Category Archives: Blog

Why Register a Business with the State?

Many of us have considered starting a business. Some of us provide services such as mowing lawns or selling essential oils. The question arises, why would I want or need to make my business official by registering it with the proper government authorities?

Starting a New BusinessCreating a business is not as expensive as some people might think. I can set up a business starting at $300 depending on the factors involved. The annual renewal for an LLC in Utah is only $15 per year.

Protect Your Assets

The best reason to setup a business is to protect your personal assets from creditors or from judgements from lawsuits. Depending on the type of business you setup your personal assets could be secure from bankruptcy, judgements, and creditors.

The second reason would be so that you can have an official start date of your business where you can show business history. By creating a business you can start forming business credit with loans or credit cards.

Businesses have credit scores through D&B just like individuals do. Also, many banks and creditors look at how many years you have been in business, and the most likely place to find or validate this information is the creation date listed with the state.

Keep Business Finances Separate

If you have customers write checks to your business, you will want a business bank account setup in the business name to deposit the checks. It is important to separate your business expenses and personal expenses, because if you commingle your personal and business funds you run the risk of somebody being able to pierce the corporate veil, and not only sue the business, but also sue you personally because you are commingling funds.

Also, when you do the accounting for the business you don’t want to have to designate which transactions are personal and business, this makes it virtually impossible to do the accounting the right way. If you had to deal with an audit it would be difficult to validate an expense as a business expense vs. a personal expense.

Keep Options Open

If you are a contractor you might be asked to provide a workers compensation certificate or waiver. You must have a business in order to apply for a workers compensation waiver as a business with only one employee and that employee is the owner.

If you have a business that is an anything but a sole proprietorship, and you happen to be sued and lose the lawsuit, you can close the business and start a new business in the same industry the next day.

There are many different business entity types. There are sole proprietorships, LLCs, LLPs, Corporations, Parternships, Limited Partnerships, etc. If you setup a sole proprietorship it costs virtually the same to setup as an LLC, and it provides you no asset protection. What type of entity you want to setup depends on what you are trying to accomplish. For most businesses with one owner, I recommend setting up an LLC because you can still report taxes on an individual income tax return Form 1040. You can also make an election to tax an LLC as an S-Corporation which could help reduce self-employment taxes.

Starting a business is a serious commitment but there are many different advantages to forming a business the right way. Contact me if you are interested in a free consultation to discuss your business options. I can work with anybody’s budget, and look forward to working with you.

What Costs Can I Expect as a New Business Owner?

If you’re thinking of starting a new business, it’s a good idea to know what all the different types of costs that you will have as a new business.  Not having the proper understanding of the different types of costs and their amounts could put you out of business.  If you are thinking of starting a business I can help you estimate your income and expenses before you invest a single dollar.

The Hidden Costs of Doing Business

I will mainly cover the expenses that most people are going to overlook.  If you are planning on having employees, there are payroll taxes, including the employer FICA tax match, state unemployment, federal unemployment, worker’s compensation insurance and the cost of processing the payroll.

New Business CostsDifferent types of industries will require different types of insurance policies.  The most common types of insurance policies are general liability, auto, professional liability (errors & omissions), and worker’s compensation insurance.  Depending on the industry your insurance policy could dramatically vary in cost, and in some instances, the premiums could be much higher than expected.  One example would be a trampoline park pays a very high general liability premium due to the risk of injury, and framers pay a very high workers compensation rate due to injury as well.  Other industries such as interior design pay a very low workers compensation premium because they have very low risk in the workplace.

There are also professional fees including accounting, taxes and legal issues.  Some business owners would be able to perform most of the administrative work themselves, but in some circumstances business owners do not have the time to manage the business affairs and take care of administrative issues such as billing or accounting.  I can help clients by providing help with all different types of administrative work including insurance quotes, working with bank underwriters on loans, and other types of high level administrative work.

There are costs associated with setting up a business, and renewing the business every year.  There are also business licenses with the city.  Non profit 501(c)(3) organizations have to file a charitable solicitations permit each year and prepare a statement of functional expenses.

There are many different types of taxes businesses are subject to.  The list includes sales tax, restaurant tax, property tax, personal property tax, income tax, and IFTA taxes for trucking companies.  There is a cost of the tax itself as well, and the cost to prepare the returns or calculations needed to prepare the return.

Many businesses require more than just your standard accounting software to be able to do the invoicing, estimates, and time keeping.  There are also other business software programs that require an annual maintenance fee that can become significant.

There are information technology expenses.  If you have things go wrong with your computers, software programs, equipment, and email accounts you might need an information technology expert to help you figure out how to fix things.  Sometimes they are able to configure your systems so you can work faster and more efficiently.

Depending on the terms of your lease or rental agreement you might have to pay for utilities, common area maintenance fees and property taxes.  This is all in addition to your monthly rent, this is commonly referred to as a triple net lease.  Make sure you carefully check the terms of your lease and understand the related expenses before signing.

Starting a new business is a giant leap of faith.  Many business don’t survive the first year of being in existence, and that is because they did not have an accurate picture of what their expenses were going to be.  I can help you put together a projection that you can use to attain loans from banks, or help you feel better about the commitment you are making by starting a new business.  There is nothing better than being your own boss, so contact me and I’ll help you achieve your goals.

The Problem with H&R Block, Liberty Tax, and Jackson-Hewitt

The problem with H&R Block, Liberty Tax, and Jackson-Hewitt is that they have inadequately trained professionals, and that they overcharge for their services.  You also will likely not be able to meet with the same person each year.

Companies like H&R Block and Liberty Tax hold training seminars 12 weeks before the tax season begins.  They offer the classes as free training on how to prepare a 1040 tax return.  young professionalWhile the people are in training they are offered a job to work as a tax preparer.  After 12 short weeks, only breezing through each of the tax topics they are preparing returns for you.  Some of these people take the classes with the intention that they may be offered a position.

They even have the nerve to attempt to prepare business tax returns where they have absolutely no training on this matter.  They are only advised to review some of the examples that they have in their software.  They are not to turn away a business owner that is looking for a business return prepared.  This is malpractice, if there was a standard for tax return preparers, which there is none.

H&R Block and other franchised curbside tax return preparing companies oftentimes will charge you more for a tax return than if you would go to a CPA.  They charge on a flat fee based on the different forms that the software generates.  Even though they only had to enter one number for education expenses they might charge you $50 for that service.  The value of the service you are receiving is not even a quarter of what they are charging you.  You wouldn’t pay a high school student that has 12 weeks of training $100 or even $200 an hour.

The turnover at Liberty Tax and H&R Block is outrageous, because they might be able to offer one person a full time job at each location.  The rest of the tax preparers are found each year right before tax season.  The software they use is an in-house software that is below the standard for CPA’s in the industry.

As a CPA I have over five and half years of education, three and a half years of training in accounting and tax.  I have several years of experience behind me as a tax preparer.  I have taken the extensive CPA licensure exam and passed.  The exam itself is 16 hours long, and covers the areas of audit, accounting, tax and business.  I bill clients on an hourly basis.  If the return is simple you will not overpay.

Why Should I Create a Business?

 

Some people ask what is the benefit of actually creating a business. After all what is the big deal, people can operate as a sole proprietorship in their name without any cost.Creating a Business

Creating a business starts by registering the business name with the state. It is convenient to setup your business in your local state for in-office visits. There are certain states where a charging order is the only way to receive a judgement from an Limited Liability Company (LLC). Wyoming is one of these states, but you must have a registered agent that lives in Wyoming. So you will end up paying $150 a year to somebody to act as a registered agent, and they likely will do absolutely nothing for you all year.

The charging order requires the judgement to be paid from distributions made from the business. If the business never distributes money then the judgement will never get paid. The charging order will never force somebody out of business or bankrupt them, it will just force them to pay the judgement out of the funds actually distributed.

This discourages filing a suit against a business, because if you are granted a charging order as the plaintiff you will receive a judgement. That entire judgement is subject to income taxes whether or not it has been received. As I discussed earlier this may never happen if funds are never distributed.

In other states such as Utah setting up an LLC is enough protection in itself. In almost every case the laws regarding LLCs will protect your personal assets. The name itself limited liability company means that your liability is limited to the money that you have invested in your business.

Creating a new business allows you to file for a separate federal employment identification number (FEIN) that you use to file all tax returns. This FEIN number will also help you keep your social security number private because you can disclose the FEIN instead on W9 forms and applications and such.

With a business you can create a business bank account. You will need your business registration with the state and a printout of your letter granting your FEIN. With a business account you keep your personal assets separate from your business assets. If you are not separating your personal bank account from your business bank account you are commingling assets. Someone could potentially pierce the corporate veil, and go after your personal assets as well as your business assets, because the way that you are using them is one and the same.
Setting up a business bank account also makes the accounting much easier. If you have to search through your personal bank account and pile of receipts for business expenses it takes much longer and costs you more money when you go to do your taxes. With a business bank account you can reconcile your bank account and keep a set of accounting books that is accurate and reliable.

If you are ever audited by the IRS the auditor will not be happy if you tell them that you will have to go through your personal bank account and tell him which expenses are business related. The auditor may determine that all the expenses are not business related because you have nothing to substantiate your claims. This can result in tens of thousands of dollars in taxes and penalties. On the other hand, if you give the auditor your books for your business the auditor can quickly audit the information, and because the financial data is separate it is sufficient proof to determine that the expenses are business related.

Having a set of accounting books gives you information that helps you manage your business with real numbers instead of an assumption of how your business is performing. Sometimes your books will help you see if you are over-spending on certain types of expenses. The books will also show you exactly how much money you are making versus how much is in the bank account. You can also setup budgets when compared to your financial data you can determine if you are over or under budget on certain items. Just like with personal finances if you don’t know how much your spending you really don’t know how you are doing financially.

You can also have a set of books for you individually. This helps track expenses and reconcile the bank accounts. It also tracks medical expenses and charitable expenses as well. These personal financial statements will also help you determine if you are depleting or contributing to your savings.

With a business you can begin to establish business credit with Dun & Bradstreet. This business credit history is important as your business grows older. When applying for loans you can show the bank your financial statements as well as tax returns for the business.

There are many reasons why you should setup a business for any business activity. The benefit of having an accurate set of books, and business that has been properly set up outweighs the cost of these items. Knowing where your business is financially allows your business to expand and thrive.

If You’re Audited, Call Your CPA First

One of the things that I tell my clients ever year is if you’re get audited contact me first. There are a number of different reasons for this.

1. People get stressed out over an audit. Let your CPA take the stress away by contacting the auditor with a designated power of attorney, and speak with them on your behalf. With a power of attorney your CPA can find out everything as if they were the taxpayer.

2. Auditors ask you questions to get you to say something you don’t want them to know. Your CPA knows what the auditor is looking for and is more likely able to answer the question in a more direct fashion. Also your CPA provides a layer of protection because they can find out the information the auditor requesting, and then ask the client for the information, and relay the information back to the auditor. People get scared in an audit and will say things that they would wish they had not said if they knew what it meant.

3. The penalties and interest can be between 20% to 40% of the tax owed. Not to scare you, but there is also the chance of a civil fraud penalty equal to 75% of the tax owed, as well as tax fraud which is punishable up to 5 years in prison. Here are some of the ways to commit tax fraud.

  • Understatement of income
  • Inadequate records
  • Concealment of assets
  • Failure to cooperate with tax authorities
  • Attempting to conceal illegal activities
  • Dealing in cash
  • Failure to make estimated payments

4. Your CPA is aware of the due dates that the auditor gives you to respond. If you ever get a letter from a taxing authority you should respond promptly. Oftentimes if you do not respond in the time frame allowed you open yourself up to liability. The taxing authority may be able to automatically assess the tax, and you will be forced to appeal the case in tax court.

Your odds of randomly being audited are small in percentage, especially if you make less than $100,000. The IRS has been tasked with handling all the additional work stemming from the Affordable Care Act. This will likely even further decrease your chance of an audit.

Oftentimes, audits are easy to resolve if taken care of in an efficient manner. Auditors know that people that hire CPA’s are serious about reporting and paying tax accurately. Your CPA can negotiate with the tax authority by offering a different point of view to the way the tax amount is calculated.

Respectfully,

Lance Hori, CPA

lance@cpa-utah.com