The guys talk about the big payout LinkedIn made to its employees for backed pay. They also answer, "I wanted to incorporate as an S Corp but I heard there are restrictions. What rules do I have to follow?"
Full Podcast Transcript
NASIR: Welcome to Legally Sound Smart Business. This is Nasir Pasha.
MATT: And this is Matt Staub.
NASIR: And welcome to our business legal podcast where we cover business in the news and also add our legal twist – almost like a lemon in a piece of fish or a drink of some sort. And then, we’ll also answer some of your legal questions that you, the listener, can send in to firstname.lastname@example.org.
MATT: I want to know how you’re preparing your fish.
NASIR: You put, you know, a little bit of twist of lemon at the end, you know?
MATT: I guess. Usually, you’ll see that people will slice a lemon in, if you do some sort of grilling especially on a plank, they’ll put a slice on top and then that’s how it’s served. I don’t know. You can do a twist but…
NASIR: Of course, you always put lemon in. You know, it just depends on the fish. For any kind of fried fish or grilled fish, I like to put a little lemon at the end because I do tons of cooking. That’s all I do every day.
MATT: Ah, this podcast is basically like a fish is what you’re saying.
NASIR: Yeah, or a drink. You can put a little lemon twist in your drink.
MATT: I think that’s the better analogy, yeah.
NASIR: Oh, yeah.
MATT: A twist of lemon.
NASIR: Either way.
MATT: Oh, all right, well…
NASIR: A little twist of lemon in your lemonade is really good, too. Just a tad right at the end.
MATT: Well, before we get too off-topic, we’re going to talk about LinkedIn today. For those of you who don’t know, it’s a company where you can post your resume online, more or less. That’s how I look at it.
NASIR: I think that’s a very old school way of describing it. I think that’s how they started but, yeah, obviously, you were partly joking but still…
NASIR: That’s funny.
MATT: A little bit tongue in cheek. But, I mean, that’s more or less what the site is. It’s basically your resume on there.
NASIR: LinkedIn is another one of those sites I just don’t 100 percent get yet. I will, someday.
MATT: But, apparently, they do a lot of business. Let’s see. They made $1.53 billion in revenue last year. That’s pretty solid. But they’re dealing with a lawsuit and I guess they actually are going to pay out money, $6 million to 359 employees in back wages and damages for unpaid overtime. It looks like we’re getting into an exempt/non-exempt issue.
MATT: I’m guessing that’s what happened with this.
NASIR: Well, I think it’s a mix of things because it looks like they also did not track certain hours and, you know, this exempt status in California for inside sales persons, it’s somehow unique to California. Not every state has this and there’s no such thing that I’m aware of for inside sales persons in the federal law but, in California where LinkedIn is based – but I don’t think a lot of these sales persons were actually in California – you can be exempt from overtime if you’re paid more than 1.5 times the minimum wage and you’re inside sales and so forth and even if you’re 100 percent commission or whatever. But, at the end of the day, you have to be paid at least more than 1.5 times the minimum wage. But, these other cases in the other states, it looks like, when all these people were working overtime, they weren’t tracking it which that’s more of an issue – when they are working overtime, you have no way to determine if they are and so, therefore, you’re never even going to know that you’re supposed to be paying overtime.
MATT: And the production comes with outside sales positions and I guess what this one was was inside sales commission employees. I think that’s one of the reasons that this ended up the way it is but, yes, the not tracking the overtime, too – that’s probably the bigger issue than the inside versus outside sales position.
NASIR: Do you know what worries me? It’s that this is a tech company, obviously, but they didn’t have the tools in place for the employees and managers to track hours properly. That seems a little off to me because, first of all, there are plenty of tools out there – both online and offline and, frankly, even on paper you can do – to do so and, by the time the Department of Labor actually started enforcing this, they had caught up to speed or whatever but I don’t know. I think LinkedIn has already been construed as a company that’s a little bit behind in technology as far as they’re coming up. They seem to be copying what Facebook and Twitter does and so forth. They’re becoming their own a little bit now more than before but it’s kind of sad to see that they’ve finally got this done.
MATT: That’s a little bit questionable. I don’t know how that would happen for them but it was a federal claim but it was dealing with employees in California, Illinois, Nebraska, and New York. I don’t know how many different offices they have but this is obviously something that’s internal with the company. You know, it’s not just one branch that’s doing this. This is a company-wide issue. It’s stretching literally coast to coast. There’s a lot of red flags here which is their operations. No way to track hours. I mean, that obviously doesn’t help. This is a big internal issue, especially for a company that made $1.5 billion in revenue last year – which I guess that was mostly advertising and then people paying for job postings? I don’t know how else they’d make their money.
NASIR: I guess, yeah. I have to give them credit, though. They also stepped up after the allegations came and paid right away. I mean, there’s other companies that try to drag this along and try to fight and so forth. Obviously, I think this is worth it for them. But I think the other very important note that we should all be listening to here is that it is not uncommon at all for a company of this size to fall in this mistake. This law – unlike Monday’s episode when we talked FMLA which applies to big employers – this applies to everybody and the point here is that even the big guys make the same frankly silly mistakes that the little guys do when it comes to paying overtime and wages. The reason is because (1) there’s a lot of laws that are there to protect employees and maybe rightly so and (2) it’s complicated. It’s not as simple as maybe people think and so being lazy in this aspect is high-risk.
MATT: Yeah, especially because, as an employer, the deck is so stacked against you. You have very little chance of really succeeding if you want to try to go this route, especially if your employees want to do anything about it, too. I mean, you pretty much have no chance.
NASIR: Yeah, you’re right because these employees, in fact, your employees, even if you’re not paying them minimum wage or not paying them overtime, they’re not going to complain if they’re happy in their job. But, just remember, there’s always moments, even in the greatest work environments, someone may get upset and they may find a way to get back at you if they’re upset and if they’re terminated or what, laid off, and all they have to do is go to an attorney that’s working on contingency to find a fault in your business practice. And what if that one employee is the same as all the other employees? Now, all of a sudden, that same claim is multiplied by ten, fifteen, twenty?
MATT: And where do they go to find their attorney? LinkedIn! You see who you’re connected with.
MATT: If you’re not connected to any attorneys, you can find a second-degree connection.
NASIR: Or a third-degree and then get an introduction.
MATT: That was probably the better way to describe it at the beginning of the episode – some sort of six degrees of separation thing. I think that’s actually the better way. I don’t know why I said the virtual resume.
NASIR: Ah, yeah. I haven’t spent a lot of time on it but I haven’t found anyone through that second- or third-degree connection just online. It hasn’t worked out that way for me yet – or vice versa. I don’t think anyone’s found me that way either.
MATT: There’s LinkedIn specialists that I’ve listened to and I don’t buy into it because their strategies are just “search through your contacts, find people that are two or three degrees away, have the other person make the introduction or reach out.” It just seems so… I don’t know, just too much for me.
NASIR: I mean, there’s probably people that benefit from it but, for me, if I don’t really get it – and I feel like I’m pretty computer savvy – and I don’t really get the benefits and I’m not using it, then how are other people going to use it and how are other people going to be receptive if I reach out to them in that same way, you know? That’s how I see it.
Anyway, LinkedIn’s great. #linkedinisawesome
NASIR: Question of the day. It’s a long one!
MATT: Well, not really. Someone from Austin, Texas.
NASIR: It doesn’t fit in our Excel sheet just perfectly. You actually have to select the cell so you can see the entire question.
MATT: The text isn’t wrapped here.
NASIR: Yeah, it’s not wrapped. Oh, there you go. Okay. That’s a long question
MATT: “I wanted to incorporate as an S Corp but I heard there are restrictions. What rules do I have to follow?” Like I said, this is someone in Austin, Texas, but this is going to be more of a US question, I guess. This is going to apply to S Corps in any state in the US.
So, for those of you who don’t know, an S Corp is basically I would say a smaller version. There are two types of corporations, for most people – C Corp and S Corp. C Corp is the big… I do a really bad job of explaining this.
NASIR: The big, yeah.
MATT: S Corps are the smaller corporations that fall under subchapter S but it’s not just size. There’s restrictions on what’s allowed for S Corporations and one of them is size. You can’t have more than 100 shareholders – which, for a lot of small, private companies, that’s not going to ever be an issue.
MATT: But, you know, once you become bigger, it becomes an issue but, for people who are just starting out, 99 percent of them, that’ll never even come into play. That’s probably not as big of an issue so we’ll get into some other ones.
It has to be a domestic corporation – you know, that’s going to be fine, too. I think the ones where it usually gets people are these. Shareholders can only be certain people. You can’t have partnerships, corporations, or non-resident alien shareholders. That actually trips corporations up sometimes because, you know, you have someone that’s not a US citizen and wants to be involved. That’s going to be a problem. Or if you have a corporation or partnership, like I said, if they want to be one of the owners, you know, that’s going to be an issue so that’s definitely something to think about.
And then, one class of stock – I think that’s probably another big one as well that will trip people up just because there’s no sort of preference. You can’t have the preferred type of distribution.
NASIR: Those are the general rules, obviously. I think most people already know – or maybe they’re not aware of the benefits of an S Corp – but basically it designates the corporation as a pass through tax entity versus a C Corp that’s taxed twice for its corporate income tax that is received and then, also, the income tax that is given or charged against the shareholders themselves when dividends are issued.
I think C Corps and S Corps are commonly termed as a small corporation or so forth but, in reality, I mean, both small and large corporations can be considered S Corps or C Corps but the big restriction for bigger companies is that 100 shareholders and also, like Matt mentioned, who the shareholders are. It’s oftentimes when you have especially investors and so forth, they want to invest through their entity and so forth and that’s going to be restrictive. Also, if you have investors, a lot of times you’re going to want multiple classes of stock.
NASIR: It seems like S Corps are usually fitting for, like you said, a small company with one or two shareholders and doesn’t expect to increase much after that; otherwise, if you want any kind of complex structure in your corporate structure, S Corps just don’t work.
MATT: Yeah. If you want to kind of not game the system but kind of get the best of both worlds, you can be an LLC that gets taxed as an S Corp. And so, that’s the case, you know, you’re kind of getting the best of everything. Just keep that in mind, that’s an option, too. You don’t have the same sort of restrictions that an S Corp is going to have.
NASIR: I think that’s also commonly not known. I’m pretty sure LLCs can be taxed as a C Corp, too, right?
MATT: I believe so. Don’t quote me on that.
NASIR: I’m quoting you on that. I’m pretty sure. I don’t think we’ve ever done that because it’s not something that I would have any reason to recommend.
MATT: Yeah, I don’t know why. I’m sure there’s probably some reason out there on why you would do that but I don’t know why you would go that route.
NASIR: I think, if it is possible – which I’m pretty sure it is – maybe the company started out as an LLC and then they realized they want to have a little bit more complex tax structure? I don’t know. I’m trying to think it through. Well, because, also, there’s benefits of not being taxed as a partnership in an LLC as well. But an S Corp may not work because maybe they want different classes of stocks or have more than 100 members. It probably has something to do with that.
MATT: I was going to say we don’t give tax advice and then I remembered our next episode and the question we have is straight tax advice. We don’t give tax advice on Wednesdays – only on Fridays. If you want a tax question answered, you’ve got to email us on a Friday. That’s the only way it gets done.
NASIR: Very good.
MATT: I mean, tax plays a little bit into this, I suppose, but we definitely answered the question in terms of the sort of restrictions that are out there for S Corps.
NASIR: Yeah, and I’m looking here, a limited liability company can be taxed as a C Corp or S Corp but I don’t think I’ve ever done one.
MATT: Yeah, I don’t really anticipate it either.
NASIR: All right. Well, thank you for sending that question, Mister or Miss Austin.
MATT: I think that’s their city.
NASIR: Business owner. Well, it’s the name of somebody.
MATT: All right, keep it sound and keep it smart.