The Potential Pitfalls of Being Your Own Client
Billy Swanson dreams of owning his own business. He decides that he is going to open a business catered to the needs of homeowners. Specifically, he is going to provide cleaning services, lawn care services, and snowplowing services to homeowners. So, he decides that he is going to name his business, “The Perfection of a Home, Corp.” He decides to use “Corp” after his name because he believes his business looks more official. So, his buddy tells him that opening up a corporation is easy—you just go to the Secretary of State’s office and register your business as a corporation—because that is what his buddy did for his buddy’s business. So, Billy registers his business as a corporation with the Secretary of State with the filing of one piece of paper, prints business cards and flyers on his computer, starts soliciting, and starts getting business. He does his own taxes because tax returns are “easy” to do. Billy says “look how easy it is to be a business owner.”
Once Billy starts becoming busier he hires independent contractors (IC) to help him with providing services to the clients of The Perfection of a Home, Corp. Business is booming. Then one day one of his IC’s “Bob,” is involved in a car accident while talking on his cell phone. The following day, Billy receives a notice that he is going to undergo a sales tax audit. Billy ignores the notice regarding the sales tax audit because he doesn’t charge sales tax so the notice, he believes, does not apply to him.
Problem # 1—Billy’s business is not properly formed as a corporation because all he did was file one document with the Secretary of State. He failed to complete all of the required corporate formalities, and therefore, Billy’s corporate veil will most likely be pierced (when he and his business are sued by the person that Bob hit while talking on his cell phone) because a proper corporate veil was not established.
Problem # 2—Billy never applied to the Internal Revenue Services to be taxed as an S-Corp. Therefore, he will be taxed as a C-Corp. As a result, the tax “breaks” that he thought he had received were improper because he cannot be taxed as an S-Corp. He owes six figures of back taxes, penalties and interests.
Problem #3—Bob sues Billy and his company for the injuries that he suffered in the car accident because at the time he was working for Billy, Bob was technically not an “IC” under the law, but rather was an employee. Billy gets slammed with back taxes, penalties and interest for all of his IC’s who are employees, and he also gets slammed (in the six figures) because he did not have worker’s compensation on the IC’s. Furthermore, Billy is fighting a lawsuit for the injuries suffered in Bob’s car accident from both Bob and the person Bob hit.
Problem #4—Billy has sales taxes assessed against him for his cleaning and lawn care services because he engaged in services that are taxable as sales tax. In addition, he is assessed penalties, interest, and is found to have committed fraud.
The Perfection of a Home, Corp is out of business, and Billy is broke with no prospects of paying off his debts, which not all of them are dischargeable in bankruptcy. Billy should not have been his own lawyer and accountant.
Spangler and de Stefano, PLLP assists business owners with business issues, such as classification of workers, corporate formation, etc. It is important that you are working with a competent team of professionals, including a business attorney and business accountant.
The material contained herein is for informational purposes only, and is not intended to create or constitute an attorney-client relationship between Spangler and de Stefano, PLLP and the reader. The information contained herein is not offered as legal advice and should not be construed as legal advice.