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Critical Issues for Startups and Small Businesses

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by

Gary Arnold

on 8 November 2012

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Transcript of Critical Issues for Startups and Small Businesses

Formation Strategic Planning
Locations
Office systems
Phones
Internet
Security
Develop acceptable use and privacy policies
Develop Advisory Board (CPA/Attorney)
Credit PCI compliance issues Other Business Considerations Develop Marketing plan
Business logo, business cards, stationary
Develop online presence
Domain name
Webpage
Social media
SEO services
Press releases
Radio, newspaper, phonebooks & TV Marketing Employee skills and training
Independent contractors VS Employees
Establish employee pay scales and benefit packages
Employee contracts
Non-Compete agreements
Non-Disclosure agreements
Obtain I-9 & W-$ forms
Determine employee review processes
Develop employee manual Employees/Human Resource Customers
Customer terms
Credit approval forms
Return and account adjustment policies
Vendors
Credit application form
Vendor terms
Flooring lines Customer/Vendors/AR/AP Budgets and Financial Forecasts
Capital requirements
Use of capital
Revenue and expense forecasts (Monthly)
Cash flow budgets (Monthly)
Responsible Parties
In-house accountant
Hire and train accounting staff
Internal controls
Outsourced
Accounting Systems
Payroll systems
Financial and management reports Accounting/Tax/Bookkeeping Tax ID numbers
Federal Tax ID Number (EIN)
State Withholding
State Sales Tax
State Unemployment
Workers Compensation
Other Industry Specific
Hotel
Restaurant
Fuel Federal & State Compliance Accounts EXAMPLE:
Member C buys Member A’s 50% membership interest for $100,000 cash
Asset held by LLC is a building worth $200,000 with a basis of $25,000
A valid IRC Sec. 754 election is in place
Member C’s outside basis will be $100,000 and the LLC will step-up the basis of the building to $112,500 from the $25,000. Member C will receive special allocation of depreciation on his share of the new adjusted inside basis of the LLC. The $100,000 will be depreciated with the depreciation allocated directly to Member C. Combination of Entity Structure Accounting will be unaffected by (owner perks or adjustments)
This is critical to maximize business value. The EBITDA calculation will not have to be adjusted for “adjustments” when business valuations are performed.
Under this structure each members will be able to utilize their own S-corp for their individualized perks (for example if one of the owners wants to write of his plane, car, race team etc. he can do it his S-corp)
Potential IRS adjustments relating to “perks” will be at the S-corp level thus allowing the group to be unexposed for someone else’s perk
Income can be allocated by production or any other method
Business operating expenses and future investment will be made out of one set of records
Future business opportunities can be spun off easily and potentially without taxation
Centralized benefit management and administration such as health care plans and retirement plans for owners and staff Combination of Entity Structure Advantages:
A step up in the basis of the company assets when partner a retires or is bought out for remaining members (IRC Sec 754)
Retiring member could (subject to the types of assets held by the LLC) get capital gain rates on income from sale of an interest
Income can be specially allocated
Income items retain characteristics when they flow through to partners, such as dividends interest and capital gains
Assets contributed by members are not subject to a gain unless the liabilities exceed the basis of assets contributed
Basis of assets contributed are attributed to the member who contributed the assets (this is important if the assets are later sold by the LLC the gain will be specifically allocated to the member who contributed the asset) Limited Liability Company Advantages:
Raise capital by selling stock
Easy to take company public
Low Corporate rate on the first $50,000 of taxable income at 15% Fed rate and 5% State rate
When a shareholder sells stock the gain is a capital gain C-Corporations Strategic Planning/Corporate Cultures
Financial and Accounting
Corporate Governance
Corporate Documentation
Business Succession
Human Resource
Tax and Government Compliance
Proper Business and Tax Structure for Ownership Changes
Asset Protection Critical Issue Checklist Choosing Bank
Open Business Checking Account
Cash Management (Sweep Accounts)
Business Credit Card
Line of Credits
Used for temporary changes of cash (NOT TO PURCHASE ASSETS)
Business Loans
Term Loans (USED TO PURCHASE ASSETS) Banking In partnership taxation (and LLCs electing to be taxed as partnerships) inside asset basis adjustments can be adjusted by outside member interest transactions. Under IRC Sec. 754 and election can be made that will allow the basis to be stepped up to assets held by the LLC for membership transactions.

With a valid Sec. 754 election in place now members will not inherit built in gains for inside assets held by the LLC when they contribute assets for membership interests or if they buyout existing members. The outside basis for the member buying in will match the inside basis of the assets held by the LLC in proportion to the new members membership interest. The new member will receive a special allocation of deductions and depreciation reflecting this stepped up basis of assets and related depreciation or amortization for those assets. Combination of Entity Structure Recommendation
Using different business entities will allow a company to utilize the advantage of several different entity structures
Using an LLC as an operating company will allow the business to take advantage of all the tax benefits available under partnership taxation
Each member of business would create an S-corporation to own the interest of the operating company
Each S-corporation would then be owned by the member Combination of Entity Structures Using an LLC and S-Corporations Advantages:
Avoid double taxation of profits
Avoid self-employment tax by paying reasonable wages to owners
When a shareholder sells stock the gain is a capital gain S-Corporations Troy R Martin, CPA
Cook Martin Poulson, PC Critical Issues for Startup
and Small Businesses Formation Disadvantages:
Double Taxation of profits. Corporation pays and shareholder pays if dividends are issued
Company has to take special care to control the amount of income subject to corporation tax rate by paying additional wages to owners, which will generate more payroll taxes.
Income tax audits are more common with C-corporations and can be costly
If personal expenses are deducted and adjusted by an audit the company will have to pay tax as well as the officer, owner would have to pay tax on a constructive dividend
When property is contributed by a shareholder a gain must be recognized by shareholder if they transfer property to a corporation if they don’t own at least 80% of voting stock and 80% of all other stock. (IRC Sec 351)
Gain must be recognized on assets other than cash are distributed to owners
Gain is calculated by determining fair market value of the assets less it’s tax basis
Capital gains are taxed at same rate as ordinary income at the corporate rates
No step up in basis for inside assets of company for remaining shareholders when shareholder retires or is bought out (unlike an LLC)
Losses are not passed through to individuals and can only be deducted at corporate level
Disadvantages:
No step up in basis for inside assets of company for remaining shareholders when shareholder retires or is bought out (unlike an LLC)
Distributions for shareholders must be equal
Income is reported according to ownership percentage and can not be specially allocated otherwise unequal distributions will create a second class of stock and revoke the s-election
Number of shareholders is limited to 100
When property is contributed by a shareholder a gain must be recognized by shareholder if they transfer property to a corporation if they don’t own at least 80% of voting stock and 80% of all other stock. (IRC Sec 351)
Gain must be recognized on assets other than cash are distributed to owners
Gain is calculated by determining fair market value of the assets less it’s tax basis
Can only have one class of stock Disadvantages:
Partners could pay self employment tax on income
Every time ownership changes the operating agreement must be changed Operations - Advantages Member Interest Buy-Ins, Buyouts, and Retirements - Advantages Member Interest Buy-Ins, Buyouts, and Retirements - Advantages
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