Employees vs. Independent Contractors vs. Franchisees.

When starting a business, you must decide whether you will work with employees, independent contractors, or franchisees. All are different and each has a different relationship with the principal of a business. Principals or bosses have the most potential liability with employees; they have the least potential liability with independent contractors.

If you have a business, it does not really matter whether you call your workers employees or independent contractors. The specifics of the relationships matter, most importantly the amount of control you exercise over the workers and how they conduct their daily tasks. The more control you exercise over them, the more likely you have employees. If the workers control their hours and how they do their job, and pay for their own supplies, you are more likely to have independent contractors.

The IRS provides guidance on the distinction between employees and independent contractors. As you would expect, there are more tax requirements with employees than with independent contractors. An attorney can help if you are unsure whether you have employees or independent contractors, or you can file a Form SS-8 with the IRS, which is a request for a formal determination. There is risk in filing a Form SS-8 if you have been calling your workers independent contractors, because you may be required to pay past employment taxes if the IRS determines that you have employees. But it does provide certainty for your business going forward.

If you want to franchise your business, the requirements are much different. Federal law requires a business owner to provide the prospective franchisee with a Franchise Disclosure Document at least two weeks before the Franchise Agreement is signed. The Franchise Disclosure Document has many requirements, but all are designed to protect the franchisee's investment, by providing transparency before the franchisee invests money in the franchise.

Additionally, each state's laws differ on what other disclosures may be necessary. The formalities and specific requirements are strict in franchise law. If you get one wrong, your entire Franchise Agreement may be void.