Want more ways to protect your business? Check these out:
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Buy-Sell Agreement
If you have co-owners in your business, it’s wise to decide what happens to an owner’s interest when he or she retires, dies, or just wants out. This can be settled by the terms of a buy-sell agreement.
The agreement can be constructed in several ways:
- Cross-purchase agreement, in which the remaining owner or owners buy out the interest of the departing owner. This type of agreement works best if there are only two owners in a business; it gets cumbersome when multiple owners are involved.
- Redemption agreement, in which the company buys back the interest of the departing owner. This type of agreement works best when there are several owners.
- Hybrid agreement, which can include both a purchase and buyback.
The buy-sell agreement should be made when the company is started, but can be created at any time.
Here are some features to include:
- The type of buy-sell agreement (e.g., cross-purchase agreement).
- A list of triggering events, such as retirement, disability, personal bankruptcy, divorce, or death.
- A mechanism to determine the value of the departing owner’s interest. This can be a formula clause in the agreement, a requirement that an appraisal be obtained at the time of the triggering event, or some other method. It’s usually not a good idea to set a fixed value in the agreement because it may not reflect changes in value by the time of the triggering event.
- The funding that will be used to pay for the buyout. Life insurance usually is used for buyouts at death; other funds must be used for buyouts for other triggering events.
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Independent Contractor Agreement
Many businesses hire contractors as a way to lower operating costs while still getting things done. The problem is that the IRS and the states will look at how you classify your workers, and if it’s determined that your contractors are really employees, you are liable for payroll taxes, employee benefits, workers compensation, and unemployment coverage for them, too.
Worker classification is primarily based on the degree of control you exercise over the workers. One factor in determining control is the relationship of the parties. If you and the workers agree up front that the relationship involves independent contractors and is not an employer-employee relationship, this helps to avoid reclassification of workers as employees. A good way to show the relationship is with an independent contractor agreement.
The agreement should include the following points:
- A statement about the relationship of the parties.
- A statement that the worker acknowledges responsibility for taxes and insurance.
- Language bolstering independent contractor status, such as that the worker is required to furnish his/her own tools
While the agreement is not binding on the IRS, it can help demonstrate worker classification if the IRS has questions.
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Bottom Line
While sample agreements may be useful in getting ideas for your situation, it is highly advisable to have any agreement you prepare reviewed by your attorney. Your attorney can tailor your agreement to your company’s specific needs and make sure it complies with the laws in your state.
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OLUKAYODE ASHAOLU 1 year 2 months and 21 days ago
Thanks this is a great post about a topic that many small business owners starting out seem to skip. I especially have experience in misclassification of contractors as employees instead of independent contractors, and our paperwork was key in resolving that issue.