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New Regulations Will Impact SMBs in 2024

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As if figuring out how to make a decent profit in 2024 won’t be enough to tie your stomach in knots, the federal government has arranged for the New Year to bring a passel of new regulations for Freelancers and small business owners to grapple with. While it’s true that business and labor regulations are created to promote fair, ethical and legal conduct and working conditions, what it takes to comply can sometimes place a burden on Freelancers and small business owners, who may struggle with the required paperwork, the costs of implementation and, always, the threat of penalties for missing a deadline or failing to comply. But cheer up, my friend, because one of the new rules will give you a spoonful of sugar (thank goodness!). Here’s the who, what, when and why of it all, coming your way.

Corporate transparency

As of January 1, 2024, most small businesses will be required to file a Beneficial Ownership Information (BOI) report with the federal government under the Corporate Transparency Act. The act is intended to increase transparency regarding business ownership and help law enforcement officials discourage the use of shell companies for money laundering, terrorism, fraud, or other illegal activities.

Under the CTA, new and existing businesses that meet the definition of a reporting company must file a BOI Report with the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN). The report provides information about the identities of the beneficial owners of the business, that is, those who directly or indirectly exercise significant control over the business or own 25% or more of the business. Entities formed on or after January 1, 2024, must also provide “company applicant information” about individuals who file business formation or registration paperwork and will have until January 1, 2025 to file the initial beneficial ownership.

Unless your entity is exempt, all corporations, limited liability companies and other reporting companies must provide the Treasury Department (FinCEN) with info about the beneficial owners, meaning, a list of those who either own or control the company. New businesses are also required to provide info about who prepared and filed the business formation documents. Reporting companies could face civil and criminal penalties if they don’t file the report. While the CTA may seem as if it applies to big corporations, the rule primarily impacts small businesses, including LLCs and S Corps with just one or two owners.

Domestic reporting companies are corporations, LLCs, limited partnerships and other business entities created by filing documents with the secretary of state or similar office, or with a Native American tribe. Foreign reporting companies are businesses formed in a foreign country that have registered to do business in any U.S. state or Native American tribe. A sole proprietorship or informal business partnership is not considered a reporting company and will not have any reporting requirements under the CTA. LLCs, corporations and limited partnerships must file beneficial owner information unless they fall within one of the 23 exemptions listed in the act. Most exemptions apply to larger companies and specific regulated industries, so small businesses and Freelancers who operate as a C Corp, S Corp, LLC, or limited partnership will likely need to file a BOI Report.

Small business loans

The Consumer Financial Protection Bureau’s Small Business Lending Rule would require affiliated financial institutions to collect and report data on small business loan applications, including applications from minority-owned and women-owned small businesses. The rule would also create the first comprehensive database of small business credit applications in the United States.

The goal is to create a database similar to what the mortgage industry has. Per the Home Mortgage Disclosure Act of 1975, banks collect data from residential mortgage applicants that includes geography, race, whether or not the loan was approved and at what interest rate. HMDA data is used by regulators and the public to look for possible signs of mortgage lenders discriminating against borrowers (redlining).

It’s often difficult for small businesses to obtain a loan because there may be scant profit made or an insufficient track record to assure banks of the owner’s ability to repay the loan on schedule. Women and minority-owned businesses especially find it difficult to obtain loans to grow their ventures. To encourage more transparency and equity around business loans, the CFPB in 2023 said it would require banks to begin reporting the demographics and income of small business loan applicants in 2024.

In rebuttal, some small business advocacy organizations claim that CFPB requirements will slow down the loan process and make it still more difficult for small businesses to obtain loans, not easier. Karen Kerrigan, Small Business & Entrepreneurship Council President and CEO, says the proposed regulations will “bury small businesses and financial institutions with costly and time-consuming paperwork, expose small-business borrowers and lenders to increased litigation and privacy risks, drive more small banks out of business and limit competition in the financial lending space”.

On October 26, 2023, the U.S. District Court for the Southern District of Texas issued a nationwide injunction prohibiting the CFPB from implementing or enforcing its Small Business Lending Rule, the CFPB has stayed deadlines for compliance with the small business lending rule for the moment. The U.S. Supreme Court may take up the matter, so those of you in search of a business loan may want to follow this issue.

National Labor Relations Board joint-employer rule

Also in October 2023, the National Labor Relations Board issued a revised joint employer rule, expanding the definition of “joint employer.” This means that two companies that are both responsible for some decisions about employees—such as a franchisor (entity that holds the trademark and grants license to use the corporate name) and franchisee (owner/operator of one or more individual franchise locations)—can both be held liable for unfair labor practices and the rule goes beyond franchises.

Backstory: in 2019, a group of 1,400 McDonald’s workers filed a lawsuit alleging that their employers had violated California Labor Code wage-and-hour regulations by denying them overtime pay and meal and rest breaks and also forced them to work off the clock. Furthermore, the suit alleged that as “joint employers,” both the Haynes Corporation, the franchisee that owned eight locations in Oakland and San Leandro, and the franchisor, McDonald’s, were responsible. Although the employees and Haynes reached a class-wide settlement, the court ruled that McDonald’s was not responsible, since it isn’t involved in “day-to-day operations” of the restaurants, despite them carrying the McDonald’s name. But on October 26, 2023, the NLRB issued a clarification of the joint employer rule, deciding that both franchisors and franchisees can be held liable for unfair labor practices and labor law can no longer insulate corporate franchisors from liability for what goes on at individual franchise locations.

Unions and workers’ groups say the new rule will benefit and help protect workers, but restaurant associations and other small business advocacy groups say it’s unfairly burdensome to owners. The rule was scheduled to go into effect on December 26, 2023 but pending Congressional and legal challenges, the NLRB extended the effective date of the new joint-employer rule to February 26, 2024.

Wages and overtime

Maybe you own a seasonal business and hire minimum wage employees to keep things going during the busy season? If so, you already know that hourly wages are rising and in fact, more than 20 states will have minimum wage increases in 2024, including Nebraska’s minimum wage increase of $1.50 to $12/hour on January 1, 2024, and Rhode Island’s increase of $1 to $14/hour.

There could be still more action on wages coming soon—in August 2023, the Department of Labor proposed a rule that would allow 3.6 million more workers to become eligible to receive overtime pay. The proposed regulation would require employers to pay overtime to salaried workers who are in executive, administrative and professional roles and earn less than $1,059 a week, $55,068 /year, as full-time employees. That annual salary threshold was increased from $35,568.

Karen Kerrigan, President and CEO of the SBE Council (and who also opposed collecting demographic info on small business loan applicants, as discussed above) said she expects that when the final rule is handed down it will face legal challenges, since raising the minimum wage would have a big impact on many businesses. The Labor Department may issue the final rule sometime in 2024. Kerrigan said, “That’s going to have a lot of disruption for small businesses in terms of cost, but also the models they may use in their workplace in terms of career growth models, compensation models, etc.”

$600 online payments reprieve

I’ve saved the best for last! In November 2023, the Internal Revenue Service for the second time delayed activating the requirement that payments of $600 or more for goods and/or services provided by you and sent to you via Third-Party Settlement Organizations, e.g. payment apps like Venmo and Zelle or online marketplaces like Amazon or Etsy, must be reported on IRS Form 1099-K as taxable income. The requirement was scheduled to go live in tax year 2023.

Instead, the IRS has instituted a threshold of $5,000 for tax year 2024 that will introduce a phase-in of what will eventually include the Form 1099-K $600 reporting trigger for TPSO payments received. The IRS in November 2023 said that in tax year 2023, 1099-K reporting will continue to be required only of Freelancers and others who received $20,000 or more in annual gross TPSO payments for 200 or more sales transactions in that year. Beginning in tax year 2024, the TPSO annual gross payments threshold for Form 1099-K reporting will be lowered to $5,000. 

Thanks for reading,

Kim

Update: In response to a suit brought by the National Small Business Association against the Treasury Department, the U.S. Federal District Court for the District of Alabama ruled on March 1, 2024 that the Corporate Transparency Act is unconstitutional. Presiding Judge Liles Burke granted the plaintiffs’ motion for summary judgment and issued a permanent injunction after finding that the CTA “exceed[ed] the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’ policy goals.” The ruling was handed down only two months after the CTA went into effect on January 1, 2024 and an appeal by the Biden administration is expected.

Image: © (Getty Images) James Stewart (R), as a caring community activist, points at Lionel Barrymore (L), a “greed is good” style real estate baron and banker, in a scene from It’s a Wonderful Life (1946, produced and directed by Frank Capra).

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Only Those Who Have Money Can Borrow Money

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Here is a typical story: A passionate would-be entrepreneur launches a venture, often with the romantic and exciting intention of bootstrapping the finances.  But realistically, bootstrapping is not the correct description of the financial plan.  The term that applies here is under-capitalized.  The idea may have been realistic,  but before our intrepid entrepreneur could get traction with the concept, the money ran out.  The only thing remaining was debt.

Our hero would like to start over, since valuable lessons were learned and baked into business plan and model 2.0.  However, start-up capital that was not requested in the first go-round must be sought now, because the realization that there will be no success without adequate funding is now apparent.  What can be done to give our story a happy ending in a world where it takes money to make money? Let’s take a look at some possible funding options, some common and others less so.

Friends and family financing

Besides your own bank account, the most obvious place to look for start-up capital is with friends and family, that is, if you have a very good idea of whom you can do business with and those relatives or frenemies who must be avoided.  Many business ventures are funded in this way.

If you choose to borrow from family and friends, put into writing the loan amount, terms and repayment schedule and agree only to what you are certain you can uphold.  According to CircleLending’s Business Private Loan Index, the average current interest rate on business loans made by family members and friends is 7.6%.  Do everything possible to preserve relationships and not let money divide you.  The last thing you want are tense holidays (there are more than enough ways for that to occur as it is).

Micro-lenders and web-based lenders

There are several non-bank lenders found only online that offer micro-loans to small entrepreneurs.  The loan amounts are usually between $5000 – $25,000 and these outfits can be excellent sources of start-up and expansion capital for entrepreneurs with debt and /or limited resources.  There is sometimes a potentially very useful credit repair feature available through certain of these lenders when loan repayments are reported to credit bureaus.  On-time payments will raise your credit score, improve your credit rating and lower your future interest rates.

Here are sites to visit, including the Small Business Association’s Micro-loan Program:  http://prosper.com   http://www.zopa.com   http://www.accion.com https://www.sba.gov/loans-grants/see-what-sba-offers/sba-loan-programs/microloan-program

There may as well be small not-for-profit organizations that are micro-lenders in your state, but they may not be found online.  To obtain contact information on these loan source possibilities, please visit  www.microenterpriseworks.org

CircleLending data demonstrated clearly that comparison shopping is a must-do.  The loan interest rate at Accion was 12%, while the rate at Prosper was more than 20%, for those with poor credit.

In 2016, the National Small Business Association found that 73% of small businesses used some type of funding to launch a venture, expand a business, purchase inventory or equipment, or strengthen the company’s financial foundation.  The 2012 U.S. Census Bureau Survey of Business Owners found that 57% of start-ups launched the venture with personal savings; 8 % used personal credit cards; 6% used other personal assets (retirement account?); and 3% used a home equity loan. Only 8% used a bank loan.

While it is possible for individuals who are in tight financial constraints to obtain bank loan financing and business credit cards as noted above, interest rates are high.  More than that, even those who might qualify for bank loans are not going there.  You want to put your money not into interest payments, but rather into building your venture into a successful enterprise and paying off debts, in that way positioning yourself to save and invest capital and build for yourself a strong financial future.

Thanks for reading,

Kim

Triple Dollar Signs, Andy Warhol (1982)   Christie’s Images, Ltd.

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Transition: Employee to Freelancer

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Happy New Year! Is your number one New Year’s resolution to establish your own entity and become a business owner or Freelance consultant? Are you planning to abandon the “safety” of a traditional job to directly market and sell your products or services to customers with money and motive to do business with you?

Going out on one’s own is a thrilling and sometimes frightening prospect. Those who take the plunge eventually discover that many resources that are casually taken for granted while working in an office are not readily available to those who step out on their own.  As you weigh your options and prepare to write your business plan,  be aware of a few changes and expenses to expect should you join the self-employed sector:

No paid days off

It is now Winter and there will be days when extreme snow fall could make it impossible to meet with a client or otherwise work.  Further,  regardless of the season,  there will be no more paid sick days,  vacation days or personal days.  In particular for those who own a small B2B or B2C venture where the business model requires you or your employees to visit a customer location (e.g., cleaning services),  or customers to visit your location (e.g., a laundromat),  snow days = no revenue days.

Establish business credit

For tax purposes,  it will be useful to open a separate business bank account and also apply for a business credit card or two.  There will be business expenses to write off and you want to make it easy to monitor spending.  Do yourself a favor and check your personal credit ASAP and correct any errors.

Financial management

Financial management will assume more than one form.  As noted above,  you’ll need to establish credit for the business,  so that you can order inventory and supplies without immediately impacting business cash flow,  for example.  Those are Accounts Payable items.  You will also need to ensure that clients pay on time,  or at all,  and that is an Accounts Receivable function.

Maintaining sufficient cash flow is crucial to the business’ survival and your own ability to keep a roof over your head,  food on the table and your car on the road. You must develop a business budget and plan for the purchase of equipment,  licensing costs (if applicable),  insurance (if applicable),  professional certifications (if applicable),  or space rental (if needed).

In addition,  you may consult with a business attorney or accountant to discuss the legal structure of your venture: Sole Proprietor,  Corporation (chapter S or C),  or Limited Liability Company.  The type of business that you’re in and your exit strategy will play a role in choosing the legal entity.

Paying for office supplies

Free scanning and photocopying will be over.  When you need to staple a few pieces of paper together,  you must buy the stapler and the staples and you’ll buy paper clips,  photocopy paper and envelopes,  too.

There will likewise be no meeting space or audiovisual equipment for you to reserve.  You’ll have to meet at the (prospective) client’s office,  or at a coffee shop or other restaurant.  Privacy might be an issue and arranging a Power Point or other visual presentation can be awkward as well.  A lap top computer or tablet are must-haves.  It will be imperative to possess the tools of your trade and to always appear as a competent and prepared professional as you develop your reputation and build your brand.

Next week,  we’ll look at more unexpected challenges that await those who choose to launch a business venture.

 Thanks for reading,

Kim

 

 

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C x 5 = Success for Your Business

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If one intends to succeed in business,  then it is necessary to manage the business effectively,  because in the long run,  the better-managed businesses  succeed.  Dan Barufaldi,  Freelance management consultant active in metro New York City,   authored the 5 C’s for Success in Business list.  According to Dan,  success in business requires that you attain and leverage these five resources:

Clients

Credibility

Cash flow

Credit

Capital

I.   Clients

But of course a robust client list is necessary if one expects to keep the doors open.  Clients are the life blood of every business and priority is given to acquiring and retaining the  source of revenue.  There are a number of tactics  strategies that business owners can use to find and retain customers,  including:

Advertising and promotion

Advertising in newspapers,  blogs,  newsletters,  trade journals

Email marketing campaigns

Trade show and conference  exhibits

Participation in local charity events

Brand

The focus may not be on a specific product or service,  but branding is marketing/advertising designed to enhance the reputation of the company/ consultant in the marketplace.  It is important to communicate to current and potential customers that the company/consultant is reliable and trustworthy.

Customer service

Create good word of mouth  (still the best form of advertising)  and stimulate referral business by providing excellent customer service and exceeding expectations every time.

Networking

Those whose target clients are B2B will greatly benefit from membership in the local chamber of commerce,  Rotary Club and neighbor hood business association.  Those whose target customers are B2C will be wise to take part in neighborhood charity events and otherwise be visible in the community.  B2G oriented businesses and Freelancers will attend information sessions and certified vendor conferences sponsored by city,  state,  county and federal organizations.

II.  Credibility

Freelance consultants and small business owners must package and present ourselves and our products and services in a professional manner.   We cannot afford to advertise and brand like the major corporations,  so we must be creative in our use of promotional resources.  A good ongoing branding campaign to enhance reputation is essential,  as is excellent customer service.  Promote your brand and build trust with good customer service,  to create good word of mouth that can earn you recommendations and testimonials.  Teaching is a time-honored way to demonstrate one’s expertise.  Speaking on (or moderating)  a panel at a professional development symposium is another excellent way to create visibility among your peers and potential clients.

III. Cash Flow

For Freelance consultants and small business owners,  cash flow can sometimes take precedence over  short-term profitability.  Cash flow glitches will result in unpaid accounts payable,  the inability to take advantage of special offers,  an unmet payroll and/or the inability to cover immediate and urgent expenses.  It’s a smart idea to project cash flow needs over 8 – 12 weeks,  so you’ll know when to invoice clients,  when receivables are expected,  when accounts payable are due and have time have time to cover any gaps that appear.  It may be possible to extend the due date on certain accounts payable,  accelerate the collection of accounts receivable,  adjust expenses or even get a bridge loan  (or a temporary job).

IV. Credit

Available credit supports cash flow management.  An honored request to increase the credit card limit allows one to float expenses when accounts receivable collections are unexpectedly slow,  or allows the business to stock up on inventory when prices are favorable.  Those with good credit ratings pay lower credit card interest rates,  which is also good for cash flow.

V.   Capital

Those looking to grow their business may need to make large expenditures and that will require access to capital.  If significant business growth is part of your organization’s three-year plan,  start now and improve your credit rating by paying off debts,  if that is an issue.  The establishment of a good relationship with a bank,  along with a credit rating and financial management practices that demonstrate good judgment and fiscal responsibility,  will be very helpful when it is time to seek financing.  Make an appointment with the manager of your bank to discuss your plans,  learn how much you are qualified to receive and the payment terms.  Meet a banker as you network at the local business association and get a second opinion.

Thanks for reading,

Kim

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Squeezed

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It is difficult to be in business these days.  Billable hours and revenue are down for most, especially for those who offer intangible services.  Unless a clear and visible link to a sale can be demonstrated, many decision makers are reluctant to sign a contract.

Sometimes that link to a  sale is  fantasy, especially when the transaction results in a tangible product.  This phenomenon may explain how videographers have been making so much money. The desperate and the naive seek to drive traffic to their websites in the hope that customers will spend some dollars.  Unfortunately, the video produced may not communicate the right message to target customers.  Furthermore, sticking a video onto the website is  often not the best  solution to the client outreach objective. Traffic to the website may actually increase—but will that expensive little film clip also increase revenue? Not if the message is wrong.

Paula Harris, owner and co–founder of WH Cornerstone Investments, says that one of the biggest mistakes that an entrepreneur can make is thinking that the phone will just ring when you spruce up your website.  She says it’s all about networking (source: Boston Business Journal Nov. 6-12, 2009).

On the other side, we’ve got the credit card companies squeezing us.  Need $10,000 from AmEx to finance a contract? Fuhgeddaboudit! Two or three years ago a reasonable account holder could call them up and request a credit line increase for a legitimate reason.  If you paid on time and your credit rating was decent, you could almost guarantee that increase, especially when a contract representing the pay-back money was involved.

Try making that call today (if you dare).  Not only will there be no credit line increase, but for good measure they’re liable to claw back a couple of thousand from the line you’ve got now! Oh, and let us not forget about the inflated interest rates.  I worry about small retailers who tried to purchase inventory for the all-important 4th quarter. What was that like this year?

The credit card companies and big banks—many of whom brazenly took our tax money in the form of bailouts—have turned around and are working overtime to kill our cash flow. With business down, we need to float expenses more than ever, just to pay the phone bill and eat! Big business has denied us our bailout.  As we all know, it takes money to make money and their actions are preventing small business people from making the money we need to survive.

As a result of these disturbing trends, both business and personal bankruptcies have increased nationally.   Cash flow is tragic.  Many have run out of options. Why has this been allowed to happen in the United States? How can we manage to hang on and ride out this awful storm that will last for God knows how long?

No one knows what to do exactly. There are defensive measures to take:  some may have an immediate benefit,  others that only in hindsight will the effects be revealed.  If you’re still in business and still  living in your house next year at this time, well then you did something right (or you got lucky).

I respectfully suggest a few defensive measures.  Increase your visibility through networking:  do some speaking, teaching, volunteering and attend selected business events,  so that good relationships can be made or renewed.  Whatever business you manage to  get is likely to come in through a referral source.  Remember also to make referrals and facilitate introductions for colleagues, when possible.

Refine and hone your elevator pitch and sales pitch repertoire.  Make sure that your verbal package contains the hooks that prospects and clients want to hear.  Prospecting will likewise be essential,  as you must identify all credible sales opportunities.

Negotiations  and compromises  are likely to be necessary and perhaps advantageous.  Consider offering discounts for invoices paid within 15 days.  Consider also trades and barters.  Make sure that you’re trading equivalents.

Short term employment or an under the radar type part time job (maybe in the evening) will ease your cash crunch.  If you can be certain that colleagues and clients will not encounter you,  particularly as you labor in a low wage gig for $12.00/hour,  this can  help to pay a bill or two each month.

Times of adversity demand a special resolve and resourcefulness.  I wish you good luck.

Thanks for reading,

Kim