Regulations and red tape can sometimes rip the fun from running a business – regardless of the size of the entity. Just like a large corporation, small businesses risk fines, penalties, and negative tax implications if they do not stick to the necessary rules. So read on for our tips and tricks regarding four major areas of small business compliance.
Good small business compliance starts with developing a process that includes closely monitoring federal and state rules and regulations. Evaluate the current status of your small business compliance with questions such as these below.
- Is the human resources team up-to-date on changes in employment law?
- Is the accounting team monitoring sales and use tax issues?
- Does the company have a compliance officer or committee, or does the compliance buck ultimately stop with the owner?
While certain industries are more heavily regulated than others, there are some general small business compliance issues that apply to businesses of any size. We’ve listed several of these issues below.
According to the Equal Employment Opportunity Commission (EEOC), racial and sexual discrimination are two of the most prevalent forms of workplace discrimination. Given that a 100-employee company can expect an employment practices claim at least once every three years, it behooves all companies to cling to the letter of the law.
Takeaway: Address the biggest causes of non-compliance head on by providing employee discrimination training — and documenting that the training occurred. Additionally, clearly spell out policies in an employee handbook. Then have all employees sign a document to acknowledge that they understand and will adhere to those directives. Finally, plan for periodic updates of that acknowledgment by your employees.
Resources: The Small Business Administration (SBA) website offers tools, guides, and training materials that can help organizations comply with employment and labor laws.
Employee Benefit Plan Compliance
The DOL requires businesses to properly manage employee benefit plans. The DOL expects plan sponsors to properly apply plan provisions, conduct tests, file proper reporting, and provide employees with required notices and documents. In some cases, businesses may need to submit audited financial statements.
Takeaway: Because of the compliance complexity, many companies utilize third parties to administer their benefit plans. However, even if a company outsources the duties of managing a plan, it still retains the ultimate fiduciary duty of executing the benefit plan in full compliance with the law.
Resources: The DOL provides the Reporting/Disclosure Guide for Employee Benefit Plans, a reference tool for basic reporting and disclosure requirements under the Employee Retirement Income Security Act (ERISA), as well as regulations and guidance for Affordable Care Act (ACA) compliance.
Tax compliance is easier said than done. Consider that there are roughly 10,000 state sales tax jurisdictions in the United States — and thousands of changes made by state legislatures each year. Complicating matters are Internet sales tax issues, as well as states increasingly subjecting new services and items to sales and use tax. Some states are even reversing exemptions that have traditionally been granted. States are typically aggressive in sales and use tax audits, so businesses of all sizes should watch out for areas of exposure.
Takeaway: Understanding sales tax nexus is one of the most important parts of tax compliance, yet many organizations lack this knowledge. A study by Thomson Reuters’ Sabrix Tax Services division found that 95% of companies surveyed underestimated their nexus footprint, and 85% of participating companies underestimated the number of states in which they needed to register by more than 50%.
Resources: The IRS’ Small Business and Self-Employed Tax Center provides online tools and educational products (including a desktop tax calendar tool) to help small business owners manage business taxes more efficiently.
A company that is registered as a C-corporation or an S-corporation must act like a corporation in order to enjoy the protection of a corporation. A business’ so-called “corporate veil” can be pierced if it violates rules regarding items such as holding annual director and shareholder meetings, adopting and maintaining updated bylaws, issuing stock to shareholders, and recording all stock transfers.
Takeaway: Small business owners and management teams should keep – and maybe even be “glued” to – corporate minutes. The goal is to maintain accurate documentation of the board’s actions to substantiate their discussions and decisions.
Resources: Business owners should check with the secretary of state (the state in which the business is incorporated) for specific guidance, such as the requirements for filing an annual statement or paying a franchise tax.
CRI Can Help You Avoid a “Sticky” Business Compliance Situation
Make the time to learn about the compliance challenges your business faces. After all, red tape that is not properly handled can create sticky situations that may impact your bottom line. Contact CRI’s experienced governance CPAs and advisors for assistance with your business compliance issues.