LLC vs S Corp

I get asked frequently about Limited Liability Companies (LLC) vs Sub Chapter S Corporations, particularly when it comes to small business and start ups.  Here are my thoughts on these.

The LLC for a start-up is fine, but they are not my preference. I actually prefer the S Corporations.  They both have limited liability.  They both can take investment capital, though the S Corporation restricts the type of investor and the number of investors.  And they both allow “income to flow through” to the investors.

But S Corporations will not drain cash as quickly as an LLC.  Investors in an LLC will be required to pay self employment taxes on the profits.  If there are five investors, and three are not working in the business (true investors) and all split $500,000 profit equally in an LLC, the non-working investors will pay self employment taxes of about $12,000 each if they have no other earned income.  In an S Corporation, they will pay nothing.

Other things to consider are costs.  For example, the annual fee for the LLC starts at $500.  For the S Corporation, it starts at $25.  (In New York State; in New Jersey, the reverse is true)  Further, lawyers seem to charge twice as much to form an LLC as they do a Corporation.

One final consideration: a one person LLC is filed as a Schedule C on Form 1040.  A $100,000 profit would make the tax return look like a large taxpayer and possibly subject it to an Internal Revenue Audit.  A one person Subchapter S corporation files Form 1120S and looks like a small business.  It would be less likely to be audited based upon the identical numbers.

So in my opinion, the S Corporation for the start up makes more sense.  Why pay more, or risk more, to get the same thing?

THEIR Hands Are In YOUR Pockets

Whose hands? The scammers.

How do they try to get there? The Internet is the first obvious way.

They are always phishing for your personal information. Through direct emails, telling you that you are a winner, or that there is a package waiting for you, or through cleverly disguised emails using a bank’s stationery or even the stationery of the Internal Revenue Service.

The IRS will never contact you via email. And neither will the security department of your bank. Do not respond to these emails. Print them and forward them to the real IRS and bank involved.

But what if you get a phone call at home from your bank claiming that there is a problem with your credit card? Don’t answer the questions from that person. Hang up, get your credit card and call back the phone number on the card. Ask if there was a problem that they would have been contacting you about. If no, report the phone call. If yes, resolve the problem.

How The Government Can Quickly Stimulate the Economy

Several days ago, Entrepreneur Magazine published an article entitled “Where to Get a Small Business Loan“.

These are tough times for a small business (or any business for that matter) to borrow money.  Why?

Strange is it seems, our government has not given the banks any incentive to lend money to new and old businesses.  The banks can borrow from the Federal Reserve at three quarters of one percent and lend to consumer credit cards at 19- 29%, or just buy no risk Treasuries and make a couple of points.

A primary stimulus for the economy is getting small businesses funded again.  If the government is serious about forcing the banks to issue credit and getting the economy rolling again, then they need to create a formula that would penalize the banks for not issuing loans.  It’s simple: If the penalty were large enough, the banks would have to take the risk and lend the money.

Simply put, just taxing the banks does not create the loan incentives needed to re-energize the economy.  After all, why did the taxpayers bailout the banks, if not to help the economy in the first place?

The IRS and Their “Do Right” Department

These are tough economic times for everybody.  But when you owe the Internal Revenue Service money, this is especially so.  As the tax filing deadline is rapidly approaching us, I thought I would share some timely advice to you.

I have a client who has been on a pay-out with the IRS for a number of years.  The effect of the pay-out is that he has paid his tax for the year involved, but now owes the penalty and interest for that year.

Nine months ago, he lost his job and he has court ordered payments which leaves him nothing to pay the IRS.  I wrote to the IRS explaining the situation and asking for the penalties and interest to be expunged.

They ignored my letter and instead, sent a notice of lien, which implied that he violated their agreement.  They ignored subsequent letters that I wrote as well.  I had to take this further and did.

If you find yourself in this situation as my client, where the IRS is not hearing you, be advised there is a Taxpayers Advocates Office within the IRS.   I got resolution through this process.

They have a Form 911 which allows the Advocates Office to step in and try and remedy the situation.

It’s been several weeks since I contacted this Office.  Today, I was informed that not only did I get the current penalties and interest forgiven, but I also received a refund for my client for prior penalties and interest that were previously paid as well.

Do Right or Due Rights? Doesn’t matter, the problem was handled.

Our government and it’s affiliated agencies can be big, bureaucratic, and scary to any individual or small business.  But, when you look hard and have the right advice, these can be navigated so that you can be heard and your problems handled.

What Small Businesses and Individuals Should Know About The New Credit Card Reform

February 22, 2010 marks the day when Congress allowed credit card reform to take affect. Why they waited so long when they passed the bill over nine months earlier is a mystery to me. What is also a mystery to me is why they could not see the abuses in the credit card industry before last year.

Yes, changing the interest rate without notice is an abuse. So is being able to change the rate on balances already in existence. And charging you for going over the limit when they know and you don’t is totally unfair. And interest rates of 29% is worse than the Mafia. But all of that is small potatoes.

Think about this. Why did they love that $39 late charge? If you had a minimum payment of $10 and you were one day late, they could hit you with a $39 late charge. That is an effective rate of 1,423%.

The new laws have made all of this tougher for the credit card companies. You should expect them to raise their annual fees and raise their balance transfer fees as well. If you are carrying a small business card from American Express or Visa or a personal card from any credit card company, you should expect to see the credit card companies act more like the airlines. That is, fees go up and charges for “extras” (such as a meal or a blanket, that were previously free).

We have been successful negotiating these fees in the past for clients – both small businesses and individuals — and should be able to do the same if you start to find the fees outrageous.

Bookkeeping Software Needs the Human Factor

All bookkeeping software, be it QuickBooks, Peachtree, Sage, BeanCounter or my custom written software, is designed to produce the same end product; a general ledger. The output will look somewhat different, but the result should be exactly identical.

Given the size of the company, there may be a few options as to who handles data entry for the bookkeeping software system:

Option A – The small business owner does it himself– might be able to see financial problems as they are developing but it becomes a terrible, wasteful use of their time. Probable best use of their time is in marketing and selling of product, not in saving overhead dollars.

Option B – A data entry clerk – can be cost efficient, but without the accounting and business background to recognize an ongoing financial problem. And if there is an accounting firm, how often will they be reviewing the books? If the problems are not caught immediately, will it be too late to save the company?

Option C – A full charge bookkeeper – will not be as cost effective as option B, and comes with the same problems.

What becomes incredibly important is that while this type of software may seem inexpensive and cost efficient at the outset, in reality, it may not be. This is primarily due to the combination of the software and the person doing the data input not being able to recognize problems in the day to day mechanical operations of the business. What appears to be the simplest and most mundane of functions is, in reality, the small business’ first line of defense against financial insolvency. And, in today’s economy, isn’t that what it is all about?

I saw a quote once that read “In a few minutes a computer can make a mistake so great that it would have taken many men many months to equal it.” This is the risk that small businesses take by relying on software alone. The experienced human factor here is simply invaluable to ensure that the errors the computer can not catch are actually caught and that business continues to remain viable.