Every business needs funding. Depending on the industry, you need money for everyday operating costs (electricity, rent, supplies, salaries and wages), fixed assets (machinery and equipment) and, of course, enough left over to support you and your family.The question is, where do you get funding to start your new business - or to support current operations - in these times of tight credit? To find the answer, let us first identify the types of financing available and then discuss ways to obtain that funding.

The two general types of business financing are debt and equity. Equity financing is ownership financing. You, or you and a group of others, put cash and other assets into the business with the plan of making a profit and paying yourselves back in the future. In its simplest form, equity financing has this advantage: the company isn’t required to generate enough income to pay the owners back for their initial contributions. Neither principal nor interest payments are required for the business to continue to operate. Debt financing, on the other hand, requires both principal and interest payments. In exchange for a loan, the business must pay the lender both principal and interest over a set period of time.

Equity

Equity financing involves giving ownership interests in an entity in exchange for cash, property or services. If you have ever invested in the stock market, you have been an equity investor. The form of equity can vary. For example, if your business is a partnership, your investment takes the form of capital ownership that can be withdrawn from the business at any time if assets are available. If your company is a corporation, you own shares of stock and receive dividends instead of direct capital withdrawals. From a tax perspective, the differences can be dramatic.

The advantage of equity financing is that it never has to be repaid in order for the company to survive; however, the purpose of any business enterprise is to make enough money to repay investors a reasonable rate of return. If the business is going to be successful, then at some point the initial investor will want to receive the amount invested along with a reasonable profit. If you generate funds through equity financing, expect to cash the investor out at some point. Even though this is not a legal requirement, it is a business reality.

Debt Financing

Debt financing is nothing more than borrowing money from a lender who expects to be repaid both the amount loaned plus interest. If you must finance a portion of your business operations with debt, there are several things you should be aware of.

First and foremost, you must match the repayment terms to the purpose of the loan. For example, you are purchasing an embroidery machine that you will use to produce custom shirts. It is unlikely that you will be able to produce enough with that machine to pay all your operating costs, plus principal and interest within a year.

Typically, the profit produced by machinery is realized over several years. For that reason, borrowing $100,000 to purchase the machine and promising to repay that amount in one year is not realistic. In this case, you would want to negotiate repayment terms for a period of several years - what we call a term loan.

Suppose you are a contractor and need financing to complete a construction job. If you expect the project to be complete within 60 days and anticipate payment within 30 days of completion, a short-term loan (due date within one year) is reasonable. When a business needs to borrow money for a short period, it is wise to obtain a revolving line of credit. In this type of arrangement, the company has a credit line against which to draw funds without going through a long lending process. When the company has sufficient funds again, it repays the loan plus interest.

Assuming your business is closely held (only a few owners), expect the lender to require collateral along with your guaranty. By requiring your guaranty, the lender puts not only the collateral and assets of the business on the line, but also can compel you to pay off a debt if the company cannot. In this case, you could be forced to liquidate personal assets to pay off company debt.

If you intend to rely on debt financing, do not expect to finance 100% of your company. Lenders will not take on the entire risk of an entity succeeding or failing. Instead, they will generally require you to have some investment at risk as well - normally 20 percent. The reason for this requirement is that a borrower is far more likely to work toward making a company successful if he or she also stands to lose.

What You Need

Regardless of whether you expect to seek debt or equity financing, be prepared to share your business plan with prospective investors and lenders. That plan, which we will be discussing next month, is your roadmap to success. In addition to providing prospective lenders and investors with details of your current resources, your business plan also needs to make a compelling case that their money is safe with you.

Approach prospective lenders and investors with an open mind. Don’t expect to get what you want without questions, suggestions and a good deal of negotiation. While your way might indeed be the right one, allowing input from those who will help you achieve your goals will go a long way toward cementing the deal.
Parting Thoughts

Businesses, like automobiles, need fuel to run on - and for a business, that fuel is cash. Determining your short-term and long-term financing requirements is only half the battle. Securing the needed financing is the other half. Give us a call if you are seeking financing. We can help you determine your needs and map out a strategy to obtain it.

Strong companies are bought and sold every day. While purchasing an established business has many advantages, there are some significant disadvantages that the wary buyer should avoid. In the next few paragraphs, we will discuss some points to consider if you are planning to buy an existing business.

Should you go it alone?

Too often, potential buyers enter into negotiations with a seller before seeking expert advice. A purchaser should consult knowledgeable business professionals before agreeing to acquire a business. Ideally, you should consult with someone who has experience in purchasing established businesses or who has a broad overall knowledge of business and business finance. Particularly important will be finding someone who can help you properly value the business.

For example, an employee of an upscale clothing store once agreed to purchase the business for approximately $400,000. Prior to finalizing the deal, the potential purchaser consulted with a CPA. After analyzing the historical financial trends of the shop and the current economic environment, the professional was able to demonstrate to the seller and the purchaser that the net value of the business was $250,000. While the advice may have cost several thousand dollars, it was only a fraction of the $150,000 reduction in the purchase price. As it turned out, the shop would not have been able to support the additional debt load and the buyer would have lost her life savings.

What kind of company are you buying? Is it a corporation or a partnership? What is the best way to structure the purchase to avoid taking on any liabilities from the prior owners? If there are tax attributes of interest, how do you preserve them? These are just a few of the questions you need help answering in the course of negotiation. While you could strike a deal with the seller on your own, it’s likely he or she will use an attorney and an accountant. Shouldn’t you have the same advantages?

How much is the business worth?

Valuing a business is, at best, a rather imprecise science. There are a number of different methods to determine that value, each with its own strengths and weaknesses. The method of valuation depends on a number of factors including the industry in which the business operates, how significant hard assets are to the business versus goodwill and other intangibles and how leveraged (amount of debt) the company is.

The starting point in valuing a business is generally its historical financial statements, but that is only a starting point. How reliable are those financial statements? On what basis is income and expense reported? Are the assets being presented at realistic values? Depending on the type of business, you may need equipment and real estate appraisers in addition to business valuation assistance. Don’t be bashful about fully investigating the factors that go into valuing a potential acquisition. It is better to have too much information on the front end than be hit with surprises later on. If the current owner(s) of the business are not forthcoming with information, you need to carefully evaluate the reasons why. Generally, there is no reason for a seller to be anything less than candid.

Do you buy assets or stock?

With the advent of limited liability companies, more businesses are formed as “pass-through” entities (partnerships, etc.), but there are still numerous corporations in existence. When the owners of a corporation decide to sell the business, their general preference is to sell stock. This allows them to pay tax on their net gain at capital gains rates and avoid the double taxation inherent in the sale of an asset sale.

In limited instances, you may wish to buy stock instead of assets. This primarily occurs when the corporation has significant tax attributes the buyer wishes to retain. More often than not, however, the better route for the purchaser is to buy the assets. This is especially true when the business is purchased for a greater amount than the company’s recorded net worth.

If you purchase a company for greater than its net worth, that means you believe the assets are worth more than their recorded value. If you purchase assets rather than stock, you will be able to record them at their fair value. This will, in turn, increase their tax basis and save you needed tax dollars. Purchasing assets will also relieve you of any liabilities associated with the old corporation.

Careful consideration must be given in deciding how you will structure a business acquisition.

Conclusion

Acquiring an existing business can help you become your own boss more quickly and without the need to spend months or years building a reputation for your company. There are numerous pitfalls in structuring a purchase that a buyer might not think about until it’s too late. If you are considering acquiring a business, give us a call. Let us help you make sure to structure an agreement that is one which you and your company can live with.

Sometimes it seems like every other television commercial or online ad is encouraging you to start your own home-based business. If you have embarked on the work-at-home adventure, remember to take advantage of the tax saving opportunities it can offer.

Furniture, Computers and Supplies

In most homes, computers and the Internet are used for playing games, shopping, etc. But in the home office, the computer and the Internet are truly the workhorse. Home-based businesses are dependent on computers and printers to do a myriad of tasks, from ordering products to keeping the books. Computers and peripherals used strictly for business, along with associated supplies and programs, are fully deductible.

Since computers, telephones and other equipment typically sit on desks or other pieces of furniture, don’t forget to deduct the cost of these items as well. Just be careful to document their business use.

Internet and Telephone Service

In the same way that computers and other equipment are deductible, so are telephone and Internet service. In the case of the phone, the first line coming into your home is assumed to be used for personal reasons and thus not deductible. Second lines and fax lines can be fully deductible if they are used only for business. Internet service should also be limited to business purposes in order to secure that deduction.

Home Office

Many taxpayers are afraid to take a deduction for home office use. The reason most often cited is that it will flag their return for an audit, but that is not necessarily true. As long as you properly document the business use of a room in your home, you should have nothing to fear by taking the deduction. If you have any question as to whether you qualify, here is the rule directly from the Internal Revenue Service:

Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly… 

• As your principal place of business;
• As a place to meet or deal with patients, clients or customers in the normal course of your business;
• In the case of a separate structure that is not attached to your home, it must be used in connection with your trade or business.

For certain storage use, rental use or daycare facility use, you are required to make use of the property regularly but not exclusively.

Assuming you do meet these rules, you can deduct a portion of your home’s operating expenses, including:

• Home mortgage interest
• Property taxes
• Insurance
• Utilities
• Repairs

The deductible portion of your home’s operating expenses is based on a percentage determined by the size of the home office, divided by the size of the home.

Vehicle Expenses

If your home is your primary office, then traveling to purchase supplies, meet clients and perform other business tasks qualifies as business use of your vehicle. You have a choice between using the standard mileage rate or actual expenses for the operation of your vehicle, which includes depreciation. It is imperative to maintain a log throughout the year to document the mileage claimed.

Conclusion

In addition to providing an income (and maybe helping you keep an eye on your children), working out of your home can provide substantial tax benefits. Just take care to follow the rules and, above all, keep good records. If you are working at home, give us a call and let’s make sure you are taking every deduction you are entitled to.

Many businesses face the prospect of an annual financial statement audit. Some businesses, like public companies and large borrowers, are required to obtain annual audits, while some just believe it to be good business practice. Let’s take a look at the advantages and disadvantages of obtaining a periodic examination of your financial statements.

Types of Accountant’s Reports
When you talk about financial statements, a certified public accountant basically has three levels of service he can offer - audit, review, or compilation.

A compilation is typically nothing more than the accountant taking the numbers you give him or her and putting them into proper financial statement format. The accountant will then issue a report to that effect and specifically state that he or she has not audited or even reviewed the numbers. While that is technically true, you do obtain some value from the service because you 1) might satisfy the banker’s needs for annual financial information and 2) the CPA does get a chance to look at the numbers and discuss the economic state of your business with you.

A review is a little more in-depth than a compilation. Typically, the CPA will compare your financial results to your industry peers and your prior year’s results. Additionally, the CPA will go through a detailed list of questions designed to determine if there are any indications of errors in your financial statements. This gives a CPA the basis to at least say he didn’t find anything that caused him to believe the finances were misstated. It also gives the CPA a little more information to allow him to identify business issues you may need to address.

An audit is far more detailed than either of the preceding services. It is designed to allow a CPA to report that, in their opinion, your financial statements are free from material misstatements. The CPA is saying he or she believes the financial statements contain the information necessary for an investor to make an informed decision on the financial health of your company. In addition to the work involved in a review, CPAs must also perform detailed tests to obtain the evidence necessary to support their opinion.

Disadvantages of an Audit
Simply put, if you want a quality audit, defined as one where all professional standards are observed, it is going to cost a fair amount of money. As previously stated, an audit by its nature is far more time-consuming than a review, which takes longer than a compilation. Depending on the complexity of your system, the audit can cost 2 to 3 times what a financial statement review can cost. By comparison, the compilation takes about one-half to one-third the time of a review.

Once you get past the cost of the audit, the second concern is time. Since audits are expensive, CPAs generally ask a lot from the company’s accounting staff. The more work your staff can do in the form of preparing schedules and providing requested documentation, the less time the auditors will be on-site - and that translates into cost savings for you. If your company carries a significant inventory, you might also expect to spend a great deal of time performing a physical count, which the CPA observes, to give you an accurate picture of your inventory value at year-end.

As part of the audit, an auditor spends a great deal of time with your staff asking about controls in place to ensure that financial statement amounts are properly recorded. This helps the CPA determine what work is needed in order to be comfortable with stated amounts and is another reason for the large amount of time spent on audits, as opposed to simpler financial statement services.

Advantages of an Audit
The disadvantages of an audit are actually what make it so valuable. It takes time to understand the industry in which a client operates and exactly how they do so. That time spent can give the CPA invaluable insights into your business operations, which can translate into major savings for you.

For example, auditors are required to evaluate the controls you employ to protect your cash. One of the simplest controls is to require an employee (typically the owner in small businesses) other than the one writing checks to receive the bank statement unopened. This allows the reviewer to look at checks written and deposits made for anything unusual. This one step has saved business owners hundreds of thousands of dollars by helping them catch employee theft early.

While the goal of the financial audit is to obtain the necessary information to report on your financial statements, CPAs are - first and foremost - business advisors. Their extensive experience with similar clients gives them a reference point from which to make suggestions on such far-reaching issues as tax planning, inventory valuation, and maximizing business value. The time spent by the CPA in auditing allows them to identify areas where you can streamline your operation and enhance profits.

As an example: many accountants also serve on the board of directors of one or more nonprofits, so their nonprofit clients can benefit from their knowledge of fundraising techniques and other operational issues that the CPA might learn from service on a nonprofit board.

Companies that begin with an eye to going public in the future may not need audits early in their lives, but it’s a good idea to start them annually anyway. When the company does begin the registration process to become a public entity, the regulators will require several years of audited financial statements. Proactively obtaining audits can look good to potential investors and reduce the cost of performing a lower-level service followed by the higher-cost audit.

When it comes down to it, the cost of an audit is not out of line with the benefit a client obtains from the process. Operating and financial advice that might result from the audit can help a floundering company prosper - or help a prosperous company become even more profitable. If you are thinking of engaging a certified public accountant to report on your financial statements, let’s talk about your alternatives, including an audit, and choose the one that’s right for you.

Do you remember your first job? Perhaps you worked at a grocery store. Or maybe a fast food establishment. Whatever the case, you probably thought the boss had it easy; he or she made you do the really hard work.Do you still have the same view of the boss now that you are the boss? Chances are that with age and responsibility, you have tempered that view a bit. As a business owner, you know the hours you put in far exceed those of your employees. But did you know that what makes your job tougher is not only the hours you put in and the responsibilities you shoulder, but also the myriad employment laws you must follow. The larger your business grows, the greater your obligations will be.

As with everything governmental, employment law compliance can be daunting. This article is meant to give you an idea of what you face as an employer. It is not meant to be comprehensive, as you do not have time to read several thousand pages of material. But hopefully, it will help you decide when to seek professional legal advice.

The United States Department of Labor’s (DOL) Employment Laws Assistance website lists 26 major laws administered by the DOL. Each of these laws is linked to a webpage that lists resources designed to help employers comply. Though it is unlikely that many of these laws will affect you, the sheer volume of information does give you an idea of what you face. Some of the more significant laws are discussed in the following paragraphs.

Fair Labor Standards Act
The Fair Labor Standards Act is the federal law that regulates minimum wage, overtime pay, record keeping and child labor standards for nearly all types of employment. It is generally applicable to all employers with revenues exceeding $500,000 and two or more employees. The FLSA also covers employees engaged in interstate commerce, production of goods for commerce, closely related processes or occupations essential to production of goods for commerce or domestic service. In short, almost every U.S. employee is covered under this act.

Employee Retirement Income Security Act of 1974
The Employee Retirement Income Security Act is the nation’s primary vehicle for regulating how employers establish and administer retirement and other employee benefit plans. The law does not require employers to offer retirement plans; however, once those plans are established it regulates their activities. ERISA also guarantees the payment of benefits under some plans through the Pension Benefit Guarantee Corporation.

Consumer Credit Protection Act
If you have ever received a notice of garnishment from the court, you know what a hassle it can be to comply with such a notice. The Consumer Credit Protection Act protects employees from discharge by their employers because their wages have been garnished. It also limits the amount of earnings that can be garnished in any one week.

Family and Medical Leave Act
This is perhaps one of the laws most quoted by employees. It is also one of the most misunderstood laws. The Family and Medical Leave Act provides an entitlement of up to 12 weeks of job-protected, unpaid leave during any 12-month period to eligible, covered employees for certain reasons. Applicable to employers with at least 50 employees, the FMLA does not require employers to provide paid leave. The act’s provisions are complex.

In addition to the many acts administered by the Department of Labor, other federal laws affect the workplace.

EEOC: Equal Employment Opportunity Laws are administered by the U.S. Equal Employment Opportunity Commission and generally prohibit discrimination based on age, disability, race, sex, religion or national origin.

ADA: The Americans with Disabilities Act is primarily administered by the U.S. Department of Justice, which protects persons with disabilities.

OSHA: These workplace safety regulations are administered by the Occupational Safety and Health Administration.

As an employer, you are responsible to make certain you comply with various employment laws. You are also required to follow laws related to employment taxes, including Social Security, Medicare and unemployment insurance. This article is general in nature. If you are an employer and question what your responsibilities are under various federal laws, give us a call. While we are not lawyers, we can assist you with general questions and point you in the direction of attorneys who are versed in employment law.

Cash is the lifeblood of business and any tool that enhances cash flow is worth investigating.  Back Office Conversion is not a new concept. It allows you to convert customer checks into electronic deposits without the need of going to the bank. This has been possible using point of purchase check conversion (POP): the customer writes a check at the time of purchase, the clerk scans and voids it, and returns the cancelled check to the customer. POP has not been widely implemented due to the cost of acquiring the equipment - and this is especially true in multi-lane stores.

BOC, however, overcomes this limitation by requiring only one scanner in the “back office.” With the exception of certain required notices, the process of receiving a customer’s payment doesn’t change from what you have done in the past. It is when the day’s receipts are processed in the office that the check is transformed into an electronic deposit. The deposit information is then transmitted to and processed by your bank, which uses the information to collect funds from its own customers or other banks. All of this is done electronically from the comfort of your office.

Aside from convenience, the benefits of BOC are significant. Unless you deal in large amounts of currency, it virtually eliminates the time wasted in taking a paper deposit to your bank - and time, as they say, is money. For example, assume an employee you pay $9/hour spends one-half hour per day going to the bank. Counting only the actual payroll and taxes, making the daily deposit costs you around $1,300 per year - money you could probably find better uses for!

A second major benefit to BOC is that it puts your money to work faster. At a minimum, you can add one day’s interest earnings, or savings, by using BOC. Much of the time, you can add 2 to 2 ½ days interest earnings. Properly implemented, you will receive immediate credit for the BOC deposit and start receiving interest on those funds. If your bank automatically transfers excess deposits to pay down your line-of-credit, receiving credit earlier can reduce your overall credit costs.

Finally, the need to manually prepare a deposit slip is eliminated. Thus, paperwork is reduced along with the overall cost of processing customer deposits. Reducing the number of items a teller must handle could also reduce monthly bank charges.

Does BOC sound like a good idea for your company? Most likely, it will enhance your profitability, but there are costs associated with this modern miracle. You will need to purchase equipment to implement BOC and train your personnel in its use. The exact cost of the system will depend on the equipment you purchase, which will include a special scanner, possibly software, and an additional computer.

You will also need to change your billing policies to ensure that customers are properly notified that you are using BOC. Because you get nearly real-time access to your customer’s funds, their accounts are debited almost immediately. For this reason, the Federal Reserve Bank requires you to notify customers that the check they write authorizes you to make a one-time electronic transfer from their account. For retailers, this means posting a sign at each cash register and giving a copy of the notice to the customer, typically on the sales receipt. If you are not in a retail business, you will need to adjust your invoices to include the appropriate notification to your customers.

A customer can refuse to let you use his or her check to make an electronic withdrawal, but you also have the right to refuse to accept a customer check as payment. Since the procedure is so new, it will take time to determine whether this becomes an issue.

You will not have to return the check to a customer if you use BOC, but you will be required to keep the check for up to two years. This allows the customer time to dispute unauthorized transfers.

Technological innovations are causing major shifts in the way customers pay bills. Generally, the changes reduce the customer’s ability to use ‘float’ and enhance the seller’s cash flow. Properly implemented, back office conversion can be a powerful tool in managing your cash flow. If you are considering the use of BOC, give us a call to discuss the merits of it before you take the plunge.

Sometimes in these days of twittering and instant messaging, it is tempting to question whether business plans are obsolete. The answer is a resounding no. Without a business plan, your ideas, financial planning and basic strategy almost certainly will be vague in parts - and any business pitch you make will lack the strong foundation needed to attract serious attention from prospective investors, business partners and others whose support is required.  

Let’s consider some planning fundamentals and determine what a plan will do for you and for your business.

A road map
A good business plan is your road map. It establishes your starting point, the things you must do before hitting the highway, the reason for the trip, the steps and the best direction you need to take, an estimated time of arrival and so on. In this way, a basic plan will generally require that you have researched the following prior to starting out:

• A well-defined product or service
• An estimate of the size and purchasing power of the target audience
• Assessment of competitors or issues that impact purchasing decisions
• Unique selling points or competitive edge your product/service offers
• Projected growth rates
• Sales forecast
• Marketing tools
• Timeline
• Calendar showing time frame for measurement and assessment of plan’s progress against stated goals and objectives
• Budget projections (start-up costs, cash flow estimates)
• Skills and expertise of the management team

A good plan is articulate, concise and to-the-point. Developing the plan is a means to an end, not a project that requires months of drafting, revising and editing. However, it is vital that a business plan shows you know your targeted market well, that your financial planning is good and that your strategy includes measurable goals.

Dos and Don’ts

• Recognize that the business plan is the basis for your future presentations and pitches. Write it based on the research that shaped your strategy. Without a business plan, you will be stumped for an answer if your audience challenges any budget estimates or sales and marketing assumptions.
• Keep it simple and as short as possible. Avoid ambiguity, industry buzzwords or any kind of jargon or unexplained acronyms. If you are uncertain about something, do more research. Above all, don’t try to impress people with complicated language. Your audience will pick up on any lack of clarity or wild guesses immediately.
• Anticipate change and revisions. Review the plan regularly. The basic components might need revision along the way, but they will still be an integral part of the overall plan. Short-term goals and projections might have to be revised and management might need to change intermediate priorities in order to meet the long-term objective.
• Be skeptical if someone tells you to bypass the business plan and go straight for the business pitch. Even if the people you are pitching to do not seem interested in your business plan, experienced analysts back at their office will take a hard look at it.

Bottom line: though the pace of business has accelerated and change is constant, entrepreneurs still need to develop a basic business plan before charging ahead. The effort and dollars required to draft a plan are a good investment and a major factor in business success.

There was a time, a long time ago, when the idea of “going public” was a magical thing. If you took your company public, it was almost as if you had “arrived” as a businessperson. Sure there were headaches, but they were manageable with the team of internal and external managers and advisers you had assembled. The payoff, aside from the potential for cashing out in the future for a high price instead of passing the business on to your kids, was the pride in knowing you created a company that the general public valued enough to buy. That’s pretty heady stuff!So what does the term “going public” really mean? For purposes of this article, “going public” means offering to sell a portion of a company to the general public in exchange for capital in the form of cash. Sometimes the sale will include not only newly issued stock of the company, but also some shares of current shareholders, commonly referred to as “selling shareholders.” When a company goes through this process for the first time, it is referred to as “going public” since the company is giving up ownership by a few shareholders and offering to sell to a disparate group of unrelated shareholders throughout the United States.

Those days are long gone. Now, the goal of cashing out for big bucks is harder to attain and the headaches sometimes require major surgery rather than two aspirin to control. Some people in the know might tell you to take your company public while some people tell you to run from it like the plague. So what’s the truth?

The capital obtained by the sale must be used in accordance with the Registration Statement required to be filed with the Securities Exchange Commission prior to any offering to the public.

Advantages of Going Public

Access to capital - One of the chief advantages of going public is it allows a company to raise capital from the general public rather than going to banks or other private lenders and/or investors. Sometimes, the capital needed may be so great that obtaining bank financing or funds from private investors would be impossible. The ability for investors to sell their shares in an established market may entice them to risk their money with the safety valve of having the ability to sell if the stock loses too much value.

Stockholder liquidity - Let’s face it, eventually you are going to want to retire from your business and live the good life without the pressures of running a business. You can give the business to the kids, sell it to the kids or third parties, or liquidate the assets and head for the Riviera. If you intend to live the good life, chances are you can’t afford to just give the kids the business, and liquidating a thriving business will probably not give you the highest value for the years of hard work in building the company’s good reputation. This leaves you with the sale alternative and the kids may not be able to afford to buy the business from you. This leaves a sale to unrelated parties and that can be to a few individuals or the public at large.

Bear in mind that while you may be able to cash out to some extent in a public offering, you will likely have some portion of your stock ownership declared restricted, which means you are limited in the amount of stock you can sell and the timing of the sale. Assuming continued success, you should eventually be able to sell most, if not all of your ownership, over time.

Better strategic alternatives - The ability to issue stock that is readily tradable on an established exchange to acquire potential rivals or other merger candidates is a significant advantage of going public. If your goal is to grow market share through acquiring other companies, the owners of those companies will want to have the ability to liquidate their investments. That means you pay cash, give them stock that is readily convertible to cash or some combination of both. Issuing stock in a privately held company that is not readily tradable is unattractive to sellers.

Diversification of ownership - As any entrepreneur will tell you, there’s nothing like being the master of your own fate or captain of your own ship. Unfortunately, it’s sometimes not wise to rely on just one key person for capital in a company. What happens if there is a small group of owners and one decides to cash out? The remaining shareholders may have a burden to heavy for them to carry. Going public can make the risk of losing an investor much lower by spreading ownership over a large group of stockholders. When one chooses to sell his or her shares, the chances of having any real effect on the company are virtually nil.

Greater access to talent - While the past few years have shown the ugly side of stock-based executive compensation, there is still a place for it in corporate America. If you have the ability to hire top managers and tie part of their compensation to readily marketable securities, the pool of candidates rapidly widens.

Prestige of the founders and company - From a business perspective, the fact that you have taken a business from nothing to being traded on a stock exchange does nothing but enhance your prestige. While not always true, people also look at public companies and privately-held concerns differently (i.e. ascribing greater stability and competence of the public versus privately-held company).

Disadvantages of Going Public

Costs - A very major drawback of going public is the cost of doing so. The process is long, arduous and very expensive. Management must determine if the advantages gained justify the cost expended. On-going reporting costs will also be greater for the public versus private company. Cost will be discussed in detail in later articles.

Undue pressure on short-term profits - One of the nice things about owning your own company is the relative calm at stockholder’s meetings. You are not as likely to step up to the microphone, pound your fists and ask, “Where’s the beef,” when research and development costs eat up the bottom line. You realize those costs are an investment in profits two, three, five or more years down the road. Unfortunately, the price of a public company’s stock is heavily influenced by its earnings. Management of a public company can sometimes sacrifice the future by refusing to incur costs needed for long-term growth to bolster stock prices and this can ultimately be disastrous.

Transparency - As a privately-held company, your business does not need to provide sensitive information to competitors to keep regulators happy. Public companies, however, are required to provide sufficient information with respect to their prospects so an investor can evaluate the investment. Sometimes, this provides a competitor with information that can be used against you in the marketplace. Reporting regulations try to avoid this, but the public demand for transparency sometimes forces the disclosure of sensitive information.

Loss of control - As the owner of a privately-held corporation, you enjoy a great deal of control over the direction of the company. You can also design programs to benefit you at the expense of the corporation. The minute the business goes public, you have a legal and moral responsibility to manage the business for the benefit of shareholders. Part of our current problems with public companies stems from the executives forgetting they are no longer running the show for their own personal benefit.

Restrictions on stock - Management and large shareholders of a privately held company are not prevented from selling their ownership interests based on inside information. The market value of the stock also won’t be affected by sales of large blocks of privately-held stock, except for the various control premiums or minority discounts inherent in such trades. This is not true in the case of a public company. Trading on inside information is a crime punishable by jail and other sanctions. Many times, investors will want some portion of management’s holdings in stock restricted as to sale in the market to avoid possible dilution of value.

Conclusion

There are many benefits and many costs in obtaining capital through public markets. If you are currently looking to go public or if you have long-term goals that include taking the company public, give us a call. Let’s talk about your plans and begin now to assemble a team that will help you maximize the value of your company while minimizing the cost of going public.

Just last month, President Obama’s long awaited health care bill was signed into law, but that was only the beginning of major changes to come in U.S. health care. This tax and accounting article discusses some of the issues of the new Healthcare Act from a business perspective.

Early Retirees
Beginning June 21, a new reinsurance program will become effective for businesses that provide insurance for early retirees. The federal government will reimburse 80 percent of the cost of benefits that employers provide to retirees aged 55 through 64. The reimbursement will be based on costs incurred in excess of $15,000 but less than $90,000. The reinsurance program will end by 2014 or when the $5 billion set aside for the program is exhausted.

Extended Coverage
Beginning with the 2011 plan year, employer health plans must offer coverage to adult children of plan participants through age 26. To qualify, the adult child does not have to be the participant’s dependent, but they cannot be eligible for coverage under another health plan. After 2014, the adult child can participate in his or her parent’s plan even if he or she is eligible for other employer coverage.

Other reforms effective in 2011 include:

• Prohibition on lifetime limits; however, restricted annual limits will be allowed; annual limits are no longer allowed beginning in 2014; Prohibitions against imposing pre-existing condition limitations will be enforced in 2011 for children under age 19 and in 2014 for any participant;
• An employer’s plan must satisfy nondiscrimination rules of the Internal Revenue Code, applicable previously only to self-insured plans.

W-2 Reporting
Beginning in 2011, employers will be required to report the value of employee health care coverage on Form W-2.

Employer Responsibilities
After December 31, 2013, applicable large employers (generally those with at least 50 full-time employees) will be required to offer affordable coverage to all of their full-time employees. They will pay a penalty if one of their employees is certified as having purchased health insurance through a state exchange and the employee receives a tax credit or cost-sharing reduction.

Employers offering coverage through an eligible employer-sponsored plan and paying a portion of the cost will have to provide vouchers to their employees that can be applied to the cost of a health plan with an insurance exchange.

Certain small employers might be eligible for a credit if they provide health coverage to their employees.

It’s too soon to see whether small business and the consumer will be in better shape as a result of the new law. But one thing is certain: health care reform has been a long time in the making and will be a long time in the implementation. The provisions are complex and the economic implications for business owners (in terms of health care costs and taxes) are significant. It is not too early to begin planning how to best position your company to respond to changes that are on the horizon.

If you need assistance understanding the impact of Healthcare Reform on your business, please contact our Small Business experts at smallbusinesssolutions@mjlm.com

The Tax Top 10 List - Mistakes that Cost You Money
With the arrival of 1099s and W-2s from your employer, banks and others, it’s time to get down to the business of filing your income tax return. While technology has certainly eased the burden of filing, mistakes still happen. This article focuses on some of the more common mistakes that will cost you money.

Math Errors
Despite the explosion of electronic filing solutions, math errors are still the taxpayer’s No. 1 problem. While most common for those who file old-fashioned paper forms, even computer-prepared returns can be incorrect if the preparer transfers the wrong number from one schedule to another.

IRS computers are adept at catching these errors. If your return is wrong and you owe more taxes, you will get a bill for the tax, plus penalties and interest. If you owe less, you will get a check from the IRS.

Don’t assume that the IRS calculations are correct either. Even they make mistakes sometimes. Take a good look at the numbers before you pay any bill.

Interest and Dividends
If you earn interest or dividend income, make sure you include it on your return. The IRS matches the income on your return to the amount reported by payers. This results in about 10 million notices annually, including a number of which are incorrect. Unfortunately, fear of the IRS leads many taxpayers to simply pay the notice without investigating its validity. Depending on the amount, this can be a reasonable course of action. However, if you believe the IRS is wrong, follow the prescribed procedures to contest the assessment.

Incorrect Investment Basis
Whenever you sell an investment, you pay tax on the proceeds less your basis. Basis is generally the original cost of the investment, plus any dividends or other income reinvested, less prior sales. In the case of mutual funds and stocks, it can be tricky to calculate the basis for investments held for many years. Here is an example: You purchase Mutual Fund A for $1,000. At the end of the year, the Fund declares a dividend of $100. You will pay tax on that $100, but your basis will also increase. If you sell half of your shares the next year for $1,000, you will recognize a taxable gain of $1,000 minus half of $1,100, which comes out to $450.

It is not unusual for a client to provide the original cost of the investment but fail to share information on dividends, sales and other events that affect the basis of the asset. This can literally mean the difference between taxable income and a loss.

Failure to Report Stock Sales
In a rush to file for a refund, taxpayers might forget to wait for Form 1099-B, which brokers file with the IRS to report sales of stocks, bonds and other investments. Unfortunately, the IRS will compare the amount reported by the payer to your tax return. If you have not reported a stock sale, the IRS will send you a bill for tax on the entire amount of the sale. Should this happen, do not send a check to the IRS. It is probable that you have some basis in the asset that can be used to reduce taxable income or even totally eliminate it.

A Final Word on Stock Basis
Until 2010, if you inherited property, your basis in the property equaled its value on your benefactor’s date of death. For example, your mother bought $10,000 worth of Exxon stock on Jan. 30, 1970. She died on Dec. 15, 2009. Six months later, you sell the stock for $1 million. The closing price on Dec. 15, 2009, was $69.17, making the value of the stock your mother gave you about $393,000 when she died.

Heirs sometimes refer to the original cost basis of inherited property when reporting the gain or loss from the sale of property. If this happened in the example above, the heirs would incorrectly pay tax on $990,000 in capital gains and not $607,000.

We often see cases where a spouse dies and the survivor provides us with the original cost basis of stock. If the stock is community property, the basis of all the stock in the community is the value on the spouse’s date of death.

Change in Marital Status
With some exceptions, your marital status on Dec. 31 dictates your filing status for the year. Marrying on Dec. 31 might sound romantic, but it can have serious tax consequences. While Congress addressed the marriage penalty several years ago, many tax provisions still work against you if you marry at the end of the year. In some cases, spouses who decide to file as married but on separate returns lose the entire benefit of tax breaks. The reverse is also true.

The bottom line is this: before taking the plunge or ending your marriage, do the math. If a change in marital status by year-end costs you money, postpone the event by a few days. Even if you don’t change the big date, at least you’ll know what it will cost you.

Keep Up With Your Receipts
If you take a deduction, the IRS might ask you for proof of that deduction in the form of a receipt. No receipt means a lost deduction. Typically, the IRS has up to three years from the date your return is filed to adjust it, unless fraud can be proven. Since a disallowed deduction will increase your tax, by the time you get the bill from an audit added penalties and interest will significantly increase the amount you owe.

Improperly Paying Itemized Deductions
Many taxpayers do not pay enough in a given year to exceed the standard deduction. With a little timing, though, you can realize significant tax savings by bunching itemized deductions.

For example, say you are married, file jointly and typically give $10,000 to your favorite charity every year on Dec. 31 and this is your only itemized deduction. For 2009, the minimum you can deduct regardless of your actual itemized deductions is $11,400. If you follow your typical pattern and give $10,000 on Dec. 31, 2009, 2010 and 2011, your deductions for 2009, 2010 and 2011 will be $11,400. If, however, you wait to make your 2010 donation until 2011, you will deduct $11,400 in 2009, $11,400 in 2010 and $20,000 in 2011, resulting in significant tax savings.

Failure to Pay Estimated Taxes
If you are required to make estimated tax payments, failure to do so will cost you money. Certain taxpayers are required to make quarterly estimated tax payments during the year in anticipation of their year-end tax liability. This is in addition to or in lieu of withholdings from your paycheck. If you fail to make the required payments, you will owe an estimated tax penalty. Depending on the required payments, those penalties can be significant.

Failure to Properly Extend a Return
Many taxpayers fail to extend their returns on the April 15 due date. Sometimes this is accidental, but some taxpayers will not extend because they believe they must send a check with the extension. Even if you can’t make an extension payment, the penalty for failure to file your return on time is 5 percent of the tax due multiplied by the months you delayed filing. The late payment penalty is 1.5 percent per month. Lower those costs by extending, even if you cannot pay.

The Bottom Line
The tax law is complicated and there are numerous traps for unsuspecting taxpayers. Before you file this year, consider this list of common tax return errors and do your best to avoid them. If you have any questions, give us a call. We will be glad to help.