Costly Mistakes Made with Your Business Entity

Dec 4, 2017 by

Investing in a powerful tool and not using the tool properly does not make a lot of sense. I know when it comes to running a business it requires multiple hats to wear and very often you are off and running on 10 different projects, calls, appointments, presentations…and perhaps the very foundation of your business may be in jeopardy. Here are the top costly mistakes I have seen made over the past 20 years:

1. Not completing the transition from a sole proprietorship to a separate legal entity. If you started a business in your own name for a few months before you formed an entity odds are part of what you did you completed as an individual and you need to connect the dots to the new entity. If you filed a DBA (doing business as) with yourself as the applicant that needs to be cancelled and re-linked to the entity. That means your entity needs to be the applicant, not you! If you don’t do this you still are exposed to unlimited liability and filing a Schedule C with a
higher audit potential. Next point is to open a bank account in the name of the business, not just keep the account in your personal name. Use a business credit card in the name of the entity, not just your personal credit card and keep track of expenses. You will want to minimize the amount of debt that shows up in your personal name. Update all affiliate programs, vendors with your new entity information so any income is going to your business entity, not to your name personally. Update your websites, business cards, letterhead with the new name of your business. Another important tip make sure your website is in compliance, most are not, I would recommend www.autoweblaw.com simple software that has all the legal agreements you need on your website or blog.

2. Funding concerns. 95% of businesses fail within 5 years and undercapitalization is the #1 reason. The pattern I have seen is that small business owners are hoping for revenue to come in as the primary source of money to grow their business. What happens if your revenues are off or don’t come in at all? You may be working on that great new product and all your e-mails go out and no one converts. That is a real problem. The key is to model success. Almost all successful companies do not use only their own money to grow. I know you know the concept, “OPM”, other people’s money, yet are you doing that? Are you only self funding your business on your personal credit? Did you know that once the entity was filed the business credit bureaus will start creating a file. They scan the Secretary of State’s records to create a file with any new filings. They look for the name of the business, the start date, and name of the officers/managers the address…If you are not paying attention to how you fill out forms with the business address, business license, state forms you can create disconnects in the database. In one business credit bureau, NCP is spelled four different ways. The NCP part is the same, but one way has “Inc.”, one has “,Inc.” other has “, Inc” and the last one is “Inc”.

Did you notice the differences between the comma and period? That created four different files! Don’t make that same mistake. Unlike the personal credit bureaus, the business credit bureaus are very difficult to fix any mistakes. They have their own set of rules and are not set up for changes after mistakes happen. This creates a problem when it comes to developing credit for your entity because you basically have one shot at the apple to get it right the first time. Banks and vendors are very interested in your financial strength of your company. Now joint venture partners can check you out for free to determine who is stable in your operation. You may be losing business and not knowing it. It is really a must to be financially solid in your business and your developing business credit is a must for your long-term success.

3. Safe and risk assets. Mixing asset classes is a major risk to your wealth that is unnecessary. A risk asset is any asset that would cause liability to your entity. That may be a business, real estate, equipment, again, anything that may cause liability to an entity. A safe asset is one that does not cause liability to an entity, like cash, ownership of another company, investments…If your business falters and you need to reply upon your safe assets to recover short term, why unnecessarily put your safe assets at risk? It happens all the time. There are two reasons this may be happening to you, first, you have thought that your amount of safe assets are not large enough to protect. Imagine having $25K in a brokerage account in

4. Not clear on who does what? A partner can help you grow a business quickly and destroy it even faster if you are not on the same page. Very similar to being married. I have been married for 21 years with three girls and it is a lot of work and requires meetings, and discussions to do the best to be on the same page. Business like marriage can be very exciting at first and you really need to be able to communicate well as to what you are looking to accomplish. The fun part of the business is discussing how you will bring in revenue and all the possibilities that can happen with profits. The part that isn’t fun is the expense side of the ledger. First, you must agree upon what is actually considered an expense, does that include things like cell phones, travel, meals…? What happens if revenues are way off and there is not enough money to pay each partner and you need more capital from each partner to keep it going? This can be a very uncomfortable problem. It is best to presuppose the challenges ahead of time and see if you can calmly discuss them and come up with solutions that make sense. If you can’t get to first base on the uncomfortable parts before you get started that is a bad sign and perhaps you should NOT be a partner. In fact, odds are the business is doomed to fail if you can’t get through some of these basic uncomfortable discussions from the start. Now, that does not mean your partner is telling their spouse the same story. That can and often does create more issues. Having as much in writing from the start and a business plan in place makes the most sense. Almost ALL, not all, but close, partnerships that refuse to take the time to put things in writing fail. It is like clockwork. If anyone wants to start a business with you and they refuse to put things in writing, run! Most of the time the only one that makes money in that situation is the attorney’s after the partners sue each other! Take the time to be clear and put it in writing!

 

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Doing Business in Multiple States-When Does Your Company Have to Register?

Nov 27, 2017 by

Establishing a separate legal entity is step one in separating your and business assets. The next step is to make sure you are in compliance, which can mean many things including compliance from a Secretary of State level, to compliance from a business credit level to compliance at a state taxation level (and federal). All areas are very important. Let’s discuss an area that is not often discussed until it is too late and that considers the multistate taxation rules which will help determine which states your entity will need to register to do business.

In our industry, where Nevada and Wyoming corporations are promoted this is the reason why benefits such as saving state corporate income taxes or privacy rarely comes into play because if you live and do business in another state, the Nevada entity will need to foreign register to do business in that state. At your state level, there may be state taxes and your name and information is probably going to be more exposed. Two important points, first if you are operating as an LLC taxed as an S corporation for example, it is a flow-through entity with no federal taxes paid and in many states, no state taxes. An informational return is required to be filed at the federal and state level (in most cases) and the tax is paid at the owner’s level. This comes into play when someone says, “I live in Arizona and I want a Nevada LLC taxed as an S corporation to save state corporate taxes here in Arizona.” There is not any state taxes on LLCs taxed as an S corporation in Arizona anyway. This is typically promoted in relation to a C corporation which has state corporate taxes in most states but usually is the wrong entity for the small business owner (because of double taxation and the goals of the small business owner, especially a home-based business owner is to have low overhead and high-profit margins). The second point is that privacy is many times overrated because I find there is a common pattern to strive for so much privacy and the basic asset protection is missing. Most do not think it through with capitalization, issuing ownership interest…

Back to the subject at hand, when does your company have to foreign register or qualify to do business in another state? There are two ways to look at this, what does the state say about this at the Secretary of State level and more specifically what does the multi-state taxation rules say about it?

Each state has some basic rules that may help in determining what is considered doing business in their state and therefore state taxes may be due. Let’s take a look at California and Texas. California is one of the highest taxed states in the country. They have an annual $800 minimal franchise tax fee that applies to all entities (there is an exception in year one for corporations). California has a state tax rate for all entities and that is why they spend more time on the California Franchise Tax Board website to let you know what is considered doing business. On this site, https://www.ftb.ca.gov/businesses/faq/734.shtml, the California Franchise Tax Board defines doing business in California as ‘doing business’ means actively engaging in any transaction for the purpose of financial gain. That is a very wide interpretation of what is considered doing business.

Texas does not have a state corporate income tax but they have a franchise tax. The franchise tax is a privilege tax imposed on corporations, including banking corporations and limited liability companies that are chartered in Texas. The tax is also imposed on non-Texas corporations that do business in Texas. The Texas Franchise Tax fee is just a fancy name for state income taxes. But from a marketing point of view if the state can promote it has no personal income taxes and hit the businesses harder that may help them from a political point of view. If you are doing business in Texas, like owning real estate by itself will trigger the Texas Franchise tax fee which Corporations pay the greater of the tax on net taxable capital or net taxable earned surplus. There are two approaches, one is the taxable capital of a corporation’s stated capital (capital stock) plus surplus. Taxable capital for an annual report is based on the end of the corporation’s last accounting period in the calendar year prior to the calendar year in which the report is due. The tax rate on taxable capital is 0.25 percent per year of privilege period. Earned surplus for an annual report should be reported beginning with the day after the ending date on the previous franchise tax report and ending with the end of the corporation’s last federal accounting period in the calendar year prior to the calendar year in which the report is due. The tax rate on earned surplus is 4.5 percent.

There is an easy way that the California Franchise Tax Board will determine if you are doing business in California, they will subpoena your business credit card and look at where the transactions take place. If they are all in California for example, and you formed a Nevada LLC and did NOT register to do business in California you will be subject to the California franchise tax fee plus penalties and interest. From California’s point of view, if you were doing business in Nevada and lived in California, most of your expenses should be where you are doing business. This is a good rule of thumb for any state. Does this mean anytime you go into another state your LLC or Corporation will have to foreign register? No. But more times than not you may be doing business in another state and not be realizing it and be subject to state taxes. The best way to blow this is to hire employees in another state. If you do that the entity will need to foreign register and pay taxes in that state. You may be thinking is having independent contractors an exception? Yes, that does not constitute doing business in another state. Does that mean the solution is just to have independent contractors only work for your company outside your state? No. You must follow the IRS’s test for employees vs. independent contractors. Don’t wait until it is too late to find out you really have employees working for you! Here are the tests: https://www.irs.gov/newsroom/understanding-employee-vs-contractor-designation

When I started NCP back in 1997, several times during the first two years went to speak to Deloitte, the big global tax firm and invested $400-$600 per hour to understand these basic concepts because no one in our industry was addressing these issues or concerns.

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Strategies to Access More Money for Your Business

Nov 25, 2017 by

With the economic environment and changes in technology, you must look at new strategies and some twists on old strategies to access more money for your business. Cash flow is king and it is a must.

Let’s start with the easiest and fastest way in which is to raise your prices. That by itself is not a new idea but how you go about raising prices, the reasons for such is new. You already know that if you want to bring 10% more to the bottom line raise your prices by 10%, if you do the opposite (which many do in this economy) you will lower your bottom line by 10%. That can be very bad if you are already losing money. One part is to be very clear on your cost of goods sold and your profit margins on different products and which products or services will lead to upsells and more customers.

The key is how you go about raising your prices and how that is presented. Here are some tips to do it effectively:

  • Bundle other services together (especially one with a higher perceived value and low cost) and come up with a new compelling name for that new bundle of services and package. That is a clever way of raising prices.
  • Emphasize a new improvement in your product or service, which could be speed (people will pay a premium for that) or performance or service advantage. Perhaps you are already doing things fast but maybe you create an actual service for “express service” vs. regular service and give your customers an option for speed. I have always suggested this to my CPA to charge an “expedited tax service” especially those who wait the last night to get all their tax information to them. It is a clever way to raise prices.
  • Change the “Who” you are selling to so that the market may be thinking your prices are a bargain. This works well when you start selling to the affluent market. Search Dan Kennedy, “No BS, Marketing to the Affluent”. If you only have “cheap” customers it is most likely because that is who you are marketing to and your marketing materials and sales copy may be leading people to believe that your products and services are lower priced and that may be the reason you are having an issue raising your prices. Just model some of the products or services in your industry that are higher end and look at their copy, websites and marketing materials and see where you can improve.

Master up selling at the point of sale is a must (the key is how you go about it). I would guesstimate 90% of small business still don’t do it. Big businesses get this! You can’t go to a Walgreens to get gum, a birthday card, or some cough drops to go through the checkout counter only to be asked if you would like a candy bar with your cough drops (which makes no sense). An improvement would be a better matched upsell based on what is being purchased, like a vitamin C packet with the cough drops. But at least they are doing it. McDonald’s does it, banks do it, and almost every major company will ask you for a small upsell at the point of sale! That small upsell ad up and you need to figure out that every product you offer what small or large upsell can you offer either on your website or when your clients or customers call you. You must train and MEASURE (otherwise nothing will happen) with your staff and this is now mandatory! You may give rewards for the most upsells in a month (a great way to start the momentum). You may need to actually script this out for your staff, for a couple of reasons, one to be consistent, and second to test what is working or not!

Better bundling will lead to more profits! You can offer one product with another. You have to work on bundling and ways of positioning complimentary products together. I would recommend you come up with a new creative name for the new bundled package that gives an implied greater benefit vs. the standalone product or service. You can also use Amazon’s model of when someone buys a book or product they share the most common other books or products bought by someone who made the first purchase. They are testing to see how often that triggers someone to buy a second or third product. Did you ever buy a domain on GoDaddy®? You are presented with so many upsells and bundle options. This is very similar if you buy a plane ticket on Orbtiz®, there are several packages and bundled options. But are you doing this in your own business? If you are, congrats! Now, what can you do to improve what you already have working? Are you testing names, combinations, copy, graphics? You may be not doing this and this is a must to maximize your results. You must test and see what will work better to make those improvements. We started doing this again on one of our websites and tested three different landing pages and one
out pulled the other by 4x the amount! That is huge over time.

JV creatively. If you are not getting many companies to promote you to their list at no cost to you then look for a smaller win. Perhaps you can trade a banner post on each other’s blog. Perhaps you can trade a “P.S.” in an email blast you are both doing to help cross promote. If you each have a loyal following and valuable list why not cross promote! You have to be the one suggesting new and simpler methods to JV. You may even hire someone to make JV calls on your behalf to set appointments. If you have someone doing that now for new clients or customers why not have them spend 1/5 of their time making calls for JV opportunities for your business. That is what we do at NCP.

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Simple vs. Complex Solutions

Nov 18, 2017 by

What will help take your business to the next level? Perhaps the next level isn’t even a goal, perhaps getting started with revenue is your goal. In this economy I see so many small business owners looking for “magic dust” to solve their revenue or business challenges. This is, of course, fantasy land.

One school of thought focuses on the brutal harsh reality that being successful requires complex solutions.

You want to hold your own seminar because you were at one recently and there were 150 people in the room and you saw all the sales in the back of the room and you thought, “Wow, at least 50 people invested in programs to improve their business and the average price was $2K, which means that event generated over $100K in sales plus ticket sales! That was simple, I can do that.”

What no one tells you is that to get 150 people to show up at an event (especially in this economy) it can take a 75-150 step process, with everything from emails, to postcards, sales letters, marketing pieces, preview calls, training calls, affiliate efforts, etc. It is a very complex process. Unfortunately, most things work the same way; an effective website that drives traffic and converts to leads then sales is a whole lot easier said than done.

In the search for solutions for your business challenges, first, realize that each step required to be a success may involve complex solutions. Nothing wrong with that (other than the hard work and time involved) and when you realize that and become consistent and frequent in the steps you do to create more business, you will be a huge success!

As I’ve mentioned before, Dan Kennedy has said, the reason 99% of the people are poor and 1% are rich is that the 99% that are poor want to buy simple solutions to complex problems. The 1% that are rich, realize that complex problems require complex solutions BUT when selling make sure you offer simple solutions to complex problems. Because that is what people want to buy! They want simple.

Any tools that you invest in to improve your business (some software programs are exceptions) will require a lot more work, time and probably expenses involved then what you are being told on the front end. We would prefer to work with those that realize at one level or another that it really is complex solutions involved.

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Costly Mistakes to Avoid as an Officer of a Corporation or Manager of an LLC!

Oct 10, 2017 by

Forming a separate legal entity is a huge step in separating your personal and business liability. You obtain liability protection with a separate legal entity the day you file the LLC or Corporation.

What most people do not realize is that after day 1 and beyond you are not protected unless you operate the entity as a separate legal entity.

That involves avoiding commingling of funds, proper capitalization and proper minutes and resolutions as your role as the director, officer, shareholder or manager, member or member of an entity.

Typically as a director of a corporation or a manager of an LLC, your liability is limited personally. As long as you operate within your role as the manager of an LLC or director of a corporation. Nevada will protect you as long as you do not commit fraud. Other states have a minimum fiduciary duty or duty of care.

Let me cover for you the biggest mistakes we have seen over the years that have caused unnecessary liability to directors, officers and managers:

Not using your corporate or LLC title
when signing contracts, checks, documents, licenses…followed by the name of the entity. Signing your name without any title or reference to your company may mean that you are representing yourself personally and that brings personal liability to you. You presented yourself as an individual vs. the manager of an LLC. That is a huge mistake.

Continuing to operate as a sole proprietorship even though you have formed a separate legal entity.
This is a big one. This means you are operating a business in your own name, for a month or several months before you formed the LLC or Corporation. Perhaps you filed a DBA name (doing business as) like Marketing Solutions
and the new LLC is Marketing Solutions, LLC and you are still doing business under Marketing Solutions with the bank account in that name under your SSN. That is a huge mistake! Reconnect that DBA name to the new LLC or Corporation. You do that by dissolving the DBA linked to you as the applicant and re-file that same day a new application with the LLC as the applicant. Now the DBA name is connected to the LLC or Corporation for liability and tax purposes.

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