Before You Hire: HR Basics Every Emerging Manager Needs to Understand

You've built your strategy, gotten some seed capital, and you're ready to grow your team.

As new managers grow, their first help often comes in pieces: a virtual assistant, a marketing consultant, a research analyst, an operations person, a tech contractor, or someone to help with investor follow-up. For managers, that can feel practical and flexible. But it also creates risk.

Before you hire your first person, you need to understand what that person is really doing and, therefore, how they should be classified: are they an independent contractor or an employee?

There are a few Human Resources fundamentals that trip up many new managers. Get these wrong and you're looking at IRS penalties, regulatory headaches, or worse. Let's walk through what you need to know. 

Independent Contractor or Employee: It's Not Your Choice to Make

The single most common mistake new managers make is treating workers like

independent contractors when the IRS, the Department of Labor, or their state would classify them as employees. This isn't a preference. It's a legal determination based on facts.

Control is one of the key questions, but it isn’t the only one. Regulators look at the facts of the relationship: who controls the work, whether the person is operating an independent business, whether they serve other clients, whether they make their own investment in tools or systems, and whether the work looks like part of the firm’s regular operations. For example, if you set the person’s hours, direct how they do their work, provide their tools, and they work exclusively for you, a regulator may conclude they’re an employee, regardless of what your contract says.

With an independent contractor, the contractor usually invoices the firm and handles their own taxes. With an employee, the firm is dealing with payroll, withholding, wage and hour rules, unemployment, workers’ compensation, supervision, training, confidentiality, and compliance obligations.

Calling someone a contractor doesn’t make them one if the actual relationship looks like employment. Misclassification often starts as a practical or cost decision, not an intentional one. When in doubt, consult your attorney or CPA. Misclassification can create tax issues, penalties, wage claims, benefit questions, and, for regulated managers, a governance story you don’t want to have to explain during due diligence.

Paperwork for Independent Contractors

When you bring on an independent contractor, the usual process is to have the contractor complete a Form W-9 before work begins and before the first payment is issued. The W-9 gives the firm the contractor’s correct legal name, business name if applicable, taxpayer identification number, and tax classification. You keep the W-9 in your files and use that information if a year-end Form 1099 is required. The IRS says Form W-9 is the first step once you’ve determined the person you’re paying is an independent contractor.

At year-end, if payments to an independent contractor meet the applicable IRS reporting threshold, the firm may need to issue Form 1099-NEC for nonemployee compensation. For 2026, the threshold is currently $2,000, but thresholds can change, so firms should confirm the rule each year.

There are also exceptions. Payments to incorporated businesses are generally treated differently for 1099 purposes, but there are important exceptions, including certain medical, health care, and attorney payments. Don’t assume that “incorporated” automatically means “no 1099.” Get the W-9 up front and let the firm’s tax process determine whether a 1099 is required.

Paperwork for Employees

Employees require different documentation than independent contractors. A new employee should complete Form W-4 so the employer or payroll provider can withhold federal income tax properly. Form I-9 also has strict timing rules: the employee completes Section 1 by the first day of employment, and the employer completes Section 2 within three business days.

The Form I-9 verifies that your employee is legally authorized to work in the United States. Form I-9s are not optional. The requirements come from the Immigration Reform and Control Act of 1986 (IRCA). Today, Form I-9 compliance is administered through the Department of Homeland Security (DHS/USCIS), and Immigration and Customs Enforcement (ICE) may inspect employer Form I-9 records.

The requirement isn’t limited to large employers. ICE inspections are real, and small firms are often less prepared because they don’t always have a dedicated HR or compliance department. In practice, many small employers make mistakes on Form I-9 because the rules are more technical than they appear, the timing requirements are strict, and the form is easy to underestimate.

That matters because Form I-9 is one of those documents that looks administrative until someone asks to see it. Managers who are unfamiliar with the process should review the requirements carefully before making their first hire.

You'll also need to register with your state for payroll taxes, set up workers' compensation coverage, and comply with any applicable state-specific new hire reporting requirements.

Contracts Matter for Everyone

Whether you're hiring an independent contractor or an employee, you should have a written agreement.

For an independent contractor, don’t draft the agreement as if the person is an employee. Avoid fixed employee-like hours, benefits language, or performance reviews that look like supervision unless the role really is employment. Reinforce their independent status by defining the scope of work, setting payment terms, and addressing ownership of any work product they create.

For employees, an offer letter or employment agreement should spell out their role, a job description, compensation, benefits, at-will status if applicable, any confidentiality, compliance obligations, or non-solicitation provisions, outside business activity rules, remote work and security expectations, and termination language.

Company Policies and Procedures

Independent contractors should receive a set of written policies that apply to their work, especially confidentiality, cybersecurity, investor communications, use of firm materials, and data handling. They should sign a contractor policy acknowledgment.

Employees should receive, and acknowledge in writing, the firm’s employee handbook. The handbook should include, in addition to standard sections, regulatory and compliance sections specific to the industry. For SEC-registered advisers, that may include a Code of Ethics under SEC Rule 204A-1. Other managers may have different regulatory or contractual obligations, but the principle is the same: people need written rules and training.

Reviews

For contractors, conduct project status meetings to be sure you’re in the loop and that they’re performing according to your written contractual agreement. While you may be outsourcing the work, you can never outsource ultimate responsibility.

For employees, conduct performance reviews at least annually. Document them. If you ever need to terminate someone, that paper trail protects you.

Employees, contractors, and anyone else working with the firm need written rules that explain what they can and can’t do. For example, they can't discuss non-public information about your fund, your investors, or your trading activity. A virtual assistant, marketing person, business development consultant, analyst, or operations support person can create risk with one casual statement, one unsupported performance comment, or one inappropriate use of AI. You may also have a policy on behavior during Zoom meetings and whether AI can or cannot be used and, if so, how.

If you're a registered CTA or RIA, your compliance obligations extend to the people working for you.

Having contracts, company manuals, and training aren’t just good practice; they’re part of demonstrating control. If someone on your team makes representations to prospective investors without being properly licensed and authorized to do so, you need to be able to demonstrate that you had policies in place, trained people on them, supervised their activities where appropriate, and took corrective action when issues arose. The wrong answer is, “we’re small, so we handle it informally.” Informal doesn’t scale and it doesn’t evidence control.

The Bottom Line

Growing your fund means growing your infrastructure. Solid HR practices don't slow you down. They protect everything you've built. They show that the firm knows who works for it, who doesn’t, who has access to sensitive information, who is allowed to communicate externally, and what controls exist. HR basics are not just administrative paperwork. They are risk management, investor communication, and evidence of disciplined leadership.

Resource

Free educational video on Form I-9 compliance:  https://training.alternativestlc.com.

See you next month!

Carol R. Kaufman, Founder/CEO of Alternatives TLC, LLC has been consulting to emerging and seasoned alternatives managers and various types of industry businesses since 2005. She performs operational and organizational due diligence, using her Emerging Manager Roadmap, helping firms find the resources they need to successfully scale. Most recently, she performs I-9 training and internal audits, Her first product, InvesTier^®, was acquired by SunGard in 2002. An entrepreneur for over 40 years, Ms. Kaufman’s specialties include public speaking, training, and software/ service-based solutions to organizational problems. She resides in Hawthorne, NJ.