Tuesday, January 13, 2009

Practicing What We Counsel

score_tjpg_mcculloch This article was written by Ben McCulloch, Chairman, SCORE Orange County

Happy New Year! Finally! Let’s kick it off with a rundown of the new things you’re going to see from us this year. Our value proposition to you hasn’t changed: we’re still your network of business knowledge and experience. But, like you, the downturn has made us take a hard look at what our customers – you – need, and the mix of products and services we offer.

And what we found boils down to relevance and accessibility: that our services are aligned with the current economic context, and that we’re available on your terms. Here’s some of our 2009 line-up:

  • ‘Saturday Counseling Fair’. If your business needs you during the week, then meeting us in Santa Ana at 10 o’clock on Tuesday isn’t an option. So, we’re holding counseling ‘fairs’ on Saturdays, where several counselors are available for individual one-hour sessions. We’re holding one a month for now, rotating the locations around the county. And, they’re ‘self-serve’: you choose the counselor and time slot you want, and schedule yourself. Here’s a tip: when you get the next announcement (February), be sure to ‘click-through’ right away. They fill up quickly.
  • ‘Surviving the Downturn’ Workshops. Over the holidays, our team was busy researching and assembling a workshop focusing on the current challenges to business owners. So, on January 31, we’re hosting our first panel discussion between you and seven experts who span the range of business functions. Bring your questions and concerns; share your experiences and solutions with other business owners. Look for the announcement in your inbox this week.
  • CEO Counseling Groups. You’re a CEO and want to grow and strengthen your peer network? We’re forming small groups of CEOs that will meet monthly to share and to learn. Each group is led by one of our counselors who’s ‘been there’ as CEO. Our first two groups kick-off in February. If you haven’t yet heard from us, and think you might qualify, we hope you will call us to find out more.
  • ‘Speed Counseling’. Would you like to get advice from several business experts in one day? Later this spring, we’ll be hosting a fast-paced day of individual counseling and mini-workshops on several topics. Plus, networking, lunch, and you’ll hear from a nationally-recognized business leader. That’s all for now: stay tuned.

Our 2009 is all about relevance and access. We’re also rolling out new workshop topics, more workshops, and more locations. Be sure to check our website regularly. Watch for our email announcements. Tell us if there’s more you’d like to see.

We’re excited to get this year going – finally – and look forward to seeing you again soon. Together, let’s make it a happy and prosperous New Year!

The Payroll Processing Decision; Some Other Factors May Decide It.

score_tjpg_Ginnaty This article was written by Dick Ginnaty, CPA

For those who are have just hired your first employee (and it may be yourself if you have just incorporated), you are facing the task of having to deal with payroll tax withholding and depositing, and all the payroll tax form filings. Most of you know that help is available (for a fee) from the national services (ADP, Paycheck), the large banks (B of A, Well Fargo, Union Bank), your software provider such as QuickBooks, or from most accountants. However, two additional services (think retirement plans, and workers compensation insurance) offered by the national services may be the deciding factor for you in choosing how you will address the various payroll tasks.

The national firms (ADP, and Paycheck to name two) offer relatively cheap 401K programs for even the smallest of employers (1 employee) at prices that you can’t match from most providers (if they offer the service at all), and they offer workers compensation insurance programs at rates that individual employers can’t qualify for. As you should be aware, in California it is mandatory to carry Workers Compensation insurance if you have non owner employees. Penalties and fines (and lawsuits) await those who don’t get and maintain it. So check out both of these issues before deciding how you are going to address your payroll withholding and reporting responsibilities. The savings from your workers compensation insurance premiums alone may pay for the payroll service.

Good luck and here’s hoping it “all adds up” for you.

(If there is any area in accounting or tax that you think needs to be addressed in this newsletter please e-mail Dick at Ginnatycpa@aol.com and if it is of general interest, he will address it in future articles)

Time To Batten Down The Hatches

score_tjpg_lefson This article was written by Bern Lefson, SCORE Orange County Management Counselor

Given we are facing anywhere from 12 to 24 months or more of tough times small businesses must get into survival mode. This means taking any and all actions necessary to preserve cash, cut costs and monitor the cash flow.

While this is easier said than done here are some realistic things a business can do to survive.

  • Cut expenses by asking the question: Is this activity or service necessary? In particular look at all your fixed expenses.
  • Is it time to consider asking your long term vendors for better rates?
  • Check the fiscal status of your lender. If it looks shaky, you might consider alternative lenders who will be there for you when you need them.
  • If you hire a bookkeeper or accountant to do your books, get a cash-flow projection and keep this up-to-date. This may be crucial if you have a large commitment coming up.
  • Your accounts receivable outstanding days are based upon how you bill and how accurately you do bill.
  • Another way to improve your receivables is to find out what each of your customer’s invoice protocol, what timing to expect, and who to contact in case of an issue that can make decisions.
  • Investigate sending invoices electronically.
  • Try to have your customers pay invoices electronically.
  • If you do not accept credit cards now consider doing so.
  • Incentives to have your invoices paid on time may enhance your collection time.
  • Track your spending by vendor and by category. This will help you see saving opportunities more clearly.
  • Look at your phone bills for cost cutting opportunities. For example, VOIP or calls through your computer can cut your phone costs.
  • Consider obtaining encryption application in order to e-mail documents instead.
  • At end of day shut off your computers and printers to save on electricity.
  • Forego raises or bonuses in order to conserve cash. Communicate the reasons to those directly affected.
  • Consider changing to a four day workweek. Or reduce the workweek to 36 hours with corresponding pay.
  • Consider giving an employee(s) an unpaid sabbatical if you wish to hand onto him/her but must reduce your payroll. Flextime may be another option that cuts your payroll but does not lose needed talent.
  • If it becomes necessary to cut your payroll, be sure to do so wisely. This means don’t discriminate but keep the most talented to be certain you can continue to function. Just be sure to keep those retained happy by assuring them, to the extent possible, that you need them and the business needs them. Don’t make promises you cannot keep.
  • Shift from a costlier PPO health plan to a lower cost HMO.
  • Consider barter. Examine organized barter exchanges or networks. (Don’t skip the tax reporting if you do bartering.)
  • As a cash raising technique, consider a “special inventory reduction sale” that reduces your inventory and keeps the place open with the cash received. Don’t let your customers think this business as usual so raising prices when events permit won’t be an issue except for customers who only bought due to the pricing.

In times such as the ones we are in, cash is king. Understanding and efficiently managing your cash flow is crucial to your survival. Some or all of the above are steps to be considered as you focus on survival.

Tough Times Don’t Last, But Tough Businesses Do!!

score_tjpg_bour This article was written by Norm Bour, SCORE Orange County Management Counselor

Happy holidays and a Toast to a successful 2009!

It’s a cliché, but one that still works is “Tough times don’t last, but tough people do”. We’re in the midst of some of the most “challenging” economic times that most of us have ever seen- and hopefully will ever see- , and with the new Administration and world uncertainty, it’s anyone’s guess as to when it will settle down. Stability and consistency may be the exception to the rule for the future and this world of today may be the new “reality”. So what does that mean to business owners or those looking to start?

Recessionary times are not the exception to the rule, but are a recurrent theme in the world of business. It challenges you to stand back and objectively look at what you do (or don’t do) and determine the things you can improve. And there is always room for improvement. One of these advantages of times like this is that your competition is feeling the pain, too, and many of them will not last. So it’s up to you to make sure that the Survival of the Fittest means that you come out of this cycle, lean, mean, and profitable.

We’ve identified 5 key steps in helping you to survive for this New Year. They will be explored in more detail over the months to come, but we will highlight the major categories:

1. Warning sign: take a snapshot of your current situation. This means looking at your cash flow and business plan to make sure they still “work”. Ask yourself honest and objective questions and reply with honest and objective replies.

2. Reduce your overhead and stop the bleeding. The times for frivolity and wasted expenses are gone.

3. Increase your sales and income. This is a non-stop priority, but in today’s world it is even more vital.

4. Reevaluate your business model. Are you a victim of the times, maybe offering products or services that are less in demand? A course adjustment may be a simple or major tweak.

5. The Next Steps: are you able to live with and embrace the new rules? We don’t know what they are yet, but you will be part of them development.

It seems counter-intuitive, but in many cases starting a business in a recession is an advantage and many businesses do thrive. Here are some interesting stats:

- Of the 30 companies in the Dow 30, 16 were started during a recession.

- Both Disney and Hewlett-Packard began in a down cycle, 1923, and 1938.

- And good old Microsoft began in the 1975 recession.

In Southern California during the last recession in the early 90’s, we had massive lay-offs of engineers and highly educated and highly paid executives. The results of these firings were the foundations of smaller, leaner companies that picked up the hiring dilemma and had the cream of the crop to draw from. Not much different than today. What all of this means is that your odds of success increase dramatically if you start a business now because your overhead will be much less than if you were to it in boom times. And since keeping your overhead low is a basic component of small business success, and bodes well for today's entrepreneur.

It’s all about growth and education. Are you in need of a top notch executive to take your company to the next level? Throw a stone, you may hit one!

What Type of Corporation Should You Form?

score_tjpg_Fulton This article was written by Jim Fulton, SCORE Orange County Management Counselor

Disposing of one question immediately; it makes no sense to form a corporation or an LLC outside of California if your principle place of business will be in California.  A “foreign corporation” must register with California and still pay the $800 annual minimum tax if it has a place of business in California.
The title Limited Liability Company, LLC, causes confusion in the minds of many SCORE clients.  Both the S-Corporation and the LLC enjoy limited legal liability (like all corporations) under both California and Federal Law.  When seeking to form a business entity that provides limited liability to its owners (shareholders), important questions arise at both the Federal and the California State level.  For most SCORE clients, the S-corporation pays significantly lower taxes than the LLC.

The Federal Government only recognizes two types of corporations.  The Federal Government recognizes the general corporation (sometimes described as a C-corporation).  This type of corporation has its own tax forms, instructions and schedules (Form 1120).  The Federal Government also recognizes one type of small business corporation, the S-corporation.  The S-corporation enjoys all of the benefits of any corporation, including limited liability for the shareholders, but is taxed as a partnership.  The S-corporation pays no Federal Income Tax but must file Form 1120S annually.  All profits and all tax liabilities are transferred to the shareholders in proportion to their ownership of the corporation.

California recognizes both the C—and the S-- types of corporations.  A California C—corporation files a Form 100 tax form annually.  This form is very similar to the Federal Form 1120.  A California S—corporation files Form 100S annually.  This form is very similar to the Federal Form 1120S.  Both the C—and S—corporations are taxed on their net profit after deducting their business expenses (including Section 179 capital investments and other tax advantages).  The S—corp. tax rate is lower than the C—corp. tax rate, it is 1.5% of the net profit with a minimum annual fee of $800.  The profits of an S—corp. are distributed to the shareholders acting as partners where the profits are shown as non-employee income on their personal FTB Form 540.  No employment taxes are due on this form of income.

To be treated as an S—corporation, the corporation must file Form 2553 with the Federal Government within the first two months and 15 days of its start of business.  California does not require filing of a separate form.  It receives a copy of the Form from the Federal Government. 

California also recognizes a separate entity known as a “Limited Liability Company,” the LLC.  The LLC is provided the same limited liability as enjoyed by corporations.  However, the LLC is taxed differently using California Form 568.  The LLC pays a “fee” based on its total California income (before deducting any expenses or Section 179 capital purchases) and also the $800 annual tax.  The sum of the fee and the tax is generally higher than the tax that would be paid on a California S—corporation.  See the attached graph.

A California LLC can avoid the higher taxes required by Form 568 if it is classified as an S—corporation for tax purposes.  It does this by filing the same Form 2553 described above with the Federal Government.  This form can only be filed if the LLC conforms to the Federal limitations on an S—corporation (thereby eliminating any advantage in forming an LLC in the first place).

The only time the LLC is taxed favorably compared to an S-corporation (with less than 20% net profit) is when it total revenue exceeds two to ten million dollars depending on the net profit of the S—corporation. 

Clients should be made aware of these differences.  In most cases, they should be discouraged from creating an LLC unless it is necessary that a non-resident alien be a shareholder.  Otherwise, they should consider an S-Corporation since it achieves their desired goal of limited legal liability and will generally pay lower taxes.  In any case, they should be encouraged to engage a tax professional to advise them on their best course of action.