Last month Coach Stacey and I presented at Endurance Exchange on business fundamentals for starting or growing your endurance sports business. Our presentation had four parts:
- Legal Issues when Starting or Growing a Business
- Financial Issues and Decisions All Endurance Sports Businesses Face
- The Importance of the Athlete Relationship
- Preparing Your Business to Grow (Why Marketing Matters)
We want to break down each of those topics in a little more detail. First up are the legal issues that should be on every business owner’s radar, and the disclaimer:
The information provided in this post does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available are for general informational purposes only. Readers should contact an attorney to obtain advice with respect to any particular legal matter.
So, you’ve gotten this far — if you are starting a new business, expanding your current business, adding a business partner, or looking to formalize your business model there are a few legal issues you should be thinking about right from the start:
- Corporate form and incorporation.
- Certifications and insurance.
- Classifying and paying employees and independent contractors.
- Protecting your confidential information and customer relationships.
When starting a business the first thing you want to think about is your corporate form. Of course you can go out into the world and start coaching athletes without having a legally recognized business, but doing so may subject you personally to liability if something goes wrong. What does that mean? If you don’t have a legally recognized business entity and you get sued, the person suing you can go after your personal assets (like your personal savings account), not just the business assets. Not a situation most people want to be in.
There are lots and lots of types of corporate forms — corporations (think S-Corp, C-Corp), not-for-profit organizations (think 501(c)(3), 501(c)(4)), partnerships (LP or LLP), and limited liability companies (LLC). The types and requirements of legally recognized businesses vary from state to state but one thing remains true regardless of the type of business entity you choose — a properly run business entity protects you and your individual or family assets.
In addition to having a corporate form, you also need to remember to observe corporate formalities. What does this mean? Make sure that you file all the appropriate paper work and follow the laws of the state your business is incorporated in, maintain business records, keep your personal assets and your corporate assets separate (at the very least separate bank accounts), and use the company name for things like marketing and invoices.
In addition to serving as a liability shield, having a formal business entity may also provide tax benefits and you should consult with a tax professional prior to incorporating as to what type of entity may provide the greatest benefit to you.
Certifications / Insurance
So now that you have a formal business entity, you’re ready to go out into the world and start providing coaching services. While coaching is not a regulated industry (anyone can call themselves a “coach”), lots of services adjacent to coaching — prescriptive nutrition advice, physical therapy, occupational therapy to name a few — are regulated on a state-by-state basis.
If you are going to offer regulated services outside of coaching you need to make sure that: (1) you meet whatever the state requirements are (e.g. some states require you to be a licensed RD to offer prescriptive nutrition services); and (2) you need to make sure that your insurance plan covers all of those activities. This holds true for things like group workouts and camps as well. Make sure you read the fine print. Many insurance policies require that you have a waiver from all participants (the USA Triathlon Club insurance policy does). If the insurance policy requires a waiver (or anything else), you need to make sure you’re adhering to the requirements so that if you run into an issue your coverage is not denied.
This is the big one. Many potential coaches want to be paid as 1099 independent contractors — as independent contractors they get a “whole check” and don’t have payroll taxes taken out. How a person wants to be paid doesn’t really matter. As the owner of a business it is your obligation to make a determination whether individuals you work with (who are not owners), including coaches who work for your company, are employees or independent contractors. I’ll note here how you pay owners is a completely different that I will go into in the future.
The difference between employees and independent contractors boils down to control:
- Behavioral Control. If you train the worker, direct their tasks, set specific hours, and dictate how the work should be completed, the person is likely an employee. To be classified as an independent contractor only the result of their work can be under your control.
- Financial Control. Paying the individual wages (a dollar per hour amount) versus flat fee (a set amount for a specific work product).
- Type of Relationship. Individuals who do work core to the running of your business are more likely to be considered employees. Individuals who work for you for an indefinite amount of time are also more likely to be considered employees.
One major thing to remember is that if you hire (and pay) someone as an independent contractor, you cannot prevent that person from coaching for another company, or from working with athletes outside your company / brand. Restraining someone from working for someone else or prohibiting them from taking clients outside your business makes that person a de facto employee.
The most frequent question I get when talking about independent contractors versus employees is why does it even matter if you’re paying the person? There are lots of reasons why it matter, but here are some of the highlights:
- Tax issues. Employees and Contractors are treated differently for tax purposes. Payroll taxes are withheld from employees. Employees are issued a W-2; Contractors are issued a 1099 (if they’re paid over $600). Improper classification can result in the requirement to pay back taxes, as well as penalties and interest.
- Wage & Hour Issues. Fair Labor Standards Act (FLSA) requires payment of minimum wage and overtime. Misclassified employees can sue (and get attorneys’ fees) for violations of the FLSA. This often comes up when an independent contractor applies for unemployment. State Departments of Labor will assess back taxes and fine companies if they find that a person was misclassified as an independent contractor. Misclassified individuals can also sue for back pay, including overtime, and penalties.
- Other Statutes. It is important to know the true number of employees your company has for things like whether certain statutes apply such as FMLA, Title VII and ADEA. If you deny someone a federal benefit because of a misclassification, you may have an issue.
Long story short, its really important to get this right and can be very costly for your business if you get it wrong. I would STRONGLY suggest working with an attorney to make sure that any individuals that work for you are properly classified and properly paid.
How to Protect Customers and Trade Secrets
Now that your business is off and running you likely want to protect proprietary and confidential information including information about clients and potential clients. Many people reach for a non-compete. That’s probably not a good idea. Non-competes are governed on a state-by-state basis. Generally a non-compete is only enforced against employees; you cannot enforce a non-compete against an independent contractor. As state requirements can vary greatly (i.e. California essentially prohibits non-competes, Massachusetts requires garden leave for period of time the person is restrained from competing) you should consult an attorney before having an employee sign a non-compete.
For many small businesses the better solution is a Non-Disclosure and Non-Solicitation Agreement. These types of agreements do not require an employment relationship, so you can have independent contractors sign them. Non-Disclosure and Non-Solicitation Agreements:
- Protect sensitive and confidential information, including customer information.
- Require the return of all information upon leaving a company.
- Do not require information to be a trade secret to be protected.
I am a fan of Non-Disclosure and Non-Solicitation Agreements if they are properly written. They have lots of the same upsides as Non-Competes but without the legal baggage.
So there’s a lot here. Hopefully if you have made it this far, you have a better understanding of some of the potential legal issues when starting (or growing) your business. If you have questions, please feel free to send me an email — [email protected]. In addition, for more resources check out our business mentoring and consulting programs and our business tool kit. And if you want to know more about me you can check out my LinkedIn Profile.