Incorporating Independent Contractors

Make Sure Your Incorporated
Independent Contractor is Really Incorporated

By Nancy E. Joerg, Esq.

Many of our client companies who use independent contractors are deeply concerned about strengthening the independent contractor relationship. They are worried about IRS audits, state unemployment insurance audits, workers’ compensation insurance challenges, and other kinds of legal situations in which the key issue might well be the strength of the independent contractor relationship between the independent contractor and the client company.

It is popular wisdom that an incorporated independent contractor is the strongest type of independent contractor. I, myself, have often advised client companies that incorporation of the independent contractor is the golden factor in proving independent contractor status in the face of a legal challenge. Over the years, I have observed that incorporated independent contractors are much more easily accepted by IRS auditors, state unemployment insurance auditors, Hearings Officers of all types, judges, and others in determining whether a worker is indeed an independent contractor or an employee. However, there is a snake in the Garden of Eden.

The big problem with this rosy picture is that independent contractors will often incorporate at the request of a client company, but then the independent contractor does nothing more to ensure that he or she remains a bona fide corporation in good standing with whatever state is involved. As the reader may know, there are many steps that a corporation must take in order to see that it remains "in good standing" with the state. Simply incorporating a business is not enough – that is just the first step. There are taxes that a corporation must pay in order to remain in good standing, as well as several types of required paperwork.

After years of experience in defending client companies on the issue of independent contractor status, I now advise my client companies to request Certificates of Good Standing from their independent contractors on a yearly basis to make sure that they are dealing with truly incorporated independent contractors – who are often the very strongest type legally. The client company must care whether it is dealing with a bona fide corporation or a "sham corporation" (i.e., one that has been involuntarily dissolved and is no longer in good standing).

There are, of course, many other good factors that prove independent contractor status in the face of a legal challenge. It is not necessary for an independent contractor to be incorporated. There are some very strong independent contractors (who are not incorporated) who would simply whiz through a legal challenge to independent contractor status. However, for those client companies who are truly relying on the incorporated status of their independent contractors to assist them in the face of a legal challenge, they should be sure they are not living in a fool’s paradise. If they are relying on sham corporations, they are relying on very little.

It would look very suspicious in the face of a legal challenge to independent contractor status if the independent contractor incorporated on the day he or she started doing business with the client company, and lost all interest in remaining incorporated on the day he or she ceases doing business with the client company. (and, did very little or nothing during that independent contractor relationship to keep up the legal responsibilities of the incorporated status). This is no more than a meaningless legal label – "incorporation" – which, when you scratch the surface there is nothing there and it is a sham.

Cautionary Note: Client companies should not force independent contractors to incorporate. The decision to incorporate should ultimately be that of the independent contractor.

Nancy Joerg has a very popular 76-minute audiocassette tape called, "Practical Tips on Independent Contractor Status: The Basics and Beyond." This professionally recorded audiocassette tape is fast paced and "easy listening." It is a tremendously powerful tool for any business that wishes to do "in-house training" of its management team as to the proper way to interact with independent contractors.

The price is $36 each plus shipping and handling. If you would like to order this tape or any of our other audio tapes, please call Doris Baxter of Masterpiece Audio Productions at 630-587-6505. (No questions asked return policy—100% satisfaction guaranteed.)

Biographical Information for Nancy E. Joerg

Nancy E. Joerg is a senior attorney and shareholder at Wessels Pautsch & Sherman P.C., a labor and employment law firm concentrating exclusively in the representation of management. Wessels Pautsch & Sherman P.C. maintains offices in St. Charles and Chicago, Illinois; Milwaukee, Wisconsin; Davenport, Iowa; and Minneapolis, Minnesota. (Ms. Joerg can be reached at the St. Charles, Illinois office at (630) 377-1554.)

Ms. Joerg writes and speaks nationally on the subject of independent contractor status. She is the author of Welcome to the World of Independent Contractors and Other Contingent Workers, published by Commerce Clearing House.

Ms. Joerg defends companies before the IRS and various state agencies (including the Illinois Department of Employment Security) on the issue of independent contractor status and other issues of employment law. She also reviews and drafts independent contractor agreements.

Posted 9/20/2000