9 Common Ways Small Businesses Fall Out of Compliance

9-ways-small-businesses-fail-compliance

It can be exciting to start a new small business, but there’s also a lot to learn and manage all at once. If you’re not careful, you could find yourself out of compliance with important state and federal regulations and laws—and subject to employee lawsuits or government fines. Here are some of the most common ways that small business owners get themselves into legal trouble, and how you can avoid doing so yourself.

  1. No human resource department

Without a dedicated HR specialist, a small HR team, or an outsourced HR model, it becomes easier for companies to violate employment laws. With so many state and federal regulations for employers to keep track of, trying to develop HR expertise on your own can put you at risk for noncompliance.

  1. Not handling payroll taxes correctly

When it comes to the IRS, payroll taxes are serious business. That’s why it’s important to properly report and file payroll taxes for each of your employees. Small businesses must calculate, withdraw, report, and deposit tax funds, including federal income tax, social security, Medicare, and federal and state unemployment tax. If you take a laissez-faire approach to managing your payroll taxes, you might hear from the IRS when you least hope to.

  1. Not setting up the right incorporation

When you’re setting up your small business, you’ll have four main options for business entities: sole proprietorship, limited liability corporation (LLC), C corporation, or S corporation. Be sure to make an informed decision based on factors such as the amount of your earnings and deductions, your exposure to liability, where you live, and whether you have employees. Each entity has benefits and drawbacks, and not all entities are appropriate for all businesses. For example, if you have employees, you can’t be a sole proprietor.

  1. No shareholders’ agreement

If your business has shareholders, it should also have a shareholders’ agreement in the case of a deadlock disagreement. If the parties involved are unable to agree on the best way forward, a shareholders’ agreement can help mitigate the dispute, save time and money, and protect your interests.

  1. Choosing the wrong investor

Any investors you partner with become part owners of your business—which means that they have legal rights, even if they don’t have a majority vote on your company’s board of directors. If you and your investors have different ideas about how your business should be run, you could end up having to make compromises you don’t want or even getting kicked out of your own company. Take the time to be sure you and your investors see eye to eye before you sign on the dotted line.

  1. An out-of-date employee handbook—or no handbook at all

Your employee handbook educates your workers about company policies and benefits, as well as federal and state laws. Without one, key policies might be harder for managers to enforce consistently.

If you already have an employee handbook, be sure that you keep it updated to reflect recent changes in the law or new policies that results from a merger or reorganization. An employment attorney or an HR specialist can help you decide what to include and what to leave out.

  1. Falling short of treating employees equally and fairly

If you’re new to managing employees, be sure to take some time to get familiar with the range of employment laws and regulations that protect employees against discrimination, sexual harassment, wage and overtime abuse, and more. If you’re not in compliance, you might be subject to disgruntled employees or even a lawsuit.

You can read about U.S. Equal Employment Opportunity Commission (EEOC) regulations on the EEOC web site. They might not apply to you depending on your type of business and number of employees; but all employers are subject to the Equal Pay Act (EPA), which requires that male and female employees are paid equally for substantially equal work.

  1. Delaying 401k deposits

Employers are required to deposit participant contributions to a 401k on the earliest date that they can be separated from the employer’s assets, but no later than the 15th business day of the following month. If the employer is able to deposit the assets sooner than the 15th business day, her or she must do so.

Delaying payment is illegal because workers lose investment returns while their contributions are diverted. That’s why it’s a good habit to deposit 401k contributions as soon as you can.

  1. Wrongful termination

Employers are generally allowed a lot of leeway when it comes to hiring and firing employees, but limitations exist. Employers aren’t allowed to terminate in way that violates an employment contract, is based on discrimination, or retaliates for reporting illegal activity such as hour and wage violations. Firing for any of these reasons is considered wrongful termination, in which case you could be required to pay back wages and compensatory damages, and reinstate the employee.

Want to learn more about compliance? Visit myaliat.com/hr-compliance. Aliat is an expert in small business compliance. We partner with small businesses to reduce their legal risk, helping to create healthy, thriving organizations.