Starting a new business is a busy time for an entrepreneur. You’re developing a business plan, getting your financial plan in order, and possibly pitching to investors or seeking funding. One thing that can be overlooked but is incredibly vital, is ensuring all legal obligations are met. The failure to do so can result in fines or possibly even court proceedings.

This guide should help you tackle the legal aspects of starting a business in the UK, from choosing a name for your business right at the start all the way to employing staff later on. You can work the relevant legal points into your traditional business plan, or even draw up a separate legal plan or checklist to ensure you have covered everything. 

While the legal processes covered are specific to the UK, the general categories are likely applicable no matter where your business located. That being said, let’s dive in.

Naming your business

You need to choose a unique name for your business, that is not being used already, to avoid running

into problems. If the name is too similar to other businesses, it can suggest there is a connection between the companies and you could be seen as trying to pass your company off as theirs, taking business from them as a result. If they complain or file for trademark infringement, you could be required to change your business name, possibly pay damages, and spend extra time and money re-doing signs, stationery, advertising, etc.

You can easily check to see if your name idea has been taken yet using Made Simple and it’s also wise to verify if a similar trademark already exists.

Choosing the legal status of your business

The legal status you choose determines whether you need to register your business with Companies House, which is the UK’s registrar of companies. The legal status also affects the records and accounts that you have to keep, the amount of tax and National Insurance (NI) you will pay, and your financial liability if the business were to go under. 

It’s also worth noting that in the UK employees pay NI contributions to qualify for certain state benefits and a state pension when they retire. This total will vary based on the legal status of your business. Here are the most common types of legal business structures to choose from when setting up a new business.

Sole trader 

This is the easiest option if you are the only owner (you can still employ people). There is no business registration with Companies House required and keeping records and accounts is simple. Many businesses start off as sole traders and change their legal status later on.

You can benefit from full profit retention and you can complete your own self-assessment tax return online each year, or get an accountant to do it for you. There will be more about paying taxes in the next section. 

If you want to protect the name of your business, you will still need a trademark as no formal registration happens. You will need to weigh up the cost of this to see if it is worth doing.

The downside of being a sole trader is that you have unlimited liability, meaning you are liable for any debts the business has. You could risk your own personal assets, such as your house and savings if the business got into financial difficulty. Sole traders also find it harder to get the funding they need from banks, but it could be the right option for you if your business is low-risk and does not need finance. 

Some people prefer to deal with sole traders over limited companies as the business tends to feel more personal, particularly if the nature of the work is sensitive.


This is the easiest option when there is more than one business owner, and two or more people share the costs, risks, and responsibilities. You do not have to have equal shares and each person’s liability is proportionate to their share.

The downside is that like being a sole trader, partners are not protected financially. If the business goes under you could become liable for your partner’s share of the debt. To avoid this scenario, you can become a Limited Liability Partnership (LLP) so that the LLP is then responsible for any debt and not the business owners.

Limited company 

Most limited companies in the UK are limited by shares. Setting the business up as a limited company means it is a separate legal entity that protects you financially, as the company finances are separate from your own personal finances.

It is more complicated than becoming a sole trader as you need to register the business with Companies House, submit accounts and annual returns to them, and adhere to their record-keeping requirements.

There can be financial advantages in terms of paying tax by becoming a limited company, and it can also be easier to obtain financing. It is best to discuss these specific benefits with an accountant before registering your business.

Paying tax and National Insurance

All businesses must be registered with HM Revenue and Customs (HMRC) as soon as you start trading so that you can pay income tax on your profit and Class 2 and 4 national insurance (NI).

This can be done online and the HMRC will set up an account for you to do your self-assessment. Once complete, they will contact you with a ten-digit Unique Taxpayer Reference (UTR) and send a letter in 2-3 weeks giving you an activation code to access the account.

In order to complete your self-assessment properly, you will need to keep records of your business sales and expenses. To help me stay organized, I have a separate business account that I use to buy the things I need for business operations.

Accepting payment by cash makes keeping track of earnings a bit trickier, and may require keeping and uploading receipts. You can also manage this with your accounting software and add the information to your business financial statements on a monthly basis.

If you are moving to the UK to start a business, you will need to apply for an NI number and can give this number a ring to apply: 0800-141-2075.

Value Added Tax (VAT)

Value Added Tax (VAT) is a tax added to most goods and services. You only need to register for VAT if your VAT taxable turnover is going to exceed the current limit in any rolling 12-month period. The limit is currently is £85,000, and you do not need to include any values from sales that are VAT exempt.

For example, VAT is not added to most food and children’s clothes. Additionally, a lower rate of 5% applies to certain goods and services such as home energy and children’s car seats. The standard VAT rate is 20%.

If you need to register for VAT, there is further information available via


Some insurance policies are legally required, whereas others are available if you want to protect your business against certain risks. Parts of the business that you can insure include your vehicle, equipment, premises, employees, your products and services, your business idea, and even yourself.

Motor insurance 

Insuring vehicles is always required by law. If you are going to be using your vehicle for work, you will need to make sure you have insured the vehicle for the correct class of use. Any claims would be rejected if you use the vehicle for business purposes without amending your policy to reflect this.

There are other motor insurances available to cover things like tools in a van, that would require Goods in Transit cover. You can compare the costs of these policies via

Professional indemnity 

This insurance is required for certain professions such as accountants and financial advisors. This protects them against claims for losses suffered by customers as a result of mistakes or negligence. Often other professional advisors decide to take this cover out for their own peace of mind in case their customers want to sue them.

Employer’s Liability Insurance

This is mandatory for all businesses with employees. This is to protect you from any claims an employee could make following an accident or illness suffered as a result of working for you.

Additional insurance coverage to consider

Here are some other insurance policies you may want to explore depending on the nature of your business:

Buildings and contentsBusiness Interruption —These policies typically cover any instance where you are unable to operate due to external factors such as inclement weather. The extent of policy coverage fully depends on limitations laid out in your insurance contract. Cyber cover — If you have access to information that would be valuable to fraudsters, this will help manage the cost of the incident and deal with enforcement against you from industry regulators.Employment ProtectionKeyman insuranceMoney in transitProduct LiabilityPublic LiabilityShop insuranceTheft

It is worth remembering that all business insurances are tax-deductible expenses.

As there are so many insurances to think about, it is helpful to go and speak to a local insurance broker to check you have the cover you need. The Association of British Insurers (ABI) website contains a section to help you choose the right insurance for your business.

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Acquire industry-specific licensing

Certain businesses require a license from the local authority to be allowed to trade legally. Some examples include hotels, hairdressers, street traders, boarding kennels, and food outlets.

Contact your local authority and ask to speak to Local Planning or the Building Control Office to find out if you need to register or obtain a license, as failure to do so may qualify as a criminal offense.

Local authorities also have Trading Standards departments who help you understand how to be legally compliant in your business area. You will need to know who the regulator of your industry is and then find a way to keep your knowledge up to date to remain compliant.

Do I need planning permission?

While you investigate whether there is a need for a license from the local authority, also ask them if you need planning permission. Working from home or changing the use of a building can both require planning consent, even if you are not changing the physical building.

You can be fined if you set up a business at home without permission. If your work leads to extra foot traffic and a lack of parking, excess noise, etc. your neighbors may end up reporting you.

Ask the Local Planning or Building Control Office about the plans for your business as soon as you can. Planning consent can take time if it is needed and may cost some money, so it is good to have this figured out early on. 

Employing staff

If you’re going to take on staff you will need to ensure that you comply with certain pieces of employment legislation. Here’s what you need to establish.

Carry out applicant checks 

As an employer, it’s your legal responsibility to make sure you check that any staff has the right to work in the UK. Depending on which sector you work in you may also need to undertake a criminal records check known as a DBS check. Failure to do so can lead to you and your business being liable for a civil penalty.

Register with the HMRC as an employer 

You usually need to register with HMRC within 4-weeks of taking on your first employee. You’ll be responsible for deducting any tax and National Insurance contributions from your staff’s pay. You’ll also be responsible for paying any remaining employee or business taxes at the end of the year if you do not plan accordingly.

National minimum wage 

You must make sure that all staff is paid at least the current national minimum wage per hour for all the hours that they work. The rate does depend on each employees’ age and if they’re an acting apprentice.

Pensions auto-enrolment 

As an employer, you must enroll all eligible staff into a workplace pension scheme. There are different pension types that either require you or the government to add a specific matching dollar value to each employee pension. In most automatic enrollment schemes, employees will make contributions based on total earnings, including:

salary or wagesbonuses and commissionovertimestatutory sick paystatutory maternity, paternity, or adoption pay

Statement of employment 

You will need to issue all staff, who will be with you for more than a month, with a written statement of employment. This document sets out the conditions of their employment, such as hours and pay, and must be given to staff within 8-weeks of their start date. In addition, staff should be given a contract (which can be incorporated with the statement of employment).

The contract sets out details of their rights, responsibilities, and working conditions. Make sure the contract is clear on which terms are contractual and which are not, as this will affect how you can make any changes in the future.

Employers liability insurance 

We mentioned this before, but if you employ staff other than direct family members then you need to take out employers liability insurance. This type of insurance will cover will protect you from claims made by employees if they are injured or fall ill at the workplace.

Health and safety 

All employers are required to provide a safe working environment for their staff. If you have more than 5 staff you will need to have a formal written Health & Safety policy. This includes a safe place to work, safe access to work, safe systems of work, safe equipment procedures, safe interactions between workers, and protection from risks of injury.

Legislation that may affect your business

Legislations are rules and regulations that you must adhere to whilst running your business. I have not listed all of them as not all will apply to every business, but you will need to identify the ones that apply to you. We will touch on the more common ones, but to explore more legislation please visit

Employment law

Employment law is there to protect the rights of employees and their health and safety. We will touch on the main laws to consider for those employing staff.

Health and Safety at Work Act of 1974

Premises and machinery must be safe and not affect the health of workers. If you employ 5 or more staff you need to have a written health and safety policy and conduct risk assessments which need to be documented and communicated to the employees.

Equal Pay Act of 1970 

Employees must be paid equally to those who do work of the same value regardless of their sex.

Sex Discrimination Act of 1975 

Employees cannot be discriminated at any stage of recruitment, training, or employment.

Race Relations Act of 1976

It is illegal to discriminate against a person because of their color, race, or ethnic group.

Employment Protection Act of 1978

Employers must provide employees with a written contract of employment. This is to protect them from unfair dismissal and gives them the right to redundancy pay should their job no longer be required after 2-years.

Consumer Protection

Consumer Protection rights are there to protect customers from unfair business practices.

Sale and Supply of Goods Act 

Goods must be of a decent standard. This applies to any goods that are identified and agreed to be purchased by consumers.

Trade Descriptions Act 

Goods and services must be as advertised and you must not give misleading information.

Distance Selling Act 

Some selling methods, such as online shopping, require you to allow a ‘cooling-off’ period, during which time a customer can change their mind about a purchase and obtain a refund. 

Data Protection Act/GDPR

This will apply to anyone that needs to take any customer details, so it will apply to the majority of businesses. You’ll want to make sure you fully understand the extent of these protections and can check the Information Commissioner’s Office for specifics.

Develop internal legal documents

Developing internal legal documents helps to instill confidence in your business for the benefit of everyone — your customers, employees, and potential investors.

Privacy policy

A privacy policy is a statement that tells your customers how their data will be collected, used, stored, and protected. It should also detail if there may be a need to share any personal information.

Company handbook

Your company handbook is something you will probably change and add to as your business grows. In short, it is really a book to summarise how you do things in your business. It needs to be made available to staff at all times — you could either give everyone a copy or make it otherwise easily available for reference. Here’s what to include.

Your company mission statement

Your employees want to know the goals and reasons for your company’s existence. This is where your mission statement comes into play. Generally, it should include the history of your company, the vision, and the goals you want to achieve.

Your company’s policies 

Your company policies are typically extensions of required legal stipulations along with any additional company-specific policies. This can be anything that is important such as having a clear desk policy outside of office hours to help protect data or even just the way you want staff to answer the phone.

Human resources and legal information related to employment

If you don’t have an HR department to help you outline every policy, you’ll need to address the following:

Joining the company Employee benefitsWorking hours Annual Leave and sickness absenceAbsence management –policy for managing short and long-term absence and requirements for reportingBribery, confidentiality, whistleblowing, and data protectionEqual opportunities and bullying and harassment policiesIT rules (including areas such as social media use both inside and outside of work)Your Health and Safety policy including how you intend for you and your staff to implement this Disciplinary/Grievance proceduresFlexible family-friendly legislation policiesCapability and performance management targets and proceduresTermination of employment including retirement and redundancy

It is a good idea not to make any company policies contractual for staff so you can amend the staff policies in the employee handbook at any time.

Retaining legal counsel

It is useful to have a solicitor on retainer so that you can get advice whenever you need it. When starting and operating a small business you probably won’t need a solicitor often, but having phone support available for when you do will be beneficial.

There are large national organizations that offer this service such as Peninsula Group Limited, but you may prefer to ask a local solicitor or a more friendly and personal service.

Why develop a legal action plan?

Incorporating a legal action plan into your larger business plan may be necessary when pitching to investors or applying for funding. It’s also valuable to incorporate specific legal steps into your milestones to better use as a management tool.

Now, this guide has covered a lot of different legal components, so you may find it easier to write a separate legal action plan. Since Employment Law is such a large part of legal planning, if you do not plan to hire any staff and will operate by yourself, you might just need a simple legal checklist.

In any case, be sure that you have some sort of plan in place to be sure you address everything.

Don’t get overwhelmed by legal requirements

This all may seem daunting as there is so much to think about, but I hope that this guide helps you to plan and meet your legal obligations. It is best to start off small but keep the big picture in mind. Keep referring back to your traditional business plan so as not to lose sight of what you dreamed of.

If you ever have questions or concerns about specific legal requirements, check the official UK government website or reach out directly to a legal expert for assistance. Best of luck with your new venture!

Editors’ Note: This article is purely informational and should not be taken as legal advice. If you have questions regarding specific laws, licensing or protections contact your preferred legal counsel. 

Original Source:

Affordable healthcare insurance is an essential benefit to offer your employees. Because of the Affordable Care Act, it may even be legally required, depending on the size of your business. To maintain legal compliance, you first need to understand what the ACA is, what recent changes have been made to it and how it impacts your business.  

What is the Affordable Care Act (ACA)?

The Patient Protection and Affordable Care Act (also known as the Affordable Care Act, PPACA, ACA or Obamacare) is a healthcare reform law that went into effect under President Barack Obama’s administration on March 23, 2010. The primary objective of the Affordable Care Act is to regulate the cost of health insurance and expand Medicaid coverage. Although some aspects have been repealed under President Donald Trump’s administration, much of the Affordable Care Act is still applicable to your business.   


Editor’s note: Looking for the right health insurance plan for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.



Who benefits from the Affordable Care Act?

The purpose of the Affordable Care Act is to ensure that every American has access to affordable health insurance. Although the ACA presents some challenges for businesses, it benefits several groups, including low-income households, people with preexisting medical conditions and children. 

The ACA benefits low-income households, or households with “income limits,” by expanding Medicaid coverage to apply to a larger group of individuals.    

“The ACA directly expanded Medicaid eligibility to people falling below 133% of the federal poverty guideline, which in 2020 is $12,760 for a single-person household, $17,240 for a two-person household, and just over $26,000 for the average four-person household,” said Ty Stewart, president and founder of Simple Life Insure.   

The ACA directly benefits individuals with preexisting medical conditions who may have previously not had access to affordable healthcare, since it prohibits insurance companies from denying coverage or charging additional premiums due to preexisting conditions. 

Children are also allowed to stay on their parents’ health insurance plans until they turn 26 years old, receiving health coverage for several essential services like pediatric and preventive care, lab tests, prescription drugs, and mental and behavioral health treatment. 

How the Affordable Care Act impacts your business

Before the Affordable Care Act went into effect, all businesses had the option to offer or not offer health insurance to their employees. The healthcare reform law changed that. The ACA declared that small businesses with fewer than 50 employees can provide their employees with insurance or let their employees sign up for their own insurance coverage separately; however, businesses with 50 or more employees are legally required to offer their employees health insurance. 

Reporting health insurance coverage

Rolling out these policies takes effort on your part as an employer. Denise Stefan, president of Engage Insurance Agency at Engage PEO, said that small businesses are required to report the value of the health insurance coverage provided to each employee on annual W-2s, and if you choose health insurance that is considered “self-insured,” then you also have to file an annual report providing certain information for each covered employee. 

You may also be required to pay a fee to help fund the Patient-Centered Outcomes Research Trust Fund. “Small employers must also withhold and report an additional 0.9% on employee wages that exceed $200,000 per year,” said Stefan. 

Small Business Health Options Program (SHOP) and tax credits

Although the ACA presents a few challenges for small businesses, it also has some benefits for the employer – a primary one being tax credits. Since providing health insurance is not always practical for very small businesses, the Affordable Care Act created the option of affordable health insurance and tax credits for small businesses. 

Small businesses with fewer than 50 full-time employees can purchase affordable health insurance through the Small Business Health Options Program (SHOP) – given that they meet the four eligibility requirements. Businesses with SHOP insurance and fewer than 25 employees may qualify for the Small Business Health Care Tax Credit, worth up to 50% of their premium costs. (This may differ by state.) 

“Small employers were not mandated to provide coverage, like large employers, but if they had no more than 25 full-time employees, they could take advantage of the tax credit as long as they provided qualifying health insurance for their employees, paid for at least half of the cost of the insurance and paid an average yearly salary of less than $50,000,” said Stefan. 

This tax credit is available to eligible employers for two consecutive taxable years and granted based on a sliding scale (i.e., smaller businesses receive larger credits). 

Employer mandate penalties

Since the goal of the Affordable Care Act was to reduce the number of uninsured Americans, it originally required everyone who could afford health insurance to either buy it or face a penalty for noncompliance. Although the penalty for individual mandate noncompliance has been lifted, some states may still have penalties in place for qualifying businesses that don’t offer essential health benefits. These penalties often do not apply to very small businesses, though. 

“In 90% of cases, small businesses with fewer than 25 employees will not be fined penalties for not offering health insurance, so you can at least breathe easier about that,” said Stewart.    

Changes to the ACA in 2020

Many changes have affected the Affordable Care Act over the years, so we spoke with experts to learn the most recent impacts. Stewart said many of the ACA’s largest changes mirror the insurance industry’s broader responses to COVID-19: 

More private insurers offering SHOP plans: There has been an uptick in short-term plans being allowed to extend from three months to 12 months, which can save small businesses money if they meet extension qualifications.

No individual penalty: In previous years, individuals had to pay a penalty come tax time if they were uninsured for longer than three consecutive months. In 2020, that individual mandate penalty has been waived. The only exceptions to this are Rhode Island and California, as legislators in these states decided to continue fining uninsured residents.

Rolling enrollment: The ACA and SHOP plans now offer employee enrollment outside the standard enrollment period.

FSA contribution increases: Employees in most cases can increase their contributions to their flexible spending accounts until 2021. 

Additionally, many taxes that were initially designed to help pay for the Affordable Care Act have been repealed by both the House and the Senate, in conjunction with the passage of the December 2019 spending bills. 

“The health insurance tax, the Cadillac tax and the medical device tax were all repealed as part of the spending bill,” said Stefan. “The repeal of the health insurance tax was passed after most 2020 insurance premiums were already in place. As a result, the effect of the change in that tax will not be felt until 2021.” 

When choosing health insurance for your company, it is best to seek an expert on the health insurance marketplace and state requirements for minimum essential coverage. 

“My biggest recommendation is to reach out to a SHOP broker or agent in your state,” said Stewart. “These are experts who can provide the most accurate information on pricing and plans available in your state’s marketplace, as well as your business’s exact liabilities. There is so much marketplace variability across the country, so these SHOP brokers really are your best resource.”

Original Source:

You have just formed your very first Delaware corporation. Congratulations! Although as a busy founder you may not have time to take care of ongoing corporate maintenance, there are some minimum corporate formalities that you should strive to maintain.  Below is my list and the reasons why.One of the main benefits that is afforded by corporate structure is the limited liability protection for its owners. This means that the corporation and its stockholders are treated as separate legal entities. The corporation enters into its own contracts, and therefore, it is only the corporation’s assets, and not the assets of its individual stockholders, that are available to pay for judgments and claims of creditors. There are, however, circumstances when a creditor of a corporation can “pierce the corporate veil” to hold the corporation’s stockholders liable for the corporation’s debts and other obligations. When deciding whether to pierce the corporate veil and hold stockholders personally liable, courts consider, among other factors, whether: the corporate formalities have been disregarded;the corporation is a mere façade of its owners; the corporation is inadequately capitalized; the owners use the corporation’s assets and property as their own; the corporation makes undocumented “loans” to the owners or extends credit not on market terms; or the owners simply take money out of the corporation; The following best practices with respect to corporate governance and external appearance of the corporation may strengthen the argument that the corporation exists as a separate legal entity: Stockholder and Board of Directors Meetings. The corporation should hold both annual stockholder and Board meetings (or at least prepare unanimous written consents). In addition, the Board should consider and approve all significant actions of the corporation (such as taking out loans, hiring executive officers, selling securities, entering into any other transaction that is out of the ordinary for such corporation). A majority of disinterested directors or the stockholders should approve all transactions between directors, officers, and the corporation. Delaware Annual Report and Franchise Tax. In order to maintain good standing in Delaware, the corporation has to file an online annual report with the Delaware Division of Corporations and pay the Delaware franchise tax no later than March 1st of each year. Delaware Registered Agent. It is important to renew the services of the mandatory Delaware Registered Agent every year.  The fee is about $50/year.Qualifying to Do Business in the Other States. If the corporation is conducting business in another state, it must register there as a foreign corporation and pay tax on the income derived from that state. The definition of “conducting business” varies state by state. So, please reach out to your accountant or lawyer for assistance with this question. Separate Bank Account. The corporation must have its own corporate bank account. All expenses must be paid from that account and all revenue be deposited there. If the founders paid for incorporation expenses personally, they should submit an expense report and be reimbursed by the corporation from the corporate bank account. One of the “red flags” for the “piercing of the corporate veil” argument is the co-mingling of funds between the corporation and its owners. Hiring Employees. The hiring process is complicated and involves setting up payroll, preparing pay notices, registering with appropriate state authorities, complying with federal immigration laws, and obtaining the mandatory insurance policies. Failure to comply with these requirements may result in hefty fines. Debt Guarantees. Stockholders should be careful not to personally guarantee and pay debts of the corporation (at least not on the recurrent basis). Otherwise, the courts may decide that the owners act as “alter egos” of the corporation and the corporation has lost its separate entity status. Board resolutions should be adopted allowing guarantees for specified purposes only. Acting on Behalf of the Corporation. All documents signed on behalf of the corporation must indicate the signing officer’s name and title. For example: XYZ Inc. ________________ Name: John Smith Title: CEO Further, all contracts should be in the name of the corporation, and the insurance policies should name the corporation as the insured. The full corporate name should appear on the website, business cards, letterhead, and checks of the corporation. In conclusion, although this list seems long, it actually doesn’t take much effort to comply with if the proper procedures have already been set up.  Your accounting and legal team should work with you on ensuring that your startup follows all corporate formalities.This article is not legal advice and was written for general informational purposes only.  It does not express anyone else’s views except for the author’s.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author Arina Shulga.  

Original Source:

By Kimberly Loocke, Eric Wall, Julia Riechert, and Richard D. Harroch

In the wake of the COVID-19 pandemic and shelter-in-place orders, businesses are considering ways to assist employees and other workers who are financially burdened by the crisis. One simple and tax-favorable action is to make disaster relief assistance payments under Section 139 of the Internal Revenue Code.

Under Section 139, payments for personal, family, living, or funeral expenses incurred as a result of the COVID-19 pandemic are both tax-free to the individual recipients and tax-deductible expenses for the business. Payments are free of IRS reporting requirements and a plan can be quickly adopted with minimal expense.

Businesses large and small can take advantage of this favorable tax treatment to help their workers during these challenging times. With careful planning, even businesses that have had to reduce salaries or adopt furloughs may be able to implement such a financial assistance plan to help their hardest hit workers from the COVID-19 pandemic.

Section 139 payments are highly tax favorable

Section 139 payments are excluded from the recipient’s federal gross income and not otherwise treated as compensation or income from self-employment, and are deductible by the business for federal income tax purposes (except to the extent self-employed individuals and other owner-employees receive a benefit as a recipient of a qualified disaster relief payment).

A broad variety of expenses may be covered by Section 139

Qualified disaster relief payments include any amount paid to or for the benefit of an individual to reimburse or pay reasonable and necessary personal, family, living. or funeral expenses incurred as a result of a qualified disaster. Qualifying payments may be structured as a reimbursement of actual expenses incurred by the recipient or as payments determined by the business to be in proportion to the recipient’s reasonable and necessary expenses incurred.

There is no dollar cap on qualifying payments, but they cannot be (1) made for nonessential, luxury or decorative items or services; (2) made for expenses which are otherwise compensated for by insurance or other sources; or (3) intended to replace lost wages or income.

Section 139 payments have low administrative and compliance requirements

Payments made pursuant to Section 139 are not required to be reported on a Form W-2 or Form 1099. These payments are not subject to any federal wage or other employment tax withholding obligations. Businesses should reach out to their tax advisors to confirm any state tax and withholding obligations.

A formal plan or policy to govern Section 139 payments is not required and a business is not required to obtain proof of the actual expenses incurred by the recipients as long as the business reasonably expects the amounts to be commensurate with the amounts of the individual’s unreimbursed reasonable and necessary expenses incurred as a result of the COVID-19 pandemic.

However, we recommend adopting a plan that describes the parameters and eligibility requirements for payments under the plan. Best practices also include obtaining an affirmative statement from the recipient that the funds received are necessary for expenses associated with COVID-19 and that such expenses will not be reimbursed by insurance.

Sample Employee Financial Assistance Plan

A variety of different approaches may be used to provide tax-favored financial assistance. Here is a sample Employee Financial Assistance Plan for a policy that provides reimbursements for documented COVID-19 expenses. This sample includes the recommended practices described above and should be tailored to your business’s particular situation:

COVID-19 Reimbursement Policy

This temporary policy establishes guidelines for Company reimbursements of employee expenses incurred due to the COVID-19 pandemic in accordance with Section 139 of the Internal Revenue Code. Subject to the conditions below, all Company employees who have incurred reasonable and necessary Covered Expenses within the Covered Period as a result of the COVID-19 pandemic may receive reimbursements of such expenses of up to $____  per employee.

Covered Expenses. “Covered Expenses” are expenses that are reasonable and necessary personal, family, living, or funeral expenses incurred as a direct result of the COVID-19 pandemic, reimbursement for which qualify as qualified disaster relief payments under Section 139 of the Internal Revenue Code, and which are not otherwise compensated for by insurance or otherwise. The Company will not reimburse costs of nonessential, luxury, or decorative items or services or make payments that are considered by the Company as replacement for lost wages, sick leave, or other income. Examples of expenses resulting from the COVID-19 pandemic that the Company will consider for reimbursement include:

Medical expenses not compensated for by insurance incurred as a result of a COVID-19 diagnosis or suspected COVID-19 infection 
Precautionary health expenses, including hand sanitizer, face masks, gloves, and disinfectant cleaning supplies 
Increased costs related to telecommuting due the COVID-19 pandemic, including initial and ongoing home office expenses, which are not otherwise reimbursed or covered by the Company 
Increased travel and commuting costs incurred as a result of the necessity to use alternative travel and commuting arrangements due to the COVID-19 pandemic 
Increased costs of child-care and educational expenses for immediate family members due to the COVID-19 pandemic

Reimbursement Procedures. Reimbursement requests must be submitted to ___________________ within 60 days of the date incurred, along with appropriate supporting documentation (e.g., a copy of receipts and a detailed itemized list of expenses incurred) and a certification that the expenses were reasonable and necessary expenses incurred as a result of the COVID-19 pandemic and are being requested in compliance with the conditions of this policy. Expenses for items or services the Company deems in its own discretion as nonessential, luxury, or decorative, or not incurred as a result of the COVID-19 pandemic will not be reimbursed. The Company will determine whether to reimburse for submitted expenses in its sole discretion. The employee must return to the Company any amounts received in excess of the substantiated expenses within 60 days from the date of reimbursement.

Payment Details. Reimbursement payments will be made as part the Company’s regularly scheduled payroll after receipt of the required documentation and completion of the Company’s approval process. The Company intends to treat qualifying reimbursements as non-taxable for federal employment and income tax purposes under Section 139 of the Internal Revenue Code, and the reimbursements will not otherwise be treated as compensation for purposes of the Company’s other benefit and incentive programs.

Covered Period. The “Covered Period” for this policy is March 13, 2020, through the date at which the COVID-19 pandemic is no longer considered a federally declared disaster or when the Company ends the policy, in its sole discretion. The Company reserves the right to modify or cancel this policy at any time. 

COVID-19 Reimbursement 
Employee Expense Certification

Employee Name: _____________________________________________

Requested Reimbursement Amount:  ________________________________

Expense Documentation Attached:   YES

I certify that the requested reimbursement amount is for reasonable and necessary expenses incurred by me or my immediate family on or after March 13, 2020, as a direct result of the COVID-19 pandemic and is being requested in good faith pursuant to the Company’s COVID-19 Reimbursement Policy. I also certify the requested reimbursement amount is not intended to compensate for lost wages, sick leave, or income, and I did not and will not receive reimbursement or payment from any other source for the claimed expenses.

Signature: ____________________________________


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About the Authors:

Kimberly Loocke is an experienced tax attorney in the San Francisco office of Orrick, Herrington & Sutcliffe. Kimberly focuses her practice on the tax aspects of corporate and real estate transactions, sales and use taxation, as well as tax controversy and operational matters. She has been recognized as a Rising Star by Super Lawyers from 2015-2019. Kimberly holds a Certified Public Accountant license and worked as a senior tax associate for Deloitte Tax, LLP. She can be reached through Orrick’s website.

Eric Wall is a partner in the San Francisco office of Orrick, Herrington & Sutcliffe, and is a member of its Tax Group. His practice encompasses a wide variety of federal and state tax issues, including domestic and cross-border mergers and acquisitions, executive compensation matters, real estate matters, and taxation of pass-through entities. He can be contacted through Orrick’s website.

Julia Riechert is an employment law partner and trial lawyer in the Silicon Valley office of Orrick, Herrington & Sutcliffe. She helps companies navigate and resolve challenging workplace issues and has extensive expertise in litigating and defeating employment claims. She can be reached through Orrick’s website.

Richard D. Harroch is a Managing Director and Global Head of M&A at VantagePoint Capital Partners, a venture capital fund in the San Francisco area. His focus is on internet, digital media, and software companies, and he was the founder of several internet companies. His articles have appeared online in Forbes, Fortune, MSN, Yahoo, FoxBusiness, and Richard is the author of several books on startups and entrepreneurship as well as the co-author of Poker for Dummies and a Wall Street Journal-bestselling book on small business. He is the co-author of the 1,500-page book “Mergers and Acquisitions of Privately Held Companies: Analysis, Forms and Agreements,” published by Bloomberg. He was also a corporate and M&A partner at the Orrick law firm, with experience in startups, mergers and acquisitions, and venture capital. He has been involved in over 200 M&A transactions and 250 startup financings. He can be reached through LinkedIn.

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