I just brough my nephew aboard my business doing custom Kitchen Cabs and the like. Moving from a one man operation to a two man set-up has a whole other realm of issues.
Just curious for those of you out there that have done it, what was the route you took and would you do it the same way again.
Specifically, LLC issues, insurance, additional liability, etc.
Any insights would be appreciated.
Thanks.
KH
Replies
Top priority, be sure you're squared away with your state's requirements with regard to worker's comp, unemployment insurance and short term disability (the terms variy state-to-state), and you keep on top of your Federal tax requirements (quarterly 941's). I suspect you'll feel that it's a tremendous amount of work for just one employee, but them's the breaks. I am much more peeved when dealing with the requirements for one employee, than I was when I had 8 or 9 people working for me.
It may or may not be worth forming a LLC -- it costs money and involves a certain amount of paperwork, but someone out there will have more details/opnions on that question.
I'm bumping this thread up, hoping maybe there will be more input now that the first-day jitters are over. Would think there'd be some strongly-held opinions out there.
I have no personal experience about starting a woodworking business, but some significant experience with LLC, LLP and other methods of limited liability. Go hire a local lawyer. Setting up an Inc, or LLC (depends on what is available in your state) shouldn't cost more than $500. The paperwork is minimal. Its purpose is to make the entity the last stop in the event of liability. For example, your nephew gets in an accident while on company business. The corporation may be liable, but your personal assetts should not be reachable. This is too often overlooked by people. Yes, the odds are slim you will need to limit your liability, but if lightening strikes you don't want to lose your house.
Worker's comp and taxes are incredibly important. Failure to pay those will almost certainly result in the IRS coming after you personally (despite the existence of a corporation).
The IRS comes after you for unfiled or unpaid payroll taxes: social security and medicare. Worker's comp is state-related, and Heaven help you if you have an employee who gets hurt and you're not registered with, and paying, the state!
Many people try to get around all this stuff by saying that a person doing work for them is an independent contractor. Big mistake! There are very specific criteria to meet with the IRS to be considered an IC, and they all have to be met.
The IRS has a good web site, and you can order a Small Business CD from them (called a Resource Guide I believe) for free. Or, if there's a Federal Building near where you live, they usually have stacks of them sitting out on the counter.
There are a thousand questions in your questions. Best bet by far.....Talk to an honest accountant.
Steve - in Northern California
If the doctor says you have Attention Deficit Disorder, do you pay attention to him?
Contractor V. Employee
Does the worker have specific hours set by you? - Yes, possibly an employee.
Does the worker use your equipment and materials? - Yes, possibly an employee.
Does the worker work to your specification and under your direct supervision? - Yes, possibly an employee.
Is there a specific end date to the workers affilation with you based on the completion of a project? - No, possibly an employee.
Does the worker currently provide their services to others or have done so in the past as a contractor? - No, possibly an employee.
The IRS has an entire department dedicated to interviewing and determining worker status. The forms and procedure is referred as SS-8 Determination. Usually an employee/contractor will begin the proceedings on the recommendation of an astute accountant who recognizes that the person was not working under the correct title, and is looking to have the employer in question be responsible for half the Social Security taxes and soon on. After determination of employer status an employer will be responsible for the back taxes and may be passed along for further investigation for issue of worker's comp. and such.
I've attached the SS-8 form (Acrobat PDF format). Take a look. You'll get the idea about what the IRS uses for determination pretty quickly.
I've witnessed this battle first hand. Take if from me, more often than not if you've hired the worker, they're your employee.
Best,
Seth
Edited 3/23/2002 9:17:07 AM ET by Seth Frankel
Edited 3/23/2002 9:25:34 AM ET by Seth Frankel
I'll throw my 2 cents of advice into this one. I think that the LLC is very worthwhile. It will forever insulate you from those unforeseen and unlikely but potentially devastating (financially and thus personally) accidents that can occur. Think of it as a single premium insurance policy providing perpetual catastrophic protection.
Well done, Seth! That's the kind of extra effort that makes these boards great (and I was way too exhausted to even attempt it -- old dog/new tricks, whew!)
My day job is general liability insurance so I'll give you the basics on it. You need an insurance policy that provides general coverage against liability, called a CGL policy. It will have to cover liability for injury and property damage arising out of: 1) your products (ie: furniture, etc); 2) your locations & operations (ie: if someone trips over your extension cord); 3) your completed operations (ie: if you did a wiring job & 2 months later the place burns down & it is alleged it is due to your work). There are many other coverages & complications, but these are the basics.
You get your insurance through an insurance broker, try the one you get your house & car insurance through. There may be insurance companies that have a programme for small woodworkers or contractors which would roll your liability insurance & property insurance into one policy instead of having to get separate ones.
Many companies you will try to deal with will require a "certificate of insurance". It is a piece of paper that provides the other company with proof that you have insurance. No certificate, then you get no work/contracts with that company. The certificate can usually be issued by your Broker. For example, if you are hired by a general contractor to do some panelling work on a job, he will want proof that you have liability insurance, etc., making him more comfortable knowing he won't be on the hook if you/your work causes injury or property damage to a third party. The contractor may also require you to add him to your liability insurance policy as an additional insured. This can be done, but it should be limited to situations where the liability arises out of your work only, not his. Basically, if you/your work causes bodily injury or property damage & you are both sued (in law suits, lawyers will name everybody they can think of), it is reasonable that your liability insurance should cover the general contractor instead of his own because he was (presumably) not the fault behind the injury or damage. When 2 companies contract to do something, the bigger company may try to strongarm the weaker party into providing insurance for the stronger company's actions, but this should not be agreed to & they should be told that only their own insurance should cover them. It is amazing how often I see this. The contract and/or the certificate of insurance should use the insurance industry's standard wording for this type of situation, which is that they are added as additional insured, "but only with respect to liability arising out of the operations of the Named Insured", where you are the "named insured".
I have provided liability insurance on a number of funriture manufacturers (not small woodworkers though) and just because your product is of high quality is no guarantee that you will not be sued. Some kid will open a dresser drawer that has too much weight in it & it will tip over onto him & the frantic mother will try to sue the manufacturer of the dresser because it is "faulty". The insurance will protect you from these stupid people (and claims from them seem to come up more frequently) as well as protecting you against true negligence on your part. Also, things that can create a lot of claims are glass (in china hutches, etc) and children. So if you want to try to lower your insurance premium, tell your broker why you think your product is not as high exposure as the insurance company may think (such as you rarely if ever make anything with glass in it, you do not make furniture for kids, etc). Obviously you have to tell the truth.
I'm long-winded but if there are any specific insurance questions I'd be happy to help!
I hope Fourquarter is still out there, as I think Homer's excellent information was probably mean for him! I'll learn from it too, though.forestgirl -- you can take the girl out of the forest, but you can't take the forest out of the girl ;-)
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