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DIY (Doing It Yourself) Comes with Risks

Sally Sue Mallard dreams of owning her own business. She decides to open Sally Sue’s Baked Goods and Cleaning Services. Specifically, she is going to provide baked goods served with eating utensils (a niche she believes) to homeowners and commercial real estate owners. So, she decides to name her business, “Sally Sue’s Baked Goods and Cleaning Services, Inc.” She decides to use “Inc.” because it makes her business look sophisticated and elegant. So, her friend tells her that opening up a corporation is easy—you just go to the Secretary of State’s office and register your business as a corporation—which Sally Sue does. She does her own taxes because tax returns are “easy” to do. Sally Sue says “look how easy it is to be a business owner.”

Once Sally Sue starts becoming busier, she hires independent contractors (IC) to help her with providing services to the clients. Business is booming. Then one day one of her IC’s “Frank,” is involved in a car accident while talking on his cell phone. The following day, Sally Sue receives a notice that she is going to undergo a sales tax audit. Sally Sue ignores the notice regarding the sales tax audit because she doesn’t charge sales tax so the notice, she believes, does not apply to her.

Problem # 1—Sally Sue’s business is not properly formed as a corporation because all she did was file one document with the Secretary of State. She failed to complete all of the required corporate formalities, and therefore, Sally Sue’s corporate veil will most likely be pierced because a proper corporate veil was not established.

Problem # 2—Sally Sue never applied to the Internal Revenue Services to be taxed as an S-Corp.  Therefore, she will be taxed as a C-Corp.  As a result, the tax “breaks” that she thought she had received were improper because she cannot be taxed as an S-Corp.  She owes six figures of back taxes, penalties and interests.

Problem #3—Frank sues Sally Sue and her company for the injuries that he suffered in the car accident because at the time he was working for Sally Sue, Frank was technically not an “IC” under the law, but rather was an employee. Sally Sue gets slammed with back taxes, penalties and interest for all of her IC’s who are employees, and she also gets slammed (in the six figures) because she did not have worker’s compensation on the IC’s.  Furthermore, Sally Sue is fighting a lawsuit for the injuries suffered in Frank’s car accident from both Frank and the person Frank hit. To add more salt to the wound, Sally has to deal with an action by the Minnesota Attorney General’s Office for wage theft, and potential criminal charges for misclassifying her workers as IC’s rather than employees.

Problem #4—Sally Sue has sales taxes assessed against her for her cleaning services and her baked goods because she engaged in services and goods that are taxable as sales tax in Minnesota.  In addition, she is assessed penalties, interest, and is found to have committed fraud.

Sally Sue’s Baked Goods and Cleaning Services, Inc. is out of business, and Sally Sue is broke with no prospects of paying off her debts, which not all of them are dischargeable in bankruptcy. Sally Sue should not have been her 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.