes, although distinctions between voting and non-voting stock may be permitted) – No more than 100 equity holders, who must all be individuals (or certain kinds of estates, trusts, or tax-exempt organizations) – Equityholders must be U.S. citizens, nationals, or resident aliens The main feature of Subchapter S taxation is that it is “pass-through” — all profits and losses of the company are passed through to the equity holders, who must report their share of the profits or losses on their personal tax return. This reporting requirement is regardless of whether the company actually distributes cash to its owners. The pass-through tax structure is in contrast to taxation under Subchapter C (or C-Corp), which is also known as double taxation, because a C-Corp pays the taxes on its own profits or losses, but owners must pay additional tax on any distributions of profits made to them. Furthermore, the pass-through structure of Subchapter S taxation is similar to that of partnership (Subchapter K) taxation, the default taxation method for partnerships and multi-member LLCs. However, Subchapter S has several important differences from partnership taxation. First, partnership taxation permits the partners to allocate the profits or losses among themselves however they wish, including out of proportion to their ownership interest in the business. Under Subchapter S, profits or losses must be allocated in proportion to each owner’s interest. Additionally, Subchapter S allows owners who work in the business to be treated as W-2 employees and take salaries accordingly; partnership generally requires partners to take distributions of the company’s profits or losses. A CPA or tax attorney can help assist you in your company formation by advising you on the various taxation options available for each company structure and helping you to determine the best tax structure for you and your business.