Articles Posted in Small Business

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Employee or Freelancer?

Is a person who works for your business financially dependent on you, or can they potentially independently profit based on their skill set? Will they be part of your company indefinitely? Do they perform a central, daily, integral role? Do you dictate when, where and how they work? Do you limit their ability to work for others? Can the person apply what they do to other endeavors, widening their market reach and leading to other revenue streams?

Small businesses and other employers will need ask themselves this set of questions and consider the “totality of the circumstances” in determining whether to classify people who work for them as employees or independent contractors, in a rule change published by the U.S. Department of Labor’s Wage and Hour Division on January 10, set to take effect March 11.

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When is the Best Time to Start a Business?

During the pandemic there were over 400,000 new businesses formed, the most since 2007.  This outpaced the number of businesses which closed during the pandemic. 50 million new startups are established every year. That means, on average, 137,000 startups are launched every day.   However, only 10% can sustain themselves in the long run. 

We have seen a number of businesses which were formed over the past year by well-meaning and cost-conscious entrepreneurs.  These new ventures – both corporations and limited liability companies – frequently overlook some critical elements of a new business.   In fact, the first question to ask is whether you should organize as a small corporation or a limited liability company.  There are tax consequences and managment questions that should be considered in making the choice. 

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Starting on January 1, 2024, most employers in the 5-300x251will be required to provide five days of paid leave for any reason. Thanks to an City Council ordinance passed earlier this month by a 36-12 vote, Chicago employers will have to double that amount, including five sick days and five vacation days, under one of the most sweeping employee leave laws in the U.S.

The ordinance, which new Mayor Brandon Johnson described as “a step towards equity in the workplace,” also mandates that when workers depart their positions, companies with more than 100 employees will have to pay out as many as seven days of unused time, while firms with 51 to 100 employees will need to do so over a two-year phase-in period. Small businesses with less than 50 employees do not need to worry about this provision.

Johnson and progressive allied on the City Council wanted a 15-day allotment originally, but business, retail and trade groups, who are still vehemently against the ordinance, pushed back vociferously. And they’re worried that violations could lead to lawsuits, an issue that the council plans to address through a possible amendment—tabled for now—that would provide businesses with a 30-day time frame to address an alleged violation first.

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Tax Implications When Leaving a Partnership

When a partner leaves a business, the resulting transaction can take the form of a payment to the retiring partner to redeem his or her share of the business, or a sale of that share of the business to the remaining partners. Either way, the person who leaves obtains cash or property while the partners who remain increase their share of the assets on a proportional basis. While the end result appears to be the same, however, the tax implications can be quite disparate.

When the retiring partner receives a redemption payment, Section 736 of the Internal Revenue Code comes into play, determining firstly whether the income will be treated as a capital gain/loss or ordinary income, and secondly whether the remaining partners can deduct a percentage of their redemption payments.

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Transit Benefits Required for Illinois Employers

Another wrinkle for employers in the Chicago area.

Businesses located in the six-county Chicago area near public transit routes operated by the Regional Transportation Authority (RTA) that have at least 50 employees will be required as of Jan. 1, 2024, to provide their full-time employees with pre-tax public transit benefits.

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Long-Term Temps to be Paid Like Employees

Both Illinois employers that contract with temporary labor service agencies, and those agencies themselves that do business in the state, should review staffing contracts and ensure compliance with relevant policies and procedures under amendments to the Illinois Day and Temporary Labor Services Act signed by Governor J.B. Pritzker, which took effect immediately.

The amendments to HB 2862 hold that temporary workers assigned to a third-party client for more than 90 days are entitled to wages and benefits—or the cash equivalent of benefits—equivalent to the lowest-paid employee at that client who performs the “same or substantially similar” work. If no such person exists, temp workers must be paid the same as the lowest-paid employee with the closest seniority level to the temp.

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Supreme Court Ruling on Religious Reasons

Small businesses and other employers are likely to find it more difficult to refuse requests for religious accommodations after the U.S. Supreme Court’s ruling in a recent case, Groff v. DeJoy, which concerned a postal worker who unsuccessfully requested to be off-the-clock every Sunday—when the post office still makes deliveries for Amazon—citing his Evangelical Christian faith.

Gerald Groff, a Pennsylvania man, nonetheless kept being put on the schedule for Sundays and disciplined for not working while his co-workers were stretched thin attempting to cover his routes. He resigned, sued, lost his case and lost again on appeal—but the Supreme Court’s unanimous ruling in June established a higher standard for employers who claimed they would face an “undue hardship” to make religious accommodations.

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You Can, But Should You?

To begin with, employers thinking about using AI such as ChatGPT during hiring and selection need to familiarize themselves with the technology at a conceptual level, and then look closely at—and understand well enough so they can explain to others—how AI integrates with their recruiting tools and practices.

A key piece of state legislation in Illinois pertaining to the use of AI is the Artificial Intelligence Video Interview Act (820 ILCS 42/1), which lays down various stipulations for the recording of video interviews and subsequent use of AI while evaluating said recordings.

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Aret Smart Contracts Smart?

Imagine if the paper on which your business’ contracts are written could somehow come to life and automatically send payments to your collectors—and receive payments from your debtors—at the appropriate times, as different provisions of said contract are triggered.

That’s more or less how electronic smart contracts, self-enforcing pieces of computer code set up to execute on the blockchain, more efficiently streamline certain processes. While sometimes legally enforceable, they have their drawbacks and will probably never completely replace traditional legal contracts.

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Are Non-Competes Really Enforceable?

Most non-compete agreements between employers and employees violate the National Labor Relations Act, according to a May 30 memo from Jennifer A. Abruzzo, general counsel for the National Labor Relations Board.  Such agreements, which bar employees from taking certain types of positions or running certain types of businesses after leaving their current positions, specifically run afoul of Sections 7 and 8(a)(1) of the act, she wrote.

Section 7 provides that employees have a “right to self-organization, to form, join or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection,” Abruzzo noted.  As such, under most non-competes, employers engage in an unfair labor practice that violates Section 8(a)(1) because they “interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in [S]ection 7.”

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