These Five Things Will Land a Startup Founder in Jail
October 17, 2016
Not remitting payroll taxes. “Cash flow is tight and a financing is just around the corner – I will just pay my employees their net pay and remit the withheld taxes and employer taxes when we close the financing (it is imminent) – it is worth the IRS penalty.” You know what happens next. This is a criminal offense. You are actually stealing from your employees – the money you should have remitted belongs to them. This type of crime is taken very seriously, as it should be and can land you behind bars.
Falsifying Financial Statements. You need accurate financial statements for a potential investor and they need to look good. Do not even think of falsifying them – your financial statements are what they are. This is “cooking your books,” and it is fraud and it is stupid. It can be criminal – certainly a career killer, also.
Not securing Workers Compensation Insurance. Workers Comp pays your employees 2/3rds of their pay if they are injured on the job and cannot work due to this injury. Most states require this coverage and will fine you dearly if you do not have coverage. Example: NY penalty is $2K for each 10-day period without Workers Comp. This is a criminal offense and will probably bankrupt the Company because the injured employee will have a claim for this benefit against the Company.
Not remitting or charging sales tax. Collecting sales tax from customers and not remitting to the state is similar to #1 above. It gets trickier, though. Often, a startup expands quickly and their activities in other states trigger a legal requirement to charge sales tax. They do not know they have this requirement until they are audited. States are very smart about finding you, even if you have not registered in their state. Even though you did not charge and collect sales tax, you are still treated as if you charged, collected and did not remit the sales tax to the state. Again, a criminal offense.
Hiring foreigners. Hiring a foreigner with the proper visa to legally work in the US is fine. Often, though, startups will hire engineers that are attending or just recently graduated from a US college or university. Often, there are restrictions on working off campus and it is the responsibility of you, the employer, to ensure they are legal to work in the US. This can be criminal, and government audits for these infractions are on the rise.