Creating Company Resilience to an Economic Downturn

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Businesses across Florida and the United States are trying to figure out how to respond to the outbreak and spread of the coronavirus pandemic. Numerous public safety guidelines have been issued, and, although they will benefit the health of the larger community, there is an economic trade off.

Global supply chains have been disrupted for over a month. The U.S. stock market has been diving for weeks now, and last week tumbled into a bear market for the first time in 11 years. Federal, state, and local governments are taking steps to help forestall the economic effects of the coronavirus, such as lowering interest rates, but it’s yet to be seen how effective these measures will be. As always happens in these situations, though, small- and medium-sized businesses will bear the brunt of this economic blow.

Businesses need to develop action plans that involve both short-term and long-term response strategies. Most importantly, though, reacting quickly and decisively to potential business disruptions is the best way to avoid long-term damages.

Immediate Concerns

In the face of an impending crisis involving a pandemic, business owners will have varying concerns and worries, often depending on their particular businesses. For example, an electronics manufacturer may worry more about an interrupted global supply chain than a local bakery would. However, both the bakery and the manufacturer still face some of the same issues, including:

Customer Communication

It’s vital that every business clearly communicate to its customers and clients their plan of action. Because we are dealing with a potentially life-threatening disease and not just a regular economic downturn, customers need to be reassured. Take time to inform them about:

  • the status of your business,
  • how you’re responding internally to the situation,
  • what steps you’re implementing to ensure their safety.

Especially for retail businesses, a clear communications strategy is key to getting reluctant customers to continue to patronize your business.

Employee Communication

Don’t stop at the customer. Employees need to know the internal company policies being implemented as well. You want to ensure employees fully understand what the guidelines on sick leave, remote work, etc. are during a critical situation like this. If your employees get sick and can’t work, your production will suffer.

This employee meeting is also a great place to outline for employees the customer safety measures you are putting in place, to explain the rationale behind them, and to remind the employees to practice those policies while at work.

Let customers see employees washing their hands, practicing good hygiene, and cleaning the store. The small things that a business does for its customers often stand out the most in customers’ minds.

Furthermore, included in the new legislation passed in response to the coronavirus disaster were critical updates to paid sick leave and emergency family leave, which employers should stay informed about and are required to inform employees about.

Wage-Distribution Ratio

Small businesses are always looking for ways to reduce their tax burden. One common method used by owners of S corporations is to play with the wage-distribution ratio to avoid paying payroll taxes.

Since distributions are not subject to payroll taxes like W2 wages, it’s clear why this strategy has appeal. Unfortunately, owners can be tempted to try to game the system and forego a reasonable salary in lieu of distributions to save even more on taxes.

If you don’t think this is a real problem, consider the 2005 report of the Treasury Inspector General for Tax Administration (TIGTA), which analyzed S corporation tax returns filed in 2000. The two most telling findings from that report, I think, are that:

No Money, Big Problems

There’s a bigger problem, though: Distributions are dependent on profits. You can always pay W2 wages, but you can’t always pay distributions. When the economy is roaring and business is good, this isn’t a problem. But as soon as the revenue stream dries up, so do distributions.

This can quickly become an untenable situation.

Let’s say you, an S corporation owner, currently have a monthly take home pay of $10,000, which is made up of $5,000 of W2 wages and $5,000 of distributions. Then, suddenly the economy takes a dive and your business goes with it. The cash flow is flat so you can’t take the $5,000 of distributions each month, which means your total take home pay has been cut in half. Whether you make $10,000 or $50,000 a month, cutting your current living standard in half will leave you in a tough spot.

Business owners can solve this problem right now, though.

We know that the economy is going to slowdown, at least in the short term. We also know that having fewer customers and clients will negatively affect your cash flow. So, before your bottom line takes that hit, revisit your compensation and change how you pay yourself. Make sure that if profits fall in the short term, you won’t be left in the lurch personally, with $10,000 in bills but only $5,000 in income.

And, in case you’re thinking, “I’ll just wait to change the ratio until later,” think again! Remember how I said the tax code states that owners have to take “reasonable” salaries? Well, changing your wage-distribution ratio after the fact signals as clear as day to the IRS that you were not taking a reasonable salary.

Act Now and Thrive

A decisive reaction doesn’t have to be an over-reaction. Owners and executives need to step up and be leaders in their organizations, especially in times like these.

Companies that wait to implement policies to address the large-scale health crisis caused by the coronavirus will be outstripped by their competitors. Not only will they feel the immediate economic impacts more acutely, they will be less resilient over the course of the economic downturn. If they survive a protracted recession at all, they will come out the other side too weak to recover.

Don't Sweat the Small Stuff

Corporate governance, meetings, and state filings can eat up a lot of your precious time. But missing these deadlines can wreck your business and destroy your liability shield!

Our Corporate Veil Program relieves your legal burden so you can focus on running your business. 

Consistent and Reliable Legal Advice

Here at Alexander Abramson, we focus exclusively on business-related legal matters. Our attorneys have advised business owners and entrepreneurs on corporate governance issues, shareholders and operating agreements, and succession planning for decades. 

We would love to speak with you directly about how we can help you start, grow, and protect your business. Call us at 407-649-7777 or email a team member to get started.

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