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STARTING AND OPERATING A BUSINESS IN RHODE ISLAND Copyright © 2004, Michael D. Jenkins
CONTENTS OF THIS SECTION:
I. INTRODUCTION I. INTRODUCTION Rhode Island, the smallest of the 50 states, has a fairly typical tax and legal structure under which businesses must operate, not significantly unlike that of most other states. Until 2003, Rhode Island had a simple "piggy-back" form of personal income tax. That is, individuals in Rhode Island who filed federal income tax returns did not have to report their income on a state return to Rhode island; instead, they simply paid a tax to Rhode Island that was equal to a specified percentage of the federal income tax, which had been reduced to 25% in the year 2002. However, since 2003, the Rhode Island income tax on individuals is not unlike that of other states, except that the tax rates are equal to 25% of the federal tax rates that were in effect before the 2001 federal tax rate reductions were enacted. Like most states, Rhode Island imposes an income tax, a franchise tax on corporations, a sales and use tax, various excise taxes, with property taxes imposed at the local level. Taxes in Rhode Island are generally quite high, in relation to per capita incomes of residents. A 2005 study by the Tax Foundation found that Rhode Island, at 11.4% had the fourth-highest ratio of state taxes to per capita income of any state in the nation, while Maine (13%), New York (12%) and Hawaii (11.5%) had the highest ratios. The state has adopted a limited liability company (LLC) law, and a limited liability partnership (LLP) law, so that businesses operating in Rhode Island in LLC or LLP form may obtain the advantages of limited liability, without incorporating or becoming subject to corporate taxation, generally. Legislation in 2002 also made it possible for professional service firms (physicians, dentists, attorneys, etc.) to operate as LLCs or LLPs. At present, the state's highly diversified economy is reasonably sound, in terms of the level of unemployment, average per capita income levels, and other economic measures. For example, in August, 2004, the Rhode Island unemployment rate was 5.5%, lower than in previous months, but still just slightly higher than the national unemployment rate of 5.4% for that month. On the other hand, the state has a relatively high cost of living, compared to national averages. Rhode Island is a hotbed of knowledge industries, with more college students per capita than any other state. The state has access to 86 colleges and universities within 50 miles, the largest concentration of higher education facilities in the U.S., and its workforce has fifty percent more Master’s Degrees than the national average. To view the latest federal Bureau of Labor Statistics unemployment rate data for Rhode Island or any other state, visit the BLS website. II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS. (a) In General. A business that operates in Rhode Island can do so as a sole proprietorship, a general or limited partnership, a corporation, or a limited liability company. In addition, like the federal tax law, the state income tax law also recognizes S corporations, for income tax purposes, and generally allows the income or losses of an S corporation to "flow through" and be taxed or deducted at the shareholder level, rather than taxing the corporation itself as an entity. Rhode Island also provides for limited liability partnerships, in which no partner is liable for certain debts of the partnership, somewhat like a corporation or LLC, but with fewer legal formalities than are required for either a corporation or an LLC. Each of the above entities is discussed below, along with the basic requirements for forming such an entity and any general ongoing (non-tax) reporting requirements that are applicable to it. The tax treatment of each form of legal entity is discussed in Section IV. (b) Sole Proprietorships. In general, sole proprietorships in Rhode Island can be formed with no formalities. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, as well. Most significant license fees are imposed by the state, not the local governments, in Rhode Island. No separate tax form filing is required, generally, for a sole proprietorship, under the Rhode Island income tax law. Instead, as with the Schedule C on your federal Form 1040, you simply report the net income or loss from your sole proprietorship on your state personal income tax return. See Section IV(c) for information on the Rhode Island income tax and filing requirements for individuals. (c) Partnerships. As a rule, general partnerships in Rhode Island can be formed with no formalities, although it is highly advisable to have a written partnership agreement. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or towns in which you operate and, in some cases, state licenses, for any type of partnership, including general or limited partnerships, or limited liability partnerships. A limited partnership, in which there is at least one general partner (who is liable for partnership debts) and at least one limited partner (who is not liable for partnership debts), may also be formed under Rhode Island law. Unlike a general partnership, a limited partnership must generally have a written partnership agreement, and must file a certificate of limited partnership with the secretary of state, together with a filing fee of $100. Foreign limited partnerships must also register before being allowed to do business in Rhode Island, and must pay a registration fee of $100. For information on limited partnership filing requirements, see the contact information for the offices of the Rhode Island Secretary of State, listed in Section VI(a). Limited liability partnerships (LLPs) are a relatively new form of partnership permitted under the laws of Rhode Island. Like an LLC, an LLP provides limited liability for its owners, while retaining the tax advantages of a partnership for federal and Rhode Island state income tax purposes. However, unlike an LLC, an LLP typically operates like a regular partnership, and is not required to file articles of organization. To form an LLP in Rhode Island, you must register the partnership, and pay a filing fee of $100 per partner, with a maximum of $2,500, to the secretary of state. Foreign LLPs, those created under the laws of another state, must register with the secretary of state pay the same fees as a domestic LLP. Note that the Rhode Island LLP law appears to give somewhat less protection to partners in an LLP than state law grants to stockholders of a corporation, so you should not ordinarily consider an LLP as the complete equivalent of a corporation, with regard to limitation of your liability as an owner. However, an LLP will provide greater liability protection than a regular general partnership in many instances. In 2002, the legislature enacted amendments to the LLP law that permit professional service firms to operate in the form of LLPs. Every such professional service LLP is required to maintain at least $50,000 of professional liability insurance coverage per professional employee, with a minimum coverage amount of at least $100,000 and with the maximum required amount equal to $500,000. Every LLP doing business in Rhode Island, including both domestic and foreign LLPs, must renew its LLP registration annually, and pay the same $100 per partner (maximum of $2,500) fee that applies to an initial registration. For more information on LLP registration requirements, see the contact information for the offices of the secretary of state, listed in Section VI(a). Note that one potential drawback of LLPs, if you will do business in other states besides Rhode Island, is that you may not enjoy limited liability with regard to creditors of the LLP if you do business in some such states. Some states, like California and New York, only recognize certain types of professional partnerships as LLPs. Such other states may simply treat your LLP like an ordinary general partnership, with no limitation of liability. A partnership agreement, for any type of partnership, should spell out in considerable detail such matters as the following:
Partnerships, as entities, are not subject to state income tax in Rhode Island. Partnerships are required to file an annual tax information return with the state. For details on Rhode Island partnership tax return filing requirements, see Section IV(c). (d) Corporations. To form a corporation in Rhode Island, you must file articles of incorporation with the Rhode Island Secretary of State and pay an incorporation fee of $70, plus a license fee based on the number of shares of authorized stock of the corporation. If the number of authorized shares is less than 75 million shares, a flat license fee of $160 applies. If 75 million or more shares are authorized, the license fee is 0.2 cents per authorized share. Additional license fees must be paid if the corporation subsequently increases the number of authorized shares by amending its articles. A foreign corporation (one formed under the laws of another state or a foreign country), must obtain a certificate of authority before it may legally conduct business in Rhode Island. This is done by filing an application for a certificate of authority and paying a qualification fee of $150, plus a license fee computed on capital stock at the same rates as for a domestic corporation, but prorated to reflect the ratio of its Rhode Island assets and receipts to total assets and receipts. The minimum license fee is $160, as in the case of a domestic corporation. For more information on filing articles of incorporation or applying for a certificate of authority to do business in Rhode Island, see the contact information for the offices of the secretary of state, listed in Section VI(a). In addition, once your corporation is formed, it will be required to file annual reports and a filing fee of $50 with the secretary of state each year. Failure to file this report on a timely basis could result in suspension or revocation of your corporation's charter. In addition to paying federal income taxes on its income, a corporation that does business in Rhode Island must also file corporate income tax returns with the state. See Section IV(c) for a discussion of state corporate income tax rates and tax return filing requirements. Corporations that do business in Rhode Island are also subject to a corporate franchise tax. The corporate franchise tax applies to corporations at the rate of $2.50 for each $10,000 par value of capital stock, or fraction of $10,000. No par stock is assumed to have a value of $100 per share. The Rhode Island corporation income tax paid is allowed as a tax credit against the franchise tax liability. In effect, the franchise tax generally is not imposed unless it exceeds the income tax liability, with the exception of a minimum $500 franchise tax ($250 before 2004) that applies to business corporations, including S corporations. A reduced tax rate applies to certain corporations that did not do business in Rhode Island during the preceding taxable year. For tax forms and more information on corporate income and franchise taxes in Rhode Island, see the contact information for the offices of the Department of Administration, Division of Taxation, listed in Section VI(a). (e) S Corporations. An S corporation is simply a regular corporation that has elected, for federal or state income tax purposes, or for both, to be taxed somewhat like a partnership, with its income, losses and tax credits flowing through to its owners, who report such income, losses, or credits on their individual tax returns. Rhode Island recognizes S corporations for income tax purposes, and treats them in a manner similar to the federal tax treatment. However, they are nevertheless subject to the annual minimum franchise tax, which was increased from $250 to $500 as of January 1, 2004. (f) Limited Liability Companies. Rhode Island, like every other state in the U.S., has adopted a limited liability company (LLC) law. Thus, in addition to the traditional choices of a sole proprietorship, partnership, or corporation, a business that operates in Rhode Island may also choose to operate in the form of an LLC. LLCs are very attractive entities for many small businesses, in that they offer the same protection as a corporation from creditors for debts of the business, while offering much of the flexibility plus the flow-through tax treatment of a partnership for federal tax purposes, and in most states. See Section IV(c) for a discussion of the income tax treatment of LLCs under Rhode Island tax laws. To form an LLC under the laws of Rhode Island, one or more persons must file articles of organization with the secretary of state, which must be accompanied by filing fees of $150. The articles must state whether, under the articles or any operating agreement, the LLC is intended to be treated as a partnership, a corporation, or disregarded as an entity separate from its one member, for federal income tax purposes. Rhode Island state law allows formation of one-owner LLCs, which now qualify for treatment as sole proprietorships for federal tax purposes. In addition, in 2002, the legislature enacted amendments to the LLC law that permit professional service firms to operate in the form of LLCs. Like professional LLPs in Rhode Island, professional LLCs must maintain professional liability coverage of at least $50,000 per professional employee, with minimum and maximum required coverage amounts of $100,000 and $500,000 for the firm as a whole. Foreign LLCs, those formed under the laws of another state, must obtain a certificate of authority to do business in Rhode Island, by filing an application for a certificate of authority with the secretary of state and paying a filing fee of $150. In addition to initial filing fees, an LLC formed in Rhode Island must subsequently file annual reports and pay an annual report filing fee of $50 with each such annual report. A foreign LLC is also required to file an annual report and pay the applicable filing fee of $50. For more information on filing articles of organization for an LLC, see the contact information for the offices of the secretary of state, listed in Section VI(a). III. BUSINESS ACQUISITIONS (a) In General. When acquiring an existing business, there are a number of state legal and tax issues you or, preferably, your business attorney, should attend to before closing the purchase. These include matters such as doing a title search for any real property that is being acquired, checking for any recorded security interests on personal property items, and thoroughly researching county, state, and federal records for any judgment liens, tax liens, or other liens, before property is acquired. You will also benefit from consulting a tax advisor before the agreement of sale is negotiated, in order to seek a structuring of the agreement so that the purchase price is allocated among the assets in a way that favors you. You may be able to obtain considerable tax savings if the purchase price is allocated in a way that gives you the best possible tax results under federal and state income tax laws, and other state tax laws, such as sales/use tax or property tax laws. Depending upon the state (or states) in which the seller's assets are located, you may also have to comply with state bulk sale or bulk transfer laws. You should also obtain tax releases from various state taxing agencies, as discussed below. (b) Bulk Sale Laws. Typical bulk sale laws require either publication of legal notices to all creditors in advance of the sale and recording of such notices in some cases, or maintenance of detailed lists of the property to be transferred, for inspection by the public. Rhode Island is one of the business-friendly states that has repealed its bulk sales law, as of July 13, 2001, so you no longer need to be concerned with complying with a bulk sales law in Rhode Island, when acquiring part or all of the assets of an existing business. However, see the following section on tax releases you need to obtain when acquiring a business or a bulk transfer of business assets. (c) Tax Releases. When you acquire an existing business, you will want to make sure that you do not unwittingly become liable for any unpaid taxes owed by the seller. Typically, to protect yourself, you will need to receive a tax release or releases from various state taxing agencies, for such taxes as sales and use tax, income tax withholding, and state unemployment taxes, in each state in which the seller does business. If you fail to obtain such a release or written statement from the tax agency that the seller is not delinquent on any tax payments, you will be held responsible for such tax if it is not withheld from the purchase price proceeds and paid to the state at the time the sale of the business transpires. In Rhode Island, you should obtain a tax release for state unemployment taxes from the Division of Taxation, Employer Tax Section. In any bulk transfer, it is required that the seller pay any sales and use taxes before initiating the sale; thus, as buyer, you should make sure that the seller has done so. (d) Unemployment Tax Rating of Seller. In addition to obtaining tax releases, you may find it advantageous to succeed to the seller's unemployment tax experience rating, if the seller has a tax rate lower than you would otherwise obtain as a new business. In Rhode Island, you will in most cases automatically succeed to the seller's experience rating as a successor employer. However, if you are already an employer at the time of the acquisition, you may elect for the remainder of that tax year to pay tax on the new employment unit at your existing tax rate, or at the rate applicable to the predecessor employer, which may be a lower rate. (e) Withholding Tax on Real Estate Purchases.
If you acquire Rhode Island real estate for your business,
be sure that you withhold state income tax from the purchase
price if the property is acquired from a nonresident of Rhode
Island. The withholding tax rate is 9% if the seller is a
nonresident corporation, or 6% in the case of nonresident
individuals, estates, trusts, or partnerships. A "nonresident
corporation" means a corporation that is neither incorporated
in the state nor authorized by the secretary of state to do
business in Rhode Island. Payment of the withheld tax is due
within three banking days after the closing of the transaction.
IV. RHODE ISLAND TAXES AND OTHER GENERAL REQUIREMENTS. (a) In General.
Rhode Island, with a
highly-skilled work force, is an attractive place to do business,
but it is not considered a low-tax state. Corporations are
subject to a relatively high 9% tax rate on income, and to a
franchise tax on capital that is, in effect, an alternative
tax, if the franchise tax is higher than the income tax
liability. There is also a fairly high sales tax, at 7%,
and business inventories are generally subject to property
taxes, except manufacturers' inventories.
Beginning in 2004, Rhode Island requires all pass-through
entities, including partnerships, limited liability companies
that are not taxed as corporations, and S corporations, to
withhold state income tax on the owners' Rhode Island source
income at the rate of 9% for nonresident corporate owners, or
at the highest individual tax rate, for nonresident individual
owners (partners, members, or S corporation shareholders). No
withholding is required if the owner's share of the pass-through
income from Rhode Island is less than $1,000 for the annual
accounting period or if the owner elects to have the tax due
paid as part of a composite return for nonresident owners, where
such a composite return is filed by the pass-through entity.
(b) State and Local Licensing. Nearly any business, operated anywhere in the United States, will have to have at least one government license of some kind. In most cases, this will be a local license, issued by your city or county. Before you open your business, contact your local city or county hall and find out if your particular business needs one or more local licenses. Most kinds of local business licenses are granted upon payment of a fee, with no further requirements, except possibly for annual or other periodic renewal fees. However, if you are engaging in any kind of food business, you will usually need to also obtain a health department permit and show that you are in compliance with health department food-handling requirements. In addition, be sure to check with an attorney or local government zoning or planning department officials to determine if your business will be in compliance with all local zoning and planning restrictions. If you own or rent any type of facility, you will generally need fire department permits, showing that you meet fire safety codes and any construction or improvements to an existing structure will usually require a building permit. If you intend to simply operate your business from your home, you may be in violation of local zoning requirements, but this is less likely to be a concern if you don't have clients, customers, suppliers, or employees coming to your house on business, on a regular basis. State governments have also traditionally required special licenses for many kinds of professionals, such as physicians, dentists, lawyers, and accountants. To further protect consumers, Rhode Island has expanded the list of occupations that must be licensed by the state to include many other occupations. Most state licenses not only require payment of fees, but are only issued for a given profession or occupation upon showing that you have completed certain educational or experience requirements, or passed certain tests, or some combination of the foregoing. To greatly simplify the task of obtaining and paying for state licenses and permits, Rhode Island's government agencies have cooperated to form a Business Fast Start website on the Internet, which will aid you in registering or applying for various state licenses and permits. To view the Business Fast Start project's Internet web site, see the link in Section VI(c). For information on state licensing and business registration requirements in Rhode Island, also see the contact information for the offices of the Rhode Island Department of Business Regulation, listed in Section VI(a). (c) Income and Franchise Taxes. Rhode Island has both an individual income tax and a corporate income tax, as well as a franchise tax on corporations. The Rhode Island individual income tax was formerly imposed as a flat percentage of a taxpayer's federal income tax, at a rate of 26% of the federal tax. However, due to cuts in federal income tax rates in 2001 and subsequent years, the Rhode Island tax calculation is considerably more complex, as it is now based on taxable income times 25% of the federal tax rates that were in effect prior to the enactment of the federal Economic Growth and Tax Relief Reconciliation Act of 2001. An alternative minimum tax is now also imposed (since 2001), based on 25% of the federal alternative minimum tax. Individual taxpayers generally pay state income tax on their business earnings from a sole proprietorship, or on their share of the earnings of a pass-through entity, such as a partnership, S corporation, or LLC. The Rhode Island personal income tax return is Form RI-1040, which must be filed with the Division of Taxation. Partnerships, or entities taxable as partnerships, such as LLCs, are not subject to state income taxation in Rhode Island, but must file an information return with the Division of Taxation each year, showing each partner's share of taxable income, losses, and credits, on Form RI-1065. The partnership information return is due by April 15th of the following year, in the case of a calendar year partnership. Individual taxpayers doing business as sole proprietors, or who are partners in partnerships or members of LLCs, are required to make payments of estimated Rhode Island individual income taxes, on Form RI-1040ES, if their net tax liability (not covered by withholding) exceeds $250. Estimated tax payments are due in four installments, on the 15th day of the 4th, 6th, and 9th months of the taxable year, and the 15th day of the first month of the following year. The Rhode Island corporate income tax rate, on corporations other than S corporations, is imposed at a flat rate of 9% of taxable income, with a minimum annual tax of $500 ($250 before 2004). The state corporation income tax return is Form RI-1120, which must be filed with the Division of Taxation by the 15th day of the third month following the end of the taxable year, or by March 15th in the case of a corporation whose taxable year is the calendar year. Corporations are required to make estimated tax payments of their state corporate income tax in advance, if their tax liability for the year exceeds $500. Estimated corporation income tax payments are due in advance, in two installments, as follows:
The total estimated tax that must be paid in is usually equal to 80% of the actual tax liability for the year. However, if the preceding year was a full year of 12 months, the current year payments need only be equal to 100% of the prior year's tax liability, if less (computed based on the prior year's facts at the current year's tax rates). Penalties will be imposed for failure to make the required estimated tax payments on a timely basis. S corporations are generally not taxable on their income by Rhode Island, except to the extent any of the S corporation's income is taxable for federal income tax purposes. However, all S corporations are subject to the annual minimum corporate tax, which was increased on January 1, 2004 from $250 per year to $500. In Rhode Island, a limited liability company (LLC) is taxed in the same manner as a partnership, thus avoiding the possible double taxation of income that can occur with a corporation. Note that under IRS regulations, effective since 1997, an LLC may now elect to be treated as a partnership if it has more than one owner, or as a sole proprietorship if it does not, for federal income tax purposes. Rhode Island law now recognizes the validity of a one-owner LLC. Note that it is not always entirely clear whether an LLC is a "single-member LLC" LLC or not, where the "single owner" is a married couple who hold the entire ownership of the LLC in some form of co-tenancy, such as joint tenants with right of survivorship, tenants by the entirety, or as tenants in common. The federal Internal Revenue Service (IRS) has taken a very lenient position in Rev. Proc. 2002-69, where a couple hold the LLC interest as community property, ruling that the IRS will accept whatever choice the couple make, either to disregard the LLC as an entity (treating it as a "single-member LLC") or to treat it as a partnership between the husband and wife. However, Rhode Island is not a community property state, so where the LLC is owned by a husband and wife in some form of co-tenancy, it is unclear whether the IRS treatment would be as lenient as for community property owners, since the IRS has not issued any published rulings on whether an LLC can be a disregarded entity if held in one of the various forms of co-tenancy by a married couple, rather than being held as community property. Thus, it is also unclear, where an LLC is owned by a husband and wife as co-tenants, whether Rhode Island would treat the LLC as a single-member LLC or as a partnership. While generally treated as a partnership for Rhode Island tax purposes, an LLC is nevertheless required to pay the annual $500 corporation minimum tax ($250 before 2004). (d) Sales and Use Tax. Rhode Island imposes a general sales tax on retail sales of tangible personal property and certain types of services at the statewide rate of 7%. In addition, a 5% tax applies to hotel and motel transient accommodations, and a 6% additional tax applies to car rentals. There is also a 1% local meals and beverage tax on sales of food and beverages by eating or drinking establishments, which went into effect on August 1, 2003. Sellers are required to obtain a seller's permit and to collect and pay over the state sales and use taxes to the Division of Taxation, Excise Tax Section. There is a $10 permit fee, which must be paid when renewing the seller's permit each year. There are numerous exemptions from the sales tax, the most important of which is the resale exemption. If you are a wholesaler or retailer who purchases goods that you will resell, your purchase of such goods may qualify as an exempt sale for resale. Similarly, if you sell goods to wholesalers or retailers for resale by them, your sale may also qualify as an exempt sale for resale. In any such transaction, the exemption is ordinarily available only if the purchaser gives the seller a valid resale certificate, certifying that the items are being purchased for resale, and not for use or consumption by the buyer. A shadow tax, the use tax, is also imposed at the same rate as the sales tax. It is primarily intended to tax property that is acquired from sources outside of the state, in transactions not subject to sales tax, when such property is used or consumed within Rhode Island. Use tax may also apply to items purchased on an exempt basis, such as for resale, if such items end up being used or consumed, instead of being resold. Before making any taxable sales, you will need to register with the Division of Taxation, Excise Tax Section, by filing an Business Application and Registration form. For more information on Rhode Island sales and use tax registration and compliance, see contact information for the offices of the Division of Taxation in Section VI(a). (e) Real and Personal Property Taxes. In Rhode Island, as in every other state, any business real estate you own will be subject to real property taxes. In general, there is little that you must do, unless you wish to challenge your assessed valuation, since the assessor will bill you for each year's property taxes as they come due. Property taxes are levied by cities and towns, but not by counties. Rhode Island localities also impose personal property taxes on tangible personal property. However, certain business personal property, such as manufacturing inventories and new manufacturing machinery or equipment, are exempt from personal property tax in Rhode Island. While Rhode Island cities and towns generally tax tangible personal property, there is no property tax on intangible personal property, such as stocks, bonds, promissory notes, and other such paper assets, except in the case of banks and credit unions. (f) Other Business Taxes. Rhode Island imposes a number of other taxes on businesses, some of which may affect you. These include:
(g) Trade Names. A trade name, also known as a fictitious or assumed name, is any name used in the course of business that does not include the actual legal names of all the owners of the business. Thus, if your business goes by any name other than your own real name, it is operating under a trade name. The same is true of a corporation, if it operates under a name other than its legal name. A trade name might also be one that suggests the existence of additional owners, by using such words as "company," "associates," or "group." In most states where you do business, it will be necessary to register a trade, fictitious, or assumed name, so that people who do business with you can find out who the actual owners of your business are. You may also want to register any such trade name, as a means of protecting against other companies usurping that particular trade name. Rhode Island law provides stiff penalties of up to a year in prison or a $500 fine for doing business under a fictitious name without first registering the name with the town or city clerk for the town where the business is carried on. A filing fee of $10 is charged by the town or city clerk. The requirement to file with town or city clerks does not apply to corporations or limited partnerships. Instead, they are subject to state requirements that they register any fictitious corporate or limited partnership business name with the secretary of state and pay a $50 fee. A limited liability company (LLC) is also required to file with the secretary of state and pay a $50 fee if it uses a fictitious business name, rather than its true name. V. EMPLOYER REQUIREMENTS IF YOU HAVE EMPLOYEES (a) Employer Registration and Withholding. If you have any employees, you will already be withholding federal income tax and FICA taxes from their wages. Since Rhode Island imposes a state income tax on the income of individuals, you will need to also withhold Rhode Island income tax from the wages of your employees. Before you begin to pay wages, you must register as an employer with the Division of Taxation, part of the Department of Administration. Employers must also withhold Temporary Disability Insurance (TDI) from employees' wages, as discussed in Section V(f)(5), and must register for TDI with the Department of Labor and Training. For more information on Rhode Island income tax withholding and registration requirements for employers, see the contact information for the offices of the Division of Taxation, listed in Section VI(a). (b) Unemployment and Other State Payroll Taxes. If your business has one or more employees, you, as an employer, will be required to pay state unemployment tax based on the amount of such wages paid. Employers subject to the Rhode Island unemployment tax are required to register with Department of Labor and Training. New employers are required to pay tax at a rate of 1.79% in 2004 on the first $14,000 of wages paid to each employee, plus a Job Development Assessment tax of 0.21% on the same wage base amount, a total tax rate of 2.0%. After you have had employees for a while, you will develop an unemployment tax experience rating. This rating is based on the number of employees you terminate who then claim unemployment benefits and the amount of such benefits paid to those former employees, under a complex formula. The state will inform you when they have assigned you an individual tax rate based on your firm's experience rating. That rate may be higher or, if you have had relatively few benefit claims charged to your account, lower than the standard new employer tax rate you initially were paying. All state unemployment taxes are imposed upon you as the employer, and, under Rhode Island law, cannot be charged to your employees or withheld from their wages. However, as noted in Section V(f)(5), you must also withhold state Temporary Disability Income tax from employees' wages. For more information on your Rhode Island unemployment tax obligations as an employer, see the contact information for the offices of the Department of Labor and Training and the Division of Taxation, listed in Section VI(a). (c) Workers' Compensation. Workers' compensation insurance is a state-mandated insurance requirement for most employers, in almost every state. In Rhode Island, effective since January 1, 1999, virtually all businesses with one or more employees are required by law to have workers' compensation insurance, except those able to self-insure. Previously, employers with three or fewer employees were exempted. Note, however, that a sole proprietor or a partner in a partnership is generally not considered an employee, and certain corporate officers are also exempted, if they file a waiver of coverage with the Division of Workers' Compensation. In addition, certain individuals may be designated as independent contractors and exempted from coverage if they file Form DW 11-1C. Workers' compensation provides wage loss and medical benefits to employees injured on the job and it protects you, as an employer, from legal action for damages for injuries or job-related illnesses suffered by your employees. In effect, it is a "no-fault" insurance system for work-related injuries or illnesses. Thus, if you fail to obtain required workers' compensation insurance, and an employee is injured on the job, you will have opened yourself to unlimited liability and severe legal consequences, so it is very important to obtain workers' compensation insurance for your employees. Be aware that neither general liability nor health and accident insurance can properly substitute for workers' compensation insurance. As an employer, you must notify injured employees of their benefits and post a notice in the workplace informing your employees of their workers' compensation coverage. A $250 fine can be imposed for each failure to display the required poster. For more detailed information regarding your obligations as an employer under the Rhode Island workers' compensation laws, contact your insurance carrier or see the contact information for the offices of the Workers' Compensation Division of the Department of Labor and Training, listed in Section VI(a). (d) State Wage and Hour Laws. Some employees of certain small firms not engaged in interstate commerce are not covered by the federal minimum wage and overtime laws. However, even if few or none of your employees are covered by the federal wage-hour laws, if, for example, because your firm does less than $500,000 a year in gross sales and the employees in question are not deemed to "...engage in (interstate) commerce...," they will still generally be subject to the Rhode Island wage-hour laws, which provide for a state minimum hourly wage that is $6.75 an hour since January 1, 2004, significantly higher than the federal minimum. Since the state minimum wage is higher, it will apply for any employee who is covered under both the federal and Rhode Island minimum wage laws. As under federal labor laws, Rhode Island requires payment of time-and-a-half for overtime hours worked, in excess of 40 hours in a week. Time-and-a-half is also required for any hours worked on a Sunday or holiday, under the Rhode Island law -- but such hours need not be counted toward the over-40-hours overtime calculation. Employees subject to the minimum wage laws who report for duty at the beginning of a work shift must be paid for no less than three hours at the regularly hourly rate, even if the employer offers no work for him or her to perform, or less than three hours of work is furnished. Note that, as under federal wage-hour laws, certain classes of executive, administrative, and professional employees are exempted from the Rhode Island wage-hour rules. Besides the federal wage-hour posters that you must display in the workplace, you must also display a state wage-hour poster, which you can obtain from the Rhode Island Department of Labor and Training. In addition to wage-hour laws, most businesses are subject to federal child labor laws, which put numerous restrictions on the working hours and kinds of work in which minors under the age of 18 may engage. Your business must also be cognizant of similar state child labor laws, in Rhode Island. (e) State Occupational Safety and Health Laws. Employers in Rhode Island must comply with state and federal job safety laws designed to prevent injuries resulting from unsafe or unhealthy conditions in the workplace. The state does not maintain an OSHA-approved safety plan, and thus relies on federal OSHA to enforce job safety laws in Rhode Island, as do more than half of the states. Note that while you may obtain a free safety consultation from federal OSHA experts, they must and will cite you for any violations they discover at your workplace. This is not the case with state safety inspections. If you request a safety consultation from the Rhode Island Department of Health, Division of Occupational Health and Radiation Control and they detect violations, they will not cite you if you promptly correct the unsafe conditions. For information on your job safety and health obligations as an employer, required posters, and possible on-site safety consultations, see the contact information for the Providence offices of the U.S. Department of Labor, OSHA, listed in Section VI(a). (f) Other Miscellaneous State Labor Laws. Other Rhode Island labor laws you need to be aware of, as an employer, include the following: (1) Wage payments to terminated employees. When an employee's employment is terminated, final wages are usually due on the next regular payday. However, if the termination is the result of the employer being liquidated, merged, sold, or moved out of state, wages are due within 24 hours of termination. (2) Right-to-work laws. About half the states have enacted "right-to-work" laws, which guarantee that no person may be denied employment for refusing to join a union or for not paying union dues, thus banning either "union shop" or "agency shop" agreements, or both. In a union shop, an employee not belonging to a union may be hired but then must join the union, usually within 30 days. In an agency shop, an employee need not join the union but, to remain employed, must pay union dues. Rhode Island does not have such a right-to-work law and allows union shop or agency shop contracts between an employer and a union. (3) State anti-discrimination laws. In addition to compliance with federal anti-discrimination laws, employers must also be aware of and comply with state civil rights laws in Rhode Island, and display a poster informing employees of their rights. For more information, contact the Rhode Island Commission for Human Rights, at the address listed in Section VI(a). (4) Reporting new hires. Under federal welfare reform laws, employers in all states are now required to report newly-hired (or rehired) employees to a designated state agency (the Rhode Island State New Hire Reporting Directory for Rhode Island employers) within 20 days after the date of hire. See the contact information for the State Directory of New Hires in Section VI(a). (5) Temporary Disability Insurance. Rhode Island is one of only a very few states that require disability insurance coverage for all employees. Employers are required to register for Temporary Disability Insurance (TDI) with the Department of Labor and Training and to withhold the tax from the wages of employees. The tax, equal to 1.5% of the first $46,800 of an employee's wages in 2004, is imposed entirely on the employee. To register as an employer for TDI, see the contact information for the Department of Labor and Training in Section VI(a). VI. STATE SOURCES OF HELP AND INFORMATION (a) Key State Agencies Contact Information. Rhode Island, as many states have done in recent years, has set up a "one-stop" center to help your new or existing businesses to obtain all necessary state licenses and permits from a single office, without your having to go from agency to agency to meet all the legal and regulatory licensing requirements. See the Internet web links to the First Stop Forms web page and to the Business Fast Start website in Section VI(c). You can receive help with obtaining permits for your business from the state by contacting the Rhode Island Economic Development Corporation at the following address: To obtain permit assistance and information on starting or relocating your business in Rhode Island, contact:
BUSINESS STARTUP INFORMATION. Another key agency that can provide helpful information on getting your business up and running in Rhode Island is the Business Development Center, operated by the Rhode Island Secretary of State's Office:
TAXES. Obtain state income, sales and use tax, and other miscellaneous business tax forms, instructions and information from the Rhode Island Division of Taxation, which is the main tax collection agency in Rhode Island. Also register with this agency as an employer, for state income tax withholding purposes.
STATE LABOR LAWS. Contact the following agency about your obligations as an employer under various state labor laws, including:
STATE LICENSES. The following agency is a major Rhode Island licensing agency. Register with this state agency for real estate, travel, auto body, auto salvage, alarm systems, liquor and upholstery businesses.
STATE SALES TAX. Obtain your sales and use tax license or permit and information on the Rhode Island sales and use tax law, from the Division of Taxation, at the address listed above for that agency. EMPLOYER WITHHOLDING. Contact the Division of Taxation to register as an employer, for purposes of Rhode Island income tax withholding, at the address listed above for that state agency. STATE UNEMPLOYMENT TAX. Contact the Department of Labor and Training, Unemployment Insurance Division, at the address shown for that agency above, to determine whether you are an employer subject to payment of state unemployment taxes, and for registration as an employer if you are subject. Or, contact the Division of Taxation (regarding taxes only):
NEW HIRE REPORTING. Rhode Island employers must report all newly hired or rehired employees to the following agency (and no, the Nebraska address is not a misprint):
WORKERS' COMPENSATION INSURANCE. If you employ workers for whom you must supply workers' compensation coverage, contact the following agency for further information:
STATE OSHA PROGRAM. There is no state OSHA program in Rhode Island. The federal government provides federal OSHA enforcement instead. For required posters and information on federal occupational safety and health laws that affect you as an employer in Rhode Island, contact:
STATE ANTI-DISCRIMINATION LAWS. Contact the following state agency for more detailed information on Rhode Island civil rights laws that may apply to your business, and to obtain anti-discrimination notices you are required to post in the workplace:
(b) Small Business Development Centers. A number of Small Business Development Centers (SBDCs) are located throughout Rhode Island to assist you. These centers, usually located on college campuses, provide a wealth of start-up information and sponsor frequent business-oriented seminars. Contact the lead office below for information, or for the location of other SBDCs nearer to you.
(c) Internet Sites. If you have access to the Internet, there is a wealth of state and even local business information provided by state and local governments. All states now have a state government Web page, and most major state agencies also have sites on the Internet where you can obtain useful small business information on matters such as state taxes, financing sources, or the addresses and phone numbers (or e-mail addresses) of various state and federal agencies' offices in Rhode Island. Since new sites are appearing constantly, you might also want to search for other Rhode Island government Web sites by using one of the popular Internet search engines, such as Infoseek, AltaVista, or Yahoo. To start your Internet search for Rhode Island government information, you may want to begin with the following Internet sites: State of Rhode Island home page: Rhode Island Secretary of State (filings for limited partnerships, LLPs, LLCs and corporations): First Stop Business Information Center (business forms and other startup assistance, from the Secretary of State): Business Fast Start project (a collaboration of state agencies to provide for a single point of entry for new business owners to obtain, submit and pay for state license and permit applications): Department of Labor and Training (state unemployment tax and Temporary Disability Insurance registration): Division of Taxation (tax forms and information):(d) Financing Sources. For information and help on locating financing for your small business, contact the nearest U.S. Small Business Administration office in Rhode Island, or contact the Rhode Island Economic Development Corporation. This agency offers several programs to help make financing available to existing and start-up businesses. For further details and information about state lending programs, contact the Economic Development Corporation at:
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Copyright © 2004 Michael D. Jenkins
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