But, you might also claim a special “summertime credit” for hiring youths age 16 or 17 who work for your business between May 1st and September 15th. The youth must reside in an Empowerment Zone (EZ) or Renewal Community (RC). The WOTC for these workers is 40% of the first $3,000 of wages. You can use the EZ/RC address locator located on the HUD website to find out if a worker qualified for this credit.

During the government’s fiscal year 2008 (ending September 30), sole proprietors with gross receipts of between $100,000 and $200,000 had audit rates of 3.9%. The audit rate on all S corporations was only 0.4%.

There are many substantive business reasons to convert a sole proprietorship to another business entity type. Minimizing your risk of audit is just a collateral benefit.

1. Patents
Patents are appropriate for “useful things” or methods of doing something. There are three main kinds of patents. Utility patents cover “inventions” – a machine, an article of manufacture, a method of doing something, a chemical or DNA sequence or the method of its use, products of genetic engineering, or improvements to any of these things. Plant patents may be granted to anyone who invents or discovers, and reproduces, a new variety of certain kinds of
plants (other types of plants, especially those altered by genetic engineering, may be protectable under utility patents). Design patents cover the ornamental appearance of a useful device but not its function. For example,the “Swoosh” on the side of a Nike sneaker was the subject of a design patent.

2. Trademarks
Trademarks cover the name or some other symbol (i.e. logo) that represents the source of a product or service. Sometimes the appearance of a product or its packaging can be considered a trademark (called “trade dress”). For example, the name Coca-Cola, or the shape of a Coke bottle are registered trademarks. In rare instances, other things such as sounds (Tarzan’s yell or the MGM lion’s roar), a sequence of notes (the NBC chimes), a piece of music (the the Lone Ranger theme), colors (pink Fiberglas insulation), or even fragrances (a floral scent applied to Clarke thread) – may be registered as trademarks.

3. Copyrights
Copyrights protect works of authorship, composition, or artistry. Copyrights cover books, sculptures, paintings or photographs, computer programs, architectural works, movies and records, musical compositions, etc. In the case of musical recordings, the copyright may extend to the music itself (tune and lyrics) and also to a recording of the performance.

4. Trade secrets
This protection is available, as the name suggests, for secrets used in business-the method of making a product or the ingredients that go into it, customer or prospect lists, any fact, which, if known, would give your competition an advantage. The inner workings (algorithms, source code) of computer programs are often protected as trade secrets. The formula for Coca-Cola is a famous example of a trade secret.

The question for these businesses is, “Are electronic contracts legally enforceable?” Assuming all of the elements to establish a traditional contract are present, an email or web contract can be a valid and enforceable agreement.

A valid traditional contract requires four elements:

1. Agreement – To have an enforceable contract, there must be an agreement between the parties. This requires an offer and an acceptance of that offer.
2. Consideration – The agreement must be supported by something of legal value given in exchange for the promise.
3. Contractual capacity – The parties to a contract must be able to legally enter into a contract. For example, minors are not legally capable of entering into a contract, so they lack contractual capacity.
4. Lawful object – The goal of a contract must be lawful. Contracts to commit a crime or contracts against public policy are void.

Clickwrap Agreements
The term “clickwrap” refers to agreements that obtain a user’s affirmative acceptance electronically. You see clickwrap contracting virtually every time you install a piece of software. During the installation, you are usually presented with check boxes to either “accept the terms of the License Agreement” or “not accept the terms of the License Agreement” along with a link to view the text of the end-user license agreement.

But, the use of clickwraps is not limited to software. They are often used for acknowledgements of assent to contracts for online services, too. In those cases, the text usually invites the user to click to accept the terms of a service agreement covering the online offering.

Generally, courts have treated clickwrap agreements as valid and enforceable contracts. Moreover, the trend over the past decade has been to find these agreements enforceable even if the contract is first presented after the fact – provided that the customer must be given the right to return the goods for a full refund if not satisfied with the contract terms.

Electronic Signatures
Over the last decade, the law has adapted to the reality that most customers demonstrate their assent to terms of an online agreement document with no more than clicks of a mouse. Many states have passed laws making electronic signatures binding to the same extent as a traditional hard copy signature. In 2000, the U.S. government enacted the Electronic Signatures in Global and National Commerce Act, or E-SIGN, recognizing a digital signature on interstate and foreign contracts as legally binding.

An electronic signature is defined under E-SIGN as:

“an electronic sound, symbol, or process attached to or logically associated with a contract or other record and executed or adopted by a person with intent to sign the record.”

This broad definition means that virtually any form of electronic assent can constitute an effective electronic signature. E-SIGN also provides that a contract “cannot be denied legal effect … solely because it is in electronic form.”

Electronic signature laws mean that most commercial contracts in the United States can be digitally signed and will not be held unenforceable simply because the agreement is in electronic form. There are some exceptions, though. For example, you cannot convey real estate or execute your will with a click.

Summary
Electronic contracts allow a single company to be a party to millions of contracts. They make mass contracting fast, efficient and very low cost, but care must be taken to ensure the traditional elements of a contract are met to provide to ensure enforceability.

Document Everything
When it comes to employees, make sure that everything is clearly spelled-out in a detailed employee handbook. Ensure that your employees understand what you expect of them, the rewards for success and the consequences of failure. Your up-to-date employee handbook should contain a clear disciplinary procedure that is administered fairly across the entire company.

Also, make sure you document everything relating to your employees. Every business, regardless of its size, should keep accurate and complete records regarding its employees from the date of the employee’s application for employment through the employee’s termination and afterward for at least the statute of limitations period in your state. It will make things much easier for you if you have to go to court after firing someone.

New Employment Provisions
Here is a sampling of a few new employment law provisions enacted in 2009:

Family and Medical Leave Act Amendments
Employees who have family members serving in the armed forces now have expanded rights under the federal Family and Medical Leave Act (“FMLA”). In October 2009, federal legislation changed the definition of which service members are covered under the qualifying exigency category. Employees are now entitled to qualifying exigency leave when a family member who is in the regular armed forces is deployed to a foreign country. Previously, this leave was only available when a family member was called to active duty in the National Guard or military reserves.

Qualifying exigency leave allows an employee to take up to 12 weeks of leave per year to deal with specified issues related to overseas military service by a family member (defined as a spouse, son, daughter, or parent). Examples include arranging for child care, making financial and legal arrangements, and counseling. In addition, federal legislation has also expanded the right of employees to take up to 26 weeks of leave per year to care for a family member with a serious injury or illness incurred as a result of military service.

Employers that are covered by the FMLA should notify employees of the changes, and revise their policies and procedures to ensure that they are in compliance with the new requirements.

New Form I-9, Employment Eligibility Verification
The federal government issued a new Form I-9, Employment Eligibility Verification, on August 7, 2009. The new Form I-9 contains an updated list of acceptable documents employees must present upon hiring. Employers must complete and retain a Form I-9 for each individual they hire for employment in the United States and should immediately stop using all previous versions of the Form I-9. A copy of the new edition of the form can be found on the IRS website here.

Easier for Employees to Unionize
The federal Employee Free Choice Act will virtually eliminate secret ballot elections, allow signed union authorization cards to determine whether an employer must accept a union, and compel employers to arbitrate their terms and conditions of employment if an agreement with the union is not reached within a certain amount of time. Avoid the mistake of failing to educate employees on the burdens of unionization now – long before authorization cards are signed.

The Tip
Update your employee handbooks and policies. The deluge of employment law changes this year compel a review and revision of your written employment policies. It’s much better to take the time now to address these issues than to be surprised in 2010 or beyond by a disgruntled employee.

Classifying individuals as non-employees is tricky. It is very risky to directly engage individual contractors who do not have a business license, a state business identification number, their own place of business, their own equipment, and who are solely dependent upon your business for their livelihood.

Hallmarks of an Independent Contractor
Bona fide independent contractors meet the following criteria, among others:

1. They are in business for themselves;
2. They typically have multiple clients;
3. They determine whether they will do the work themselves and/or use employees or subcontractors;
4. They furnish their own tools, equipment and materials; and
5. They pay income and business taxes on business revenues and payroll taxes on employee compensation.

In short, independent contractors should not be working full time at your business, using your equipment and supplies and doing the same work as your employees.

The Risk
The IRS can order offenders to pay all employment taxes that should have been paid plus a penalty that ranges from 12-35% of the tax bill. And that’s just the federal side of the equation. Your state will likely weigh in and take a bite out of you for back state payroll taxes and fees, plus their own penalty for non-compliance.

The Tip
If you are using independent contractors to assist with your business, make sure you are treating them as contractors and not employees. A few things you should do to protect the classification are:

1. Pay them by the job, not the hour;
2. Don’t require all work to be done on your premises;
3. Make sure they have their own business licenses;
4. Have all contractors sign a contract detailing the terms of the relationship.

Contractors come in all shapes and sizes; the ones you hire directly should be bona fide contractors with established business credentials to avoid the risk of re-classification by the IRS.

Business owners need to prepare early for the day when they will part company for whatever reason. At some point down the road, every entrepreneur is going to have to, or want to, cash out or transfer his or her equity interest in the business. Someone is going to leave the business, die, become disabled, or experience a messy divorce.

Potential separation issues are just one very important part of the initial planning and documentation process that should be addressed in a calm, planning-oriented atmosphere and not at a point of crisis. Taking the effort to address these types of issues at the outset is also the most logical time to do so, when the business organizers are making other important decisions about their devotion of capital and energy to the business enterprise. Thinking and discussing key issues upfront often will bring to the surface the different expectations of the owners. It helps to have these expectations out in the open before irrevocable commitments are made to the business.

Below is a general overview of several entity types and the implications on some important business factors. Click on the graphic to download a PDF version of the file.

There are many, many requirements that need to be taken care of, but here is a list of some basic legal and administrative obligations:

1. Obtain an employer identification number (EIN).
   This is similar to a Social Security Number for a business and will allow you to submit documents to the IRS. An EIN can be obtained by filing IRS Form SS-4, which can be downloaded on the IRS website.
2. Get worker’s compensation insurance.
   In many states employers are required to buy worker’s compensation insurance, which protects them from lawsuits resulting from work-related accidents. Though it is highly recommended, you should investigate your state regulations to determine if it is required.
3. Have employees fill out Form W-4.
   Form W-4, which is the Withholding Allowance Certificate, allows employees to claim a certain number of allowances for tax purposes, and helps employers withhold the correct amount from the employees’ paychecks. If employees wish to change the number of allowances they claim, they’ll need to fill out a new form with their employer.
4. Fill out Form I-9.
   U.S. Citizenship and Immigration Services requires employers to fill out Form I-9, which is the Employment Eligibility Verification form, for each new hire. This form is used to verify that your new employees are eligible to work in the United States. This form does not need to be filed with the USCIS, but does need to be kept on file for three years and must be provided upon inspection by the USCIS.
5. Report new hires to your state’s new hire reporting agency.
   The Administration for Children and Families, part of the U.S. Department of Health and Human Services, requires that employers report all new employees to their state’s new hire reporting agency. The information is used to locate parents who owe child support.
6. Determine what OSHA regulations apply.
   All employers (with few exceptions) need to comply with the requirements of the Occupational Safety and Health Act. You can check out the OSHA website to review the rules.
7. Withhold taxes.
   Set up a payroll system so that income taxes, Social Security, and Medicare taxes are automatically withheld.
8. Deposit taxes.
   Taxes, Social Security, and Medicare paid by the employee, along with the company’s portion of the Social Security and Medicare taxes, must be handed over to the government on a periodic basis. You can do this a few different ways.
   a. Larger employers deposit through the Electronic Federal Tax Payment System;
   b. You can mail or deliver these taxes to a Federal Reserve Bank or authorized financial institution;
   c. If quarterly withholdings are less that $1,000, you can pay them through your quarterly tax return (Form 941);
9. File Form 940 annually.
   The Employer’s Annual Federal Unemployment Tax Return (Form 940) can be obtained on the IRS website.
10. File Form 941 quarterly.
    The Employer’s Quarterly Federal Tax Return (Form 941) can be filed via mail, or if you’re eligible, it can be filed using the 941TeleFile system.

Answer:
With a Limited Liability Company (LLC), you have a tremendous amount of flexibility on how the entity is taxed. If the LLC has a single member, the default is for it to be considered a disregarded entity and for the LLC’s income and expenses to become the income and expenses of the LLC member. If the LLC member is an individual, the LLC’s income and expenses would be reported on Schedule C of the member’s Form 1040.

If the LLC has multiple members, the default is for it to be treated as a partnership. As a result, the LLC would have to file a Form 1065 annually and to issue each member a Form K-1 (Form 1065), which would list each member’s share of the LLC’s income and expenses. Each member would then be required to report his or her respective share of the LLC’s income on the member’s tax return.

An LLC can also ELECT to be treated as an S corporation. This requires filing Form 2553 with the IRS by the applicable deadline. If the LLC is treated as an S corporation, the S corporation would file Form 1120-S with the IRS and issue each LLC member a Form K-1 (Form 1120-S). Each member would then be required to report his or her respective share of the LLC’s income on the member’s tax return. The LLC may also issue a Form W-2 to the member of the member is an employee of the LLC.

An LLC can also ELECT to be treated as a C corporation. This requires filing Form 8832 with the IRS by the applicable deadline. In this case, the LLC would file Form 1120 with the IRS and would be taxed on all of its taxable income. The LLC would issue a Form 1099-DIV for dividends paid to LLC members (which would get reported on the members’ tax forms) and a Form W-2 if the member is an LLC employee.

The question of how you want your LLC to be taxed can be a complicated one. If you have any other questions, please let us know.