Question

Topic: Strategy

Independent Sales Reps - Business Structure?

Posted by Anonymous on 8/5/2009 at 10:29 PM ET 500 Points
Note this is an advanced level question, I recommend only experienced marketers who have dealt with independent sales representatives respond.

We are in the process of rolling out a new agreement for our independent sales rep network. I started with pulling together a number of agreements I was able to find from various sources, merged them together and refined them for our specific business as a starting point.

Our legal firm has reviewed and revised the agreement to what we think is the final document, and we are satisfied it meets the requirements of the test for independence of the reps for tax purposes, and fits our needs as a business, while outlining the key expectations of our sales reps as well as what they should expect from us as a company.

The last point I am concerned about is the advice we have been given on the business structure of our sales reps. The attorney is suggesting we only enter into agreements with corporations, even excluding limited liability companies and limited liability partnerships from signing the agreement.

The main reason we enter into agreements with reps with a corporation structure is to provide distinction between the independent nature of the reps, and any implication that they resemble employees of the company.

We had a second opinion from another law firm, he said the agreement we have in draft is very solid and does and excellent job as an independent rep agreement. He is not 100% convinced that we need to have the requirement that they be a corporation vs. an LLC, although, he does agree the corporation requirement would make the agreement bulletproof for us as principal in the agreement.

For the sales reps, even a single person rep company can create a corporation. There are structures that allow you to have the same level of tax liability as an LLC, along with other potential liability and financial benefits. The costs to form a corporation are not significantly higher than those to form an LLC, so I do not think it necessarily places an undue burden on the sales rep to require a corporation.

I realize there are not probably many lawyer types reading this forum. I am mainly looking for thoughts from serious thinkers about this situation, and if you concur with our primary law firm. Also, I would be interested to know if anyone else requires your independent sales reps to be set up as a corporation.

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RESPONSES

  • Posted by Frank Hurtte on 8/5/2009 at 11:20 PM Accepted
    Many of my clients are Rep Agencies. Most of them have formed corporations but this is done based on the tax rate differences between income and dividends.

    I believe your requirement for corporation status will not be a major issue but there may be a few reps that will balk at your insistance that they provide corporate status.

    CarolBlaha would be a great second opinion. She has extensive experience as a rep.
  • Posted by michael on 8/5/2009 at 11:37 PM Accepted
    Steve,

    Answering as a company that has an independent rep division.

    Our structure is very loose. None of our reps are incorporated. LLC...but mostly for THEIR tax purposes. Very familiar with the debate about tax laws, but as long as (not a lawyer) they represent other companies too, there is not a problem with them being considered an employee.

    Again, that's what our lawyer said. Picking the right companies to rep is the key...from the rep's standpoint.

    Michael
  • Posted by CarolBlaha on 8/6/2009 at 11:21 AM Accepted
    I have been an independent manufactuers rep most my adult life. I have reviewed literally hundreds of rep agreements and not one has ever asked about my corporate structure. I closed my CO agency to relocate to GA, and during the past 12 years there-- ran my biz as a sole proproritor and in attending sales meetings and conferences-- the majority of them are. I have never had the IRS question any of my principals. One of my largest principals is the largest in his field-- a billion dollar company-- and didn't care less about my business structure.

    All agreements clearly state I am not an employee of the company. They state I pay my own expenses, etc. Even though some provided me wtih business cards with their name and logo. There is never anything in the agreement of course saying my hours, my travel obligation, etc.

    I am starting another rep agency in GA. I have decided to be a LLC, not because of the IRS but asset protection. I sell, I don't care for govt paperwork. I would not consider working for a company that requires me to be a corp. Having said that-- I have many co's require me to have liability insurance. And I do in my own name.

    My history has taught me-- the companies that put a lot of paperwork in front of me are focussed on the wrong thing. My rep agreements are only a few pages long. THose who give me 20 page agreements send off red flags to me. Consistantly, they have been the ones who do not perform-- as a rep I am as good as my backup.

    Its very hard to find good reps. We work hard, put 35K biz miles on our cars, and burn thru them. We travel 70% of the time or more. You are going to severely limit your playing field with this action.
  • Posted by CarolBlaha on 8/6/2009 at 1:41 PM Member
    I am sure you pass the IRS tests too. Remember reps have multiple rev streams and get multiple 1099's. Its never been even brought up.

    I wasn't posting that you are trying to limit the rep-- but you are limiting yourself in finding good reps. You aren't contracting with a person, but an independent business- no matter the business structure. Let me decide how I want my business to be structured. You know managing reps is like herding cats-- we are independent for a reason.

    The reason we are changing the biz structure is we are adding product that we'll be distributor and rep -- reselling which is something we never did before. And we are going to be on the construction site more than ever before- putting up equipment that could be tripping hazards, etc. Its asset protection -- there isn't a lot of tax advantage either way. As my accountant says-- the IRS isn't going to leave any money on the table. I pay the self employment tax and corps have their own tax.

    Run by your carrier the requirement for the rep to carry liability insurance and provide proof. Remember the rep is representing you, but you are the seller. If a rep says a product will perform in one application and it hasn't (if or not the rep did this) then they've exposed both of you for a potential lawsuit. In a perfect world.....



  • Posted by cookmarketing@gmail. on 8/6/2009 at 9:13 PM Member
    Don' allow lawyers to run the sales department - nothing good will come from that. K.I.S.S. still applies.

    A one page agreement will satisfy the IRS and that should take care of that.
  • Posted by CarolBlaha on 8/7/2009 at 9:43 AM Member
    cook is absolutely right. Lawyers are in the "non sales department". Initiallly your post was concerning the IRS and independent vs employee questions. Using established reps-- this is a non issue.

    And yes, I changed my structure for asset protection. You are also concerned about asset protection-- but reality is -- both of us doing something really stupid and we will be sued-- and not just the corporation. Do something really stupid and insurance will walk too.

    Its all a false sense of security if you as a manufacturer aren't diligent and me as a rep aren't the same. Let the rep choose the business structure of their own business entity. And again, as someone who has reviewed too many to count of these contracts (and helped newbies draw up their own) I have never seen one calling out a business structure.

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