llcI am about to create a small startup for a specialized, small piece of software that I will be primarily writing myself.
Anything I am unable to do or would prefer experience people to do it instead will be contracted out.
My goal is to ensure I retain complete control of the company. This may change if the startup grows and employees become a necessity, but as of now it is a moot point.
To avoid becoming an employer, is the type of company relevant? What about having partners who only receive a share of the profits?
The following is relevant to the United States.
In regards to “type of company” I think you are looking for the word “entity”. In the U.S. we have entities like Sole Proprietor, Limited Liability Corporation, C Corporation, S Corporation, and more. The type of entity will affect taxation and liability.
An employer is any entity that has employees.
To avoid hiring employees you may consider hiring freelancers.
Employer’s are required to file/pay a variety of taxes and provide employee’s with annual W-2’s.
A single person business might hire freelancers and provide the freelancer with annual 1099. The freelancer is responsible for reporting the income noted on the 1099 on his or her income tax return, while you (the business owner) simply deduct that as an expense (no additional tax calculations).
You can check the IRS (Internal Revenue Service) or the SBA (Small Business Administration) for more details about this.
The best solution will be to outsource work when necessary and try to do as much as possible yourself. When you get to the point of having employees try to hire them first on fix contract bases, as much as you can. This way you leave yourself option to get rid of people that do not fit your profile without bigger problems. After that you will have to employ people and you are right to try to avoid that as much as you can.
To help you make the determination of whether or not you have employees, the IRS has Form SS-8 to help you.
Instructions: https://www.irs.gov/pub/irs-pdf/iss8.pdf
Form: https://www.irs.gov/pub/irs-pdf/fss8.pdf
While SS-8 is the way the IRS looks at the determination of employees, it is a rebuttable presumption. You should use it a guide. The more factors in favor of employee, the more risk you take with the IRS’s interpretation. You are not required to submit an SS-8 to the IRS. You have to choose to send it to them, which I recommend that you do not do. The best way to avoid having “employees”, is to use independent contractors. A very good defense is to have independent contractor agreements. The agreement should specify what should be done, but not how to do it. To be a true independent contractor the person should work for more businesses than yours. All independent contractors receive 1099s rather than W-2s. If you have significant doubt whether or not a person is an employee, I suggest you see a tax CPA or a tax lawyer. Many times the professional can tweak the responsibilities so the person is more like a independent contractor.
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