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Is working for a startup without pay illegal?

My attorney says she's wary of using the Slicing Pie model, that I should find a securities lawyer. Workers must be paid. I searched on-line and it seems that for-profit companies can't have volunteers. Or they can, but they might run afoul of The Fair Labor Standards Act (ehow.com/facts_7464428_can-business-volunteers-isn_t-nonprofit_.html ).

So is my corporation running an illegal operation because I'm working without pay? Must I give or lend my company enough to pay me minimum wage plus the employer 7% of social security and medicare and have the company pay me?

And now someone is joining me. Maybe I should pay him $1/month as a contractor, plus give him the right to his Slicing Pie portion?

Or should I dissolve the corporation and have it be a partnership?

74 Replies

Max Avroutski
4
1
Max Avroutski Entrepreneur
eCommerce, Software Developer, Usability, Marketing & Product Creation consulting services.
It is illegal not to pay people who are legally employees no matter if you call them contractors and no matter if they agree. There is a legal definition of an employee in each state, find it in yours. In most states except in CA & NY there is a way out by assigning bonafide 20% of the company to employee and then you don't have to pay them, but SlicingPie would not work because if any of them get less then 20% at solidification they can sue for unpaid wages. In CA & NY even 20% is not possible. Solution is pay or run from another state. It's pretty stupid situation to pay yourself your own money & to be taxed again on after-tax money. Don't forget to pay Income tax. I haven't researched partnerships. Only if stock is worth a lot where investors bought it and you pay with it to employee and that is more than minimum wages only then there maybe a way out, but if you have investors that buy your stock then you should have money to pay minimum wages.
Rand Strauss
0
0
Rand Strauss Entrepreneur
Transforming politics and government, Visionary at PeopleCount.org
What if the people working are just board members?

Weird, thanks. No, the company only has money that I give it or lend it. It's a California C corp (really a benefit corp, but there's no diff between it and a C corp, other than that it can make decisions to deliver the benefit, not just profit.)

Minimum wage is "only" $9/hour in Ca, call it $10, so $10k each for 6 months, sigh... And about $1.25 would go to taxes...
Max Avroutski
2
1
Max Avroutski Entrepreneur
eCommerce, Software Developer, Usability, Marketing & Product Creation consulting services.
Randy, are you not going to pay income tax ?
"board members" & "Working" are still "employees"
Edit: If they only doing board member work then they are board members, but if they also do employee work then they are also employees.

Steve, while being LLC members they also can be employees , you are confusing stock/interest holding with providing work.

"However, in practice, no one will enforce the minimum wage unless one of your co-founders files a wage claim against the company. Not impossible but very unlikely." partially agree - if possible why tempt the fate, you give your employee tremendous leverage over you, like they know you killed someone and they have the proof, most people will give in to demands and that is why you don't hear many people being sued.
Kenneth Larson
0
1
Kenneth Larson Advisor
Retired Aerospace Contracts Manager, MicroMentor Volunteer and Founder "Smalltofeds"
The most common form of the occurrence you have questioned is "Sweat Equity", whereby a prospective partner earns a share of the business by an agreement to perform a certain amount of hours or bring a specified product to fruition on the part of the organization.

Upon achievement of the specified milestones, the agreement results in the addition of the contributing party to the organization article of incorporation as an owner, and a specified % of ownership or number of shares are added on his or her behalf to the company operating agreement.


Rand Strauss
0
0
Rand Strauss Entrepreneur
Transforming politics and government, Visionary at PeopleCount.org
If I must pay people, and it seems that I must, I'll use ZenPayroll, so if minimum-wage employees pay income tax, we'll pay income tax. They also provide worker's comp...

Luckily, we're planning to be profitable in 6 months, so it's not too much of a burden- 3 people at min wage is $30k. If someone wants to chip in $100k, please don't be shy...

I looked yesterday at http://startupclass.samaltman.com, #18. They go over your example. If I don't pay someone and have to fire them, they have tremendous leverage and usually use it to get the rest of their stock vested...
Max Avroutski
2
1
Max Avroutski Entrepreneur
eCommerce, Software Developer, Usability, Marketing & Product Creation consulting services.
Ken, "Sweat Equity" is illegal in USA. Everyone have to be paid. Again, you have to pay ether in cash or in some cases in it's equivalent. Stock of un-invested into company worth $0 to IRS. In some states you have to give 20% and then you can not pay.

Rand, 6mo ? it's nice to see optimists still exists. (wink)

There are some very borderline things possible, but would require too much of a lawyer's time.
Rand Strauss
0
0
Rand Strauss Entrepreneur
Transforming politics and government, Visionary at PeopleCount.org
Yes, 6 months. More than that, I'll make you a promise. PeopleCount.org/how.htm will make a big impact in the 2016 congressional election in making Congress accountable to citizens, and freeing them from much of their accountability to donors and the parties. If you want to keep track of our progress, put yourself on our mailing list: PeopleCount.org/tohelp.htm
Irwin Stein
2
1
Irwin Stein Advisor
Very experienced (40 years) corporate,securities and real estate attorney.
Rand: You do not have to pay yourself if it is your corporation. If someone else is performing tasks for you, you can negotiate a price for the task or for hours spent performing the task as an independent contractor. The IRS has very specific rules about who is an employee and who is an independent contractor. You cannot, for example, tell them when they must be in the office or come to work. You can get the regulation from the IRS. Owners do not have to get paid and independent contractors can work for a negotiated price. If the person is really an employee, then minimum wage rules apply. You will also need Workmans Comp. insurance for employees.
Rand Strauss
0
0
Rand Strauss Entrepreneur
Transforming politics and government, Visionary at PeopleCount.org
I just brought on a cofounder. But the IRS definition of employer is:
https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Defined
With an employee: "the employer has the legal right to control the details of how the services are performed." Even if I have the right to terminate the company's relationship with him if I don't get my way, I don't have a legal right to control how he does stuff. I can't call the police if he disobeys. We're peers. But yes, if I have someone work for me, they would be an employee. Thanks!
Colin Vincent
3
1
Colin Vincent Entrepreneur
TEDx Speaker | Co-Founder at Equity Directory
At Equity Directory, we recommend that you decide on an hourly rate and that gets billed against a convertible note, which carries the same terms as the current raise.
If you are looking for equity-based engagement, join us at http://www.EquityDirectory.com

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