This article by Stuart Adams appeared as part of his material from an adult education seminar.
Rare is the successful small business owner who can do it all. Success usually breeds the need for additional management and labor hours. As the business grows, it will typically require more planning and "paperwork." If you are providing a product or service, demand may exceed the capacity of the original entrepreneur to keep up. Rather than turning away business, most entrepreneurs come to the choice of disappointing their customers with slower or more limited output of the product or service, or taking the big leap. That leap may take the form of higher priced equipment, but often may take the form of adding personnel to the business in some fashion. This a critical stage of the new business. It can spell success or doom.
Partnering Taking on a partner is a major change in the way a business is run. If the chemistry of an existing partnership has worked well, taking in a new partner will change that chemistry. It may be for the better or worse but it will change the mix. If the sole owner has been accustomed to making all the decisions and answering to no one, that will change.
An equity partner or a major stockholder has a right to protect his or her investment by "seeing the books" and voicing an opinion on how the company is run. If things were perfect, you probably wouldnt be at the point where the "partner" was coming into the business. Make sure personalities, goals, management styles, and work habits are compatible.
One key to making partnerships work is to put it all down in writing. Make sure your complete understanding is in writing. That includes price of admission (money, time and property); consequences of the business going bad; management and labor responsibilities; duty to provide additional money or security for business loans; ability to bind the business financially and by actions; transferability of interest in the event of death, disability, retirement, or mere desire to get out; ability to compete with or disclose proprietary information of the business upon departure.
A good partnership can reduce the risk to the original owner(s), enhance the ability of the management team to see reality, infuse the business with new money, bring in new skills, and much more. It will also result in a smaller share of any profits for the original entrepreneur and change the complexion of the business forever.
Employees Its much easier to hire an employee than to fire one. It seems to be much easier to find a poor employee than a good one. It is easier to lose a good employee than to retain one. Compatibility between a new employee and the current entrepreneur (and other employees, if any) is subject to most of the same issues as is the search for a good partner.
An employee requires a substantial investment of the entrepreneurs time and money. Many entrepreneurs shy away from hiring an employee because of the well founded fear of the additional money and paperwork associated with having an employee. They may forget, however, about the additional training time, equipment, management and supervision required to make an employee productive.
Time and money spent on an employee must be diverted from other needs of the business. This is based upon the gamble that some aspect of the business can be leveraged into greater profitability by use of the employees time and effort. Many entrepreneurs make the mistake of training an employee only to lose them to a higher paying or more attractive job once they become fully trained and able to justify the investment made in them.
Managing employees is nearly an art form. Obviously, compensation is a key issue. This can include not only pay but the benefits that go with a "good" job. It can be possible to induce good employees to your business by lures other than money.
Flexible hours and conditions are high incentives to employees with small children and other family or business obligations. Job sharing and multiple part-time employees can result in filling your "position" in nontraditional ways. Many employees are willing to take less pay if medical insurance and other benefits are available. Be creative and keep an open mind. Dont rush into what could be one of the most important decisions in your business.
You must also be prepared to lose your good employees. Make sure you know what they know. Keep an owners "cookbook" of your employees functions. You may have to perform them yourself or train someone else to do so. Employees get sick, take vacations, become disabled, retire, etc. Treat them right, be fair, and induce loyalty by your actions, compensation and other incentives.
Make sure your administrative work is in good shape. A high percentage of businesses that get in trouble arrive at that point because of failure to properly withhold employee taxes and other employer payments. Workers compensation and unemployment insurance payments must be kept up to date. What could be worse than an injured or terminated employee coupled with administrative or tax problems. Just when your key employee is out or gone and you need to put things back on track, you get double trouble if you have not kept up to date with your payments and paperwork.
Consultants Management, production and other consultants can be an alternative to either hiring an employee or gearing up with more expensive equipment. Before investing in either, the wise entrepreneur might consider hiring an outside consultant to help fine tune the business.
There may be other more efficient ways to get the job done. A top notch consultant, although expensive, can often be worth many times the fee over a fairly short time period. They can help avoid mistakes in judging technological or market trends. They may be aware of sources of help to the entrepreneur which can be purchased on an as needed basis rather than the entrepreneur making a major cash purchase which might not be justified over time.
Consultants should be carefully interviewed and checked out for references. There are large numbers of instant consultants afield looking for your business. You have a right and duty to your business to ask for proof they have handled several businesses like yours and similar problems. They should not be bashful about providing references you can look into.
Independent Contractors There is a great battle going on these days between small business and taxing authorities. The battle is over the issue of categorization of personnel working for the business as "independent contractors" rather than employees. Almost always, the small business will lose. Even if the employment audit is won by the entrepreneur, the cost to the entrepreneur of time, expert fees, and loss of other resources diverted from the business to wage the fight, will weigh heavily upon the business.
The rules of the battle are largely determined under what is commonly referred to as the IRS 20 point test. This is a list of certain criteria use by the Internal Revenue Service and others to determine if someone is an employee or independent contractor. There is no magic answer to the "test." The test is largely cumulative but some items and combinations of items hold more weight than others. Certainly, when more than a few of the characteristics of an employee are present for the person under consideration, the likelihood increases of designation as an employee.
In addition, it is important to note that if you have an employee doing essentially the same thing as an independent contractor, or if you have used the same independent contractor for a substantial period of time, you increase the risk of designation as employee. A list of the standard twenty points follows, as does an article about the severe penalties which can attach to improper designation of an employee as an independent contractor.