We Are All Corporations Now

Owners and advisors of small businesses are always monitoring the costs of expansion. Renting additional space and buying a new computer system are examples of familiar cost-benefit calculations that need to be performed.

Federal corporate income tax rates (Form 1120)

But there are many costs that accelerate with size. Examples are the San Francisco tax on payrolls larger than $150,000, higher Federal tax rates on higher corporate income (much like the rate schedule for individuals), or even mandated e-filing for eleven or more tax returns.

One number that is likely to influence decision-making is the 50-employee threshold for company-paid health insurance under the Patient Protection and Affordable Care Act, aka "Obamacare". (Failure to comply can result in fines of up to $2,000 per employee.)

We will bet our bottom dollar that there will be thousands of small businesses that will avoid having 50+ employees like the plague, not only because of the out-of-pocket health-care cost but also because of the regulatory headaches.

One IT entrepreneur foresees a dramatic restructuring of small business because of the PPACA:

"Going protean" offers a better strategy for many businesses. Owners of protean companies create a core of strategic employees who manage the big-picture elements of the enterprise—the culture, business model, product mix, vision, strategy, etc. This core then outsources the business tasks to other corporations. [snip]

It's not about replacing employees with contractors, but about replacing employees with corporations.

These new contracts will be a mix of large corporations, small businesses, micro-corporations and even nano-corporations (an individual doing business as a corporation). But to be a protean solution, it must involve a corporation-to-corporation relationship. Any substitute—e.g., a sole proprietorship—is only a time bomb because eventually the government will pressure you to turn any so-called 1099 contractors into employees.

The IRS is already aware of simple work-arounds, such as using temp agencies and part-time workers, to escape the 50-employee rule. It has threatened "anti-abuse" rules and penalties, the thrust of which will be to examine the substance, not the form, of working relationships between the hirer and the hired.

However, the "protean" corporate-to-corporate system that is forming before our eyes involves real changes in rights and responsibilities of all parties and is very likely to withstand legal challenges. Many of us, as owners of companies, will become our own bosses. And we will have President Obama to thank for setting us free. © 2013 Stephen Yuen