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Work Force Development

The Hidden Crisis: Small Business Owners Unable to Pay Themselves

Will it Lead to the Next Large Wave of Job Losses in Georgia?

By Lou Phelps,

SBJ Staff

Many small business owners have stopped paying themselves a living wage – or any wages at all – as they struggle to keep their companies alive, continue to pay their employees and independent contractors, and pay the rent, light and telephone bills at the office.

But many in Savannah are at the end of their rope and are finding that their personal options are limited as they look at sources of money for their own needs of food and mortgage payments. The fact is that they have fewer options than their employees.

Even though a small business owner currently has no personal income, they are not “unemployed” and cannot collect unemployment benefits. They are “working,” even if they are not “earning,” according to the Georgia Department of Labor.

As they keep others off of the unemployment and welfare rolls, they don’t qualify for welfare or food stamps themselves because they have assets that are impossible for government agencies to calculate.

Making the Decision to Close a Company

Understanding the Georgia Unemployment Laws enforced by the Georgia Department of Labor is imperative as a small business owner considers their options. A review of the Georgia laws shows that owners only have a small window in which to decide to close their business if they want to be eligible to file for unemployment benefits in the future. If a critical deadline is passed, they will lose the option of receiving an unemployment check, even if they have paid into the unemployment tax system for years.

To file for unemployment, a person must have earned wages recently – must have earning wages within the first four of the last five calendar quarters - and unemployment taxes must have been paid for two of those quarters. They must also meet standard requirements to qualify for unemployment – be able to work and be actively seeking re-employment. Each week, all recipients of an unemployment check must certify that they are still out of work and are a seeking reemployment by going to their local Career Office of the GADOL. In Savannah, the office is on White Bluff Road. The minimum payment is $44 a week and the maximum is $330 per week for 26 weeks of state benefits, depending on the wages they had claimed over the past year.

According to Brenda Brown, Assistant Commissioner for Unemployment Insurance with the Georgia Department of Labor, each claim is reviewed individually to determine if a person is entitled to unemployment benefits. In the scenario of a small business owner whose company is still open, but they are unable to pay themselves, Brown explains that, “You are attached to the workforce; you’re working as designed, so you’re not entitled to benefits. Unemployment insurance is designed for those that have lost their job due to no fault of their own.”

Defining “No Fault of Their Own”

If a business owner has to close their company due to no fault of their own, such as a general decline in the economy, “the general answer is that ‘Yes,’ they would qualify for unemployment compensation. But each case is decided on its merits,” according to the GADOL’s spokesperson. But that is IF they have been recently taking a paycheck.

Making the Decision to Close Your Company


A small business owner must meet important criteria of reporting wages in the first four of the last five calendar quarters reported on their 940s, leaving little time to make a decision to close their company once they stop paying themselves.

For example, it’s now mid-July 2011. If a business owner stopped paying themselves after March 31, 2011, they would have had no income reported in the calendar quarter that ended June 30, 2011. That would become the “fifth calendar quarter.” Therefore, they only have until Sept. 30, 2011 to close their company and file for unemployment. They have to do so before they cross into a sixth quarter to meet the criteria of eligibility.

Turning Around Georgia’s and the U.S. Economy

Small business owners are credited with creating more than 80 percent of the jobs in the U.S. – as high as 85 percent in the Savannah area - and most agree that the U.S. economy will not rebound and create new jobs if small business owners are not the driving force. Is their eminent collapse the next major wave of job losses in Georgia and the U.S.?

It's impossible to know how many small business owners in our area are near collapse, according to Tony O’Reilly, president of the Small Business Assistance Corporation, “but you’re spot on,” he says about the crisis that small business owners are facing.

If the U.S. economy takes an upturn and small businesses start to do a little better, the first incremental dollars that will be spent will be paying the boss, many owners surveyed agree, not hiring new employees or buying products from vendors. Small business owners will go back to paying themselves a living wage.

The Wall Street Journal published story on April 24, 2009 entitled, “Entrepreneurs Cut Own Pay to Stay Alive,” reporting on this problem. That was two years ago. “Thirty percent of 727 small-business owners and managers surveyed by American Express Co.'s small-business services division…said that they were no longer taking a salary. That's a troubling sign for small businesses, which have created a significant share of the new U.S. jobs in recent years,” the WSJ wrote.

“During past downturns, business owners might have turned to a home-equity line of credit, a personal loan or credit cards to shore up finances. But this time, real-estate values have plummeted, leaving many with less equity to tap, and bank credit is virtually nonexistent,” the story states. In other words, the capitalization for start-ups or operating cash needs came out of small business owners’ savings or equity in their homes. Those second mortgages – some of which have led to the collapse of the home mortgage industry – artificially fueled small business growth.

It's not uncommon for owners to give up salaries from time to time to give their companies a temporary lifeline, but business advisers and owners say the prevalence of salary cuts now is unusual even for a recession, added the WSJ.

There is no question that some business owners have stopped paying themselves in order to invest in their companies – positioning themselves for better times ahead – in effect, betting on the future. But a number of small business owners interviewed say that time is running out for them and their friends in the same ownership situation.

Scott West, president of the public relations firm Sea Witch Marketing in Savannah, has his ear to the ground in the small business community as an active member of the Small Business Chamber.. “There are many people I know in this situation. Some started companies and didn’t realize it would take so long to turn a profit and be able to take a salary. They’re not losing money – they’re paying the bills and not going into debt – but they can’t pay themselves. And it just can’t go on,” he relates that he is told. He knows of a great start-up company with two partners and a long-time painting contractor company in Savannah that are both in this situation.

State Rep. Ron Stephens is one of the most powerful Republicans in Georgia, chair of the House Ways & Means committee. But he is also owner of QuickRX Drugs, a small business with less than 15 employees. He agrees that many small business owners do not understand some of their options.

“We need to educate small business owners about the liabilities they are taking on – that they are not on an equal playing field with their employees.” But he also says that “it’s a gamble you take. It’s the American way,” and he believes that most small business owners “understand the risk when they get into it.”

In June, The Guardian Life Small Business Research Institute released a report that the company was observing shifting small business owners’ views on retirement. Many expected they would need to continue to work until age 70 or never retire. Others were still counting on the somewhat mythical dream that they would sell their business to fund their retirement. And, their survey was conducted in December 2010, seven months ago as the economy has continued to decline.

The results showed then that small business owners who operated companies with from two to 99 employees expected that to live well in their retirement years they expected to have to work well past 70 years of age. Their biggest fear was outliving the money they needed to retire, “a concern expressed by nearly two-thirds of small business owners,” according to the company.

This aging of the work force compounds the problems; it means fewer job openings through natural attrition of the employment base as people decline to retire in their mid-60s.

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