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  1. #1
    Join Date
    Mar 2019
    Posts
    1

    Default Can Commission-Based Stylists be Members of a Manager-Managed LLC

    My question involves business law in the state of: CA

    Hello and thank you in advance for your assistance!

    I own a salon in CA. For the last 11 years I have treated our stylists who get paid on commission as independent contractors/1099. I hand-write them checks biweekly for a straight commission of their service sales performed. I do not take out taxes or have worker's compensation for them (I do for my front desk staff, however). This was the industry standard for salons for a long time, even though it was a gray area. However, in light of the recent Dynamex rulings, I no longer feel that this is a safe and legal way to run my business and am looking at options to resolve the legality of my business structure. Obviously making my stylists renters or employees would be one way to resolve this. But this would negatively impact both mine and the stylists' income, and present major cultural challenges for my business. (Not impossible, but definitely not preferable.) However, my business lawyer has presented another option that does not seem very common, and I am looking for advice from other lawyers as to the legality of his suggestion:

    My lawyer has suggested creating a Manager-Managed LLC, where I am the Manager and the majority stakeholder and my stylists are the Members, splitting 1% of the company amongst them all (18 or so). So they would each own 1/18 of 1% and would simply buy-in to the business for $100 each. He said that we could structure their normal commissions on services to be payouts for their membership in the LLC, so that we would not have to change the amount or the way anyone gets paid. Does this sound like it could work? Is there anything I should take into consideration when contemplating converting us to this model?

  2. #2
    Join Date
    Mar 2013
    Posts
    16,670

    Default Re: Can my commission-based stylists be members of Manager-Managed LLC?

    It's a good idea in theory but the way you are proposing it (miniscule ownership) sounds like an obvious scam to do an end run around employment and payroll laws.

    It's likely to blow up the minute one of your employees gets hurt or has a pay beef.

    If you want to go the ownership route I suggest you make it real ownership, giving each minority LLC member a larger percentage of ownership and pay them their appropriate percentage of the weekly profits. They could still buy in for $100.

    Give them each 2% of the ownership. That's 36% and you retain the rest. You can give them a bigger share of the profits to compare with their usual income. But don't call it commissions or you blur the line between employee and owner.

    At the end of the year you issue K-1s to each member (not 1099s):

    https://yourbusiness.azcentral.com/l...tner-4127.html

    Encourage your members to pay estimated tax during the year so they don't get hit with big tax bills and penalties. You'll want to get a tax pro into the shop to give everybody a class on how to do that.

    Make sure you have an operating agreement signed by everybody addressing the duties and percentages.

    Buy the appropriate insurance on the salon including professional liability and workers compensation. Yes, workers compensation. Owners are eligible for coverage under workers compensation laws. If one of your members gets injured and can't work her first stop will be the state's workers compensation commission where she will say she was really an employee and was coerced into the LLC scam under the threat of termination. Always imagine the worst case scenario and take the proper precautions.

    Don't say it can't happen. I spent 35 years in the insurance industry and, trust me, everything that could happen, does happen and happened to people who swore up and down that it couldn't happen.

  3. #3
    Join Date
    Oct 2014
    Posts
    7,090

    Default Re: Can my commission-based stylists be members of Manager-Managed LLC?

    Quote Quoting Hovercraft
    View Post
    My lawyer has suggested creating a Manager-Managed LLC, where I am the Manager and the majority stakeholder and my stylists are the Members, splitting 1% of the company amongst them all (18 or so). So they would each own 1/18 of 1% and would simply buy-in to the business for $100 each. He said that we could structure their normal commissions on services to be payouts for their membership in the LLC, so that we would not have to change the amount or the way anyone gets paid. Does this sound like it could work? Is there anything I should take into consideration when contemplating converting us to this model?
    For those not familiar, Dynamex is a decision of the California Supreme Court dealing with employee classification issues under California state law for the purpose of wage order claims. In my view, I think you need to consult an attorney who is expert in California employee classification issues. I'm not sure that your business attorney qualifies as an expert in that area. My perspective comes from federal tax classification decisions. In my view what your lawyer proposes would not pass the smell test for federal tax matters. They aren't true partners in a partnership. They'd have no effective say in how the LLC is run, and the ownership is so minute as to be pretty irrelevant. Moreover, what the stylists are getting is not their respective shares of the profit but rather the same commission they got before. In short, the IRS is very likely to see this as simply a smoke screen for the same arrangement you have always had. And if those stylists would be classified as employees now, I think they'd be employees after this change, too. It is not the case in federal tax law that simply calling someone a partner in the partnership removes them from being classified as an employee of that partnership. I'd be surprised if the state would view it differently; that is, I think it likely that the state would see this as not a true partnership either and also see that it does not significantly alter the arrangement you have with the stylists. But I don't practice in California and you need to consult someone who does. When you do, you may want to discuss the points I've raised and how they would be dealt with if the state challenged the arrangement.

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