Can I have everyone in my startup be contractors or consultants (“1099 services”) rather than employees?

Friday, October 19, 2007

Fred Greguras, Fenwick & West, http://www.fenwick.com/

Many startups label and engage service providers as consultants rather than employees prior to a round of financing to try to avoid employer obligations such as income tax withholding and unemployment taxes. This status depends on facts, however, not a label in an agreement. The basic test is the degree of control over the individual.

If he/she is tightly supervised and on the company’s premises during regular working hours, the individual is really an employee. It is very hard for a startup to properly structure a contractor relationship in a startup because of the way the company must operate. For example, many times the company provides a “contractor” with business cards identifying them in an employee position such as “VP, Sales” which is not the right thing to do legally but is what the company believes it needs to do to be successful.


Learn more about BizPlanBuilder business plan software.

Return to Library of Business Information