Business Law

On December 3, 2024, it was announced that Judge Amos L. Mazzant, III of the U.S. District Court for the Eastern District of Texas issued an order purporting to impose a NATIONWIDE preliminary injunction on enforcement of the Corporate Transparency Act, which required most small businesses to report beneficial owner identifying information to the Financial Crimes Enforcement Network. View the order here.

The preliminary injunction has now been appealed.

What does that mean for your business?  Enforcement of the January 1, 2025 deadline is still on hold unless the preliminary injunction is reversed.

We will continue to monitor the developments of this case and provide updates as they unfold.

Find more details surrounding the Corporate Transparency Act here.

Various work arrangements exist, and sometimes there are even subcategories within each. For example, companies in Raleigh may exclusively hire employees, including part-time and full-time or salaried ones. Other North Carolina businesses may only take on independent contractors (ICs) or have a hybrid arrangement consisting of employees and ICs. As a company owner or member of upper-level management, you must realize that there are notable distinctions between the independent contractor vs. employee classifications. Continue reading below, where we’ll discuss the legal distinctions and implications associated with each.

Understanding the Legal Distinctions Between Employees and Independent Contractors

Simply put, an “employee” (sometimes referred to as a “W-2 worker”)  is someone who works directly for and under the direction of a company or a business owner.  The Code of Federal Regulations (CFR) and more specifically, 26 CFR § 31.3121(d)-1(c), spells out how the Internal Revenue Service (IRS) views a relationship as an employment relationship when the employer “has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished.” 

In contrast, an “independent contractor” (sometimes referred to as a “1099 worker” or, incorrectly and problematically, as a “1099 employee”)  is described as being free to perform his or her tasks or functions at the individual’s own discretion with regard to means and methods. Given their arrangement with the employer, ICs must report and pay their own income and self-employment taxes as compared to employees, for whom employers are required to withhold deductions from paychecks for taxes income taxes and government programs like Medicaid, Social Security, and unemployment insurance.

Workers Are Commonly Misclassified as Independent Contractors vs. Employees

Employers often misclassify their workers as “independent contractors” instead of as “employees”  without the workers’ knowledge, by having the workers fill out the wrong tax paperwork and then not making any withholdings from their paychecks. Although unlawful, employers may do this for a number of reasons, including to avoid common employer obligations, including:

• Having to make payroll deductions: Employers must withhold taxes used to pay for government programs like Social Security, Medicaid, and unemployment, whereas that’s required of them if they have independent contractors. 
• Offering health insurance: Per the Internal Revenue Service, under the Affordable Care Act (ACA), employers with at least 50 full-time workers must provide health insurance to at least 95% of their staff. The smaller a company is, the more likely it is that it will solely hire independent contractors or have a hybrid arrangement to avoid providing insurance.
• Complying with minimum wage and overtime pay obligations: The N.C. Department of Labor outlines how a Fair Labor Standard Act- and Wage and Hour Act-compliant role is one where workers must be paid no less than the federal minimum wage, which corresponds with the North Carolina minimum wage, and is currently at $7.25 per hour for up to 40 hours of work and pay and a half for overtime (so hours over 40 in one week); although there are exceptions to this rule for certain exempt employees. There’s little to no oversight for pay for independent contractors.
• Having to offer additional employment benefits: Employers with just independent contractors don’t have to worry about offering paid annual or sick leave or workers’ compensation, the latter of which is insurance that the North Carolina Industrial Commission says all employers with three or more employees must have.
• Making contributions to retirement plans: Employers get out of paying toward a worker’s 401(k) and other types of retirement accounts if they’re not bona fide employees.

Implications Associated With Errors in Classifying Workers

Hiring employees instead of independent contractors involves extra work and added costs as an employer. However, you shouldn’t let that push you into misclassifying your workers thinking that will relieve you of obligations to purchase workers’ comp coverage, pay overtime, or comply with other governmental requirements, as there may be fines levied and back taxes due for doing so. Specifically, since 2017, the  North Carolina Industrial Commission has maintained a fully-staffed “Employee Classification Section” whose main purpose is to investigate  and then pursue those employers  who have misclassified their workers as  “independent contractors” instead of as “employees.”  Moreover, in the case of a worker getting hurt on the job, your company may be sued for damages without the protection of an insurer to cover the costs if you have misclassified that worker as an independent contractor.  

In addition, the IRS tests a multitude of factors to determine whether a worker should be classified as an employee or IC.  The U.S. Department of Labor also has its own criteria, which it has recently updated, and we recently wrote about that here.

As a law firm that assists business startups with incorporation and aids existing Raleigh companies with operational matters, Wilson Ratledge supports its clients with a wide range of matters, including workers’ comp defense. We are ready to support you with your company’s needs to ensure you don’t land on the wrong side of the law and incur unnecessary costs. Contact our law firm to schedule a consultation with a business law attorney to discuss your company’s legal needs.

On March 1, 2024, a U.S. District Judge in Alabama issued a memorandum opinion and final judgment in National Small Business United v. Yellen, finding that the Corporate Transparency Act (CTA) is unconstitutional because it exceeds the Constitution’s limits on Congress’ power.

The court permanently enjoined the FinCEN (Treasury Department’s Financial Crimes Enforcement Network) from enforcing the CTA against plaintiffs in that case.

It remains to be seen how the decision of this ruling will impact other Reporting Companies and their Beneficial Owners and Company Applicants, though we anticipate an immediate appeal by the Treasury.

At this time, there is no direct change to CTA compliance requirements, and it remains prudent practice for clients to continue to abide by the reporting requirements set forth under the Act.  Our prior memorandum (which can be found here) gives further detail about the CTA’s requirements.

Wilson Ratledge will continue to monitor the developments and its implications on the future of the CTA.

Whether you’re considering pursuing a merger or acquisition for your North Carolina business, in researching whether one of these options is best for you, you’re bound to have encountered the concepts of “stock purchase” and “asset purchase.” If you’re wondering how these differ, continue reading, where we’ll describe some of the differences between them. 

What a Stock Purchase Is

In a stock purchase, the buyer purchases shares of stock or other equity interests in the target company directly from the owners. The buyer becomes the new owner of the target business. 

Advantages and Disadvantages Associated With Stock Purchases

Whether a particular factor associated with a stock sale is positive or negative will vary depending on one’s role in the transaction. However, some commonly cited advantages associated with stock purchases from a selling business owner’s perspective include:

• The transfer of stocks involves less complexity than transferring assets. 
• The tax consequences to sellers are generally more advantageous than in an asset purchase.
• The name, the organizational structure, contracts, etc. remain the same once the stock purchase occurs unless otherwise stated in the acquisition agreement.
• It is less likely to violate anti-assignment clauses in contracts, given that the company continues to exist in the same form after the sale is closed.

At the same time, there are some factors that, depending on one’s perspective, may be seen as disadvantageous to those considering a stock purchase, such as:

• Stock purchases are disfavored by risk-averse buyers as they will assume additional risk in acquiring pre-existing liabilities and contingencies, whether known or unknown.
• Getting in touch with a large number of stockholders and coordinating a sale among them can be challenging, if not a deal-breaker, to a buyer looking to acquire 100% equity.
• There isn’t a step-up for tax purposes when acquiring assets, with limited exceptions (such as if an S-corp has 336(e) or 338(h)(10) elections).
• A buyer may find their tax obligation is higher in the future because there is lower depreciation expense. 

What an Asset Purchase Is

In an asset purchase, a buyer purchased all or substantially all of a target company’s assets, or those of a business division. Asset purchases generally involve buyers taking on only specified pre-existing liabilities of the target company. 

Benefits and Downsides to Asset Purchase Sales

Pros and cons of asset purchases vary depending on one’s point of view as a buyer or seller. Some benefits associated with asset purchases include: 

• Buyers can purchase assets they want, leaving known and potential liabilities and any undesired assets in the seller’s possession.
• The assets acquired by the buyer are received on a step-up basis, which offers significant tax benefits for them (and generally less favorable tax consequences to sellers).
• The buyer deals with the company’s management more so than shareholders.

Conversely, some commonly cited downsides of asset purchases include:

• Separate negotiations may need to occur regarding the purchase of certain assets.
• Separating assets can be costly and time-consuming measures, such as the negotiation of a transition services agreement between buyer and seller, may be required. 
• The transfer of assets from seller to buyer can be complicated.
• It may be necessary to procure third-party consents to move forward with the sale of assets. 
• Sellers may incur more tax as noted above.
• Deciding what to do with a selling company’s remaining assets or liabilities is necessary if all are not purchased/assumed by the buyer.

Getting Legal Guidance in Planning for a Merger or Acquisition

Above is only a brief introduction to what stock and asset sales are and some of the pros and cons associated with each option. Reach out to our law office, Wilson Ratledge, and we will put you in contact with an experienced attorney who has guided other companies here in Raleigh and elsewhere in NC in growing their business’ reach through strategic acquisitions.

CORPORATE TRANSPARENCY ACT IN ACTION | TALES FROM THE TRENCHES – PART 1

And so begins the inevitable experiential anecdotes in this, the first year of implementation of the Corporate Transparency Act (“CTA”).  I wrote a general overview of this law on January 15, 2024.  I fully expected to encounter noteworthy experiences and information as this year progresses, and so far, I have not been disappointed.  I hope to continue to share our experiences, and invite you to do the same.

TALE #1: ARE WE A LARGE OPERATING COMPANY?

Before I posted my article, I got an email from a client asking me to confirm that his company would be exempt from the CTA based on the following:

For example, to take advantage of the “large operating company” exemption, an entity must (1) employ 20 full-time employees in the United States; (2) have an operating presence at a physical office in the United States and filed a federal income tax or information return in the United States demonstrating more than $5,000,000 in gross receipts or sales.

At first glance, based on what I knew about the company, I thought this was an easy yes.  As any lawyer must do, I went to the actual law to confirm.  Not surprisingly, I needed to ask some more questions.  For purposes of the exemption, the CTA has its own guidance regarding whether an employee is a “full-time employee,” and even what is considered the “United States!”  Generally, a full-time employee averages 30 hours per week, or 130 hours per month.   The United States means “[t]he States of the United States, the District of Columbia, the Indian lands (as that term is defined in the Indian Gaming Regulatory Act), and the Territories and Insular Possessions of the United States.”  In addition, “gross receipts” means “net of returns and allowances” and net of any such gross receipts or sales “from sources outside of the United States.”  Once I clarified these points with the client, I was able to confirm his company should be exempt from the CTA.

TALE #2:  THE PROCESS OF FILING THE BENEFICIAL OWNER INFORMATION (“BOI”) REPORT

I already have personal knowledge of an individual attempting to file the BOI report on his own.  While it was mostly correct, he omitted an individual with “substantial control” that was not an owner.  His experience was that one is not offered guidance in the process of completing the report; therefore, it is important that the client either receive competent advice or thoroughly review the informational materials provided by FinCEN and others prior to filing the report.

TALE #3:  OBTAINING AND USING FinCEN IDENTIFIERS

As discussed in the original article, the CTA allows individuals who are either a beneficial owner or otherwise exercise substantial control over a reporting company, to obtain a FinCEN identifier, and provide that to reporting companies in lieu of their personally identifiable information (“PII”) required by the CTA.  This allows the individual to submit their PII directly to FinCEN rather than the reporting company.  I am not sure how much comfort that provides the individuals, but it is an opportunity to simplify the obligations of the applicable reporting company(ies), discussed further below.

Your humble author is the proud owner of her own FinCEN identifier.  It was fairly easy to get one.  You can get yours here:  https://fincenid.fincen.gov/landing.  An interesting and query-inducing side note:  You will be required to log in using login.gov, which is a system maintained by the Federal government for use by the public and interaction with participating government agencies.  I tried to create a new account, and was told I already have one, though I have no recollection of ever setting up such an account.  I do, however, have an Id.me account that I set up some years ago.  Id.me is a third-party service used by some government agencies for interaction with the public (including IRS which, like FinCEN, is also part of the U.S. Treasury).  Perhaps there was some crossover there?  Who knows?  

Once I was able to log in, I was able to get the FinCEN identifier pretty easily, as I stated above.  I took a picture of my driver’s license and submitted that.  Now, if I move, or when I renew my license, I will have to file an updated report with FinCEN.  However, any companies for which I am a beneficial owner or otherwise have “substantial control” will not have to file an updated BOI report when my information changes.

Please consider a hypothetical based on a real example in our office.  Below is a chart (which has been abbreviated!) of companies in which our clients, two brothers, are involved as beneficial owners:  

These clients are incredibly fortunate to have (and to have had for a long time) a brilliant and capable assistant that helps them and us keep all of this straight.  Not all of our clients have that.

Imagine one person in charge of all of this, having to gather PII for all beneficial owners and others with substantial control as defined by the CTA.  Then imagine what happens when one brother moves.  In this hypothetical, one brother’s move would trigger TEN new BOI reports!  As you may have figured out, as did their brilliant assistant, the brothers are obtaining their own FinCEN identifiers.  We are also exploring the use of FinCEN identifiers for entities “upstream” of the reporting company.

I recommend, however, that this be taken a step further and that, in our hypothetical, all JV partners also obtain their own FinCEN identifiers.  This should ease the burden of the reporting companies regarding providing FinCEN with any updates to the personal situations of its beneficial owners and other with substantial control.

I further contend that this strategy is appropriate for any entity with more than one beneficial owner or other individual with “substantial control.”  One day I might contend it makes sense even for entities with only one applicable person.  I do not think it would be detrimental in any material way to take that approach.  

Again, stay tuned, I am sure there is more to come.