Best Business Practices

You face plenty of challenges as a small business owner. Finding ways to protect yourself against lawsuits is a major one. You may be able to add protection by structuring your business as a corporation or limited liability company (LLC). Both these entities may shield the owners’ or members’ personal assets from the company’s debts and liabilities.

The protection isn’t bulletproof, however. Requirements must be met, and the separation between the owners or LLC members and the business must be clearly established. Evidence to the contrary could spell trouble.

The Corporate Veil

In the face of a legal challenge, if you’re not following proper protocol, a court may decide your business isn’t being operated as a separate entity from the owner(s) — despite the existence of a corporation or LLC. That could lead to a legal decision to “pierce the corporate veil,” a term that means the owners’/members’ personal assets can be used to satisfy business debts and liabilities.

Follow Formalities

Corporations must meet strict state requirements regarding bylaws, director and shareholder meetings, issuing stock and recording transfers, fulfilling annual state filing requirements, and paying corporate taxes. There are fewer requirements for LLCs, but members would be wise to follow the guidelines for corporations.

Document Diligently

The best way to show that your business is operating properly is to document everything. Keep minutes of all major management meetings and record all business activities and decisions. Keep these records with your other formal business documents (including contracts your company is party to) for a minimum of seven years.

Capitalize but Don’t Commingle

It takes money to run a business. There are several ways to capitalize your business: You and the other owners or members might fund it, you might take out a loan, or you might find new partners who are willing to fund you. Regardless of what method you choose, be sure to document all important financial transactions.

Never commingle your personal assets with business assets. Establish separate bank accounts and credit cards for your business, keep property and equipment separate, and file separate income tax returns.

Small businesses make accounting errors and oversights regularly. Here, we cover five of the most common small business accounting mistakes. Read on to see if you’re making any of these mistakes and how to avoid them in the future.

1. You don’t take bookkeeping as seriously as you should.

Recording everything is an excellent rule to follow for bookkeeping and accounting for a small business. Ensuring that everything is recorded and categorized correctly in your accounts is essential, from small transactions like purchasing office supplies to large payments from customers and clients. No matter how small your company is, accurate bookkeeping and accounting methods are essential for a reliable assessment of your company’s health.

If you’ve slacked in this area, find the weak spots. For example, you may need to: categorize your assets and liabilities correctly, have a monthly accounts review, or establish a new bookkeeping system. A sound bookkeeping and accounting system is the only way to know how your business performs.

2. You refuse to outsource your accounting needs.

If you read point one above and the need to establish a new bookkeeping and accounting system rings true, you’ve identified a serious issue. Many small business owners decide to handle bookkeeping and accounting in-house because they feel “too small” to justify outsourcing those tasks. While the temptation to reduce costs by controlling the books in-house is tempting, it can be overwhelming when trying to manage a business and wear the accountant hat.

Handling your own accounting could be costing you money. Accountants understand ways to save businesses money that can escape others. They know all the ins and outs of taxes, deductions, write-offs, etc. It’s what they do all day, every day. Consider outsourcing your accounting to a qualified firm instead of missing out on opportunities to save money.

3. You outsource, but you fail to communicate with your accountant.

So, maybe you have already outsourced your business’s accounting. Are you communicating with your accountant? Does your bookkeeper know what’s happening in your business? Keeping up with all transactions – great or small – and sharing those with your accountant is vital. Overlooking even a small purchase can lead to costly issues over time.

A great way to make sure your accountant is fully apprised of any and all expenditures. Keep receipts and a record of all transactions. You can use receipt tracking software or keep a paper or digital log. Regardless of the method, your accountant will appreciate your efforts. Their job will be easier, and it can save you money in the long run.

4. You don’t record every expense, even the small ones.

This point cannot be emphasized enough. It is essential to record all business spending, no matter how insignificant you think. That $5 of petty cash you took out of the register to send your employee to pick up stamps for the business counts! This is particularly crucial for cash-based (i.e., retail) businesses. No expense is insignificant. This is a fundamental rule to follow for new companies. While it is easy to overlook the small stuff, as your business grows, you will be glad you were attentive because it makes managing your books so much easier. Again, this can be a big money-saver in the long run.

The bottom line: No transaction is too small to record. Save receipts, keep a record, tell your bookkeeper.

5. You assume that profit always equals healthy cash flow.

If you make a sale of $1000 that cost your business $300, did you profit $700? Not necessarily. Depending on the type of business you are in, additional costs could be associated with the sale that reduces the profit. For example, if you’re in retail sales, you must account for expenditures like overhead. What if the merchandise is returned and refunded? Handling the refund costs you money, and that cuts into profit. Suppose you’re in a business that provides services like construction or home improvements. In that case, you must consider setbacks and delays due to receiving materials, weather, etc. Any setback you experience in completing a job means less profit to your firm.

Not accounting for costly setbacks can give you a false sense of how your business is performing. While the numbers may look good on paper, a distorted picture of its financial health is detrimental to your success.

Awareness of these small business accounting pitfalls can help you improve in weak areas and position your business for long-term success and a healthy financial future.

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Contact our accounting professionals now for more help managing your small business finances.

Small business owners cite the unavailability of workers as one of their biggest challenges1. The labor shortage means that employers cannot, in some circumstances, operate at full capacity and must forgo some revenue opportunities. Businesses may have to delay planned expansions or the addition of new products or services because of the scarcity of workers.

Employers understand that having a skilled, trained, and committed workforce is key to growth and profitability. In the competition for a decreasing pool of skilled employees, employers have to assess their current hiring practices, identify any deficiencies, and develop and implement policies that help ensure that they can hire the employees they need when they need them.

Here are some issues employers need to consider when developing a strategy to attract and retain key employees.

Sharpen Your Hiring Process

Use every available tool. If you are not using social media to reach out and contact potential hires, you are not taking advantage of a very helpful medium. Social networks like LinkedIn and Facebook can be productive resources. They can be particularly effective if you ask family members, friends, and current employees to reach out and talk up job opportunities with your company on the sites they frequent.

Posting available positions prominently on your company website can also be effective in reaching out to a pool of potential hires. Traditional avenues, such as headhunters and employment agencies as well as radio and television ads, remain helpful.

Revisit Your Compensation

Some industries, such as information technology, pay more in wages and benefits than other traditionally low-paying industries, such as food services and retail. Still, if the job opening you want to fill is critical to the future growth of your business, you may want to consider paying above market salary if you can afford to do so. You may even have to get into a bidding war with other employers.

The reality is that employees with in-demand skills typically command a premium salary. Before you make a prospective employee an offer, find out how much other employers in your area pay for similar jobs. One place you can find useful employment and wage statistics is the Bureau of Labor Statistics website (bls.gov). The BLS information covers most geographical areas in the United States and is broken into type of occupation as well as various levels within that occupation.

Rethink Benefits

Most employees look for health care coverage, paid vacation days, and an employer-provided retirement plan. If you can’t be competitive with these benefits, you may have to step it up with others. Think of offering employees the chance to work remotely for a few days a week if it is feasible with your business’s operations. Consider summer hours, employer-provided snacks and drinks, and casual dress days.

Coping With a Labor Shortage

Not every incentive has to have a price tag attached. Non-monetary awards — from recognizing an “employee of the month” to a heartfelt face-to-face expression of gratitude for a job well done — can be remarkably constructive and can leave a lasting impact on employees. Inexpensive incentives can include gift certificates, cash spot awards, and even extra paid vacation days.

Offer Training

While costly, offering courses and educational opportunities that can help employees advance in their area of expertise is a potent way to attract ambitious, committed employees. Courses that develop well-rounded team players who can take on other roles within your business are especially cost-effective in the long run.

Consider Incentive Plans

Incentive plans reward employees for their achievements and create a sense of accomplishment. Plans can be used on a one-time basis or as an ongoing program. Some incentive plans include:

• Annual incentive plan: Rewards for this type of plan are tied to expected results that are identified at the beginning of the performance cycle.
• Discretionary bonus plan: The owners/managers determine the size of the bonus pool and the amounts that will be given to individuals after a performance period. Typically, payouts from this type of plan are not guaranteed, nor is there a predetermined formula.
• Profit sharing plan: A profit sharing plan allows employees to share in their employer’s profits. Such plans typically include a predetermined formula for allocating profit shares among participating employees and for distributing funds accumulated under the plan. Some plans are tied in with the employer-provided retirement plan and some plans are discretionary.

Work With Your Financial Professional

Structuring an effective compensation and incentive package can be a complex and time-consuming task. The help of an experienced financial professional can be invaluable during every stage of this undertaking.

1″The America Works Report: Quantifying the Nation’s Workforce Crisis,” U.S. Chamber of Commerce, June 1, 2021.

While you may think it’s better to take care of your small business accounting tasks in-house, you may be surprised to know that your business can benefit from having a professional accountant or CPA handle the job for you. Here are the top three reasons to outsource your accounting.

1. Peace of Mind

The number one reason for outsourcing your accounting is the peace of mind you will get regarding managing your accounting records. A qualified accountant or CPA on your team allows you to gain access to their professional knowledge and experience. Further, you can even choose an accountant that specializes in your unique business needs. A professional can help you keep your business records accurate and up-to-date. For example, payroll and tax documents will be maintained appropriately and submitted promptly. Timely and accurate accounting reduces your risk of penalties resulting from inaccurate record-keeping or lack of knowledge regarding aspects of accounting like tax laws and deadlines.

2. Focus on Business Development

When you enlist the services of a qualified accountant or CPA to manage your small business accounting needs, you minimize the time that you or your senior staff must spend performing or micromanaging those tasks. Freeing up your time in those areas enhances your ability to maintain a keen focus on the day-to-day tasks your business faces and any additional business needs that arise. Being able to focus your time on managing and growing your business, you improve operational efficiency. As you develop strategic goals, you can convey those to your outsourced accountant to garner their professional guidance and support when executing and realizing those goals.

3. Save Money

Many small business owners feel that handling accounting tasks in-house is more cost-effective because they can utilize existing staff. However, consider the total cost involved in hiring or training a staff member to manage your business’s accounting needs. There is also the associated time expenditure related to supervising an employee who manages the accounting. For a dedicated in-house staff member to handle the task, you must consider the additional costs of payroll, payroll taxes, and employee benefits. There is also employee turnover to consider, which, if high, could lead to additional training and expenses. By not electing to have a full-time dedicated employee handle accounting in-house, you also save on space and technology required to accommodate that individual.

For these reasons – and more such as getting timely financial advice, understanding cash flow, and maximizing your tax savings opportunities – it’s time to outsource your business’s accounting needs. What you gain far outweighs the cost.

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Contact our firm to find out how we can create a package of accounting services for your small business.

When you start a business, there are endless decisions to make. Among the most important is how to structure your business. Why is it so significant? Because the structure you choose will affect how your business is taxed and the degree to which you (and other owners) can be held personally liable. Here’s an overview of the various structures.

Sole Proprietorship

This is a popular structure for single-owner businesses. No separate business entity is formed, although the business may have a name (often referred to as a DBA, short for “doing business as”). A sole proprietorship does not limit liability, but insurance may be purchased.

You report your business income and expenses on Schedule C, an attachment to your personal income tax return (Form 1040). Net earnings the business generates are subject to both self-employment taxes and income taxes. Sole proprietors may have employees but don’t take paychecks themselves.

Limited Liability Company

If you want protection for your personal assets in the event your business is sued, you might prefer a limited liability company (LLC). An LLC is a separate legal entity that can have one or more owners (called “members”). Usually, income is taxed to the owners individually, and earnings are subject to self-employment taxes.

Note: It’s not unusual for lenders to require a small LLC’s owners to personally guarantee any business loans.

Corporation

A corporation is a separate legal entity that can transact business in its own name and files corporate income tax returns. Like an LLC, a corporation can have one or more owners (shareholders). Shareholders generally are protected from personal liability but can be held responsible for repaying any business debts they’ve personally guaranteed.

If you make a “Subchapter S” election, shareholders will be taxed individually on their share of corporate income. This structure generally avoids federal income taxes at the corporate level.

Partnership

In certain respects, a partnership is similar to an LLC or an S corporation. However, partnerships must have at least one general partner who is personally liable for the partnership’s debts and obligations. Profits and losses are divided among the partners and taxed to them individually.

Call Newton Sankey & Co. today at 631-474-2500. We’ll set up a free consultation to discuss your new venture and how we can assist with our new business advisor and incorporation experience.

Incorporating your small business the right way can bring tax benefits and protect your personal assets. Read on to learn more about what incorporation is, why you might want to incorporate, and how an accountant can help you navigate the questions that come with selecting the right business structure.

What is Incorporation?

When discussing “incorporation” in terms of a business, the term denotes how the business is organized or structured.

Regardless of the structure you choose for your business, incorporation is a legal process that brings your business into existence. The following are business structures commonly used in a small business.

Sole proprietorship

If you conduct business as an individual and do not register as any other type of business, you are a sole proprietor. With this business structure, your personal and business assets and liabilities are not separate. Sole proprietorships are relatively simple structures and a good choice for low-risk businesses or entrepreneurs testing a business idea. However, this business structure does not offer liability protection, so the owner is personally responsible for business debts and obligations. Another drawback is that it can be more challenging to get bank financing and business credit with this structure.

Partnership

When two or more individuals own a business together, the simplest structure is the partnership. There are limited partnerships (LP) and limited liability partnerships (LLP). LPs consist of a general partner with unlimited liability; the remaining partners have limited liability and limited control in the business. The partner without limited liability pays self-employment taxes. In LLPs, every owner has limited liability, protecting them from business debts and the actions of the other partners.

Partnerships can be a good choice for multiple-owned businesses and professional groups like physicians, attorneys, and veterinarians.

C-corp

Sometimes called a C-corp, a corporation is a separate legal entity from the business owner(s). The benefit of a corporation is that they offer the most robust protection for owners from personal liability; however, it costs more to form a corporation than it does to establish other business structures, and business profits are taxed at the personal and corporate level. Further, the record-keeping, operations, and reporting are more involved for a corporation. This structure is usually best for higher-risk businesses or those that raise money or plan to become publicly traded in the stock market.

S-corp

An S-corporation, or S-corp, is designed to avoid the double-taxation of a C-corp. This avoidance is possible because, in an S-corp, profits and some losses go through the owner’s personal income to avoid corporate taxes. S-corps are taxed differently in different states, so it is essential to have your accountant help you understand the guidelines and laws in your state.

LLC

A limited liability company (LLC) has the benefits of a corporation and a partnership. The owner is protected from personal liability in situations like bankruptcy or lawsuits and can avoid corporate taxes because profits and losses can pass through their personal income. However, there are self-employment taxes and Medicare and Social Security contributions since LLC members are considered self-employed.

An LLC is an option for owners with significant assets that need protection and who want the benefit of a lower tax rate than a corporation pays.

How to Incorporate

When you’re ready to incorporate your business, consult your trusted CPA or accountant so that you have a full view of what incorporating will mean for you and your business initially and for years to come.

Call Newton Sankey & Co. today at 631-474-2500. We’ll set up a free consultation to discuss your new venture and how we can assist with our new business advisor and incorporation experience.