The Tale of Two Families

father and sonAh…the image of the family owned business.  Your head is overflowing with sweet Americana images from the 1950s where three generations of family members ran the country store together.  Then someone shakes you violently to awake you from this nostalgic fantasy world!

Often a business owner wants to turn over his or her business to a relative for a variety of reasons, but ninety nine percent of the time this turns out to be a horrible mistake.  The reality of small business ownership nowadays is that most family members don’t voluntarily want to share in the responsibilities of running a family business.  Unlike previous generations, today’s young adults have no desire to work as hard as they watched their parent’s work nor do they want the family arguments.

That is why you need to understand the risks of insisting your business be turned over to an unwilling family member.  Usually when this happens, the proverbial brother or sister-in-laws will very likely run the business into the ground and occasionally steal from the cash flow.

Let me share a tale of two families!  The first father & son team didn’t fare so well in the business world.  The father purchased a deli/café for his son.  The son and girlfriend proceeded to run the business into the ground, losing the father’s $100,000 investment in the process.  This store is now closed.  The second father & son team are doing much better.  They own several Dairy Queen franchises located in major malls and casinos.  They work together as a team running the businesses in a very professional manner, much like a president and vice-president.  They have built an empire together that will one day be passed onto the son.

From my 45+ years of experience in business brokerage, the story of the first family is a far more common reality than that of the second team.  Families usually start out with the best of intentions, but tend to ignore some of the harsh realities that are visible to a stranger.  I strongly suggest that if you are considering selling, or worse, giving your business to one or more family members that you at least sit down with an experienced business broker to get a second opinion and assessment of the situation from an unbiased independent third party.  This may save you many thousands of dollars and plenty of headaches!

Don’t ask your friends, neighbors, or other business experts like your dentist, Realtor, or hair stylist. Generally these people don’t know anything about businesses and would be afraid to give you any positive opinions.  The same goes for your other relatives.  You are intelligent, you will figure it out, but it pays to consult with an expert.  Don’t put more research into your next cell phone purchase than you do for selling your business to your family member or anyone else.  Remember, business mistakes can be extremely expensive!

If you want to help a family member, then let that person purchase all or part of the business, even if seller carry financing is a part of the deal.  This is when the seller becomes the bank and agrees to hold a certain portion of the purchase price as a loan usually payable from 1 to 5 years, sometimes a little longer and at a variety of interest rates regardless of the cost of money or prime rate.  The repayment is usually principle and interest every month like a car loan.  Sometimes the seller will want extra collateral such as a lien on your home. This is especially true if there are no or few hard assets with the business as found in many service businesses. The seller is not wrong to ask for it.

It is important for the Buyer, even if they are related to you, to have some “skin in the game.”  If they have money or assets at stake, they will work harder to make the business a success.  Working a business is not a labor of love, its hard work!  If they are not willing to purchase the business, even for a nominal sum, then it’s time to look for other buyers who are not related to you.  This will keep Thanksgiving gatherings a lot more friendly!  Look at all the heart ache I just saved you!

Article contributed by Ed Smith aka Edward J. Smith, Ltd. is a professional licensed business broker in the states of Nevada and Utah with First Choice Business Brokers LV 101 office.  He has over 45 years of experience in helping business Buyers and Sellers.  Call Ed at:  702.274.7320 or email him at:  edsmith@fcbb.com

As a Business Owner What Income is Subject to FICA/Self-Employment Tax?

Self employmentWhen looking at what entity you should use to set up your new business there are a number of things you need to consider and one of these is how will your income be taxed for FICA/self-employment (FICA) tax purposes.  Because you are now the employer and employee this tax rate is a whopping 15.3%, which means the more of your income you can keep from being subject to the FICA tax, the more money you are going to be able to keep in your pocket to run your business.

The following will give you some guidance on what income is subject to the FICA tax and what income is not.

C Corporation – Wages paid to the shareholder-employee are subject to FICA tax.  Distributions paid from a C Corporation are not.

S Corporation – Wages paid to a shareholder-employee are subject to FICA tax.  (which you must pay yourself a wage in order to stay compliant), but pass-through income reported on your K-1 is excluded from the shareholder’s self-employment income.  S Corporations are many times a great entity to use to help limit your FICA tax.

General Partner (General Partnership or LLC) – Pass-through income is included in the partner’s self-employment income and is subject to the FICA tax if the partnership engages in a trade or business.  Guaranteed payments to a general partner are also included in self-employment income and are subject to FICA tax.

Limited Partner (Limited Partnership or LLC) – Pass-through income is excluded from the limited partner’s self-employment income and is not subject to the FICA tax.  Guaranteed payments for services are included in self-employment income and are subject to the FICA tax.

Sole Proprietorship – All proprietor earnings are self-employment income and are subject to the FICA tax.  This is true whether the proprietor works in the business or hires others to do the work.

 

Are You Thinking of Quitting Your Job to Start a Business?

Are you one of the many Americans who are tired of the daily grind of working for an unappreciative boss who leaves you feeling overworked and underpaid and is quit your joblooking to start your own business?  If so, there are a number of things you should consider before you make the plunge of becoming self-employed.

 

Know the Rules for Rolling over Retirement Plan Funds

Upon leaving your job, you will generally be entitled to immediately receive vested amounts in your qualified retirement plan accounts.  You are probably aware that most distributions from qualified retirement programs can be rolled over tax-free into an IRA account.  However, you must arrange for a “direct rollover’ or the plan administrator is required to withhold 20% of your distribution for federal income tax.  Direct rollovers involve having the funds transferred directly from your former employer’s retirement plan into your designated IRA account.  (the distribution check cannot be made out to you)  Talk to your former employer’s benefits representative and to the financial institution or brokerage house where you will establish your IRA.  Tell them you want to make a direct rollover to avoid the withholding, and ask for the required forms and paperwork.  Failure to arrange a direct rollover means you will have to replace the 20% withheld to accomplish a totally tax-free rollover.

 

Expend Your Flexible Spending Accounts before You Quit

If you have a flexible spending account (or cafeteria plan reimbursement account) for uninsured medical expenses and/or childcare expenses, make sure you incur sufficient qualifying expenses to use up the funds in your account before you leave your job.  For example, go get new glasses or contacts if that’s what it takes to use up your account balance – otherwise, you will lose it when you quit.

 

Open a Separate Business Bank Account

Segregate your business and personal financial matters by keeping separate bank accounts.  Deposit all business income into the business account and pay all business expenses (including your own draws) out of that account.  If you pay business expenses in cash or out of your personal account, reimburse yourself with checks drawn on your business account and document this with receipts.  This will make your year-end recordkeeping easier.  Keeping separate accounts shows you are serious about running things in a businesslike manner, and IRS examiners like to see that.  You do not want to have to explain that the $10,000 deposited into your one and only checking account was actually a gift rather than business income.

 

Start Keeping Tax Records – But Do Not Overdo It

In addition to maintaining a separate business bank account, you need to start keeping documentation of your business income and expenses.  At the beginning this generally does not need to be anything fancy (however, if your business involves inventory, employees, or a corporation you are going to need to be much more detailed).  For example, in most cases, you can simply use file folders or envelopes to keep your business expense receipts until tax return time.  You may not really need a bookkeeping software program, a tax preparation program, or more sophisticated recordkeeping techniques until later.  Also keep a list of billings or sales and the dates you get paid.

 

Keep Good Auto Records

Expenses of using your personal auto for business uses are deductible, but only if you keep good records documenting the date, the number of miles, the business purpose of each business use of the car.  Mileage not properly substantiated is considered personal use and related expenses are not deductible.  You should also record the car’s mileage at the beginning of the year or when you first start your business.  Unless the standard mileage rate is used, receipts or invoices and cancelled checks should be retained documenting the car’s purchase price, fuel costs, repairs, taxes, insurance and other out-of-pocket costs.  Auto logbooks for recording mileage and expenses are available at local discount and office product stores.

 

Consider Setting up Your Own Retirement Plan

If you work for yourself, you are on your own when it comes to planning for your retirement.  A retirement plan set up for your benefit accomplishes two goals – it is a way to save money for your later years, and in most cases it saves taxes now.  Using a defined contribution Keogh plan, you can contribute and deduct up to 25% of your net self-employment income (maybe more if you set up a defined benefit Keogh plan), but remember Keogh plans must be in existence before the end of the year for you to take a deduction.  If this Keogh plan is also a 401(k) plan, you may also make elective deferrals.  A simplified employee pension (SEP) plan can be set up in the following year – as late as the extended due date of your return – and still get the current year tax return deduction.  SEP’s are simpler and cheaper to administer and you can contribute and deduct up to approximately 20% of your net self-employment income.  SIMPLE retirement plans are another option available to self-employed persons.  The biggest disadvantage of qualified retirement plans is that you may have to make contributions for any employees that you have.

 

Do Not Underestimate the Benefits of Tax Planning

Even after the above, tax planning can yield bigger benefits now that you are in business for yourself.  You may be able to employ your children part-time and save income taxes and SE tax.  If your spouse is an employee of your business, you may be able to set up a fully deductible accident and health plan that covers you and the family without the use of a corporation.  Certain expenses that your former employer did not reimburse (such as professional association fees and supplies for a home office) may now be deductible.  Year-end tax planning is critical – particularly if you can use the cash method for income and expenses.  As stated earlier, retirement plans other than SEP’s must be set up before year-end to get a current year tax deduction.

 

Do Not Automatically Incorporate

An often-repeated comment is that corporations are wonderful because they limit the shareholders’ business liability, which is true, but depending on the industry you are in this may not be an immediate concern for you.  You should know that using a corporation requires addition recordkeeping, tax preparation fees, legal expenses and state and local filing fees.  Significant effort must be expended to keep the affairs of the corporation and the owner separate.  Based on the above, depending on the size of your small business, incorporating may not be one of the first things on your list.

 

Using Your Talents to be Your Best

Franz SidneyFranz Sidney energizes the Podcast with her vibrant & bubbly Italian personality. Thanks to her upbringing Franz learnt about self-reliance from a young age. She practiced this and read a lot about the subject and found herself giving out free advice until one day she decided to put it all into a book and “Back to basics” was born.

In Back to Basics Franz tells us how to save money on the usual stuff and to shop with cash and shopping lists. Shopping for groceries online can be another way of saving a few bucks here & there.

Franz tells us that parents are spending far too much money on toys for their kids and gives us some insight on how she homeschools her kids and what they play with. Her oldest son is now reading 20 books a week…

For this and a lot more download the Podcast on iTunes:

To listen to the full interview with Franz, please listen to the podcast HERE

Listen to the full interview with Franz Sidney on iTunes HERE

-Fabrizio Poli

Living Outside the Cube

www.livingoutsidethecube.com

Learning to Survive, can make you Thrive

evacpackRichard Cook grew-up playing outside with his friends, climbing trees and exploring forests. At 8 years-old someone gave him a copy of John ‘Lofty’ Wiseman’s, “SAS Survival Handbook”. This opened Richard up to a new fascinating world. As a result, while in High School, he set-up a Survival School with some friends and then joined the British Territorial Army. From there he moved onto teaching outdoor pursuits to groups of managers from the corporate world to help improve things like teamwork & leadership and this eventually led into creating Evacpack.

Inspired by Napoleon Bonaparte who said: “ Time spent in reconnaissance is seldom wasted.”, Richard and his wife Linda spent a considerable amount of time doing market research, to figure out what to sell and how to structure their business model. This brought them to develop their motto of:”Evac Pack, knowledge & kit for your next adventure”.

After just over 18 months in business they are selling all over the world to Russia, USA, Middle East and the UK of course. It is amazing to hear they started the project with zero budget and promoted the business through word of mouth and social media. They are based in the North West of England where there is a strong community of Home Schoolers, so Richard reached out to them offering courses on Emergency Preparedness and wilderness survival. After just an hour of sending out an email blast, 20 families signed-up and after attending evacpack courses, are enthusiastically coming back for more and bringing their friends too.

The next step will be to put some of these courses onto dvd and sell them, as well as offer short video clips on youtube.

Richard is a great example of how to take a passion and develop it into a successful business.

To listen to the full interview with Richard, please listen to my podcast HERE

Listen to the full interview with Richard Cook on iTunes HERE

 -Fabrizio Poli
Living Outside the Cube

New Insights into the inner game of business

Jeffery CombsJeff Combs grew up surrounded by entrepreneurs and millionaires in his family. At a young age he decided he would become a businessman. Jeff first got exposed to the world of MultiLevel Marketing at 18 as he joined Shaklee as a distributor. He was also given a copy of the book “Master the Art of Selling” by Tom Hopkins. By his mid 20s Jeff was an alcoholic and this dragged on until he came clean at 31. Jeff was then very focused and reached his goal of becoming a Millionaire at 38 years-old. He then retired from MLM to dedicate himself to coaching and producing life changing personal development programs.

Jeff’s core message is getting the inner-game of business right first. Many people are very good at their jobs but are so used to being told what to do. They then find themselves with all the freedom of being an entrepreneur and get emotionally overwhelmed. Reason being is they have job skills, but lack business acumen. It really is a mindset thing and people get caught into procrastinating.

People need to go from acting by force to acting from power. Forcing yourself to do things is very left brain. If people work from right brain, they will connect emotionally and act from power.

In this podcast interview Jeff told us of an example of how he helped one of his clients go from Force to power. This lady was 50 lbs overweight and tried every diet, therapist, hypnotherapist she could find with no results. She thought she was going to find the cause, when in reality was addressing the effect. I wasn’t until she learnt to let go that the weight started to go.

Jeff then told us about why many people have a problem selling. selling has got itself a bad rap, when actually it’s the highest paid profession in the world. To be successful in selling you have to learn to ask questions…

To listen to the full interview with Jeffery, please listen to my podcast HERE

Listen to the full interview with Jeffery Combs on iTunes HERE

-Fabrizio Poli

Living Outside the Cube

www.livingoutsidethecube.com

Learn how to use Social Media to boost your business

kim reynoldsSay goodbye to SEO & payperclick and welcome to Social Media Marketing. Kim Reynolds is always ahead of the game and keeps educating/updating herself and enlightens us with her expertise.

The traditional advertising system was that of broadcasting out. Most people still use Social Media this way , but there is a better way…People need to engage with their customers. The big thing in 2013 will be to connect with people, get feedback and use this to improve your business. This will then allow you to connect to these customers networks too and spread further the word about what you do.

Facebook and Twitter are still very important and your business should be present on both these platforms. Kim suggests choosing another couple of social media platforms that will work for you and focus there.

Google Plus Communities is going to be the big thing for 2013. Google + is actually a better platform for business, in particular if yours serves a niche market. A Google+ Community is a place to meet and engage with people on topics you’re interested in. If you had trouble finding engagement in Google plus in the past, it’s time to take a second look and check out active communities on topics you care about. Not only will you find great discussions going on, but you’ll also meet great people who share your interests. And this will help build your relationships and expand your network.You can create public communities and private communities. There are already thousands of communities forming—and you can find dozens of communities on almost every topic imaginable. People like interaction and hate being marketed or sold to. So learn to interact using the Google Plus communities and why not set some up yourself. Go here to join the Living Outside the Cube one: https://plus.google.com/communities/111312050058786435439

Another two platforms to watch and join are connect.me and rebelmouse.

Kim then tells us how important it is for our website to be designed for Mobile devices as more and more internet access is happening that way instead of via computers.

For this and a lot more download the Podcast on iTunes:

To listen to the full interview with Kim, please listen to my podcast HERE

Listen to the full interview with Kim Reynolds on iTunes HERE

-Fabrizio Poli

Living Outside the Cube

www.livingoutsidethecube.com

To Incorporate or Not to Incorporate…that is the question

incorporateTo Incorporate or Not to Incorporate…that is the question

by Gina Bongiovi

I often meet with sole proprietors who wonder whether it’s in their best interest to incorporate.  99.9% of the time, my answer is a resounding “YES!”  Of course, my clients want to know why, so here goes:

To clarify, when I say “incorporate,” I don’t necessarily mean forming a corporation.  The term “incorporate” refers to the process of forming an entity so that you’re no longer operating as a sole proprietor.  You have several entity choices – corporation, limited liability company (LLC), professional limited liability company (PLLC), limited partnership, (LP), limited liability partnership (LLP), limited liability limited partnership (LLLP) and any other entities states can come up with that overuse the letter “L.”  I mostly deal with the corporation and the LLC, so for simplicity’s sake will address only those two in this article.

For any entity, you start the formation process by filling out and filing Articles with the state.  Most Secretary of State offices administer entity formations, but some states have separate corporations divisions that handle the filings.  For a corporation, you’ll usually file “Articles of Incorporation.”  For an LLC, the document is usually called “Articles of Organization.”  The second step is usually the Initial List of Officers (for a corporation) or Members (for an LLC).  This document lists the names and addresses of all the business owners.  You’ll also need a registered agent (some states call it a resident agent).  This is a physical address, not a PO box, at which a human being can accept service of a lawsuit during normal business hours.  You can act as your own, hire a commercial registered agent service, or have a law firm do it.  Many people prefer to have a law firm in this capacity so a lawsuit can be acted upon immediately.  Acting as your own registered agent doesn’t mean you have to stay at that address Monday through Friday, 9-5; it just means someone looking to sue you needs to be able to find you.  You’ll have to renew your entity every year to keep it in good standing, which involves filing an Annual List of Officers/Members and paying the associated filing fees.

If all this sounds like a giant pain in the neck, let me explain why you want to incorporate.  Operating your business through a separate entity places a “corporate veil” between your personal assets and your business, which is the likely target of a lawsuit.  In other words, if someone sues your business and wins, they get a judgment that’s usually some amount of money.  In order to get this judgment satisfied, they will look to your assets.  If you are operating your business as a separate entity, the lawsuit winner can only satisfy that judgment out of business assets; they can’t touch your personal assets.  This assumes you’re really operating the business as a separate entity and haven’t signed any personal guarantees.  In contrast, if you are operating as a sole proprietor and someone sues you, you have no entity to protect your personal assets and the lawsuit winner can satisfy the judgment out of your personal checking account, your home, your car, etc.

In only incredibly rare instances do I ever tell someone they are better off as a sole proprietor, and even then, I do so reluctantly.  In nearly all cases, it’s worth the few hundred dollars a year to maintain an entity and provide yourself protection and peace of mind.  If the few hundred dollars a year is cost prohibitive, then you probably aren’t making enough money for someone to sue you.  (Ouch, right?)  The saying goes, you can’t squeeze blood from a turnip.  So if you want to remain a turnip, then maybe sole proprietorship is okay.  But if you have aspirations to being more than a turnip, strongly consider forming an entity to give yourself that protection.  My analogies are quickly disintegrating so I’ll wrap up.

There is a misnomer out there that a corporation provides more liability protection than an LLC.  You’d have to check your own state statutes, but in most states, the individual owners of an entity are not personally liable for the debts or obligations of the business, provided the business is managed properly.  In deciding between a corporation or an LLC, you must consider the type of business you have, how you’ll fund it, how you’ll grow it, how you’ll manage it, and your exit strategy.  Yes, it’s counter-intuitive to consider your exit strategy when forming a business, but it plays a role in which entity you choose.  As an aside, these are questions that require some introspection, analysis, and a modicum of intelligence, none of which are provided by the robots over at LegalZoom.  Just sayin’.

To conclude, in 99.9% of instances, it’s best to incorporate.  The question then becomes what type of entity to form and then how to manage it so that you keep that corporate veil securely in place.

For more information on Bongiovi Law visit: www.bongiovilaw.com

Will MSN’s War on Graymail Affect Email Marketers?

msn graymailWill MSN’s War on Graymail Affect Email Marketers?

by Richard Vohsing of Benchmark

Graymail is probably a word that you haven’t heard of before, and that’s probably because until only a short time ago it really wasn’t a word at all. MSN recently coined this term to describe legitimate newsletters and emails that a recipient just doesn’t care to receive. Shortly after defining the word, Microsoft launched an all-out attack on Graymail, and it will likely change the face of email marketing forever.

This is basically just a highly intuitive and advanced version of a smart inbox. By monitoring your engagement with commercial emails, MSN inboxes will now segregate emails by type and interest of the reader, and place less important emails into a Graymail folder.

Isn’t This Just a Spam Folder?

Not quite. Spam is defined as unsolicited email or, more specifically, emails that you never signed up for. The purpose of the spam folder is to give you a chance to catch any email that may have been improperly classified as spam. Graymail however is email that you did sign up for but may not be interested in anymore.

So How Does It Change the World?

The existence of a Graymail system isn’t really the key point here, as it is more or less the gray-area between spam and normal emails (hence the name). The game-changer is what this Graymail folder is capable of.
In an effort to improve convenience, MSN is providing a one-click unsubscribe. Meaning that a recipient can jump in and unsubscribe from emails without having to view them, or jump through unsubscribe hoops. In the case that the single-click unsubscribe fails, all future emails from that sender are automatically sent to the spam folder for deletion. More importantly, speculation is that there will likely be an automated version of this as well (e.g., After “X” number of campaigns are received and not opened, automatically unsubscribe me from this sender).

How Does This Affect Marketers?

This system is really quite genius. Best-Practices for email marketing already implement a very similar system. By cleaning unengaged contacts from your list, you are removing contacts that are uninterested, and thus much more likely to report an email as spam. Many marketers however do not follow this procedure, meaning that they continue sending “graymail” to contacts until the contact unsubscribes, or clicks on the spam button.
With this new feature implemented, marketers will have no choice but to clean their lists or have it done for them by recipients’ email inboxes. Remember, the Can-Spam Act of 2003 requires that marketers honor unsubscribe requests. Failure to do so can lead to permanent blacklists and possible legal action.

Marketers that already clean their lists on a consistent basis will not be affected in any way. It’s the perfect checkmate to ensure that email marketers follow best practices.

For more information on Benchmark Email visit: www.BenchmarkEmail.com

Obamacare and the Current Tax Changes

fiscal cliff

Obamacare and the Current Tax Changes

 by Dave Hall

If you are like me, I am looking forward to a great 2013. I look at it as a year for each of us to take what we have learned from the ups and downs of the last few years and apply it in our businesses to help them find even greater success.

That being said, we are not completely out of the woods yet. There are still a lot of uncertainties we are all going to have to deal with in our business, but if we will prepare ourselves we can be ready. The two biggest uncertainties most of us are looking at are the effects of Obamacare, and the current tax changes, are going to have on our businesses. Both of these could have far reaching effects on the success of the small business owner.

The most important thing I can tell you about Obamacare is to make sure you are getting individual advice for your business on how it will affect you. This law not only effects how you are going to provide health insurance for you and your employees, it also has a number of tax increases that can become very costly to each of you.

The biggest tax issue most people are talking about is the Medicare contribution tax. This tax is designed to increase the tax burden on passive income by 3.8% on those individuals who make over $200,000 a year and married people who make over $250,000 a year. If you add this to the increasing ordinary income tax rates, you may find by the time you add your state taxes you are paying over 50% in tax on your income.

In regards to the current tax law changes, an agreement has been reached and is going to be signed into law. Therefore, there are some key tax issues you should be aware of.

First, you are going to pay higher social security tax in 2013. In 2012, the employee portion of the social security tax had been reduced by 2%. This reduction expired at the end of 2012, and is not being renewed. As a result, if you are a taxpayer making $40,000, your total tax bill will increase by $800.

Second, the capital gains rates are going up. In 2012 we enjoyed capital gains rates that capped at 15%. In 2013 the maximum rate is going up to 20%. This might not seem like that much of a change, but if your capital gain income is so large that it is also subject to the 3.8% Medicare contribution tax, your tax rate will have gone up by a total of 8.8%, or just over 50%.

Third, they did pass a permanent patch for Alternative Minimum Tax. This is great news, because if a patch was not passed, most of middle-America would have seen increased tax rates.

Fourth, dividends will no longer qualify for long-term capital gain treatment. This means if you have dividend income your income tax on that dividend could go from 15% to 39.6%. Plus, depending on your income level, it may also be subject to the 3.8% Medicare tax, making your total tax burden 43.4%.

Fifth, if you are a couple and make over $300,000, or are single and make over $250,000, your itemized deductions and personal exemptions are going to get phased out again. This is something we haven’t seen since the Clinton era.

Sixth, 50% bonus depreciation has been extended for one year. The Child Tax Credit, Earned Income Tax Credit, and the American Opportunity Credit have all been extended for five years.

Seventh, the estate tax exemption stayed in place at $5 million per person, but the top tax rate on the wealthiest estates went from 35% to 40%.

As you can see from the above information, there are a lot of tax changes that are set to affect you and your business. The best thing you can do is to set up a consulting appointment with one of our tax professionals so they can help walk you through how each of these changes is going to impact you.

Find us online at: www.davehallsba.com or call our offices at: (435) 767-0660