Skip navigation
2010

By Christopher Freeburn

 


Stress is a fact of daily life, especially for small business owners. Starting your own company and managing its growth forces you to deal with a myriad of never-ending problems, make quick decisions, smooth over employee interactions, deal with customers, suppliers, and business partners-not to mention bankers and insurance companies. Some people thrive on stress, using it as a tool to propel their performance; others find that, over time, it takes a toll on their productivity and erodes their sense of well-being.

The stressed-out workplace
There is no question that stress is a major issue in today's world. Indeed, in 1992, the United Nations declared stress the "20th Century epidemic." In fast-moving modern societies, where every day involves hundreds of complex decisions and constant interruptions, stress-inducing obstacles seem to litter life's landscape. But nowhere is the rise in stress more evident than in the American workplace, where stress-induced health issues, absenteeism, employee turnover, and lower productivity cost our economy an estimated $300 million a year. On average, according to data from the Center for Economic and Policy Research, adults in the United States work longer hours and take less vacation than workers in any other industrialized nation. Perhaps then, it's no surprise that a recent study of 2,500 American workers by CareerBuilder.com found that more than three out of four-77 percent-feel overworked and burned-out at their jobs.

Entrepreneurs, however, often carry a much heavier burden than the average worker. Pouring all of their passion into keeping a small company afloat amidst extremely challenging economic conditions, small business owners often pay an exceptionally high price in terms of stress. In fact, a Brother Small Business Survey from this past March found that more than half-51 percent-of small business owners reported their stress level as either higher than usual or the highest it's ever been. And nearly half-48 percent-acknowledged that they think about their business even while trying to fall asleep at night.

Causes of stress at work

 

Technology-much of it meant to reduce labor-has actually increased the amount of work we can do and, thereby, added additional stress. "Computers and cell phones and email all increased productivity," says Dave Bowman, a human resource expert at TTG Consultants, "but this also means you can do more work in a day, and that you end up expecting to get more work done every day."

Bowman also says that the combination of the deep recession and the highly competitive business environment has exacerbated this problem. "Companies are paring down their workforces to remain competitive, even as they increase the demands on their employees," he explains, noting that job stress is rising at all levels of the workforce. "It's not just the middle manager, or the executive vice president that feels stressed," he adds, "even production line workers and clerical staffs feel it too." Business owners under the strain of stress can lash out at their employees, become overbearing, or even create a hostile workplace, making them ripe for a lawsuit.

Rosemary Haefner, vice president of human resources at CareerBuilder explains that our society's connectedness also makes it harder to shut out stress from work once we go home. "The lines between work and life can be very blurry these days-17 percent of workers said they feel like their work day never ends because of technology connecting them to the office," she noted recently in another CareerBuilder worker survey from last year. "To reduce burnout and avoid potentially risky behavior, workers should allot technology-free time when away from work."

Dealing with workplace stress

 

All this stress-whether it's weighing on your shoulders or your employees-can cost a business significant profits, something that most companies now realize, according to Barry Hall, principal at Buck Consultants. "Employers increasingly realize they must address the rising tide of employee stress, and not just to improve employees' well-being," noted Hall in a recent "Stress in the Workplace" study. "Those who ignore stress will take a hit to their bottom line, in higher costs and lower productivity." As a result of this awareness, two-thirds of the more than 200 companies participating in the survey have implemented four or more strategies to mitigate workplace stress. (For more on this survey, go to http://news.xerox.com/pr/xerox/Buck-Consultants-A-Xerox-Company-Stress-in-Workplace-Survey-161678.aspx.) Below, are a number of these stress-busting tactics, plus a few others, that your small company can employ to avoid burning out your employees and yourself.

 


Employee assistance programs
Implemented by 78 percent of businesses in the Buck Consultants survey, employee assistance programs (EAP) are a very popular stress mitigation tactic. As something of a catch-all wellness benefit, EAPs offers workers the resources to deal with a wide range of personal issues before they begin to undermine work performance. (For more info on EAPs, check out http://ncadi.samhsa.gov/govpubs/workit/ts8.aspx, or to find a directory of certified EAP providers near you, go to http://www.eapassn.org/.) Studies of some large corporations have found that they experienced less absenteeism, lower medical claims, increased productivity, and a reduced rate of employee lawsuits after implementing EAPs. But entrepreneurs shouldn't dismiss EAPs as only something big businesses offer; many small companies have banded together into consortiums in order to offer EAP services at a cost of between $10 and $25 per employee.

Better time and resource management - A considerable amount of office stress results from poor time management, with too much time devoted to less important issues and not enough devoted to critical projects with impending deadlines. A better, more productive method, one that also accommodates the increased family responsibilities facing many employees and employers, might be to institute flexible work hours or even telecommuting at your business. This tactic is also an increasingly popular way for employers to minimize the stress from tight cash flow and avoid layoffs. In fact, last summer, a Monster Meter poll found that 55% of U.S. workers experienced flexible hours.

Take that vacation - Work is a critical part of most Americans' daily lives, particularly small business owners, who have often staked their personal energies and their financial futures on the success of their startups. Though working long hours, often seven days a week, and refusing to take any time off is common among entrepreneurs trying to make that first profitable dollar, no business owner can (or should) be all work, all the time. Nor should they expect their employees to be, either. In fact, some health surveys, like the Framingham Heart Study, have found a high correlation between people who rarely take vacation and their likelihood of suffering a heart attack. As a result, some businesses have begun offering three weeks or more of annual vacation time as a way to keep health costs low, improve morale, and prevent burnout from affecting productivity. Brian Scudamore, the CEO and founder of 1-800-GOT JUNK, who started his business at age 18 with just one truck, now gives staffers at the company's corporate offices five weeks of vacation a year after only two years on the job. There is one catch, though-they have to take time off for two consecutive weeks. "Extra vacation time helps prevent burnout," he explained in an interview on ABC's Good Morning America, adding, "which can lead to losing employees-a very high price to pay."
In this four-part series, we'll examine the different ways to structure your small business, comparing the various advantages and disadvantages of each

Part II - Limited Liability Company and Limited Liability Partnerships

 


by Reed Richardson

Started more than 30 years ago as a hybrid between corporations and traditional partnerships, limited liability companies have proven to be an increasingly popular strategy for small business owners and are now legal in all 50 states. The flexibility and financial benefits offered by an LLC structure have quickly made it a common choice for business owners of all sizes, supplanting even the once favored S-Corporation business model. (In 2007, after hedge fund investors bought out automaker Chrysler, they re-organized the new private company as an LLC.)

For the most part, LLCs and LLPs are very similar organizational structures. They both offer the limited liability protections common to incorporated businesses, but with the ability to pass through profits to the company's individual owners. Where they differ centers on operational control and tax status. LLCs, though equally owned by their members, are typically run on a day-by-day basis by a single president or a few hands-on managers, whereas with LLPs, the business's many partners usually have a more substantive role to play in running the business. As a result, most traditional retail and B-to-B companies tend to organize as LLCs, while most legal, accounting, and consulting firms-professional practices that have a higher number of partners and a more flattened-out organizational hierarchy-tend to favor LLPs. Also, an LLC can be taxed in various ways-as a sole proprietorship, general partnership, or corporation-but an LLP must, necessarily, be taxed as a partnership.

 

Here are some of the advantages of the LLC/LLP approach:

Operations - If your small business will have 35 or fewer partners, a fairly simple one-page article or certificate of organization, filed with your state's business authority, is all that is usually required to establish and maintain an LLC or LLP. (To find your individual state's filing requirements, try your state's Secretary of State website. To compare sample LLC and LLP certificates of organization from the state of Washington, go here: http://secstate.wa.gov/_assets/corps/LLC.pdf and here: http://secstate.wa.gov/_assets/corps/LLP.pdf .)

When it comes to spelling out how your LLC or LLP will run on a day-to-day basis, drawing up a fairly straightforward "operating agreement" is standard practice. This document, which typically runs from three to ten pages, sets up the rules for governing the company as well as the rights and responsibilities of each partner, or "member" as they're called in LLCs. These partners or members are free to make decisions and run the business however they see fit. They can even change the operating agreement whenever they want, provided they get unanimous approval. In addition, if some members of an LLC want to function more like silent partners, the group can choose to elect a manager or managers-who may or not be members of the LLC-to run the day-to-day affairs of the business. To create another layer of ownership and additional liability protection, LLCs can also have separate corporations as members. (To view a blank operating agreement, check out this online sample for LLCs in the state of California: http://docstoc.com/docs/294675/Sample-LLC-Operating-Agreement .)

Tax - The LLC or LLP operating agreement also spells out how the business's profits will be allocated. Just as in a sole proprietorship or general partnership, LLCs and LLPs allow for tax simplicity as they permit the multiple owners of the company to directly share in the profits and, as a result, file only once through their individual returns. In addition, they have the flexibility to choose not to "pass through" company profits to their personal tax returns or to have the business taxed as a separate entity. Also of note, because of the similar way profits are treated, the IRS allows sole proprietors and general partnerships to convert to an LLC or LLP without changing the company's reporting requirements or paying any additional taxes. (For a comparison of the tax implications of the different business entities, go here: http://irs.gov.)

Personal Liability - Here is where the LLCs and LLPs differ from sole proprietorships and general partnerships. Members of a limited liability business, while they enjoy the same tax privileges of a general partnership, get the same limited personal liability protections that are afforded to shareholders of a corporation. This means that members typically do not have any more exposure to loss than what they have directly invested in the business because any legal judgment against an LLC is limited to that company's assets. However, some states do have a requirement that at least one partner in an LLP have personal liability for the company, so be sure to check your local regulations.

 

While LLCs and LLPs can appear to combine the freedom of sole proprietorships/general partnerships with the safety of a corporation, they do have some quirks that are worth considering before you choose the LLC/LLP for your small business's structure.

Operations - Since LLCs and LLPs are relatively new legal entities, their regulations can still vary greatly from state to state, making organizational structure a bit more difficult for companies with a regional or national presence. For example, because some states restrict the types of businesses that can form as LLCs, most law firms and accounting practices with a nationwide presence choose to organize as LLPs since there are no states that restrict forming limited partnerships. Also, it's worth pointing out that several state laws automatically stipulate LLC expiration dates (typically 30 years after formation), which could complicate a situation in which a business owner intends to hand a company down to the next generation of his or her family. In addition, many states require unanimous approval by all other members before one member can sell or transfer their stake in the company. This also means that if a member dies, in many cases the LLC's operating agreement is immediately rendered invalid and a new document must be drawn up.

Tax - Just as with sole proprietorships, the earnings of LLC members and LLP partners are generally subject to self-employment taxes. In fact, the IRS does not recognize LLCs or LLPs as classification for tax purposes, so your business must still follow the tax filing procedures for a sole proprietorship, partnership, or corporation. Also, be aware that if your LLC sells or exchanges more than half of the company's capital within a 12-month period, the IRS will assume the company is dissolving the partnership and summarily terminate the LLC for federal tax purposes. And while LLPs and LLCs are mostly treated the same as general partnerships and sole proprietorships tax-wise, some states do not exempt the former group from state income taxes or "franchise taxes" so, again, it's best to check your state's Secretary of State website for more information. (To find a state-by-state list of requirements for starting a LLC or LLP, with links to individual state government websites, go here: http://limitedliabilitycompanycenter.com/states.html.)

Be sure to come back next week for Part III in our business organization series, which deals with the pros and cons of the S-Corp structure.
In this four-part series, we'll examine the different ways to structure your small business, comparing the various advantages and disadvantages of each

 

Part I - Sole Proprietorship/General Partnership

 


by Reed Richardson

The first and most common small business structure that many entrepreneurs choose is a sole proprietorship. This is the simplest and cheapest way to start a business and involves little more than hanging out your shingle and paying a few nominal fees to obtain a business or retail sales tax license. (A state-by-state list of business licensing agencies can be found at http://business.gov/register/licenses-and-permits .) For single-person start-ups, sole proprietorships remain quite popular and some businesses continue to maintain this structure even after they've hired staff and begun to bring in millions of dollars in annual revenue.

As for the advantages of a sole proprietorship, there are several:

Operations - Sole proprietorships don't require entrepreneurs to set up any complex organizational rules or governing bylaws as to how the business will be run. You can simply make decisions as you normally would since all the power and responsibility rests with you, the owner. From a legal perspective, the owner and the business are considered the "same entity" and for many entrepreneurs, who typically start their businesses because they didn't like taking orders from someone else, the ability to take their company in any direction they want is one of the primary advantages.

Tax - Filing taxes becomes much simpler in a sole proprietorship structure as well. All business revenues, expenses, and profits are recorded on a simple two-page 1040 Schedule C form. (For a list of potential IRS forms needed, go to http://irs.gov/businesses/small/index.html.) With a more straightforward filing come tax time, sole proprietorships often choose a correspondingly simple and less expensive accounting process. In addition to saving time and money in terms of filing, sole proprietorships also offer a couple of important tax breaks when it comes to family members.

The first of these involves employing a sole proprietor's minor children. It's a little-known fact that they can be hired without triggering any payroll taxes. In fact, this tax break is something of a win-win, as your children do not have to pay any income taxes on earnings of up to $5,000 a year, while you can save your business up to $2,000 a year on self-employment and income taxes if you pay your children that salary out of your business's profits.

Health Benefits - The other important benefit of sole proprietorships deals with health benefits, specifically health reimbursement accounts (HRAs). HRAs are employer-sponsored plans that pay back employees for medical expenses as well as health insurance deductibles and co-payments. Normally, sole proprietors, like general partners, and S-Corporation shareholders, are prohibited from participating in HRAs. However, if the sole proprietor's spouse is a legitimate employee of the business, he or she can participate in an HRA and, thanks to a loophole in the tax code, such coverage can include that person's dependents and spouse, who just so happens to be the business's sole proprietor. So by doing this, a married sole proprietor can reap the health insurance benefits of an HRA as well as claim the expenses of both self-employment and income tax deductions, potentially saving thousands of dollars a year. (For more on the potential savings of using this HRA tax loophole, check out this discussion on the TaxTalk section of the National Association of the Self Employed website: http://nase.org/knowledgecenter/myconsultants/taxtalk/10-05-25/Tax_Deductions_and_Hiring_Your_Spouse.aspx .)

 

Sole proprietorships do have some notable downsides, however. These disadvantages are particularly important if an entrepreneur has concerns about losing his or her personal assets in the venture or if in the future he or she might want to raise significant amounts of outside capital to grow the business.

 


Personal Liability - One of the major disadvantages of sole proprietorships is that they do not protect the owner from personal liability. So, if a business incurs large operating expenses or faces a lawsuit settlement that cannot be paid, the sole proprietor's personal assets-home, car, personal savings, etc.-can be targeted by creditors to pay off the debts. This represents a significant risk on the part of a sole proprietor and, as a result, has led to the rise of two other business entities-limited liability partnerships (LLPs) and limited liability companies (LLCs)-that legally shield the personal assets of entrepreneurs from business debts. (For a more in-depth explanation of the legal liability issues involved with sole proprietorships, check out http://smallbusiness.findlaw.com/business-structures/sole-proprietorship/sole-proprietorship-basics.html .)

Raising Capital/Adding Partners - Sole proprietorships tend to rely heavily on outside loans (debt-based funding) or the personal assets of the owner for capital. For start-up entrepreneurs who are seeking to raise significant amounts of capital through equity funding, however, it is often difficult to keep sole proprietor status. That's because most equity partners will require some sort of ownership stake or power-sharing arrangement if they are making a significant investment. To accommodate these changes, it is a good idea to have a lawyer draw up a partnership agreement that spells out the new terms and responsibilities of the business partners.

 

To keep things simple, the new business owners can opt for forming another type of structure called a general partnership, which is similar in many ways to a sole proprietorship. In general partnerships, very few company bylaws and financial documents are needed since most state laws assume that the stakes are evenly divided among each partner, unless otherwise specified. In addition, the business is typically not taxed as a separate entity and all gains and losses are routed directly through to the individual partners' personal tax returns, similar to how sole proprietorships treat profits. And because payroll isn't required for general partnerships if a company consists entirely of partners and has no employees, the paperwork requirements are often much simpler than that of a corporation.
However, general partnerships suffer from the same liability risks as sole proprietorships since the partners remain jointly and individually liable for any debts or judgments against the company. Also, many state laws mandate that if any one of the partners leaves or dies, the business partnership-just as with a sole proprietorship-immediately dissolves, which can make succession planning more difficult and legally tenuous. For this reason, equity lenders tend to seek out small businesses that are structured as LLPs/LLCs or those that have already incorporated.

Be sure to come back next week for Part II in our business organization series, which deals with the pros and cons of the LLC structure.

Filter Article

By tag: