Monday, September 30, 2013

Taxes for a small business owner

I had a meeting recently with a client who is new to the small business ownership world.  He had met with his tax advisor and was confused about the dollar amounts the advisor had estimated would be owed for 2012. We then had a meeting with the client, the advisor and myself to make sure we were all in agreement as to what the business owner would potentially have to pay in income taxes next April and how best to prepare for it.

We always recommend meeting with your tax advisor on a regular basis so there are no surprises come tax time.  One area our clients struggle with is understanding how taxes are calculated for a small business owner.  It is more complicated that many would think!  If your business is an LLC and you are the only member/owner than you are considered a sole proprietor by the IRS.  The federal government refers to LLCs as Disregarded Entities as they are really a legal invention, not a tax identity.  If your business is an LLC and is owned by two or more people, then your business is usually treated as a partnership.  Both single member LLCs and multi-member LLCs have the option to file as an S Corp, but that is a topic for another time.

For both types of LLCs, the focus for taxes is the bottom line: what was the business' net profit or loss for the year.  The government does not care about what amount the owner(s) drew out of the business during the year (what they paid themselves).  The owners will pay income taxes on the business whether they took all of the money out of the business or none.

In addition to income tax, owner of small businesses also have to pay self employment taxes.  This is another area that confuses people.  When you are an employee, you pay the government 7.65% of your pay for medicare and social security and your employer pays 7.65%.  When you own your own business, you are both employer and employee so you pay both shares or 15.3% of your net income to the federal government to cover your medicare and social security obligations.  Unlike an employee who has the 7.65% taken out of every paycheck, a small business owner pays the 15.3% when they file their income taxes every year.  This often catches people off guard as it can be a hefty sum if your business enjoyed a profitable year.

Such was the case for my client.  He has had a good year so far and the tax advisor had estimated the tax correctly.  Fortunately, the client has time to plan for taxes and will have the money available come April.

Next week, I will talk about estimated taxes for small business owners and the pitfalls some encounter.

Tuesday, September 24, 2013

What does risk management mean to a small business owner?

Risk management is the analysis, assessment, control and avoidance, minimization or elimination of unacceptable risks. What types of risks are we talking about? Loss of key customer, loss of key employee, loss of key supplier, damage to facilities or equipment from fire or weather, theft (of real property or intellectual property or identity).

Every business, no matter the size, should conduct a periodic review of its risks and determine if there are adequate plans in place to minimize them. We have had a couple of storms in our area this year which proved to everyone that having a backup generator is a necessity for some businesses. The best way to perform a risk assessment is to compile a list of what could happen and how the business can either reduce the risk or handle the consequences. Small business owners can form a support group who can help each other out in the case of emergency. Where can you temporarily set up shop if you lose your building? Who can lend you equipment if yours fail? Who can step in for you if you get sick or injured? Who can you bring in if a key employee gets sick or injured? What will you do if you lose your biggest client? Who can you turn to if your biggest supplier fails?

Some of these risks can be managed with insurance so having a good insurance agent and meeting regularly is important for any business owner. Other risks can be managed with the creation of good procedure manuals and lists of passwords, user names, and key contacts in the event of illness or injury to the owner or key employees.

 Make a point to conduct your own risk assessment before the end of 2013 so you can start 2014 knowing your business risks are under control.

Thursday, September 19, 2013

Skills you need to succeed as an entrepreneur

To be a successful entrepreneur or small business owner, you obviously need to be skilled in some area whether it is accounting, photography, medicine, massage, counseling, etc.  There are other skills you needs as well.

The skills which are least desired but most needed to succeed are the boring ones:  organization, money management, time management.  Being a good filer or a good bookkeeper isn't glamorous, but it will help your business succeed.  Listed below are the skills often mentioned as necessary to achieve success when starting up and running a small business:

  1. Planning-take the time to develop your business plan so you know you are charging the right price, located in the right spot, advertising in the right area and listed in the right directories.
  2. Managing money-starting up a business takes money and you don't want to waste it so keep track of where you are spending it.  Many people leave the bookkeeping and accounting to later in the development of their business and then find they have wasted money on ineffective advertising or excess amounts of office supplies because they didn't see how the expenses were adding up.
  3. Selling-there are many very skilled individuals who don't succeed in business because they are unable to sell themselves or their product.  Someone has to sell for every business so if you just can't do it yourself, you will need to hire someone to do it for you.
  4. Learn how to negotiate-there will be many times you will need to be comfortable negotiating to get the best price or level of service for your business.  
  5. Follow-up and follow through-many people fail to make follow up calls to prospective customers or business colleagues.  One expert I heard says you need to touch base with someone seven times before you can turn them into a customer so just meeting someone and then making a sales presentation isn't enough.  You don't want to turn into a pest, but you do need to touch base periodically to see if now is the right time to do business.  You also need to follow through on all promises you make to a customer or client.  Failure to deliver on time or as promised is a sure way to lose a customer.
  6. Limit the number of hats you wear-Staples has a great commercial where the same guy is performing all the jobs in a company.  This is often the case for a new small business owner, but at some point you can't do it all.  Figure out what you are good at and concentrate on that and delegate the other tasks to someone who is good at them.
We hear frequently from people who complain that they just can't get caught up or they just can't turn their business around.  Staying organized, staying on top of all the key elements to your operation, making sure someone is selling for you are what needs to be done to succeed.  

Wednesday, September 4, 2013

Exit strategy

When Beth and I started E&S, our exit strategy was to close the doors once we were ready to retire.  We didn't think the business would ever stand on its own so we had no plans to grow the business to where it would be a saleable asset.  The business has grown much more quickly than we expected and with several kids in college, we frequently get asked if one of our kids will take over the business some day.  Thus far, none have chosen to major in accounting or finance but we each have a freshman this year so who knows?

Every business owner should be thinking about his/her exit strategy whether they are just opening the business or have been operating for decades.  Your business changes with every passing day as do you so your exit strategy may change as well. 

How you manage your business will change depending on what your exit strategy is.  If you plan on selling your business, you will be more concerned about showing a profit versus keeping income taxes to a minimum.  Tax preparers are focused on minimizing what you will pay in income taxes, which is great unless you want to sell your business and their tax planning has resulted in the company just breaking even every year.  A business which has consistently shown minimal profits is not very attractive to potential buyers. 

You will also want to have sufficiently sophisticated accounting and sales systems to impress a potential buyer.  Having good systems in place takes time so knowing you may want to sell the business some day will allow you the time to develop your systems, procedures and your business. 

Another thought is bringing an employee into the business who can one day purchase it from you.  For this to work, you will need to be watching for an employee who has the skills to not only carry on the technical side of the company, but the business side as well.  They will also need to have good personal financial habits so they will have the money and credit rating to purchase the company when the time comes.  Giving the employee room to grow and develop and planting the idea of buying the business will take time and planning.

Take time as part of your annual review of your business to think about your exit strategy and determine if you are on the right path.  Beth and I will probably just close the doors on E&S some day, but maybe there will be another Schuldes or Ehlers interested in continuing E&S!