Wednesday, March 24, 2010

Why Should You Hire A Small Business Accountant?

When I am retained by a small business, one of the first questions I have is "do you have an accountant that you work with?"  Not that does your taxes, but works with you and your business on a regular basis.  Most of us just have that person that does our taxes.  As a small business owner you need an accountant just as much as you need a lawyer.

A small business accountant can help you figure out the best way to use your assets for the most beneficial financial advantage. The financial health of your small business is best left to a professional who can help guide the process and offer valuable counsel on what information is key for any business to be aware of. While small business owners are often usually experts in their own field or industry, rarely are they either accounting, tax or legal experts. An accountant can provide information that will shed valuable light on how to save and manage money for the best chance of success for your small business. Below are some reasons to hire s small business accountant.

Reason #1 - Business Assets

An accountant will become familiar with and handle the business assets, including the total ledger balance and its detailed credits, debits, profits and losses. Accountants are in a position to provide advice on how to keep monetary resources up or better them, since they have the specific insight into the financial position of your small business. 

Reason #2 - Tax Assessments 

Accountants are up to date on and have the appropriate tax law knowledge for small businesses. They can also help to verify compliance for you which will ward off taxation troubles. Accountants also know about various taxation breaks as they occur so that you can get the best value claim reward available. 

Reason #3 - Technical Financial Systems 

Many accountants are extremely skillful and updated on how to apply the latest technical aspects for accounting, such as with software that enables quick statements and reports, as well as access to financial information. This can also help a business owner in other areas of their business, with access to some of the most organized accounting systems. 

Reason #4 - Business Planning 

An accounting firm can act as advisor and perform business reviews to provide information that will be important for key financial reports that your company will rely upon to make other important business decisions.

Accountants can assist with appraising the viability of future projects with gain and loss forecasts. The expertise of a professional accountant can be instrumental in preparing business proposals and plans that will grow your company.

Accountants often have experience in similar business organizations to yours, which will provide worthwhile business experience advice for your company. An example is that the accountant could provide useful suggestions from evaluation calculations and by setting income targets grounded upon your particular fiscal situation and business organization targets.

Reason #5 - Networking and Referrals 

Because of the respect that they receive in the business community, accountants can also provide valuable networking contacts that can help to easily grow your business organically.

Professional accountants have similar customers that can be utilized as relevant contacts that may be referred to other clients. This also helps with networking for selling, buying and with potential business partnerships as well as other ventures. 

Those are just a few of the many benefits you can receive from engaging the expertise of an accountant for your small business. Accountants don't just crunch numbers; they can provide worthwhile and essential tax and business advice that is vital to your company and its future success.  

If you need help finding a good small business accountant feel free to contact me at Out-House General Counsel or (951) 737-4040 ext. 2.  I will help match you up with a good one.

Monday, March 15, 2010

Does Your Small Business Have an Advisory Committee?

This is a great post by Salene Kraemer on her Blog "In Plain English"

“I not only use all the brains I have, but all I can borrow.” –Woodrow Wilson
Have you ever considered forming an advisory committee for your business?  What about joining a group of fellow business owners to brainstorm about your business ideas?

To read more follow this link Does Your Small Business Have an Advisory Committee?

 If you have any questions about forming a advisory committee for your California based business, please contact The Out-House General Counsel to discuss.

Sunday, March 14, 2010

Should I Form a California or Delaware Corporation?

I am often asked by my new entity clients if there is any benefit to establishing a Delaware corporation as opposed to a California corporation and the answer is always the same, "it depends" (classic attorney answer).  We often discuss Limited Liability Companies (LLCs) as well and look the the new companies unique situation before settling on an entity and where to establish it.  

No single factor is controlling in determining the form of business organization to select, but if the business is expected to expand rapidly (every start-ups dream), a corporation will usually be the bests alternative because of the availability of employee incentive stock plans; ease of accommodating outside investment and greater long-term liquidity alternatives for shareholders.  A corporation also minimizes potential personal liability if statutory formalities are followed.  The question remains, is there any benefit to establishing a Delaware corporation as opposed to a California one?

A.  Background

A corporation is created by filing articles of incorporation with the Secretary of State in the state of incorporation.  Corporate status is maintained by compliance with statutory formalities.  A corporation is owned by its shareholders, governed by its Board of Directors who are elected by the shareholders and managed by its officers who are elected by the Board.  A shareholder's involvement in managing a corporation is usually limited to voting on extraordinary matters.  In both California and Delaware, a corporation may have only one shareholder and one director.  A president/CEO, chief financial officer/treasurer and secretary are the officer positions generally filed in a startup and, in fact are required under California law.  All officer positions may be filled by one person.

B.  California vs. Delaware

The reasons for using a Delaware corporation at startup are the ease of filings with the Delaware Secretary of State in financings and other transactions, a slight prestige factor in being a Delaware corporation and avoiding substantial reincorporation expenses later, since many corporations which go public reincorporate in Delaware at the time of their IPO.  Delaware corporate law benefits are of the most value to public companies.  However, if the corporation's primary operations and at least 50% of its shareholders are located in California, many provisions of California corporate law may be applicable to a private Delaware corporation and such a company would pay franchise taxes in both California and Delaware.  These considerations may result in such a business choosing to incorporate in California instead of Delaware.  Another reason for keeping it simple and using a California corporation is the current non-existent IPO market which makes an acquisition a more likely exit for a start up.

There is more flexibility under Delaware law as to the required number of Board members.  When a California corporation has two shareholders, there must be at least two Board members.  When there are three or more shareholders, there must be at least three persons on the Board.  Under Delaware law, there may be one director without regard for the number of stockholders.  Most Boards stay lean and mean in number as long as possible to facilitate decision-making.  Since the Board is the governing body of the corporation, when there are multiple board members, a party owning the majority of the shares cans still be outvoted on the Board on important matters such as sales of additional stock and the election of officers.  Removing a director involves certain risks even when a founder has the votes to do so.  Thus, a founder's careful selection of an initial Board is essential.  You want board members whose judgment you trust (even if they disagree with you) and who can provide you with input you will not get from the management team.

A corporation is a separate entity for tax purposes.  Income taxed at the corporate level is taxed again at the shareholder level if any distribution is made in the form of a dividend.  The "S" corporation election limits taxation to the shareholder level but subjects all earnings to taxation whether or not distributed.  A corporation my be an "S corporation" and not subject to federal corporate tax if its shareholders unanimously elect S status for the corporation on an timely basis.  "S corporation" is a tax law label; it is not a special type of corporation under state corporate law.  Like a partnership, an S corporation is merely a conduit for profits and losses.  Income is passed through to the shareholders and is generally taxed only once.  Corporate level tax can apply in some circumstances to an S corporation that previously had been a "C" corporation for income tax purposes.  Losses are also passed through to offset each shareholder's income to the extent of his basis in his stock and any loans by the shareholder to the S corporation.  The undistributed earnings retained in the corporation as working capital are taxed to a shareholder.

The current maximum federal corporate tax rate is 35%.  The California corporate income tax rate is 8.84% and the Delaware corporate tax rate is 8.7% but Delaware income taxes do not apply if no business is done in Delaware and only the statutory office is there.  There is also a Delaware franchise tax on authorized capital which can be minimized at the outset by increases as the corporation has more assets.

If the business fails, the losses of the initial investment up to $1 million in the aggregate (at purchase price value) of common and preferred stock (so-called "Section 1244 stock") may be used under certain circumstances by shareholders to offset a corresponding amount of ordinary income in their federal income tax returns.  An individual may deduct, as an ordinary loss, a loss on Section 1244 stock of up to $50,000.00 in any on year ($100,000.00 on a joint return).

If statutory formalities are followed, individual shareholders have personal liability only to the extent of their investment, i.e., what they paid for their shares.  If the corporation is not properly organized and maintained, a court my "pierce the corporate veil" and impose liability on the shareholders.  Both California  and Delaware law permit corporations to limit the liability of their directors to shareholders under certain circumstances.  The company can raise additional capital by the sale of issuance of more shares of stock, typically preferred stock when an angel or venture capitalist is investing.  Though rare, the power of a court to look through the corporation for liability underscores the importance of following proper legal procedures in setting up and operating your business.

So should you form a California or a Delaware corporation? It depends.  This is a discussion you should have with a qualified business attorney and accountant.  There are a lot of online incorporators who will incorporate you in whatever state you want.  However, they cannot properly advise you on the proper entity and jurisdiction.  

If you have a business or are contemplating starting a business in California, please do not hesitate to contact Daniel J. Alexander II @ The Out-House General Counsel to discuss your options.  You can also connect to me via telephone at (951) 737-4040 ext. 2 or using the Google Voice Widget on the right hand column of this website.