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On November 23rd, 2016 by Alexander Hubenthal

Which Business Structure is Right for You?

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Filing paperwork to incorporate as a business can be a daunting task and for good reason. The structure you choose will determine a lot about how your business will be run and managed. There are so many different options available to you and each of the entity types have their benefits and drawbacks.

For tax purposes, the IRS recognizes 5 major types of business structures; 1) Sole Proprietorships, 2) Partnerships, 3) Corporations (also known as C Corporations), 4) S Corporations, and 5) Limited Liability Company (or LLC). Each of these types of business entities vary by country so be sure to check with your country’s tax collecting authority to determine your options.

Sole Proprietorships

Think of Sole Proprietorships as the bare bones type of businesses (in terms of legalities). In most states, when filing your paperwork with the state, you don’t need to pay any fees to operate as a Sole Proprietorship. The business and Proprietor are considered one. The only requirement is that you record any income that you earn on your individual tax return.

This type of business entity has one of the largest drawbacks of all the options you have available to you. Because you and the business are considered one, you are personally liable for any and all liabilities that the business faces. This includes the unfortunate event that a lawsuit is brought against your business. If the party that brought the lawsuit against your business wins, you are personally liable to pay for all debts.

Partnerships

Unlike the Sole Proprietorships that are formed by one person, Partnerships are formed by two or more people. These parties will all share in the management and profits of the business. There are only two types of partnerships; General and Limited.

In a General Partnership, the partners manage and assume responsibility as outlined in the partnership agreement. Limited Partnerships are made up of both general partners and limited partners. Like in the General partnership, the general partners manage the business. The limited partners act as investors and don’t assume any responsibility in the day-to-day operations of the business. A major benefit to Partnerships is the “pass through” of the income tax liability or benefit to the individual partners.

Corporations

When we see the word “Corporation” we tend to think about multi-national conglomerates that are household names. However, many businesses file as Corporations or “C Corps” for the legal and tax benefits. Corporations are recognized as individual, separate entities that are given the right to operate in the state where the articles of incorporation are filed. When filing, there is generally a fee that must be paid to the state followed by a recurring, annual fee to maintain your records.

After receiving your verification papers back from the state, 2 things must occur. The first, the distribution of stock by the company to the founders / shareholders in exchange for cash or other assets to fund the business. The second, the appointment of the board of directors. The board of directors will elect the president, vice-president, treasurer, etc. of the company. In the event you are the only one starting a C Corp, you can do and be all of these things. Depending on your state, you might be required to fill out the above information on your incorporation documents.

If Corporations are properly formed, they protect the shareholders from liability in the event that a lawsuit is brought against the company. In the event that the Corporation loses a lawsuit, the most that a shareholder can lose is the amount of shares that they hold. Another benefit to Corporations is their tax benefits. Corporations file and pay for their own taxes.

S Corporations

Sub-Chapter S (or S Corporations) are a very attractive option for small business owners. It provides the “best of both worlds” where the tax benefits are more favorable than the standard Corporation and the S Corporation filing provides the same protections as the standard Corporations.

In order to become an S Corporation, you must first file with your state as a Corporation. Once you are approved in your state, you must file a request with the IRS to become a Sub-Chapter S entity by filing form 2553 with the IRS (Sub-Chapter means a sub section of the corporate tax code). There are a few tricks with becoming a S Corp. First, you must elect to become a S Corp within 2 months and 15 days after the first day of the taxable year. Also, some states disregard subchapter S entirely where as some will recognize it automatically.

One of the major drawbacks to an S Corp vs a C Corp is that an S Corp is only allowed to have up to 75 shareholders.

Limited Liability Company

A Limited Liability Company or LLC offers the liability protection the Corporations offer but don’t carry all of the requirements of Corporations including issuing shares, appointing the Board of Directors, or having annual shareholder meetings. Unlike with Corporations, the owners of an LLC are called members, not shareholders.

The Managing Members’ share of profit in the LLC is considered income and is subject to self-employment tax.


Disclaimer: The information contained in this article is not to be considered as legal advice. For state specific requirements and any questions that you want answers to, seek legal counsel for matters related to starting and forming a business.


Thanks for stopping by! I really appreciate you taking the time to read this piece. I am very passionate about business, and giving people the tools to be successful in their lives. If you found any of this helpful, please let me know in a comment below and I’ll be sure to get back to you.

On November 18th, 2016 by Alexander Hubenthal

How and When to Bill (Invoice) Your Customers

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You want to be paid for the work you did right? Well of course you do but did you know that you could be doing things that might be delaying you being paid?

Here’s the bad news: In most cases, it’s really easy to mess up invoicing.

Here’s the good news: It’s really easy to prevent mistakes

When 2 or more parties agree to an exchange of goods and or services they usually will enter into some form of an agreement or contract. When this agreement is established and signed by all parties, they are agreeing to a lot of things that will affect the invoice process.


The 7 Must Haves for Every Invoice

  1. Your Business Name and Address. This is established when you file papers to be an official business in your state or providence.
  2. The Address and Name of the business you are invoicing. It is also important to add a contact name to your invoice here.
  3. A unique invoice or reference number for this invoice and this invoice only. PLEASE NEVER EVER USE AN INVOICE NUMBER MORE THAN ONCE. It makes us Accountants and Bookkeepers die a little on the inside every time we see this 😱.
  4. A date on the invoice. Usually the date the invoice is generated.
  5. A list of all the goods and or services you provided. These MUST be broken out on separate line items on the invoice with their individual cost.
  6. A Total amount for the invoice
  7. The agreed upon payment terms. This is how long the customer has to pay from the date of your invoice. Generally, the standard is 30 days. Some companies might go with shorter payment terms and others might go with longer payment terms.

I know Fortune 100 companies that are currently paying 120 day payment terms. Yes. You read that right. 4 whole months.

3 Things to Also Consider when Invoicing

  1. When working with bigger clients, they might provide you a Purchase Order or other reference number. This number should also be included on the invoice so your customer can quickly identify the charges and who requested the goods or services.
  2. It is beneficial if you include the ways you accept payment for the invoice (i.e. PayPal, Bank, Credit Card, etc.) and the associated links or bank account details on the invoice.
  3. If you charge sales tax or VAT tax on your invoice, it is important to either include or provide your EIN (in the USA) to your customer so they can cut down on time when it comes time to file taxes.

When should you invoice your customer?

As mentioned previously, when 2 or more parties enter into an agreement either formally (with a contract) or informally (by mouth), the timing of which that you can bill your customer will be established.

Billing for Services

When Rendering Services, you can bill one of two ways; before services are rendered or after.

When you bill your customer before you render services, you the service provider bear no risk. Meaning you won’t have to worry about going after the customer for payment after the service is provided. If you are just starting out, you might have a hard time convincing your customer to pay up front because they might not trust you and your business, yet.

If you decide to bill your customer after services are rendered, be sure that payment terms are agreed upon prior to services being rendered. Unfortunately, a lot of Businesses and People don’t like paying on time. This can lead to having cash shortage problems in your business and in some extreme cases it can lead to expensive legal costs.

Billing for Products

The majority of billing for products occurs at the time the order is placed. In Business to Consumer (B2C) transactions, billing and payment occur simultaneously. For Business to Business (B2B) transactions, billing occurs at the time of the transaction but payment is done in line with the agreed upon payment terms.

Billing for Construction

In the event that you work or know someone who works in construction or other blue-collar trade (HVAC, Plumbing, General Contractor, etc.) billing can reflect the service model or a payment plan system.

The payment plan system usually follows something like the following: At the beginning of the project (usually when the agreement is signed) a down payment of roughly 20% is required for work to begin. This 20% allows the business to put funds where they are needed (labor, materials, etc.) and then payments of 20% will continue when the company reaches milestones. Think of putting a roof on a new building as an example for a milestone.

On November 11th, 2016 by Alexander Hubenthal

Preparing Your Business for 2017

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What do you want your business to achieve for next year? If you haven’t started planning yet, you are behind.

It has been an exciting week. Regardless of where you stand politically, we will have a new president in the USA come January. While we are on the topic, no one in the political arena will affect your abilities or capabilities as a business owner. You alone have the ability and responsibility to grow your business. The more time you spend being distracted by these current events and others that do not directly affect you as a business owner, the more you and your business’s performance will suffer. Why? Because it is taking time away from your productivity. Please don’t let some current event or individual be the cause for you to miss out on sales, blog post(s), etc. that you could have generated otherwise.


Most business owners I meet begin planning out the following year around early to mid October and will wrap up their planning by early to mid November. This planning can include everything from forecasting Labor Had Counts, developing a budget for the year, etc.

By not setting goals, you will go nowhere. If you have been in business for at least a couple of years, you will be able to pull on historical financial data to develop accurate forecasts to help propel your business foreward. A great tool that I reccommend for established businesses is Fathom. This platform integrates directly with both Quick Books Online and Xero and provides a treasure trove of information. A favorite feature of mine on here allows you to benchmark against other companies in the industry that you operate in. By using this information you can see where you are underperforming and outperforming your competition. Using this information, you can make more informed business decisions next year as well as make a more informed budget.

If you are starting out, the first 18–24 months in your business will be a little unpredictable in terms of financial performance and there will be little to no financial data to provide information. Your main goal should be to establish a sales base, one preferably with a recurring revenue model to guarantee revenue for your products and/or services. One issue that you will have to look out for with a recurring revenue model is creep. If you don’t watch this closely and consistently, you could have a big problem on your hands.

After you establish a baseline revenue model, it would be a good idea to write down exaclty how many customers you need to achieve “X” goal in 2017. For most of us, that goal will be some monetaty figure. For example, if you currently have no customers and your primary goal is to be generating $10,000 a month by December 31, 2017; you will need to work backwards to determine how much work you will need to do to reach that goal. Assuming you use a recurring revenue model, and each customer pays you $400 per month, you will need to acquire a little more than 2 clients per month to reach that goal. After you are established, the tool mentioned earlier will continue to help you grow and help point out any areas that your business can improve upon.


What is a specific goal that you want to accomplish in your business or career for 2017? Let us know in the comments.

On November 4th, 2016 by Alexander Hubenthal

How to Properly Record Expenses in your New Business

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Ever wonder how you properly record business related expenses when starting a business? Many first-time entrepreneurs will ask a question similar to the following: “When do I start recording expenses to my business?”, “Do I need to have a business bank account to start recording expenses?” All of these questions are valid concerns for first-time entrepreneurs and I have even personally asked these and many more questions. I also understand the level of frustration that this can cause because come tax time, you want to properly record business expenses to your business’s tax filings.

Here are some tips to help:

Scenario A: You have an idea for a business, and you want to buy a domain, logo, etc but you don’t have a business checking account set up yet. Here’s what I did;

Make purchases to your personal accounts while you get your business going and keep ALL of your receipts. You will need these later. Once some time has passed and you now have your business running (read: substantial and consistent revenue being generated), collect all of your receipts and generate an expense report. Submit this expense report to your business as you would to a previous employer. These expenses would be classified in line with your chart of accounts (COA) and offset the entry to Accounts Payable as a payable to yourself for expenses incurred. Your business will then pay you back for expenses incurred.

*It’s important to note*

This payment back to you is not considered part of a disbursement and would not be classified as income and you would not pay income taxes on this payment to you from the business. The awesome folks at Justworks offer an excellent and expanded explanation on this topic here

Scenario B: Same scenario as above but you have not incurred any expenses and you decided to open your bank account immediately. Here, you would charge your business account for all business related expenses and then record the transactions again in accordance with your Chart of Accounts and then offset the entry with Cash (assuming that’s what you used to pay for your expenses)

It is also important to note that you record expenses in your business in the tax year that you incurred them. This keeps your record keeping and books clean come tax time. Also you will not have to back date entries and make adjustments later which can be a real headache.

On October 28th, 2016 by Alexander Hubenthal

Do you Need a Bookkeeper or an Accountant?

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The Answer Might Surprise You.

Unknowingly, most business owners associate the name Bookkeeper or Accountant as one of the same. Do you know what the differences are? Are you getting the services you need to be the most successful business owner possible?

Who is the Bookkeeper and what do they do?

The Bookkeeper is the person in your business who “works in the trenches” of the business and are sticklers for the accuracy of all the transactions posting to the books.   One of the main components of Bookkeeping is maintaining the General Ledger and ensuring all activities in the business are posted properly to the ledger. Other activities include but are not limited to reviewing invoices, payroll, and bank reconciliations. Although no formal certification process is required to work as a Bookkeeper, these roles require at least some college and at least 2-4 years of previous work experience in an accounting role. Usually, the bookkeeper’s work is overseen by either the business owner or a qualified accountant.

When and why you would need an Accountant:

Unlike the role of bookkeeping, Accountants generally work at higher-lever processes. One of the biggest reasons business owners and people turn to accountants (also known as CPAs) is to have their tax returns done. In order for taxes to be completed, accountants make sense of all the information that was previously compiled by the business owner or bookkeeper. Accountants will also generally prepare adjusting journal entries, running financial analysis of the company to measure operational performance, and preparing financial statements. There are plenty of other activities that Accountants and CPAs work in including Auditing of financial information or some even provide bookkeeping services to smaller clients.

What is the cost to have a bookkeeper?

Depending on a multitude of factors including annual revenue, an average number of transactions per month, what type of services are required including AP / AR management, Budgeting, Invoicing needs, etc. Services can range from $200 - $800 per month. These are only estimates and reflect a range of bare bones services to having a complete turnkey solution for your small business.

What is the cost to have an accountant?

According to Investopedia, the hourly billable rate in 2016 ranges between $160-$312+ depending on the size of the firm that you are receiving your services from.  This rate generally includes all the services you would need from the firm. The same rate would generally apply for tax advice as would be the rate for basic bookkeeping services.

That said, it is generally much more cost effective to have a Bookkeeper working with you for a whole month in what you would pay for a few hours with an Accountant. It is important to note, however, that a collaboration between you, your bookkeeper, and accountant will contribute to the long-term success of your business and they will help you get back to doing what you love most.

 

 

On October 21st, 2016 by Alexander Hubenthal

Financially Fit Fridays 06: How to Improve your A/R Processes

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My very first “job” after college was working for a large corporation in the Accounts Receivable department collecting payments from customers who were paying invoices sent by the company I worked for to the customer. Getting timely payment from customers is not a new problem but there are things you can do to reduce time and lots of frustration during the collection cycle. I have learned and applied these tips by both working for large companies and small start-ups.

  1. Improve your invoicing processes: This can be achieved in a number of ways; for example, if you use an accounting platform, you can create standard invoices, create brand recognition for your company and you can also send invoices directly to your customers through the accounting system. Want to know what my go to accounting system is? Click here
    1. Do your best to not back load your month with invoicing. This will create a lot of pressure to collect payment from customers towards the end of the month and leave a big question mark on your cash flow if your invoices are not collected on time
    2. Invoice as soon as you complete a job or when your services have been completed. Why? Depending on what method of accounting you’re using in your software (preferably the accrual method), you will be able to recognize revenue sooner. Also, customers are much more likely to pay when an invoice is received shortly after services are rendered than a week, 2 weeks, or even later (please don’t do this 😱).
  2. Offer payment discounts to your customers who pay within a certain time period.
    1. Standard payment terms depending on what industry you operate in range between 30-60 day net payment terms. What does this mean? If payment terms on an invoice are net 30 days, that means you will owe the balance due on the invoice within 30 days.
    2. Standard discounts on invoices will look like something similar to “2/10 net 30”. No that is not some wacky accounting formula or February 10th. 2/10 stands for a 2% discount applied if payment is received within 10 days of the date of the invoice. You can have 3/15 or whatever you see fit to incentivize your customers to pay sooner. If the customer doesn’t pay during the discount period, they are expected to pay net of the invoice balance within 30 days given the 2/10 net 30 example.
  3. Offer Subscriptions
    1. As the internet continues to become more mature, more and more businesses are turning to the subscription-based business model. This business model alone reduces 90% of the frustration of issuing invoices and collecting payment from customers. There are plenty of integrations such as Bill.com that will automate this process for you. You will only need to intervene if a customer hasn’t taken the action to update their credit card information. I listed this one last because if you are a services based business and not an online one, it might be difficult to implement this business model into your business. But it is a wonderful option for plenty of other businesses.

What do you do to incentivize your customers to pay quicker? Do you do something unique to your business that you can share? Let us know in the comments:

On October 14th, 2016 by Alexander Hubenthal

Financially Fit Fridays 05: Is your Cash Flow Positive or Negative?

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Yes, your bottom line is important but there is another business metric that is just as if not more important than your business’s bottom line.

 

So many business owners associate the financial health of their business with their bottom line or net income. While it is important to know what your company’s net income is, knowing if your business is flowing positive or negative cash flow each month is just as important if not more.

 

What is cash flow and why is it important? Cash flow is defined as the total amount of money being transferred into and out of a business. Knowing what your company’s cash flow is important because you want to know if you have more cash coming in than going out. Why? Because if you have the reverse, more cash going out than coming in, you are going to have a big problem on your hands really quickly. Luckily, in today’s day and age we have fancy accounting software that helps break down what our monthly cash flow is. If you go over to the section of your accounting software and select “Statement of Cash Flows” and look towards the bottom, you should see something similar to “Net change in cash” if that number is positive that is a good thing. If the number is negative and it has been for an extended period of time, you might want to take a look at where your business is spending cash and/or if it is possible to increase your sales.

 

What can you do if you have negative cash flow? First, look at your cash from operating expenses. Here expenses for things such as salaries, purchases, and rent are allocated. Ask yourself, is there anything you can do as a business owner to adjust these expenses? Next, look at the cash from investing activities section. This section looks at the cash inflows and outflows from sale and purchases of long term assets; think a large piece of machinery with a long useful life or a vehicle. Do you need to buy the newest piece of machinery or can you buy it used? Finally, look at the Financing activities section. In the event that you have a business that has multiple shareholders or you pay dividends, this is something that will affect cash flow. Does the dividend to investors need to be decreased? Are the stockholders of the company taking too much out as a salary? All of these things affect your cash flow in a business and it is important to be cognizant of where your business stands so you can ensure your business continues to be a success.

 

Would you like a free in-depth analysis of your cash flow statement with us? send us an email at alex@bookscaping.com and we’ll be happy to help.

On October 7th, 2016 by Alexander Hubenthal

Financially Fit Fridays 04: The 3 Services You Need Right Now to Automate Your Business's Bookkeeping

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Over the past few weeks, we have covered a lot of accounting theory but this week I wanted to tell you about some services we use that make our lives extremely easy when it comes to managing our business's books.

1. Xero

Out of all the available cloud-based accounting providers, Xero is hands down the most user-friendly in terms of user interface and integrable apps as well as the amount that you can do with it. In the past, we have used other providers to meet our cloud-based accounting needs but Xero was the only one that exceeded our expectations and their price point is competitive with the rest of the market.  Another reason we love Xero is because Xero automatically integrates with literally hundreds of apps through the Xero Marketplace that makes your bookkeeping feel like a breeze. The following 2 services we use also integrate with Xero and sync instantly over the cloud.

2. HubDoc

Are you sick and tired of spending hours each week keying in data from your bills or having someone else on your staff do it? Yeah  us too! Imagine a service where you can email or fax all of your receipts and bills to one location and within a few short moments all of the important data is synced with your Xero account and it is ready to be reconciled. If this doesn't have you as a business owner foaming at the mouth yet, I don't know what will. Get on over there and check them out today!

3. Bill.com

If HubDoc didn't get your motor running, this surely will. Bill.com is a complete turn-key platform for Accounts Payable and Accounts Receivable management. This is an elegantly designed platform that provides complete audit trail information to track who did what and when in the system. Safeguards can be put in place for certain people to only have access to certain roles. For example, you as the business owner would probably want to be the only one writing the checks for bills that need to be paid. Accounts can be set up on a multitude of access levels and can be constantly changed as the needs of your business change.

 

Boom! How many hours did we save on your weekly bookkeeping tasks by taking 3 minutes to read up on some amazing services that are out there to make your life easier? Want more tips? Click Here to sign up for our mailing list to be the first to receive weekly updates and more!

On September 30th, 2016 by Alexander Hubenthal

Financially Fit Fridays 03: Did you know it’s an Accrual World?

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One of the biggest puns in the accounting and bookkeeping world is to say “It’s Accrual World”. To an outsider, one might think that I have fallen off my rocker and lost all sense of my grammar skills. I can promise you that’s not the case. No I’m not hooked on phonics, and no I have not lost my marbles (ok ... maybe one or two).

In Accounting, there are 2 proper methods of recording transactions in the books for your business; 1) The Cash Basis method of Accounting and 2) The Accrual method of Accounting (this is where the pun comes from). It is important to know because it can and will drastically affect the financial reporting of your business to stakeholders, investors, and the government. When you set up your business and began using your accounting software, you probably made a choice between Accrual or Cash based accounting in the settings section. If you had an accountant help you set up your software, they probably recommended you use the Accrual Basis of accounting and not the cash basis. I also would also suggest to you that you use the Accrual Basis as well and here's why;

The Accrual method of accounting gauges the financial performance and position of your business by recognizing transactions regardless of when cash transactions occur.

Why is this important? Let’s say you own and operate a health coaching business. On the 29th of September, you perform 1 hour of coaching services at $100 per hour and send your client a bill in the mail for your services. Under the Accrual method of accounting, when you perform the services or provide your products, you earn the revenue associated regardless if you’ve been paid in cash or not. Your customer pays you a few days later on the 3rd of October. Under the accrual basis of accounting, you would recognize Revenue on the 29th for $100 and offset that with an increase in Accounts Receivable for $100 (the bill you sent out on the 29th). On the 3rd of October, you would reduce your Accounts Receivable by $100 (because your customer paid the bill) and increase Cash by $100.

As you can see in the above example, we record 2 activities; the first is when we recognize revenue, the other is when we are paid in cash for our services.

The Cash Basis of Accounting only recognizes revenue and expense when you, the business owner physically receive cash or pay cash out.

Let’s take a look at the same example that we used above. Under the cash method, we only recognize transactions once we receive physical cash. As you can see this will have a drastic change on your business’s financial reporting.

Again, we performed services on the 29th of September but because we are using the Cash basis of accounting, we can’t record any financial activity until your customer pays on the 3rd of October.

 Assuming that this was the only service you rendered the entire month, you could easily see how this would affect your financial reporting. In the Accrual method of accounting we earned $100 of Revenue inSeptember but under the Cash basis, we earned $0 in Revenue in September.

 Neither method is right or wrong because they are both accepted in the Accounting / Bookkeeping industry. However, it is easy to see how someone could attempt to use the Cash basis of Accounting to their advantage for tax purposes. Because the Accrual basis records all transactions regardless if cash has been received or not, you get a much clearer picture of your business's finances than if you were using the Cash Basis of Accounting.

What does your business use? Cash or Accrual?

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