Report: Business Structure and Independent Contractor Analysis for CIA

This report analyzes the business organization and independent contractor status of the Career Institute of America (CIA). CIA, a non-profit corporation providing online and classroom training, faces challenges regarding its business structure and the classification of its instructors. The report examines the current business structure, the legal implications of using independent contractors, and the need to align the contracts with the actual status of instructors. It explores the advantages and disadvantages of different business structures, such as Limited Liability Companies (LLCs) and Corporations, under Delaware law. The analysis recommends that CIA reorganize as an LLC, which offers benefits like limited liability protection, flexibility in management, and tax advantages. The report also provides detailed recommendations for modifying the independent contractor contracts to ensure legal compliance, specifying the roles and responsibilities of the contractors, and clarifying that CIA does not control the means by which the instructors complete their work. The report includes references to relevant legal sources and guidelines.

To: Supervisor
From: Employee
Re:Career Institute of America, Inc. (CIA)
Date: December 6, 2016
Summary of Applicable Facts:
The Career Institute of America Inc was formed as a non-profit corporation under the
Delaware of the ‘Non-profit association Act.' It provides online and classroom training to
students. The revenues are generated from the fees paid by the students. The company
has also received a one-time grant from the U.S. Department of Labor that is made
available to non-profit organizations. The liability is unlimited. There are several other
things that require the status to be reconsidered.
The training courses at CIA are currently conducted by independent contractors who are
not under regular employment in the organization. A clear agreement has been signed
but. It does not stand up to the legal scrutiny, and this requires a solution to this problem.
CIA now needs to communicate to its instructors that their status is that of the
‘independent contractors’ and not that of ‘employees.'
1

Issues:
The key issues for the business currently are:
 What is the most appropriate form of business organization for CIA?
 How can the contracts reflect the status of instructors as independent contractors
and not that of an employee of the company?
Law:
Business Law
The current laws relating to ‘The General Corporation Law’ is designed to provide the
ease of carrying out of business, change the status of the existing business and also allow
the change in the business structure. Business owners who want to incorporate their
businesses in Delaware may do so by registering as Corporations, Limited Liability
Companies, Non-profit associations or as Professional service corporations. Other than
the above options, there is sole proprietorship or partnership. If all business owners want
to protect their personal assets from being used to pay business debts, ‘Limited liability’
is a key to protecting the interests of all business owners. If in a circumstance where the
business lacks funds to pay off company debt, or creditors, a lawsuit, the owners cannot
be held liable for the same.
2

Independent Contractor Law
‘What differentiates the status of an employee from that of an independent contractor’ is
in relation to the extent to which the employer has control over the means and method
and the process of completing the work. An independent contractor determines how the
work has to be done whereas; an employee is guided by an employer in regard to
performing the job. Employers are required to pay payroll taxes, provide unemployment
insurance and workers compensation benefits for the employees. Independent contractors
are governed by their own working hours, paying their own income tax, employment
taxes and providing for their benefits. (NIFB 2015)
Analysis:
Business Organization
CIA should utilize a different business format. The company earns its revenues on the fee
basis which is not meeting the criteria of non-profit as the non-profit cannot make its
earnings like this. CIA may, therefore, choose to organize its business as a Limited
Liability Company or a Corporation under the Delaware corporation law (Fox Horan and
Camerini LLP 2006). This is because of the reason that the CEO will benefit from its
Limited Liability protection. He will not have to pay the debts from his personal assets,
and only the company's assets can be used to pay out the debts and liabilities. The
company can register by filing its Articles of Incorporation and have their owner’s draft
bylaws (in the case of a corporation) and Articles of Organization along with an operating
3

agreement (in the case of LLC). This details the duties, responsibilities and powers of
officers, owners, corporate shareholders, LLC members, managers and the board
members. This also involves a certain amount of documentation and filings as required
by law.
However, considering the ease of business and flexibility in matters concerning taxes,
appointment of managers, etc., it is recommended that an LLC would be a better option
for CIA. In the case of a corporation, formalities such as holding annual and other
scheduled meeting of the board of directors, shareholders or officers have to be complied
with. Similarly, under IRS Tax Code, (IRS 2016) a corporation can be doubly taxed
unless Sub S status is elected, as the corporation is taxed based on the profits it earns, and
the owners, shareholders are taxed based on the profits they earn. In the case of an LLC,
there are no obligations placed on the company to hold regular meetings, or on the
shareholders. In the case of an LLC, the owners have the flexibility to manage business
and taxes. Profits are taxed only at personal income tax level without selecting Sub S
Status, (Toolkit Staff 2008) which involves restrictions on ownership and the need to
complete annual K-1 filings.
4

Independent Contractor Contracts
The CIA contract must clearly stipulate the fact that it does not control the means by
which the instructors complete their work for the organization. (Oregon Government
2015). However, CIA can specify the choice and standard of material to be used for
training, and thereby indicate that the independent contractor is given a free hand to
determine how the job requirements are met. The contract agreement should also indicate
that the instructors are free to pursue employment with others while working with CIA,
as long as they are fully able to meet their CIA job requirements (FLSA). The Fraud Act
describes independent contractors like the one who is customarily engaged in an
independently established trade, occupation or business.(Reibstein 2015). It is vital for
the company to specify the following terms before employing trainers as independent
contractors. This is required because the current agreement does not meet the legal
scrutiny. For making the agreements legally enforceable, contractors are required to be
appointed who will do the following:
 The contractor shall be solely responsible for all taxes, social security
contributions etc.
 The contractor shall have sufficient expertise, training, and experience to
accomplish the services
 The contractor shall carry out the work during the hours specified by him/her
independently.
 That the relationship with the company shall be that of the independent
contractor and shall not construe the company to be its partner, agent or principal.
5

References:
Feig, ER 2009, Employee vs. Independent Contractor: Differences You Need to Know,
viewed 3 November 2016, <https://www.legalzoom.com/articles/employee-vs-
independent-contractor-differences-you-need-to-know>.
Fox Horan and Camerini LLP 2006, Memorandum on Limited liability Companies,
viewed 2 November 2016,
<
http://brazilcham.com/sites/default/files/documents/legacy/41328.39_@_brazilcham_me
morandumonu.s.llc's_0.pdf>.
IRS 2016, Corporations, viewed 10 November 2016,
<https://www.irs.gov/businesses/small-businesses-self-employed/corporations>.
NIFB 2015, NFIB Guide to independent contractors, viewed 10 November 2016,
<http://www.nfib.com/Portals/0/PDF/AllUsers/legal/guides/independent-contractors-
guide-nfib.pdf>.
Oregon Government 2015, IRS 20 Factor Test – Independent Contractor or Employee?,
viewed 3 November 2016,
<https://www.oregon.gov/ODA/shared/Documents/Publications/NaturalResources/
20FactorTestforIndependentContractors.pdf>.
Reibstein, RJ 2015, The 2015 White paper on independent contractors, viewed 04
November 2016, <http://delcode.delaware.gov/title19/c035/index.shtml>.
6

State of Delaware 2016, Chapter 18. Limited Liability Company Act, viewed 03
November 2016, <http://delcode.delaware.gov/title6/c018/sc01/>.
Toolkit Staff 2008, LLC Electing S Corp-Best of both worlds, viewed 10 November 2016,
<http://www.bizfilings.com/toolkit/news/tax-info/llc-plus-scorp-equal-best-of-
both.aspx>.
7