Dear valued clients and supporters: This month's newsletter will focus on: (1) the treatment of household employees under Internal
Revenue Code and state statutes; and (2) a closer look at raising capital through preferred shares in the context of our continuing series of articles
on start-up entrepreneurs.
While it is not impossible to lawfully employ a household employee, it can be
tricky. A household employee is a person who generally does such domestic work as housecleaning, cooking and/or child care. The implications of hiring
a household employee often surface when the employee files for unemployment or disability insurance or if the employee simply goes to a reputable accountant
to file their yearly income taxes - thereby triggering what is known as the "nanny audit" in the accounting and legal industries. Employers should be mindful
that the Internal Revenue Code requires a household employee to be treated similarly to any other employee. Thus, besides the wages paid to the employee,
the employer is also responsible for social security, medicare, and unemployment insurance (under both State and Federal Law) contributions on the employee's
behalf. The employer must also withhold taxes and pay the employee as a W-2 employee and make timely payments to the IRS for any withholdings. In addition,
New York law requires employers to obtain a Workers' Compensation policy as well as a disability policy. Employers are also advised to comply with the
minimum wage and overtime provisions of the labor law as household employees are not exempt from these laws. Failure to adhere to these regulations under
Federal and State law subject the employer to personal liability. Both employers and employees are advised to consider the exposure in back-taxes to the
IRS, as well as the possibility of criminal prosecution for willful failure to comply.
Start-up ventures, raising money and legal obligations
Last month's newsletter rolled out the first article of a three-part series on
start-up ventures and capital. The first article
, focuses on corporate structures,
corporate formalities and applying for securities registrations exemption prior to the "seed" money or "friends and family" stage of raising capital.
The second article
, focuses on issues faced by a start-up entrepreneur that has already used the initial “seed” money to start the business, but is now at the stage
requiring additional capital infusion to fuel the company’s growth. While there are many avenues through which additional capital can be raised, the
second article in the series considers the issuing of preferred shares of stock in the company as the mechanism for raising capital.
Preferred stock is a class of shares that by definition entitle their holders to priority payment on dividends and their asset value in the event of
liquidation over holders of common stock. Preferred stock typically give investors a fixed, prioritized return, but they do not necessarily come
with voting rights or a proportional share in the value of a company when it is sold. However, the specific attributes of the preferred shares
that a company sells are variable, and a major aspect of negotiations with investors is designing the shares in a way that meets the needs of both
The article on our site discusses three
of the most important negotiable attributes of preferred stock: liquidation preferences, conversion rights, and voting rights. The article also
briefly discusses the federal and state registration requirements entrepreneurs must follow when executing such transactions.