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Do you have a question for Mr. G? Click here and Mr. G will try to answer your questions in a timely manner. However, Mr. G doesn't know everything! And when he may not have the answer he will do his very best to guide you in, what he believes to be, the right direction. Mr. G looks forward to your questions, and it's his hope that you find financial security and success!
 My business partner and I are starting an import business. I've also started a small accessory business. We bring financial, research and design experience to this business. We have a business plan and pro forma income statements, and have been working in the last nine months to line up our designers, manufacturers, custom's brokers etc. We are ready to structure our business as either an S-corp or an LLC but find ourselves uncertain about the net benefits of either structure. The LLC is appealing because it avoids what appears to be a mountain of paperwork necessary for a S corp, such as the meeting minutes, and additional filings. However, the self employment tax that an LLC is subject to is a big disadvantage. I have heard that we could also be an LLC and report our taxes as an S corp. So now we have 3 choices and can't determine what is best. I would greatly appreciate it if you could you shed some light on this matter. My partner and I will be "active" managers and will draw salaries. We fully intend to be break-even to profitable this first year. This is an equal partnership 50/50. Thank you for the service you provide to new entrepreneurs. I look forward to your opinion! Gratefully,
Teri
 Hi Teri, Congratulations on your new venture. Let me also congratulate you on preparing a business plan. You are both at the starting gate with a plan on how to reach your ultimate goal(s) which is more than most would-be entrepreneurs do in the beginning. To begin, there are a number of differences between an S-Corp and an LLC for tax purposes. You have also identified the difference in taxation between an LLC and S-Corp., which, under certain circumstances, can be significant. It is not difficult to convert an LLC to a C-Corp and an S-Corp. At the California Secretary of State website, you will find a form titled "Conversion of a California limited liability company to a California stock corporation" and related information on the process. However, If you are not comfortable, I recommend working with a trusted CPA or Attorney in this matter. Therefore, you could initially setup an LLC in the first year, and, once the business indicators show that profitability will begin to rise incrementally, then, you could convert the LLC to a corporate structure. Remember, that an LLC and an S-Corp are both flow-through entities. Therefore, though there are differences, there are similarities, as well. To follow are a few notable points to mention.
LLC vs S-Corp Similarities:
LLC vs S-Corp Differences:
* Please note that the above points are not all-inclusive. S-Corp vs C-Corp:
Each C-Corp is subject to tax on its income. For years in which the maximum corporate tax rate is higher than the individual rate, an incentive is created to avoid corporate tax. Making an S-Corp election achieves this goal since the corporation's earnings are only taxed once -- at the lower shareholder rate. The downside with the S-Corp election is that the corporation's income is taxed to the shareholder whether it is distributed to him or not. For years in which the maximum individual rate is higher than the maximum corporate rate, people tend to use C-Corp to accumulate earnings at the lower corporate tax rate. An incentive is created to keep earnings in the corporation, thereby avoiding the ordinary income tax on distributions made to shareholders. The value of the company rises and shareholder gain on the sale of stock is taxed at capital gains rates.
However, the IRS has various provisions in effect to prevent shareholders from accumulating funds in a C-Corp. The personal holding company tax and accumulated earnings tax provide that certain corporate income is taxed at the highest individual tax rate. These provisions do not apply to S-Corp since S-Corp income is taxed currently to its shareholders.
The eligibility requirements may preclude some S elections, particularly when capital must be raised from large numbers of investors. C-Corps have more flexibility in who may own their stock. S-Corps are limited to 100 shareholders and only certain types of shareholders may hold their stock. No such restrictions exist for C corporations. In addition, C corporation stock, in general, is freely transferable, whereas S corps usually have restrictions in place on the sale of the S-Corp stock. This is done to prevent a sale to someone the other shareholders may not want in the company or to ensure that stock is not transferred to an ineligible shareholder.
Another difference between C-Corps and S-Corps is that certain fringe benefits are available to C-Corp employees that are not available to S-Corps owners.
Please note that the above information is not exhaustive and there are many options to consider. I hope this provides some insight to assist you in your decision-making process.
To start out I have to tell you that I am not a US Citizen and will have a Green Card within a year or a year and a half. If that is a problem I understand. However, I though that since my status is about to change I would contact you anyways. So, please disregard this e-mail if you are unable to help me because of my immigration status. I am thinking about starting a translation company here in My question is (I have not yet started) where do I find a good resource that will guide to all the local and state regulations. I have come across some here and there; however, I have yet to find a comprehensive one. If you could guide me in the right direction I would greatly appreciate it. Thank you very much, Best regards, Alex, First of all congratulations on you upcoming Green Card status! One of the great things about our country is that it is the land of opportunity and you are about to start creating opportunity for yourself. The fact that you are not a current resident should not stop you from developing your business plan and a sound structure from which to launch your new business. As you may or may not be aware, if you do not have a valid social security number, you cannot be employed by a local business. However, if you plan to go in business for yourself and not be considered an employee, then there are a number of options you have in determining the appropriate business entity structure. I don't have a site or documentation that may have comprehensive list of all the requirements for your specific need. However, below, I have identified the various websites applicable to each governmental sector. To review local requirements, the following website address covers licensure requirements for the Chapel Hill area: www.co.orange.nc.us/revenue/business_license.htm
For county requirements, I would consider reviewing the following website: www.co.orange.nc.us/ At the state level, review the following website: www.nccommerce.com/servicenter/blio/ I hope the above provides you with the information necessary to start you on your path to success.
I am having trouble determining the legal status of my contracting work. I have just been brought on as an independent contractor for a software training company. I will train clients on their site or at client's site on computer programs. They want me to get worker's comp for myself, and if possible, also incorporate myself. I would love to know the pros and cons (especially from a tax point of view) concerning a sole proprietorship versus a corporation. Thanks so very much! Dana
San Diego, CA First of all, congratulations on your new assignment! Let me follow by providing some insight into the tax implications of a sole-proprietorship and a corporation: Sole-Proprietorship - Advantages
Sole-Proprietorship - Disadvantages
Corporation - Advantages
Corporation - Disadvantages
You also should consider whether an LLC or Subchapter S-Corporation may be a better fit for you. There are advantages and disadvantages to each entity structure. As a result, having a business plan will assist in determining whether one legal structure may be more beneficial structure over another for tax purposes. Specifically, when you are developing your cash flow and profit and loss projections, it will provide insight into the expected profitability of the business. Please note that the above information is not exhaustive and there are many options to consider. I hope this provides some insight to assist you in your decision-making process.
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I would very much appreciate your help with regard to some financial pro forma projections I have done (excel spreadsheets) for my start up business. A little background: my business is incorporated (s corp.). We are a company of 2, so far my wife and I. We have developed a product which we will bring to market next year and have initiated an initial round of friends and family financing in which they will loan the company monies for a set duration and interest return. I prepared an Investment Circular and included pro forma Balance Sheets, PnLs, and Cash-flow projections for our first two years of sales. I have every intention of employing the services of a qualified accountant as we progress, but being a boot-strap operation, so far, I believed I should be able to prepare these pro-formas myself. I have no previous experience doing so, and spent days pouring over examples and explanations on how to do them. It really was clicking for me and so I spent about an hour and a half with a good accountant who patiently walked me through a lot of it. Apparently, though, that was not enough because I still felt somewhat lost when I returned home to tackle them. So I did the best I could and sent them off with the investor package. One of the Friends I sent the package to has a financial background and brought some problems with the financial projections to my attention. While I certainly know and understand a lot more about these things and their importance than I did a few weeks ago, my ignorance has me fearful that I have really messed these up. What I would dearly love is if you were willing to look these over and give me your feedback as to what needs correcting and how. I know the numbers are right, it's just that I think there are problems with where I've put them. If you were willing to help, I could send you the files as either excel spreadsheets or pdf. After you've looked them over, I think it would be most expeditious for us both to talk rather than email. I hope this isn't too much to ask. I have availed myself of SCORE counselors several times thus far, and am still amazed such a resource exists. Thank you for you consideration and I look forward to hearing from you. Best Regards, Fall City, WA Scott, The comments made by the other professionals are good points to consider. Let me expound further on some of them and also point out some issues, as follow:
Thank you for taking my question. We have a small family business involved in the distribution of gasoline and diesel fuel. Of course, the price of both fuels has had a tremendous increase causing us cash flow problems (we have to pay for the fuel in 10 days while I give my customers 30 days to pay). We have a line of credit with National Bank that is virtually used up. Our plant is being used as collateral on the line of credit.
I estimate that we need another $200,000 fairly quickly. In our A/R, there is approximately $400,000. Does factoring sound like a good answer to that? I've heard that a factoring company will take a percentage of your sales. I hesitate doing that since our profit margins on the fuel right now are very slim (around 6%).
I would appreciate your thoughts on factoring or any other avenues we could seek in finding some financing. Thank you, Scott
Scott, First of all, let me apologize for replying late to your request. I know this is a very important issue for you and I hope we can help in this matter. In my experience, factoring is relatively expensive and, normally, there is a minimum fee cost and contractual term. It seems to perform well when, in receipt of advanced funds, you can turn the money around and create additional sales. As a result, your sales are multiplied by your ability to purchase fuel more frequently. One of the reputable factoring companies that I have dealt with is CIT (www.cit.com). If this avenue is not a workable solution, then, the SBA may be of assistance. They are currently providing low interest loans to help those businesses hurt or affected by the recent hurricanes. Please visit www.sba.gov. You may also need to consider tightening credit terms with your customers and obtaining extended terms from your suppliers. This is a time to work very closely with your valued customers and suppliers since your win is also their win. I am the owner of a new executive secretarial service in Lexington, NC. I am planning to write my business plan. My question, what is the best marketing strategy to use? Where can I get the research information needed for my business plan? I have the experience in the secretarial field. I offer 10 different services. Thank you for your time, Lexington, NC Dear Sandy, It's terrific that you have experience in same line of work you plan to pursue. This is an added advantage and it increases your chances of success. Lets begin with WHO is your market? Is it large professional companies, small, other, etc? You indicate that you plan to offer 10 different services, are they general secretarial services or do they include niche services not generally available by other competing organizations? What differentiates you from the competition, is it the breadth and depth of services, quality, timeliness, price, etc.? Your marketing strategy should focus on your strengths and these strengths are exactly what your target market needs. Note that for many start-ups, advertising and marketing expenses make up a significant portion of operating expenses during the first years. The better you identify and/or match the skill set you have with the target market, the better the chance you will have to connect with them in a mutually beneficial relationship. Regarding a business plan, there are a number of avenues to choose. A local SCORE office can provide you with a booklet specific to business plan organization and development. This would be a very handy guide, though, there may be a small cost (I believe it is $5). Software programs specific to business plan development abounds, however, I've noticed that for some of our clients, the software is difficult to learn/use and not sufficiently flexible. Local community colleges also offer Business Plan Writing courses. I believe, and this may be the more difficult avenue, that you should first understand the basic format of a business plan and develop drafts using WORD and EXCEL programs. Once you feel comfortable that you've addressed all the major points in a business plan, then, contact a local SCORE office. At no cost, any one of our members can provide you with feedback to further tailor your business plan. Finally, once you become satisfied with the core product, if necessary, you could then consider buying a software program to tie loose ends for presentation purposes. My wife Whitefish Bay, WI Ray, First of all, if you are leaving the corporate world, congratulations on taking the first step towards creating an exciting new future for the both of you! Volunteer work is an excellent way to develop contacts. Therefore, if you are able to do it, try to maintain it since it can help open doors normally not available otherwise. One of the initial considerations, which, I believe, may be up your alley, is to develop a multi-year cash flow projection in order to identify needs and resources. If you haven't developed a business plan, it's an excellent way to create a roadmap and give you a greater chance to succeed. Depending on whether you plan to have a niche or general practice, will assist in determining who your ultimate customer will be and how you plan to approach him/her. Hardware and software requirements such as specialty tax and accounting software can be very expensive. However, structured appropriately, it can go a long way in creating a professional, efficient and space-saving environment. Consequently, the area of expertise/service you plan to provide, will aid in determining the type and level of risk you are assuming. It's important to join a reputable national trade organization. They can provide professional tools, guidance, insurance, etc. As you start to identify your risks it may help determine whether or not the amount of insurance you obtain will be sufficient, in order to protect your personal assets. If not, a corporate or limited liability entity structure may be more appropriate. However, you will need to do some research in order to determine which one is best based on your specific situation. The idea of having a store front is very good as it immediately provides an image of professionalism. You also need to determine who your competition is and how you plan to differentiate yourself from them. Developing a pricing structure is also very important to have in place. This includes choosing the method you consider appropriate to your practice, whether it is an hourly basis, fixed fee, and/or value-based. The amount of investment varies greatly and goes hand in hand with who your customer is and what you are planning to offer. There are many relatively inexpensive hardware and software products which can serve a small business well. However, as your practice grows, this technology may not keep up with your needs. Initially, your hardware requirements should cover your needs, at least, for the next three years. Software costs can vary from under a thousand to many thousands of dollars. Your business plan will be critical in assisting you in identifying your start-up costs and at which point you expect your business to have sufficient funds to pay either or both of you. In addition, the type of entity structure will also determine how you are able to withdraw funds from the business. Remember, the business plan is not a static/fixed document. Periodically, you should return to it, review it and adjust your projections accordingly.
I am starting a new business in NC as an independent instructor with Baby Signs(R). I will be teaching parent workshops (and charging for a kit and my knowledge/time) and parent/child play classes (also charging for a kit and my knowledge/time). Thirdly, I will be selling a group of products. I have questions about sales tax (how, when, etc.) and wonder if there is anything else I need to do for taxes- can I use my SSN and include my business on my personal tax return, or do I need a business tax id number, and file separately? FYI- Baby Signs(R) is a program that teaches parents to teach their babies/toddlers simple sign language skills to help bridge the communication gap. Research has proven numerous benefits. Hi Amy, In order to charge and collect sales tax in Sales tax should be collected when selling products (Kits). Do not charge sales tax on your services. When invoicing make sure to separate product from service fees. If you are planning to have employees, you should also apply for a federal identification number. Based on your e-mail, you plan to setup a sole-proprietorship (entity-type). If so, then, yes you can use your SSN as your tax id for the business (in Schedule C) when filing your personal tax return. However, make sure that this is the proper entity type for your business, since there are tax, legal, and risk ramifications.
I do bookkeeping for contractors. Now someone who has a real estate company approached me to do their bookkeeping. Can you tell if there are differences in bookkeeping for real estate businesses and contractors? Waldwick, NJ Hi New Jersey, If the owner, as a matter of practice, is buying, developing and selling property, then he could be considered a Real Estate Developer. Therefore, before the property is place in service, no depreciation deduction is available. In addition, Uniform Capitalization rules may also apply. This means you will be forced to capitalize certain percentages (up to 100 percent) of almost all general and administrative expenses. This means that you might not only have to wait to depreciate the property but also have to capitalize all carrying expenses plus the general and administrative costs such as office rent, car leases, etc. Be careful as this may have significant tax consequences for your client. |
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