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 "Bullet Proofing Your Business From Failure"

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FAQ's

Frequently Asked Questions

  1. Should I structure my business as a corporation, a partnership or a proprietorship?
  2. What is the difference between an audit, a compilation and a review?
  3. What are the new education tax credits allowed when filing my federal income tax return and what are "qualified expenses"?
  4. What factors should be considered when planning to start my own business?
  5. When should I file for an extension for my individual tax return?
  6. When should I set up a trust to accumulate funds for financial planning purposes and for my children's education? What types of trusts are available?
  7. I am in the market for a bank loan. What kinds of information should be included in the business plan I present to bankers?
  8. What are five good ways to reduce my overall expenses in doing business?

 

1.

Should I structure my business as a corporation, a partnership or a proprietorship?

The structure of the business depends upon the long and short term intent of the entrepreneur.  For small business owners, the entity of choice would be a S corporation, because of the tax benefits and shelter from personal liability. However, other types of entities should be considered depending upon the nature and purpose of the business and the owner's objective.

2.

What is the difference between an audit, a compilation and a review?

An audit provides the highest level of assurance. An audit involves extensive validation of the financial statements of an organization. An opinion letter on the financial statements accompanies an audit. Audits are usually necessary when requested by a third-party (i.e., potential funding agencies, lending institution, etc.). Audits can also be used by management as a means of internal control. 

The next level of assurance is a review. A review involves an analysis of the financial statements. Account balances are not reviewed in depth. Trends, comparison of prior year amounts, and ratio analyses are the means most employed in reviews. A letter accompanies a review providing limited assurance on the organization's financial statements.

The lowest level of assurance, a compilation is a gathering of information for financial statement or tax preparation.

3. What are the new education tax credits allowed when filing my federal income tax return and what are "qualified expenses"?

Effective 1998, education tax credits are available to persons who pay higher education costs. These credits are as follows:

The Hope Credit

This can be as much as $1,500.
(not to be confused with the state of Georgia or other state's Hope credit)

The Lifetime Learning Credit

This can be as much as $2,000.

Expenses that can be used to compute the credits are generally qualified tuition and related expenses paid for an academic period beginning in the same year as the year the payment is made (prepaid expenses may also qualify). Qualified tuition and related expenses are tuition and fees required for enrollment or attendance at an eligible educational institution. The following are two general categories:

  1. Tuition and fees;

  2. Student activity fees and fees for course related books, supplies and equipment are included in qualified tuition and related expenses only if the fees must be paid to the institution as a condition of enrollment or attendance.

You may also use proceeds from borrowed funds, if such proceeds are used to pay qualified tuition and fees.

4.

What factors should be considered when planning to start my own business?

Starting a business is a serious undertaking. Therefore, many factors should be considered. Following are ideas and suggestions you might want to keep in mind:
  1. Before considering starting a new business from ground up, think about searching to see if an existing business is available in your location.

  2. Always prepare a thorough business plan. You might want to consult with your CPA prior to this undertaking.

  3. Prepare or have your CPA prepare a detailed personal financial statement. If your personal financial ratios and indexes are not good, you may want to focus on strengthening these prior to venturing out and establishing a business. Remember, a business is an extension of your personal financial life and management capabilities.

  4. Make sure you select the right and proper entity to operate your business. It might be beneficial to form a corporation rather than operate as a sole proprietor. 

5.

When should I file for an extension for my individual tax return?

The due date for an individual tax return is on or before the 15th day of the 4th month of the tax year (April 15). To obtain an extension for filing Form 1040, 1040A or Form 1040EZ, you must file an application (Form 4868) on or before the due date of the tax return. You must also include a proper estimate of the tax that is due for the year.  It must be postmarked no later than April 15, unless that date is on the weekend. Remember, interest and penalties accrue on any unpaid taxes from that date until they are paid. Under certain conditions, you might qualify for an abatement.

6.

When should I set up a trust to accumulate funds for financial planning purposes and for my children's education? What types of trusts are available?

A trust can be set up at any time. A trust, like a corporation, limited liability company or limited partnership, is a creature or fiction of your state's laws. There are many types of trusts available today. Some commonly established trusts are 2503(c) Trust (used for educational and other important purposes), Charitable Lead Trust (used to accumulate money and property) and the Charitable Remainder Trust (used to donate appreciated property and to eliminate capital gains tax).

7.

I am in the market for a bank loan. What kinds of information should be included in the business plan I present to bankers?

A well prepared business plan should include detailed explanations of the business market, management team, operations, financial structure and projections and a source and use statement explaining the use of the funds to be borrowed.

8.

What are five good ways to reduce my overall expenses in doing business?

It is always good to prepare an annual budget prior to the next operating year. In doing so, the following areas should be critically reviewed and evaluated for cost saving opportunities:

  1. Look to out-source functions that require a high level of expertise and compliance (i.e. payroll services, maintenance and repair functions, computer upgrades, internal audit functions and in some cases billings and collections). These functions should not be a part of the normal day-to-day operations.

  2. Consider self-insurance for health, life and dental benefit plans. Consider a policy in which individual employees enroll in health, life and dental plans rather than group plans. As always, a careful study should be done in this area.

  3. When evaluating the need to purchase new equipment or redecorate the office, consider forming internal committees or teams to evaluate the need or plan for such activity and expenditure. Do not always engage the service of an outside "consultant". More often than not, your employees are your best consultants. Save money!

  4. Utilize e-commerce for bids and purchase of routine and specialty items (i.e. office supplies, furniture, computers, etc.). In many cases, some of the best economical purchases are done interstate. Pending no change in sales use tax laws, such purchases, if purchased interstate are exempt from sales tax. Shipping and handling in many cases are minimal.

  5. One of the best ways to reduce costs is by offsetting non-operating income against operating costs. A good way to generate non-operating income is to fully utilize excess cash in the bank. Arrange with your bank a "repurchase agreement" (commonly referred to as "Repo" agreement or overnight investment of excess cash in an operating account).

Do you have any questions that are not listed on this page? Please let us know. 

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Answers to these questions are meant to be general in nature and must be discussed with your tax, financial and legal advisor before any action is taken. 

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