Costly Mistakes Made with Your Business Entity

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!

 

read more

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

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.

read more

How to Work Backwards to Solve Any Business Problem

by

Short and long-term success in your business will be the result of your ability to solve business problems which may include everything from legal, tax, management, marketing, lead and client issues. Successful entrepreneurs make decisions quickly and are slow to change their mind and unsuccessful people are slow to make a decision and change their mind quickly and often.

The first step is to look at any problem as an opportunity. If you have a client who complains about a portion of your website that does not work, instead of getting frustrated at the client, look at that as a real opportunity to improve your website. When you think about it, you are not even paying these people to point out your flaws and areas you need to improve. You are receiving free advice on areas that need fixing! Reframing what the problem means is step 1. You are changing the meaning to be that of an opportunity to improve!

One of the main reasons business owners do not solve many problems and it feels and looks like their business is not moving forward, they immediately conclude that is not working so let’s do something else.

A common example if your business is looking for more lead generation and you put more time and energy into social media this past month and you notice you have very little results and you immediately stop that next month and focus on article writing. After that does not work you invest your time in video marketing. You are consistently jumping around from one lead generation strategy to the next vs. digging deeper into “what part” of the first strategy did not work to the level you were hoping it would.

Here is my formula to solve any business problem

1. Clearly, define the problem and avoid generalization. Example, my lead generation is not working vs. my Facebook ads are not working to the level I had estimated. I am only receiving 100 clicks per week but only 10 opt into my list.
2. State your goal specifically and a time frame. My goal is to receive 100 opt-ins to my list per week starting in three weeks.
3. Focus on what part you can change (or test three parts at one time) to determine if that will help solve your problem. If you do have a team or a group to mastermind, allow others to give input to solve the challenge. I would recommend you use the Disney approach and when you brainstorm solutions allow for those ideas to flow without evaluation in the moment. If you start to evaluate ideas while people are still offering solutions you will find that many will shut down because their idea may be “dumb” or of no value.
4. Implement the new ideas to solve your problem.
5. Measure if you are getting closer to solving your problem. Specific measurement is a must. If you have leads you are looking to manage you may want to measure the ratios between a call to approach, approach to presentation, and presentation to close. Measuring ratios will help you isolate what part of your presentation is not working for you and where you need to focus your improvements.
6. Repeat steps 4 and 5 until you solve at least a PART of the problem or the entire problem. Other tips for success:

  • Model someone else who has solved the problem already. Find out what they are doing differently than you.
  • Find a coach or mentor who has experience in the area where you have problems. For me I did not have any management experience so I hired mentors in the area of management.
  • Focus on making small improvements in your business!
  • Allow yourself to win the game!
read more

Related Posts

Share This

Ask Better Quality Questions and You Will Get Better Quality Answers

by

If things are not working in your business it comes down to asking better quality questions. If you want to pay less in taxes and protect your assets better…better quality questions are the answer. I learned from Tony Robbins years ago, if you ask a lousy question, you will get a lousy answer. Here are some examples of lousy questions that I have heard from business owners over the years: “Why does this always happen to me? Why doesn’t this work for me? How come I always get killed in taxes every year? How come I never have enough time? Will it work out this time? Why are all my prospects broke or cheap? Why doesn’t my marketing ever seem to work?

Here is what I know for sure, you and you only are in charge of the quality of the questions you ask yourself. If you want to improve the quality of your business and your life, you must ask better quality questions. Here are some examples:

1. What specifically can I do today to bring in more quality leads from Facebook?
2. What specifically can I improve today on my landing page to improve opt-ins?
3. What specifically can I change now in my approach to bring in more joint venture partners?

Do you see a pattern already? The first part is to ask specifically, not generally. When you ask specifically your brain has to search for a more specific way to get a result. This is a must. The second part is about accountability, something you have control over. It does not say what specifically does everyone else have to do ….it says, what specifically can “I do” today. That is a huge difference. The third part is a time frame that you want the result. If you don’t say today or now, you may be just putting your goals, improvements or results in the future. Every day, week and month go by and your results are STILL in the future! That is a PART (not the only reason) why you may not be achieving them! These are very specific tips from my NLP (neuro-linguistic training) over the years. You may find that you may be still not getting your goals. Another step to add that will help is to ask another empowering question called an “ecology question”. An “ecology question” is one where you check into the future to determine if you achieving this goal will it harm or hurt anyone? You may be thinking why would making more money hurt anyone? What if you are away from your family 70 hours per week and your spouse has to do twice as much work? What will the effects be on your relationship?

Here are some other empowering questions that you may want to write down and put in front of you each day to help with your results and energy level:

1. What am I most excited about today in my business?
2. What was the best part of my day today?
3. What am I looking forward to today in my business?
4. How specifically can I generate more joint ventures today with more quality target leads?
5. What can I do today to be more productive with my time and work 2 hours less and be just as or more effective than previously?
6. How can I delegate more work to free up my schedule to spend more quality time with my family?

Another key to getting results in this area is to fully associate to the question and feeling, not just ask it, get an answer for a moment and move on. What I mean by fully associate is to discover what would it sound like to be fully excited about the day, what does it look like, what does that really feel like when you are excited about the day and allow yourself a couple of minutes to step into that amazing feeling! If you are not looking forward to some part of your day ask, “What part could I be excited about during this part of my day?” The key language is “what part” which means one part your brain immediately searches for, there is nothing I am excited about I have a lot of work. Your goal is to find a part of that work that you could be excited about. Maybe you are going to have a new breakthrough and it will help with another project to move it along. That may be the part that is beneficial. This is not always easy,
especially when things are not going well in your business, but this alone will help change your state and get you back on the right track to results faster than anything else you can do. Changing your physiology is key also and to do that you will have to ask a better quality question up front.

read more

Related Posts

Share This

Is Your Business Screaming For An IRS Audit?

by

As tax time nears you should be aware of the trends that are clear – the IRS is targeting more small businesses for audits and they’re denying deductions left and right.  Sole proprietorships are especially at risk. I have confirmed with my CPA networks that there is a huge risk to continue to operate as a sole proprietorship. Our CPA contacts are also recommending that you should get off schedule C in 2014 ASAP.

Here are just a few of the audit trigger red flags that IRS agents are watching for:

  • claiming 100% business use for your vehicle (this will almost certainly invite an audit)
  • large deductions that seem out of proportion for the business (this is what their computer systems look for)
  • any schedule C deductions for business travel, meals or entertainment (you are able to take these deductions but if excessive and if audited not documented properly you are toast)
  • hobby losses claimed as business expenses (you best be able to prove you were a real business)
  • regular wage income combined with large schedule C losses (you must prove you had a real business, which we teach you those requirements on the training below)
  • any documentation that doesn’t meet their strict substantiation requirements (this is NOT your CPAs responsibility, it is yours)

 The vehicle deduction is a very common slipup. The IRS knows that 100% business use is extremely rare, especially when there’s no other vehicle for personal use. Activities like photography, dog breeding, car racing or other sports or outdoor activities are tough to substantiate as business expenses because they look like hobbies to the IRS.

Could your business be sending an “audit me!” message to the IRS? The surest way to protect yourself is to establish a complete foundation for your business, starting with a properly formed separate legal entity. Do you know the 5 essential elements of a complete business foundation? Take advantage of this brief, free training to find out where you may be vulnerable to the IRS!

*******************************************************************************
NEW TrainingThe 5 Essential Components for a Complete Business Foundation: 
http://budurl.com/LaunchWithConfidence

Pick your time and date to be part of this special training.

read more

Year End Tax Responsibilities for an Entity

by

This is an important message if you have an entity that has a December 31st year end which includes, LLC taxed as a partnership, S corporations, disregarded entities and S corporations.

Since the tax year end is only a few weeks away it’s very important that you touch base with your CPA/accountant to see if there are any last minute tax planning strategies you should implement in December – not in January when the year is over and your chance to reduce your tax bill is gone!

Perhaps you haven’t done December tax planning in the past. That’s common because most business owners don’t pay for any tax planning and just show up to the CPA’s office the following year when the taxes are due. This is the MOST expensive approach because you can’t make retroactive changes.

By the way, if you’re not already working with a CPA/accounting firm we do have a good recommendation for you – but more on that in a minute.

For now, here are a few key end-of-year tax planning strategies you want to have in place:

  1. If you have an S corporation (or LLC taxed as an S corporation) did you have any payroll in 2013? If you only had distributions with no payroll that would be an issue.
  2. Are your books current with year-to-date profit and loss? That’s important because if your business is profitable there may be some end-of-year expenses you can use to lower your net profit and taxes owed for 2013. You can only do that if your profit and loss records are up to date.
  3. Have you properly documented all your deductions throughout the year as required by law?
  4. Even if you had no profits in 2013, will your books and accounting practices for the year be viewed by the IRS as a business or a hobby? They aggressively search for people trying to disguise personal hobby expenses as business losses on a “guilty until proven innocent” basis.
  5. If you’re outside the U.S. are you and your family adequately prepared for U.S. tax rates and tax treaties that apply to your country?

These are all important factors that can be addressed before the end of the year – with a potential for substantial tax savings. Are you working with a tax firm that’s fully supporting you in these areas? NOW is the time for an expert review of your business – it’s important to get these protections in place BEFORE the tax year is over! Plus, you’ll be in a better position for IRS compliance and tax savings going into 2014.

read more