Is Your Foundation Complete?
Even if you have been in a business for years with a separate legal entity and your business, it makes sense to check in and determine if your foundation is complete. Perhaps you establish only a couple parts of a complete foundation and moving forward this is a great time to make sure it is complete.
Let’s address the 5 areas of a complete foundation for your business and the main areas to address in each category. Some of these main seem simple, but sometimes the simple ones that you don’t do are the ones that come back to haunt your business down the road.
- The formation of the LLC or Corporation.
- A separate EIN number for the entity. Sometimes people make the mistake of using an EIN number for a past entity or a sole proprietorship. Remember, each entity is a separate legal entity and requires its own identifying EIN.
- A record book that has been completed. This means have you taken the time to complete all the initial minutes and meetings and appointment of managers or directors and officers. Also, have you update the annual minutes and minutes for the entity? You may have completed the initial record book and even issues membership interest or stock but never added any other formalities over the years. If that is the case I would recommend you listen to my interview with attorney Sherwood Cook on corporate responsibilities and implement what he recommends to get back on track. If you don’t want to do the work you are able to pay him and his firm to do this for you: http://budurl.com/CorpCompliance
- Was the entity properly capitalized? If you are the member or shareholder did you personal put any money into the entity bank account in exchange of ownership? Perhaps you contributed assets as part of your capitalization. If you contributed services that will be a taxable event. If you have a partner this is especially important to make you properly capitalize the company. How much should that be? That is a question that varies. Does the capitalization need to be $20K? Not necessarily. In most cases, at least in Nevada, capitalization as low as $200 was determined ok, in other states that may not be the case. If you have partner and you both own the company 50/50, you might want to at least put in $1K each.
- Did you make a complete transition from a sole proprietorship to a separate entity? You may think this sounds silly especially if you have been operating through an LLC for three years or long but you would be surprised at the mistakes that are made. For example, if you had a DBA name before the entity did you keep the same DBA name when you operated with the LLC and forget to reconnect the DBA to the new entity not to you personally? This happens and this basically means you are still operating a sole proprietorship for everything you title to that DBA name. Did you ever establish a separate bank account for the new entity? Most of you probably have but again you would be surprised how many are using the same bank account tied to the DBA name (which was never attached to the new LLC).
- Did you apply for a separate business credit card under the EIN number linked to the separate legal entity? If you are still using your personal credit card that is not helping your business. There are some steps from a business credit point of view to make sure you company is in compliance, like a real email address, web site, 411 listing for your business, but then the next step is to ask the bank about the application process for a business credit card. Some banks will not grant a business credit card until the entity has been around for one year. Some banks will tell you to apply but don’t know the rules on the bank end and criteria. You also want to find out what your personal credit score has to be and what personal credit bureau they pull that score from before you apply. The benefit of having a separate business credit card is that the debt does not appear in your personal credit bureaus when it is under the EIN of the entity. That helps protect your personal credit score.
- Does your business even have a business license? Even if you are a home based business you should find out if one is required in your city or county. You may live in an area that does not allow you to have a license from your home. You may have to go to a license handing service to pay a few for your license. You may be in a business that has an exception and a local business license is not required. Most business license agencies are looking for revenue and are getting smarter with creating new categories. Does your business require a sales tax number? Even if you sell online and ship a physical product you should have a sales tax number for products sold in your own state.
- Corporate formalities are also a part of compliance on an ongoing basis. This was covered in the first area under foundation.
- Payroll. If you have an LLC taxed as an S corporation, an S or C corporation you should have payroll at some point when the mangers, officers or employees are being paid. Keep in mind if you have an LLC taxed as a partnership with NO outside employees there is NO payroll for the partners, only guaranteed payments. Guaranteed payments are taxed like earned income, but payroll is not required because partners are NOT employees. You may have independent contractors who are not employees but just make sure they meet the tests of an independent contractor and are NOT considered employees. We would recommend you use a payroll service like ADP who is the biggest in the business. They have turn key solutions that are inexpensive on a monthly basis to keep your business in compliance with all the employee rules and regulations. It is well worth the $50 or so per month investment to have them handle all of that for you plus the payroll taxes that are due and end of the year filings. In the NCP members areas at ncpmembers.com there is a payroll webinar with ADP and goes through all the requirements. After watching it, I bet there will be no way you want to handle all those requirements with local, state and the federal rules. It is much easier to pay ADP to help you keep in compliance.
- Are you operating a business and not a hobby? If you are profitable this does not apply to you except the fact that if you are just barely profitable there may be some of these things you should consider doing. The IRS expect you have separate accounting software to run and operating your business. I am not sure how you would do it otherwise. The worst approach is operating your business based upon your checking account balance as the your only source of measurement. You should also be tracking monthly a budget, your profit and loss and your profit margins (there is a lot more to track but this is a start). Separately, you should have a five year business plan for your business. Even as a solopreneur the IRS expects that you have a business plan like a real business! Here is a great resource on those other areas to measure in your business for success. This was an earlier Top 5% Club interview with Nathan Smith with actionCOACH, where he covers the 5 drivers for business success: http://budurl.com/FiveDrivers
- Are you maximizing your meals, travel and entertainment expenses in your business? Don’t plan on your CPA taking care of your taxes it is your responsibility for you to understand how to maximize your business write offs. Unless you are paying for tax planning on top of your tax work to be accomplished you are MOST likely over paying your taxes. Here is a great resource called Taxbot to help you with a tool and online tips to help put more profits in your pocket, http://budurl.com/taxbotsystem.
- Tax compliance. It is YOUR responsibility for proper documentation of your business expenses, not your CPA. You must document your expenses and that does not mean show up with receipts, and credit card and bank statements for your CPA, that is NOT good enough. You may have legitimate expenses disallowed without proper documentation. The best took that will track your mileage through GPS and scan all your receipts and ask you the key questions for substantiation that is request, which is Taxbot, http://budurl.com/taxbotsystem, again go here to order this great tool that works on an iPhone or Android.
- It is a MUST to properly separate your personal and business credit which will put your business in a business position to secure funding in the future when it is needed to grow. You are probably very familiar with your personal credit score and how that works but you may not be aware of your business credit score and the significance of that. A business credit score goes from 0-100 and there are three business credit bureaus, Dun & Bradstreet®, Corporate Experian® and Corporate Equifax®.
- The purpose of building a strong business credit score, 80 or higher is ideal, is that is one of several criteria that come into play to determine how much funding your business will secure. It is especially important when it comes to vendor credit which helps preserve your cash flow and also build up your business credit score with the business credit bureaus. Now banks and other lenders will look at the quality of your business credit score and rating to determine if they should lend to you (plus other factors like business revenues, profits and your personal credit score). What you may not know is what is EVEN MORE IMPORTANT is that joint venture partners, bigger clients and organization may be checking our your business credit report without your knowledge (totally legal) and deciding NOT to do business with you because your business looks financially naked. I know you TELL a good story over the phone but how does your company look with Dun & Bradstreet®? You should go to Dun & Bradstreet® yourself and invest $61.99 to . Even on the D&B website they say that ever day 260 businesses file for bankruptcy and that D&B is your early warning system. What does that mean? It means before you do business with someone check them out! That may be costing you a lot of money even if you are a profitable business but your look like nothing with D&B because that is what your potential clients or JV partners will see. That is bad for business.
The purpose of any business is profitability. The fastest way to profits is to leverage other people’s money (OPM) through joint ventures. First, you want to find out where you ideally clients and customers go for first business. Second, approach those businesses and look to add value to their clients and customers who then may look to your product or service after. When you approach this effectively you will be getting FREE advertising because the host company has to send a message about what value you bring to their list and that will endorse you and your business. I would recommend you schedule time on your calendar for joint ventures to help your business grow. This is the fastest way to grow your business.
If you need support with any of the components of a complete foundation please call our team at 1-888-627-7007 or if you are outside the U.S. 1-702-367-7373.