Reasons to form a corporation

There are many reasons to form a corporation.

• $         Limits Personal Liability
• $         Tax benefits
• $         Shows that you are seriously committed to your business
• $         Offers a more professional appeal
• $         Corporations don’t need a passport
• $         When formed correctly offers asset protection

Another reason to form a corporation is to raise capital and additional lines of credit. I not only think this is one of the best reasons but, the most underrated and misunderstood reason.

This advantage applies to all corporation entities:

• $         Corporation – C Corp
• $         Small Corporation - S Corp
• $         Limited Liability Corporation – LLC
• $         Limited Liability Partnership - LLP

*Strategies and State laws may vary.

Corporations are called entities for a reason. They are treated separate from the individuals that form them. The Ein or Tin is how they are identified by the state government and the IRS.

What does this mean to the average person? You know the advantage of having two people in a house hold with exceptional credit (increases lending power and leverage). A person or persons may increase their lending power forming a corporation.  Of course it is not that simple. There are many things that must take place before a Corporation is credit worthy.  Proper business practices and credit structuring must take place before an investor or a bank will begin to look at a corporation as viable credit risk. The principle to obtaining good credit in a corporation is the same as obtaining good credit in one’s personal life. The laws and the strategies slightly differ but, with the right information and circumstances an individual can go from being a borrower to a lender.

Always consult your tax attorney, accountant or tax professional before venturing out to form a corporation because different corporations fit different business types.

Why do so many small businesses fail?

There are many reasons small businesses fail.

• Lack of business plan
  
• Lack of documentation
  
• Poor tax planning
  
• Not understanding the laws
  
• Only focusing on the work part of the business
  
• Many, many others.
  

I was informed by my mentor who has run a successful business in Real-Estate and Accounting for over 40 years that there are many reasons that a small business fails but, their are two in particular that handicaps a business litereally before it gets started and they are:


Federal Unemployment Tax Act (Futa)

State unemployment Tax Act (Suta)


Not to be confused with Federal Insurance Contributions (fica). Suta and Futa are a tax in addition to fica. What does this mean to a small business owner with employees? It means in addition to employee wages 10% to 15 % of the employee income must be paid to the State and Federal Government. If an employee earns $2000.00 dollars a month, at least $200 dollars goes to pay fica, Suta and futa. The unfortunate fact is many small businesses don't pay the payroll tax (fica, suta and futa). Some of the reasons for not paying the payroll tax are…..

• Unaware of the taxes exist
  
• Can't afford to pay the employees and the taxes
  
• Just flat out don't want to pay the taxes
  
• Convinced business will increase so they can catch-up on payroll tax
  
• Accepting bad advice from non tax professionals (friends, family members and co-workers)
  

Whatever the reason for not paying the payroll tax the outcome is the same. The employee/s  of the small file their tax return and a couple of months later the IRS sends the employee a bill for unpaid taxes. A phone call is made; the IRS shuts the business down for unpaid payroll taxes. The time frame for this to take place is from a year to six months of starting the business.

A word to the wise, if you are going to start a business consult a tax professional, law attorney or accountant before doing so. The information they provide will be well worth the time and money invested.


 

Assets vs. Liabilities in business

        Depending on the persons involved in the discussion. There are different definitions of assets and liabilities. The dictionary and accounting defines as follows:

Asset, Dictionary -  A valuable item that is owned

Accounting definition- The entries on a balance sheet showing all properties, both tangible and intangible, and claims against others that may be applied to cover the liabilities of a person or business. Assets can include cash, stock, inventories, property rights, and goodwill.

b. The entire property owned by a person, especially a bankrupt, that can be used to settle debts.

Liability, Dictionary - Something that holds one back; a handicap. Accounting definition - The financial obligations entered in the balance sheet of a business enterprise.
My mentor explained it to me this way,Assets -  something that makes you money. Liability - something that cost or looses you money.
  There can be grey areas. Should my children be considered an asset? If my son and daughter would have become a detriment to society, (in and out of juvenile detention and thus graduating to state penitentiary) would they still be considered an asset or a good return on investment (ROI))? The answer is obvious.
What I am talking about is strait forward. I am talking about a more immediate ROI. (Or a close to immediate ROI). I want to discuss this from a business perspective.
There are things that can be done in business that bring quick ROI's. 

Examples of assets and liabilities in business are as follows:
      Asset;
mentors - mentors are a great assets because a good mentor has fruit on their tree. They can help you avoid costly mistakes. A mentor is like a tour guide along your journey to success.
       Liability:
Negative friends and family and associates. Love them or hate them we all know of the nay Sayers. Individuals for whatever reason have nothing positive to say. These individuals are a drain on your mentality and offer nothing in the way of putting money in your pocket. The more time spent with them the less time available for making a business work. Negative people can’t be converted. If there is doubt, consult a mentor.
        Asset:

Business seminars, books and other business related training. This should be self explanatory but for the sake of argument.....  Business related training is an asset because it offers information, when used properly can have an immediate impact on a business. Training properly recorded offers a residual effect. Can always be referenced.

         Liability:

Television, video games - I can here the booing and hissing as I write this. These two mediums offer very little in the way of productive learning and education. Cable cost on average $159.00 dollars per month that is more than $1800.00 dollars a year. Video games cost on average $39 dollars per game not to mention the gaming system with all of its accessories. If $2000 dollars annually are spent on TV and video games, in 5 years the cost is 10,000.00 dollars (that could pay off a credit card). Enough said

Asset :

A master mind team - A master mind is a team of like minded  successful individuals. They meet on a regular basis (at least once a quarter) . They normally have expertise in valuable areas. (Law, Taxes, Marketing and Finance). Strategic plans are laid out and performed for the betterment of the team. The return on the investment is priceless.

        Liability:

Apathy/waiting on the government to improve the countries situation. This country had the greatest economic boom in its history during the 90’s through 2000. If the average person was not able to become independently wealthy during that time then there time has passed. That was the best the government could do (if you believe the government was responsible,forgive the sarcasm).

Basically there are a couple of choices, surround oneself with assets and increase net worth or surround oneself with liabilities and decrease ones net worth.

Tax preparation is an annual endeavor, happy tax season.

While doing a good work in and for your business..... dont get caught up

    I want to congratulate all those business owners that did more in their business in 2010. You set a goal to increase your clientele, get more referrals and  attend more training seminars. You even took a business trip in a vacation location. All these things were done but, (wait for it) you did not properly document those events. If you don't have proper documentation then all the work you did to increase your productivity in your business will increase your bottom line, however it will also unnecessarily increase your tax liability. Proper documentation answers the questions who, what, when, and where. Who were you with? (client , potential client , prospect, a referral). What was the purpose for the meeting? (to gain a client, to gain a referral, to show appreciation for a referral, to introduce a new product or service). When did this take place? (date and time) where did it take place? (location).
     I have receipts,  isn't that enough? Having receipts is a good start but,  it only proves that you purchased something (the what). Receipts do not show intent. Remember the IRS needs proof that you intended to make a profit. Without proof of intent you only have a hobby. Trust me hobby's are expensive and a liability. In any economy liabilities are not good.
 How do I keep good records to keep the IRS off my back?
     A good old fashion day planner is the least expensive way to keep track of you daily progress in your business. If you have a smart phone, i pad or samsung galaxy, there are many free apps that allow you to accomplish the same thing as a day planner. Do not go out and buy an expensive device for the purpose of  keeping track of your daily business
Keeping track of your business in this manner will allow you to see how close you are to reaching your goals for the week. You will be able to look back at your week and determine if you needed to keep doing what you were doing or if adjustments needed to be made. This is critical to your business. If you do not know how far you have gone in your business You will not be able to determine how far you have to go to reach your goals
     Proper record keeping on a daily basis keeps the IRS from deciding your business is a hobby. Once the IRS determines your business conducts it self as a hobby all business deductions are denied and  penalties and fines follow. The IRS will also look back through all your tax records.(this is allowed because they have determined that you have defrauded the government by under stating / under reporting income).
     I can not emphasize this point enough. Proper documentation is key to keeping the IRS from penalizing you with fees and bringing down the audit hammer.

Remember, tax preparation is a daily endeavor so happy tax season. 

Not All Business owners have until April to file their Taxes...........

For all the business owners that operate under the entity of LLC, LLP, SCorp or C Corp, you have leass than a month  to file your corporate taxes.(15 march 2011), or file an extension (Form 4868).
The filing date is not to be confused with the personal tax filing dead line of 18 April 2011. To the veteran business owner this may seem like a no brainer, or you may not even know that two different tax deadlines exist. One of my  new clients were unaware that there had ever been 2 separate tax deadlines, and they had been in business for 8 years. I suspect their previous tax professional just filed an extension for the business taxes and then filed everything ( personal and business taxes) by The April dead line. Now some business owners may be confused because you only receive a copy from your tax professional of a 1040 with a schedule c attached. The only reason that should happen is you are a sole proprietor or the sole owner in a LLC. If either are the case you would not be required to file form 1065 (limited liability tax form). If the corporate tax forms are not filed on time (15 march 2011), you will face penalties from both the federal and state government. Businesses that file taxes quarterly continue to do what you do.
Should you feel that you would not be able have your information in time to file your 2010 corporate taxes by 15 March 2011 I suggest you file an automatic extension (form 4868). Form  4868 must be filed on or before 15 March 2011 or you will face penalties and fines.
Tax management is a year round occurrence, so happy  Tax Season!

Is getting a tax refund really a good Idea?....it depends.

   If that is the only way you can save you money then a tax refund is good idea.The problem is the IRS does not pay interest for holding your money for more that a year. (14 to 16  months to be more accurate). I don't think people realize that the refund money they get back is nothing more than them getting change back from paying to much in taxes. This is a normal practice for more than 85 million people averaging more than $2,200 back from the IRS (that's a lot of change). To give you an example of how crazy this really is lets look at this from a different perspective. If you go to grocery store every month to purchase your food and other items and you always over pay for the food. Instead of the cashier giving you back your change she/he keeps it. Now lets say you do this for 15 months and then on the 16th month the cashier gives you all your change, all 16 months worth. If you were to tell and friend or family member you did that. They would probably have you committed. Yet we think it is perfectly fine to allow the IRS to give us back our money when they feel like it.

How about getting a tax refund in your pay check every paycheck? Make some adjustments to your W-4. Look at your deductions, consider your circumstances and above all consult your tax professional/accountant.

It is your money shouldn't you decide when you get it?

         I would like to thank another one of my indirect mentors, Mr. Daniel J. Pilla. Because of his book "How to lick the IRS with postage stamp", I was able to handle my very first tax issue back in 1994 with an abatement letter.

Remember tax preparation is an annual event, plan accordingly and happy tax season.

 

http://taxhelponline.com/resources-and-publications/research-reports/reevaluate-tax-withholding.html

Did you accomplish your goals this week?

        For many of us that is an easy question to answer. Either yes or no. But the real question is did you set any goals for your business this week? If the goals you set are in your head and not recorded then you did not really set them. Why do I say that? Simple, there is no proof that you set them. I am sure you are a trust worthy individual. but, without the recorded proof their is always a shadow of doubt. Unnecessary doubts in business in not good business. Goals need to be set so you know what to expect to make sure you don't forget and minimize regret.
Did you ever wonder why basketball, Soccer,Hockey and football have goals? So the teams can have something to aim towards. I know that was weak but, you get the picture. Once you know what you are aiming towards,then you can adjust accordingly. Tracking your goals are just as important. Having the ability at the end of the week to see if you exceeded or  fell short of your goal gives you something to work on and prepare for.
                 Is all your tax information ready to be file or  turned over to your tax professional/accountant?
If so great.! If not you can set a goal to work on a system that will allow you to keep track of all your needed tax information. If you are not sure what you need to know. Just click on this blog link  http://knowtaxlawknowmoney.blogspot.com/2011/01/how-to-prepare-for-your-tax.html  it explains what you need to have and also leads to a link to down load the client organizer (its 8 pages in PDF format).
The better and more consistant you are at setting goals the smoother you business and your life will run.
Tax preparation is a year around endeavor, so happy tax season.