You're the Boss Blog: House Republicans Try to Simplify Small-Business Taxes

How small-business issues are shaping politics and policy.

This month, Republicans in Congress unveiled proposals to radically remake the way many small businesses are taxed. As with many radical Republican proposals, this one from the House Ways and Means Committee chairman, David Camp, furthers a partisan agenda — if implemented, it would almost certainly reduce revenue to the federal government. But it also wins praise from independent tax experts for repairing what they call a body of law almost too complicated to comply with or to enforce.

The proposals would streamline the tax rules for flow-through entities — companies that do not file their own tax returns but instead are structured to pass their profits or losses directly to their investors, which is how many small businesses are organized. “The tax code ought to be easier to understand and less expensive for small businesses to comply with,” Mr. Camp said in a press release accompanying the draft legislation (pdf), “because every dollar they aren’t spending on taxes is a dollar they have to invest in equipment, start a new production line, hire a new employee or provide more in wages and benefits.” But it is unclear how much most small businesses will benefit from the changes Mr. Camp has proposed.

At the heart of Mr. Camp’s ideas, embodied in an early stage of legislation known as a discussion draft, are two alternatives to revamp the rules for the two main kinds of flow-through structures, partnerships and S corporations. S corporations, named for a section of the Internal Revenue Code, operate like regular corporations and are governed by fairly rigid rules, while partnerships are granted more flexibility.

The first alternative mostly tinkers with the rules to make it easier to operate as a flow-through company. The second option would repeal the laws regulating both kinds of entities and replace them with a single set of rules, regardless of whether the company is organized as a corporation or partnership. The new rules would be based mostly on current partnership law, with a couple of S corporation provisions thrown in (they also include most of the changes proposed in the first option). Any partnership or privately held company that is now eligible to elect S corporation status would be able to file taxes under the new arrangement.

Tax lawyers and analysts cheered the prospect of simplifying this area of business taxes. “Many professors and academics who study partnership law felt like the whole partnership system was falling apart, because it had become so complicated and not administrable,” said Martin Sullivan, the chief economist for Tax Analysts, the tax news and analysis publisher. “The I.R.S. was having trouble enforcing the law. Even the most sophisticated taxpayers could not comply with the law. Everybody had to adopt an informal, ad hoc process.”

Businesses, though, may be less enthusiastic about a one-size-fits-all regimen. Many more small companies are organized as S corporations than partnerships, and S corporations, especially those engaged in more complex businesses, may find that filing their taxes is more complicated under the new regime, though tax experts disagree on how much more complicated. On the other hand, Mr. Sullivan said, these businesses may appreciate the additional flexibility — for example, they would no longer be limited to just 100 shareholders or face restrictions on the type of shareholders.

Partnerships, meanwhile, would find some of their options limited, particularly when it comes to strategies for avoiding taxes. Steven Schneider, a Washington tax attorney and an adjunct professor at Georgetown University Law Center, said that S corporations and partnerships are often organized in different circumstances. S corporations often build their assets from scratch, for example, while investors in partnerships often contribute existing, and valuable, property to the venture. But one element of the overhaul, imported from S corporation law, could make investors reluctant to contribute that property to the partnership, because it would require those investors to pay tax on the asset’s built-in gains should the partnership dissolve. (Built-in capital gains are the increase in value of an asset that occurs before it becomes part of a new venture.)

“They took a rule that made some sense in S corporations because it’s simple but applied that to partnerships, which were intended to allow flexibility to allow people to get together and break up again,” Mr. Schneider said. “So if I want to do a joint venture with another big business, I’m going to really think about it if I’ll have to recognize all my inherent appreciation.”

Though provisions like these would force entities to recognize more taxable income, overall the proposal would likely cost the government money, said Mr. Schneider and Steven Rosenthal, a visiting fellow at the Tax Policy Center. That is because it would encourage existing C corporations — whose profits are taxed twice, first at the corporate level and then on shareholders’ individual returns — to convert to flow-through entities. The sweetener is a provision that would make it easier for the new entity to shield the built-in gains on assets it sells from a 35-percent tax. Right now, thanks to a temporary stimulus incentive, a company only has to wait five years before selling those assets to avoid the tax. In 2014, the waiting period reverts to 10 years. (The rule is meant to discourage companies from converting simply to avoid the tax.) Both Camp proposals would make the five-year period permanent.

It is not clear how much support either proposal will win from Democrats, though some elements of the first option have appeared in bills sponsored by a Democrat, Ron Kind of Wisconsin. In a statement, the top Democrat on the House committee, Sander Levin of Michigan, called for more study on small-business tax policy.

Mr. Camp and Mr. Levin have invited small-business owners who might be affected by the proposals to submit comments to the committee. The suggestion box will be open until April 15 — Tax Day. Of course, as always, Agenda readers can comment below.

Small-Business Guide: Owners Assess Customer-Relationship Software

“They were way too complicated for us and did not have a great user interface,” she said. “I need to spend time running my business, not figuring out technology.”

That is the lament of many small-business owners trying to navigate the world of C.R.M. software, which automates sales and marketing functions and acts as a central database, keeping track of everyone who comes in contact with a business. The software enables businesses to communicate quickly and frequently with customers and keep track of their preferences and needs. For example, it automates tasks like sending out shipping confirmation e-mails and surveying customer satisfaction.

Small businesses generally do not need all the bells and whistles many advanced C.R.M. systems offer; instead, they need a program they can put in place quickly and easily, without the help of an information technology department. Many small businesses began using C.R.M. platforms in greater numbers about five years ago, said Amy Larrimore, managing partner at the Empire Builders Group, a technology consulting firm in Philadelphia.

“Technology makes it easier and cheaper to accomplish things,” she said. “And sales and marketing is traditionally a very labor- and cost-intensive part of a business.”

More recently, the platforms have become cheaper and easier to use, making them more of a crucial buy. With so many options available, we asked some small-business owners to tell us about their experiences.

FOR MICROBUSINESSES “Very small companies usually just need something to manage contacts,” said Ms. Larrimore. Her own firm used Batchbook until it reached 17 staff members, then it switched to Sugar C.R.M.

Taylor Aldredge, who heads branding and marketing for Grasshopper, a company in Needham, Mass., that offers a virtual phone system for small businesses, uses Buzzstream, software that helps manage social media marketing campaigns. It costs the company $40 a month for each of three users.

Mr. Aldredge wanted a way to track conversations with prospects, customers, journalists and bloggers. “I needed something that had the ability to track interactions and mentions — whether that is social media, links or press — to see which conversations were worth pursuing,” he said. The company’s customer base has grown 500 percent over the last five years.

Thanx, a San Francisco start-up that offers retail loyalty programs with rewards linked to a customer’s credit card, started with Salesforce. The service had many useful features, said Zach Goldstein, founder and chief executive of the nine-employee company, but needed “a huge amount of customization.” Mr. Goldstein could not afford to hire a consultant and felt frustrated that the system was not being used properly.

In December, he switched to Close.io, a platform that lets Thanx sales representatives make calls by clicking on a page representing a lead, without leaving the application or having to use the phone. It also sends and receives e-mails. “We started using it the day after we installed it,” he said. Thanx tested Close.io free as an early test user and now has five employees on its Lite plan, which costs $59 a month for each user.

FOR MOST SMALL BUSINESSES Scott Gerber, founder of the Young Entrepreneur Council, an invitation-only professional organization for entrepreneurs under 40, has been using C.R.M. software from Infusionsoft for about a year. The organization offers a mentoring program, and Mr. Gerber uses the software to track those who are being mentored as they go through the program and to send them specific learning materials.

“It’s easy to customize content and create the right tracks for where that content needs to go,” said Mr. Gerber, who added that the software had increased his organization’s productivity. “If I have 50 people I e-mail today and want to follow up in a week, I can send a personalized communication by writing the copy once, adding in the variables, and it will be sent out at the exact time I need to the designee of my choice.”

“Within two quarters of using it, we had 10 times the revenue per month,” Mr. Gerber said.

Derek Christian, owner and chief executive of My Maid Service, with 37 employees in its Cincinnati and Dallas offices and about $2 million in revenue, also began using Infusionsoft a year ago. Mr. Christian paid $1,200 upfront along with a $200 a month licensing fee.

He praised the company’s tech support, and also liked the drag-and-drop interface and the ability to build a customized e-mail marketing campaign. Before employing C.R.M. software, he said, a third of his company’s leads were converted to regular customers; now, he said, conversions are up to 40 percent.

Shelly K. Winson, owner of True Choice Benefits, an independent health insurance agency in Chandler, Ariz., uses Sage ACT!, a C.R.M. system owned by Swiftpage. The software is loaded onto two computers in the office and Ms. Winson pays $300 per user. It has helped increase her database of current and potential clients to 5,500 since she started in 2009. She can segment her audience for marketing purposes, and she believes the system has improved her customer service.

NOT QUITE ENTERPRISE LEVEL Enterprise C.R.M. systems, like those from SAP or Oracle, can take years, millions of dollars and a parade of consultants to put in place, but they include powerful features. Yet some enterprise-level features are available in nonenterprise systems like Salesforce, Microsoft Dynamics and a few newer platforms.

Mike Wolfe, president of WAM Enterprises, a digital marketing firm in Katonah, N.Y., uses Salesforce. His five-employee firm specializes in generating leads using social media, search-engine optimization and e-mail campaigns. Although some small-business owners say Salesforce is too complex for them, Mr. Wolfe likes the basic edition, Contact Manager, and pays $300 a year ($5 a user each month).

He said he especially liked the mobile app. “With the app, if a client needs to reach us and we weren’t planning on it that day, there’s no reason for anyone on our team to say they didn’t have the information they needed to call back,” he said.

Benjamin L. Luftman, a partner and co-founder of Luftman, Heck & Associates, a law firm in Columbus, Ohio, that has 30 employees and four offices, likes the AppExchange, an online market where vendors sell a variety of business applications that can be integrated with Salesforce. Mr. Luftman uses Salesforce’s Enterprise edition, which costs $125 per user each month, with the Conga Composer app to create packets of forms needed by the courts for each client. “I hit one button and all the fields in these forms are populated with that client’s information,” he said.

Acumen Learning, a training company in Orem, Utah, with 18 employees and $5 million in revenue, uses Insightly because it is flexible, said the company’s marketing director, Mike Wright.

“Big business C.R.M. systems tend to dictate your processes — how you will prospect someone and get them in the system,” he said. With Insightly, Mr. Wright said he can design and modify the processes his company uses. “We wanted to add two additional steps to our sales process, and it was changed overnight,” he said. He uses Insightly’s Advanced package, which costs $49 a month.

At RemoteStylist, Ms. Fallis is now using Capsule and paying $12 a user. She said it integrated easily with other applications, and she could customize data fields and segment customers for marketing initiatives.

“And Capsule’s support team is very responsive,” Ms. Fallis said. “I can’t sit back and wait for an answer when my whole operation is on hold.” 

Small-Business Guide: Tips for Small-Business Owners to Avoid Employee Lawsuits

Monica Almeida/The New York TimesJeffrey Herold, who owns West Coast Trends in Huntington Beach, Calif., persuaded a former employee to apologize for suing.

Many small-business owners respond to employee lawsuits with grudging acceptance that, regardless of whether the company broke any laws, the sooner it pays a plaintiff to go away, the better. As repugnant as this may sound, it is a cost of doing business. That, at least, is one approach.

Do you settle and move on? Or do you fight?

Liability insurance isn’t cheap, but neither is defending a lawsuit.

If you buy insurance, be sure to retain the right to hire a lawyer of your choice.

And make sure the insurance company cannot settle without your consent.

This article from Score details practices that are likely to bring lawsuits.

This article from USA Today explains why many employees sue for overtime pay.

And here’s an article from Bright Hub that explains why employees are suing more frequently.

Jeffrey Herold, who owns West Coast Trends in Huntington Beach, Calif., does not subscribe to this belief. His company, which makes golf bags, luggage and related accessories, and averages $10 million to $15 million in annual sales, has faced three employee lawsuits alleging wrongful termination since Mr. Herold founded it in 1990. Confidentiality agreements preclude him from discussing the first two.

When the third suit was filed in 2010, he said, he was wiser. He vowed to fight all the way to trial, if necessary. “It didn’t make good business sense to settle,” he said. “We did nothing wrong.”

The litigation followed a period in 2008 when West Coast, like many small businesses, was forced to downsize as the recession deepened. Mr. Herold said annual sales had dipped 35 to 40 percent. To keep the company afloat, he laid off 14 people, about 30 percent of his staff, including one of two national sales managers, John Keller.

In court documents, West Coast stated that Mr. Keller’s performance had declined before his termination. As a result, Mr. Herold said, he reduced Mr. Keller’s sales commission by 25 percent the month before his termination. Before that, Mr. Herold said, Mr. Keller was warned about his productivity and Internet use.

Two years after his termination, and following unsuccessful attempts to obtain a settlement from Mr. Herold, Mr. Keller filed a lawsuit against West Coast and three of its employees.

Mr. Keller’s complaint included an allegation that, in terminating him, West Coast had breached an “implied” employment contract providing that he could be terminated only for “good cause.” But most of his case rested on “a mere convenient coincidence,” West Coast said in court papers.

Days before his scheduled termination, West Coast said, Mr. Keller had placed a call, an apparent “pocket dial,” from his cellphone to West Coast’s other sales manager, Josh Miller. In his complaint, Mr. Keller asserted that Mr. Miller had initiated the call and that it had been connected accidentally by Mr. Keller’s phone. In either case, once the line was open, Mr. Miller heard Mr. Keller in mid-tirade against West Coast and its employees. As Mr. Keller went on, Mr. Miller pulled West Coast’s chief operating officer into the room. He, in turn, had an assistant join them to take notes.

In his complaint, Mr. Keller claimed that his overheard comments, not his performance or the economy, had led to his termination. He asserted that West Coast and its employees had invaded his privacy by eavesdropping on his conversation and used what they heard improperly. He sought damages of more than $1.2 million, including compensation for lost earnings and statutory violations regarding the eavesdropping counts, as well as an unspecified amount in punitive damages.

After depositions revealed the nature of Mr. Keller’s eavesdropping claims, which Mr. Herold called “comical,” Mr. Herold remained determined not to settle. Having employment practices liability insurance that covered his legal expenses strengthened his resolve.

The case went to trial in early 2012 and got as far as jury selection. Eventually, however, Mr. Keller indicated a willingness to accept a statutory settlement offer of $25,000 that West Coast had extended before the trial, even though the settlement’s 30-day expiration date had passed. After Mr. Herold responded that the offer had indeed expired, Mr. Keller began to drop his settlement demands incrementally until they reached $10,000. At that point, the judge urged the parties to settle, for efficiency’s sake.