MISCELLANEOUS TAX AND BUSINESS MATTERS
Employment taxes and withholding. Employees are generally required to pay FICA and medicare taxes with respect to wages. Such taxes are paid via withholding by the employer from the employee’s paycheck. The FICA tax rate is 6.2% and the medicare tax rate is 1.45%. The maximum wage for FICA tax purposes is $87,900 for 2004 and $90,000 for 2005. There is no maximum wage for medicare tax purposes. The employer must pay a matching tax liability. In addition, the employer must generally withhold income taxes from the employee’s paycheck. The employment tax and income tax withholdings and the employer’s employment tax liabilities are paid by the employer. Most employer must file a form 941 within a month after each calendar quarter to report such withholdings and tax liabilities.
Unemployment taxes. The federal government imposes an excise tax on each employer at the rate of 6.2% of the first $7,000 of wages paid to each employee each year, but provides a credit of up to 5.4% for state excise taxes paid to an unemployment fund. Thus the minimum federal tax is 0.8%. The state gives each employer an experience rating based on unemployment benefits paid. If the experience rating is lower than 5.4% (i.e., low claims history), then the credit against the federal excise tax is 5.4%. Wages in excess of $7,000 are also not subject to the state unemployment tax. The state’s tax rate for new employers with no experience rating is 2.7%. Thus new employers will be liable for combined per employee per year unemployment taxes of $245 ($7,000 x (2.7% + 0.8%).)
For FUTA purposes, corporate officers are employees, but partners and LLC members are not employees if the partnership or LLC is taxed as a partnership. LLC members of LLC’s taxed as corporations are employees.
New employers must file a form UCS-1 to get an unemployment tax identification number. FUTA taxes must be deposited quarterly beginning in the first quarter that the employer’s liability for the year exceeds $100. State unemployment taxes are also paid quarterly via form UCT-6. An annual Form 940 or 940-EZ must be filed on or before January 31 each year.
If an entity takes over the business and employees of another entity (e.g., via an asset sale), the successor succeeds to the predecessor’s experience rating, gets a credit for the predecessor’s FUTA taxes paid and can be held liable for the predecessor’s FUTA liabilities.
Sales and use taxes. A person who conducts a business involving admissions or the sale of goods is a dealer who must collect sales taxes on its sales of taxable goods and services and pay same to the State of Florida. Similarly, landlords of commercial (and short-term residential lease) property are considered dealers and must collect sales taxes on rents collected. Each dealer must register with the state via filing a form DR-1. Sales taxes are paid on a monthly basis via form DR-15CS. The state tax rate is 6%. Counties may impose additional sales taxes, in which event the collection and payment process is the same, except for the tax rate.
The use tax is imposed whenever a person brings tangible property into the state without having paid a Florida sales tax on the purchase. A credit is available to the extent of sales taxes paid in another state. The use tax is rarely paid by consumers, but generates significant revenues in audits of Florida businesses which purchase equipment and supplies from out of state vendors.
When a business is sold, Fla. Stat. §212.10 provides that the buyer of inventory can be held liable for any sales taxes, interest and penalties which the seller does not pay unless the seller gets a release from the Department of Revenue (which generally requires an audit.) This rule can act as a severe trap for the unwary. The buyer does not even get to participate in an audit of the seller conducted after the sale. I have had two cases where buyers of convenience stores ended up with sales tax liabilities of the sellers far in excess of the purchase price.
Worker’s compensation. "Worker’s compensation" is a general term for the system of laws that provide compensation to workers from their employers for job-related injuries. Under worker’s compensation laws, there generally is no question arising regarding the employer’s fault or the fault of any third person or assumption of risk by the employee, provided that the injury occurred in the course of employment. The basic idea is to provide an expeditious remedy for the injured employee and a liability for the employer which is limited and determinative.
The employer has a duty to "secure compensation" for its employees. This generally is achieved by purchasing insurance. The rates are a function of the nature of the employee’s duties. In the construction industry contractors are liable if their subcontractors fail to supply coverage.
Sole proprietors and partners are ordinarily not employees and are thus exempt from coverage, but can elect such coverage. Corporate officers and managerial members of LLC’s can elect to be exempt by filing a Notice of Election with the Department of Insurance. The rules are different for the construction industry. Sole proprietors and partners in the construction industry will be considered employees unless they elect to be exempt and pay a $50 application fee. Further, no more than three officers or partners may be exempt if the business is in the construction industry.
Businesses (other than in construction) with four or more employees, full-time or part-time, are required to carry worker’s compensation coverage. (An exempted corporate officer or LLC member does not count for such purpose.) Businesses in the construction industry with at least one employee must carry worker’s compensation coverage.
Occupational licenses. Most businesses and professions are regulated by the Department of Business Regulation (DBR). Some businesses and professions may not be engaged in without being licensed by the state. Counties may impose an occupational license tax. (Fla. Stat. §205.032.)
Fictitious names. A business which operates under a name different than its formal name is required to register the fictitious name with the Division of Corporations. The registration fee is $50. If a business fails to comply with the registration requirement, then the business may not defend or maintain a lawsuit until compliance has been effected.
Securities law. A shorthand way to think of securities is that they are investments in which the return is a function of someone else’s management. Examples are corporate stock, limited partnership interests or LLC membership interests if someone else is in control. But other investment vehicles can also be securities, such as a high interest unsecured note to a financially weak corporation.
The sale of securities is regulated by both Federal and state law. Each set of laws provides a remedy for investors against the seller and certain other persons if the securities laws are not followed. The investor’s remedy is the right to rescind the purchase and get a return of the invested money plus interest and attorney fees. In other words, the investor does not bear the risk of loss (assuming he can collect) if the seller does not follow the securities laws.
Both Federal and state securities laws require that the securities be registered before they can be sold. Registration is an expensive and time consuming process. However, each set of laws provides exemptions from registration and sale.
The Federal small issue exemption is found in Rule 504 of Regulation D of the Securities and Exchange Commission. Rule 504 provides that registration is not required if the total value of the securities to be sold is not more than $1,000,000, there is no general advertising, no general solicitation and the buyers have no right to resell the securities without registration or an exemption. (There is also a form to be filed with the SEC.) These tests are easy to meet. In other words, the feds don’t care much about small deals.
The state law exemption is found in Fla. Stat. §517.061(11). The requirements are summarized as follows:
For example, the Florida exemption is available if the securities are not advertised, the investors are solicited privately, there are only a few sales, the investors are given the opportunity to ask questions and get answers, no commissions are paid and each investor is informed that he can change his mind within three days. Again, those requirements are easy to meet.
If a client intends to raise money from investors by, say, selling membership interests in his LLC, I typically prepare a Subscription Agreement for each investor to sign. The Subscription Agreement is designed to help qualify the sale of securities for both a Federal exemption and a Florida exemption. At a minimum the Subscription Agreement informs the investor of the three day recision right, his right to information and the fact that the securities are not registered and cannot be resold without an exemption. Note that a private placement memorandum is not necessary.
If an investor sues to rescind a purchase of securities on the grounds that the sale was an unlawful violation of the registration requirements, the defendant(s) will have the burden of proving entitlement to the exemption. If the sale by the LLC were held to be unlawful either because the seller was not entitled to an exemption or because of fraud, falsification or concealment of a material fact, then Fla. Stat. §517.211 gives the investor the right to rescind the transaction and recover his investment plus interest and attorney fees from the seller and from "every director, officer, partner or agent of or for the seller" who "has personally participated or aided in making the sale…" That is, to recover against an individual, the individual would have to be a director, officer, partner or agent of the seller and would have to personally participate or aid in making the sale of the securities.
(c)2007 Steven M. Chamberlain. All rights reserved. Republication with attribution is permitted.
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