To LLC or not to LLC?

If you're thinking about taking the leap this year and finally organizing your business as an LLC, now is a great time to consider it!  It can protect your business as well as offer tax incentives for its members.  Here are some points to consider when deciding how to structure your small business.

LLC: Pros and Cons of a Limited Liability Corporation
By Andrew L. Wang
Nerdwallet.com


The limited liability company was first offered as an option for structuring businesses 40 years ago in Wyoming. By the late 1990s, all states had laws authorizing the organizing of businesses under the hybrid structure. Today, LLCs are growing faster than any other business type, according to the IRS.

What is an LLC?
An LLC is a business structure that combines the simplicity, flexibility and tax advantages of a partnership with the liability protection of a corporation. An LLC can have one or many “members,” the official term for its owners. Members can be individuals or other businesses, and there is no limit to the number of members an LLC can have.

About 2.4 million U.S. businesses identified as LLCs in 2014, according to the latest figures available from the IRS. Take a look at these advantages and disadvantages to help you decide whether an LLC is the right structure for your business.
Small Business LLC Pros and Cons

LLC: The Pros
Choosing to structure your business as an LLC offers a number of advantages:

Limited Liability
Members aren’t personally liable for actions of the company. This means that the members’ personal assets — homes, cars, bank accounts, investments — are protected from creditors seeking to collect from the business. This protection remains in place so long as you run your business on the up-and-up and keep business and personal financials separate.

Pass-Through Federal Taxation On Profits
Unless it opts otherwise, an LLC is a pass-through entity, meaning its profits go directly to its members without being taxed by the government on the company level. Instead, they’re taxed on members’ federal income tax returns. This makes filing taxes easier than if your business were taxed on the corporate level. And if your business loses money, you and other members can shoulder the hit on your returns and lower your tax burdens.

Management Flexibility
An LLC can opt to be managed by its members, which allows all owners to share in the business’s day-to-day decision-making, or by managers, who can be either members or outsiders. This is helpful if members aren’t experienced in running a business and want to hire people who are. In many states, an LLC is member-managed by default unless explicitly stated otherwise in filings with the secretary of state or the equivalent agency.

Easy Startup and Upkeep
Initial paperwork and fees for an LLC are relatively light, though there is wide variation in what states charge in fees and taxes. For example, Arizona’s filing fee for articles of organization is $50, while the fee in Illinois is $500. These variations aside, the process is simple enough for owners to handle without special expertise, though it’s a good idea to consult a lawyer or an accountant for help. Ongoing requirements usually come on an annual basis.

LLC: The cons
Before registering your business as an LLC, consider these possible drawbacks:

Limited Liability has Limits
In a court proceeding, a judge can rule that your LLC structure doesn’t protect your personal assets. The action is called “piercing the corporate veil,” and you can be at risk for it if, for example, you don’t clearly separate business transactions from personal, or if you’ve been shown to have run the business fraudulently in ways that resulted in losses for others.

Self-Employment Tax
By default, the IRS considers LLCs the same as partnerships for tax purposes, unless members opt to be taxed as a corporation. If your LLC is taxed as a partnership, the government considers members who work for the business to be self-employed. This means those members are personally responsible for paying Social Security and Medicare taxes, which are collectively known as self-employment tax and based on the business’s total net earnings.

On the other hand, if your LLC files forms with the IRS to be taxed as an S corporation, you and other owners who work for the company pay Social Security and Medicare taxes only on actual compensation, not the whole of the company’s pretax profits.

Consequence of Member Turnover
In many states, if a member leaves the company, goes bankrupt or dies, the LLC must be dissolved and the remaining members are responsible for all remaining legal and financial obligations necessary to terminate the business. These members can still do business, of course; they’ll just have to start a whole new LLC from scratch.

How to Start Your LLC

• Choose a name: Register a unique name in the state where you plan to do business. To make sure someone else doesn’t have your business name, do a thorough search of online directories, county clerks’ offices and the secretary of state’s website in your state — and any others in which you plan to do business. For a fee, many states let applicants reserve an LLC name for a set period of time before filing articles of organization.
• Choose a registered agent: The registered agent is the person you designate to receive all official correspondence for the LLC. It’s crucial that you nail down who this person will be before filing articles of organization, because states generally require you to list a registered agent’s name and address on the form. Though people within the company are usually allowed to serve in this role, states maintain lists of third-party companies that perform registered-agent services.
• File articles of organization: This is the step that essentially brings your LLC into existence. States request basic pieces of information about your business, which, if you’ve thought through your business plan and structure, should not be hard to provide. You’ll be asked to supply details like name, principal place of business and management type.
• Get an employer identification number: The IRS requires any business that has employees or operates as a corporation or partnership to have an EIN, a nine-digit number assigned to businesses for tax purposes. The rule applies to LLCs because, as creations of state laws, they’re classified for federal tax purposes as either a corporation or a partnership.
• Draw up an operating agreement: Your operating agreement should include specific information about your management structure, including an ownership breakdown, member voting rights, powers and duties of members and managers, and how profits and losses are distributed. Depending on the state, you can have either a written or oral agreement. Many states don’t require one, but they’re a useful thing to have.
• Establish a business checking account: It’s generally good housekeeping to keep business and personal affairs separate. Having a separate checking account draws a bright line between the two. This is critical if you want to mitigate any potential risk to your personal assets if a lawsuit calls into question your business practices.

To view the original article, click here.

Analyzing Income Statements

As a small business owner, it's important to track your growth to remain sustainable. It's much more of a month-to-month task than it is for larger corporations.  But being able to interpret your finances once you track them is equally vital to sustainability. Here are two ways to analyze your income statement as an investor in yourself and your business and to potentially attract outside investors!

2 Ways to Analyze an Income Statement

By John Szramiak 

March 19, 2017

As an investor, you should be digging in to a company’s financial statements.

However, you can’t look at these financials in isolation – it’s important to compare a company’s results to other companies in the selected industry, companies outside of the industry, and against other years to determine whether or not that company might actually be an attractive investment.

This causes difficulties, since it’s hard to compare companies of different sizes. For example, if Company A has $3,000,000 of debt outstanding and Company B has $30,000,000 of debt outstanding, is Company A less risky than Company B? We have no way of knowing, because we don’t know the cash positions of Companies A and B, how profitable Companies A and B are, etc.

Fortunately, there are two forms of analysis that we can perform that will help us look at income statements and balance sheets of different sizes, so that we can compare apples-to-apples – they are: horizontal analysis and vertical analysis.

Both are very easy to understand. Let’s start with horizontal analysis.

WHAT IS HORIZONTAL ANALYSIS?

Horizontal analysis, also called time series analysis, focuses on trends and changes in numbers over time. Horizontal allows you to detect growth patterns, cyclicality, etc. and to compare these factors among different companies.

As an example, let’s take a look at some income statement items for Apple and Google.

It’s almost impossible to tell which is growing faster by just looking at the numbers. So we have to do some calculations. We can perform horizontal analysis on the income statement by simply taking the percentage change for each line item year-over-year.

By using horizontal analysis, we can now clearly see that Google’s revenue, gross profit, and EBITDA grew faster than Apple’s in every year except for 2015. We can even take this one step further by calculating the compound annual growth rate for each line item from 2012 to 2016 (you can do this in Excel by using the function: =rate(nper, pmt, pv, fv)) – this tells us the average rate the companies grew in each year.

Our horizontal analysis (time series analysis) is now officially complete.

WHAT IS VERTICAL ANALYSIS?

Vertical analysis, also called common-size analysis, focuses on the relative size of different line items so that you can easily compare the income statements and balance sheets of different sized companies.

Let’s go back to our income statement items for Apple and Google. Through our horizontal analysis, we know that Google has been growing at a faster and more sustained rate than Apple… but is it a relatively more profitable company? Do both companies profits seem to be sustainable?

To perform vertical analysis (common-size analysis), we take each line item and calculate it as a percentage of revenue so that we can come up with “common size” results for both companies.

Here are just the numbers once again. I’ve added a line for research & development costs as well.

Now, let’s divide each line item by revenue.

So what does this tell us?

For starters, in 2016, Apple generated $0.39 for every $1 dollar in sales it made. Google did much better, generated $0.61 for every $1 in sales it made. However, Google’s other costs (such as sales, marketing, general & administrative, and R&D) are much higher, since Google’s EBITDA margin was 33.7%, compared to Apple’s 34.0%.

We can also look at trends within this vertical analysis. For example, Apple’s gross profit has declined from 43.9% in 2012 to 39.1%, while its R&D expenses as a percentage of revenue have increased from 2.2% to 4.7% over the same time period. This could suggest that Apple is facing tough competitive pressures. Why?

• Trends in gross margin generally reveal how much pricing power a company has. Because Apple’s gross margin is declining, this probably means that (a) Apple is dropping the price of its products to match lower cost competitors, (b) Apple’s costs to produce its products are increasing and Apple is unable to increase prices to offset this, or (c) a combination of both.
• This increase in R&D suggests that Apple is doubling down its efforts to create new, innovative products to offset its competition.

HORIZONTAL AND VERTICAL ANALYSIS OF THE BALANCE SHEET

Just like we performed horizontal and vertical analysis on the income statement, we can also run these calculations on the balance sheet (when performing vertical analysis of the balance sheet, line items are usually taken as a percentage of total assets). The process to calculate these ratios is similar to the examples we went through above and are fairly straight forward.

However, I’ve found that horizontal and vertical analysis of the balance sheet is much less helpful than on the income statement (ratios and YoY growth rates are basically requirements when analyzing any income statement) and can often be distorted by accounting policies (for example, is a debt-to-equity ratio really useful if the equity number used is simply a result of various accounting choices made over the years?).

Rather than calculate a “pure ratio” of the balance sheet, we can instead calculate “mixed ratios” – such as an interest coverage ratio (operating income / interest expense), leverage ratio (debt / EBITDA), or even efficiency ratios like days sales outstanding (DSO) and days payable outstanding (DPO).

Reblogged from BusinessInsider.com. To view original article, click here.

Employee Benefits that Count as Taxable Income

As a small business owner, you always want to save wherever you can, but that doesn't mean cutting corners.  Cutting corners, like NOT hiring a professional to do your taxes or payroll could end up in either losing you money or making an error like deducting employee benefits you shouldn't (Number 6!).  That's why Accounting Works is offering affordable and competitive prices on Payroll Services to all small businesses.  With accounting software that allows employees to download their own W2s and Paystubs, you don't have to worry about going back and forth.  Not to mention our tax expertise to find you opportunities to save money and grow your business.

Credit: Getty Images

7 Employee Benefits You Didn't Know Were Taxable Income
With tax season upon us, it's important to understand what employee perks and benefits will count towards your employees' taxable income.

By Rebecca Wessell

With more perks and benefits becoming standard (and with tax day coming up), it's important to know which perks are considered taxable income for your employees. Here are some perks you may not realized are considered taxable by the IRS:

1. Gym or health memberships
I didn't know this one until recently (when our company offered us gym memberships), but the IRS considers a gym or health membership a fringe benefit, and therefore taxable income. The IRS will tax you on the fair market value of the gym membership, so if the gym membership is $50 per month, your employees will be taxed on that extra $600 per year.

One exception to this is if the gym facility is on-premise or employer-owned. In this case, employees won't typically be taxed on the gym, and the employer can usually write it off as a deduction. This is how big companies like Google can provide truly free gym memberships for their employees.

2. Business frequent flyer miles converted to cash
You probably knew that cash gifts to employees are considered taxable income, but you probably didn't know that the IRS doesn't care how the cash becomes cash in your employee's hands.

If you have a small business or corporate credit card and you allow employees to convert your business's points or frequent flyer miles for cash, that may be considered taxable income.

3. Season tickets
While providing infrequent or one-off tickets to events is considered a "de minimis" fringe benefit (and not taxable), providing season tickets can taxable. Depending on how expensive the season tickets are, this could be a pretty considerable tax burden to your employees.

It may be more cost-effective to your employees to provide the occasional ticket rather than a season pass.

4. Clothing
If you provide clothing to your employee that can replace everyday clothing (i.e., not a uniform), this may also be taxable. This doesn't include providing company t-shirts once a year or small value items.

However, if you frequently give your employees clothing and it amounts to a significant amount, they may need to pay taxes on them.

5. Vacation expenses
With some companies now providing "paid paid vacation" for their employees, you should also know that the IRS considers that a taxable fringe benefit. If your business pays for any vacation expenses for its employees, whether airfare, hotels or meals, this must be included in the employee's gross income.

Another kicker? None of these expenses is deductible to you as the employer.

6. Spousal travel or meals
There are some exceptions to this rule. Namely, the exceptions are if the spouse is also an employee or is there for a genuine business purpose, or if the expense would be deductible by your employee anyway.

Otherwise, any expenses, such as food, lodging or travel, covered for your employee's spouse will be taxed come April.

7. Personal use of employer vehicle
If you provide cars or other vehicles for employees, the employee's personal use of the vehicle will be taxed. This includes commuting to and from work, running personal errands or letting a non-employee use the vehicle.

And it's important to keep good records. Because if you don't keep records on when the employee uses the vehicle for business or personal purposes, then all of the usage will be taxed.

To view original article visit Inc.com

What You Need to Know About Robo-Advisers

As our society continues to automate, Robo-Advisers have become a mainstay in the financial sector. Basically, Robo- Advisers are computer programs that use algorithms to provide investment advice. This article from the Journal of Accountancy gives an overview of the service and what to watch out for.


By Ken Tysiac
February 23, 2017

Robo-advisers represent a substantial segment of the financial services industry, and their rise presents challenges to the investment advisers who operate them and the investors who use their services.

Popular especially with younger, tech-savvy investors, robo-advisers use computer algorithms to provide investment advisory services online, often with limited human interaction. These services may charge lower fees but may not provide the level of personal service that traditional investment advisers deliver.

Information and guidance related to robo-advisers for both investment advisers and investors was published Thursday by the SEC.

The SEC’s Division of Investment Management issued guidance for investment advisers on meeting disclosure, suitability, and compliance obligations under the Investment Advisers Act of 1940. The guidance includes suggestions that a robo-adviser:

Should consider providing clients with a statement that an algorithm is used to manage individual client accounts, a description of the algorithmic functions used, and a description of the assumptions and limitations of that function.
May wish to consider whether its client questionnaires elicit sufficient information from clients to conclude that its investment advice is suitable and appropriate for the client.
Should consider adopting written policies and procedures in addition to those that address issues relevant to traditional investment advisers. Additional policies and procedures may address areas such as the development, testing, and backtesting of the algorithmic code; disclosure to clients of changes to the algorithmic code that may affect their portfolios; and cybersecurity issues.
Meanwhile, the SEC’s Office of Investor Education and Advocacy issued an investor bulletin containing information investors may need to make good decisions if they consider using robo-advisers. According to the bulletin, investors may wish to consider:

• How much human interaction is important to them, their level of financial literacy, and how often they will have contact with the robo-adviser.
• What information the robo-adviser is using to create its investment recommendations.
• What the robo-adviser’s approach is to investing.
• What fees and costs the robo-adviser will charge.
• Information about the robo-adviser’s licensing and registration.
• “As technology continues to improve and make profound changes to the financial services industry, it’s important for regulators to assess its impact on U.S. markets and give thoughtful guidance to market participants,” SEC Acting Chairman Michael Piwowar said in a news release.

—Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is a JofA editorial director.