Small Business Regulation Exemptions Every Entrepreneur Should Know
Small businesses are the foundation of America’s economy. They drive ingenuity, job and economic growth, and encourage innovation and entrepreneurship. Today, small firms employ 58.9 million people and account for roughly 99 percent of all independent establishments with fewer than 500 employees. Historically, small businesses have been directly responsible for almost two-thirds of all new jobs created and consistently drive nearly half of U.S. gross domestic product.
Small businesses, however, are also the first to feel the impact of a slow economy and changing public policy. It’s essential for small business owners to understand and overcome these hurdles, beginning with state and local small business regulations.
The state of business regulations
To apply for a business or occupational license, enforce contracts, hire employees, pay taxes or even shut down a business, small business owners have to cope with a tangle of red tape from state and local governments.
“ … Depending on the business, local and state regulations [can] affect a small business more so than larger companies other than tax issues,” said David Leffler, a partner at Culhane Meadows PLLC who specializes in small businesses. “For example, if you own a restaurant business in New York City, the city council makes the rules, regarding setting [the] minimum wage and hiring and firing of employees,” Leffler said.
Small business shell out an average of $12,000 per year to comply with government regulations, according to a 2016 National Business Association survey. More than two in five small businesses spend at least 40 hours a year dealing with federal regulations, and almost three of 10 spend at least that much time figuring out state and local rules. However, staying on top of the rules and regulations is important because your business could incur penalties if you don’t.
There is an increased effort to make sure regulations don’t hurt small business as federal lawmakers revisit business regulations with an eye toward easing some of them, Leffler said. “While a focus on ensuring regulations aimed at small business at the federal level is a turn in the right direction, regulation at the state and local level has increased,” he said.
Of course, rules are necessary to do business in economies. An overly complicated or exorbitant regulatory system, however, can — and often does — adversely affect the economy. Unlike research and development, regulatory spending does not generate growth.
A document published every year by the federal government called The Code of Federal Regulations lists each area subject to regulation. This document is divided into six chapters and 50 subchapters and contains more than 175,000 pages — and that doesn’t even include state and local regulations. It’s no mystery why small businesses are overwhelmed by the regulations they must follow — that is, if they aren’t exempt.
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Business regulation exemptions
Size matters when it comes to regulations. This is especially true when it comes to whether the federal government views a business as “small.” By definition, a small business is a corporation, sole proprietorship, LLC or partnership with less annual revenue or fewer employees than a standard-sized business. This is a rather general definition, and to further complicate matters, that definition can vary by industry and changing definitions. Here’s what you should know.
A business doesn’t have to offer health insurance. Under the Affordable Care Act, however, large employers — defined as those with 50 full-time employees or more — must offer affordable and qualified health benefits to employees, or they have to pay a tax penalty. If a business employs fewer than 50 eligible employees, that mandate and tax penalty does not apply.
Although the majority of small business owners believe offering health insurance is very important to retain and recruit employees, only 41 percent of businesses with fewer than five employees provided health care benefits, according to a National Small Business Association 2015 survey. And the cost of health insurance has ranked as the top issue since 1986 among small businesses, according to ongoing research from the National Federation of Independent Business.
Businesses with fewer than 50 employees are not required to comply with the federal Family and Medical Leave Act, which provides up to 12 weeks of unpaid maternity leave.
All businesses have the risk of an injury claim within the next 10 years. Small businesses are no exception. In fact, there is a 50 percent chance that a small business will experience a claim within that same time frame. Although each state has distinct workers’ compensation requirements, most states require businesses to cover both part- and full-time employees. And, just as each state varies in coverage requirements, state laws also vary in how much coverage you need.
For instance, in Alabama, South Carolina and Florida, employers are required to carry workmen’s comp only if they have four or more employees. In Texas, coverage is optional. Some states offer exceptions for certain employees, including casual or seasonal workers; domestic employees, such as maids, nannies and governesses; and farm workers.
In Minnesota, partners, sole proprietors, some managers of LLCs, officers of closely held corporations and certain relatives are excluded from compulsory coverage. In North Carolina, employers with fewer than three employees are exempt. In California, there are no exemptions for small businesses.
The Occupational Safety and Health Act requires employers to record serious, work-related injuries and illnesses to help evaluate the safety of a work environment, identify industry hazards and create protections to reduce or cut down on hazards. Businesses with 10 or fewer workers over the past year and those in low-risk industries, however, are partially exempt from maintaining injury and illness records, unless the Bureau of Labor Statistics or OSHA says they must. If an incident results in the death or hospitalization of three or more employees, the incident must be reported, regardless of the size of your business.
Federal and state laws provide legal rights for “protected classes” of employees. Protected classes are people who might experience discrimination based on race, religion, sex, color, age, physical or mental disability or nationality.
Current federal law against discrimination, however, does not always apply to small businesses. For instance, Title I of the Americans with Disabilities Act and Title VII of the Civil Rights Act of 1964 exempt employers with fewer than 15 employees. That means that as long as the small business does not employ more than 14 employees, it can refuse to hire groups of people — including disabled persons and women — and not be in violation of federal discrimination law. The Age Discrimination in Employment Act does not apply to employers with fewer than 20 people. If a business employs only 19 people, it can legally refuse to hire anyone over the age of 40.
Title II of the Genetic Information Nondiscrimination Act protects employees against discrimination based on their genetic information, which includes medical history. A small business with fewer than 15 employees is exempt.
Energy conservation. If your business manufactures products covered by the Department of Energy standards but your annual gross revenue didn’t exceed $8 million in the previous 12 months, you can apply for a temporary exemption from all or part of a water or energy conservation standard.
Food labels. The Food and Drug Administration requires that packaged food and dietary supplements contain nutrition labels. There are, however, exemptions. If your business has fewer than 100 full-time workers and sold fewer than 100,000 food or dietary products in the U.S. in the past 12 months, you might be exempt from the labeling rules.
To receive the exemption, you must file for one each year. Additionally, if you’re a retailer with annual gross sales of less than $500,000 and total food or dietary supplement sales of less than $50,000 a year, your business is also exempt from the labeling rules. In this case, you don’t need to file a notice with the FDA.
When to ask a pro
Despite the dominance of small businesses in the U.S., federal regulations have had a disproportionate impact on small business and free enterprise. “Large companies have departments for compliance, tax, and legal issues, that small businesses do not,” Leffler said.
“That leaves the burden of wading through and keeping up to date on local, state, and federal regulations to the owner(s) or another employee, which takes them away from fulfilling their main goal: producing a product.
“Seek legal/tax help on day one. Don’t wait until one year into your business’ existence or when something has become a major problem. And, whether you call on an accountant or lawyer or both, make it clear that you are depending on them to keep you updated on new laws and regulations that affect your small business,” he said.
The bottom line
Although it’s difficult and often frustrating to keep up with the ever-changing regulations placed on small businesses, the penalty for failing to do so might result in your having to close your business, pay a fine or even face prosecution. That said, because new regulations are passed often, it’s difficult to summarize all of the regulations imposed at any given time. It’s worth the time and initial costs of working with a pro to figure out which regulations apply to your small business. Doing so now can save you many headaches later.