In early December of 2010, one could file new Articles of Incorporation or Organization at the counter in Sacramento, and expect about a six day turnaround. And just like last year at this time, processing times have recently extended considerably.

The California Secretary of State is reporting turnaround times for new corporations and LLCs at between 23 and 26 business days.

We’ve reported on this before: with budget cuts and a growth in new filings, the queue at the Secretary of State’s office can be a moving target throughout the year.

There is the 24-hour expedited filing offered by the state, for an additional $350 filing fee. Let us know if you have any questions about the best way to file and speed things up.

Share on Facebook

Tax concerns are usually at the top of the list when it comes to selecting an operating structure. Here’s a quick overview of a few tax benefits for the most common business entities:

A  Sole Proprietorship is the default structure if you’re operating on your own and haven’t officially registered your business as a corporation, LLC (Limited Liability Company), or Non-profit.  A sole proprietorship is NOT a legal business entity: you pay personal income tax on your earnings (as well as self-employment tax), can subtract some expenses as itemized business deductions on your tax return, and you’re personally liable for all of the debts the business incurs.

Why it might be a good idea

• You’re only taxed once on your earnings from the business
• There’s no need to file a separate tax return for the business
• Net losses can be “carried” to prior or later tax years to offset tax liability
• Hidden tax perks, like healthcare reimbursement arrangements and provisions for hiring family members abound

A traditional Partnership is also a “pass through” business entity, and is sometimes seen as the default structure when multiple parties run a business without forming an official entity (like an LLC or corporation). Just like a sole proprietorship, capital gains and income are taxed to the business owners, typically at a higher rate than they would be for some other business structures.

Why it might be a good idea:

• Partners are only taxed once on business earnings
• Partners can “assign” property, income, or debt to other partners, allowing for a tremendous tax savings in many cases.
• Assets can be more easily transferred out of the business to the owners without “property disbursement” taxes

The two main types of corporations are S-Corporations and C-Corporations.

First, it’s important to understand that corporations are considered a C corp when they are formed. With the Secretary of State, there is no distinction. To them, you are just “a corporation.” Period. Not S or C. This is a distinction made by the IRS and honored by state tax boards.

An affirmative action (making an election to be taxed as a small business corporation: IRS Form 2553) is needed to change your “C” corporation to an “S corp.”

A C-corporation files corporate tax returns and pays taxes on its profits. Then, from what remains after taxes, a corporation may distribute earnings to shareholders in the the form of dividends. Shareholders are then taxed on dividends, which means that the owners effectively pay taxes on the same earnings twice- once at the corporate level, and then as individuals.  This is known as “double taxation.”

For some situations, a C corp can be preferable. Most of our clients are small businesses and prefer to make the S election.

An S-Corp works like a sole proprietorship or general partnership, where income passes through and is taxed to individual shareholders.  Typically, profits and losses are allocated proportionally to ownership share.

Why an S-Corp might be a good idea:

• No self-employment tax, resulting in considerable tax savings in many cases
• Pass-through taxation means that losses can be deducted on your personal income tax return

Why a C-Corp might be a good idea:

• Corporate tax rates are often lower than top-bracket personal tax rates
• Special incentives for hiring, purchasing equipment, and other expansion-based activities (including deductions for start-up costs)

Limited Liability Companies and Limited Liability Partnerships

LLCs and LLPs are statutory business entities where rules can vary from state to state.  Generally, both LLCs and LLPs can elect to be taxed as much like S-Corporations or general partnerships, where income “passes through” the entity directly to the owners.  This avoids the double-tax issue faced by a traditional C-Corporation.

Why it might be a good idea:

• Typically considered flexible in terms of taxation
• Flexibility in profit distribution means that owners can assign income and losses in the most advantageous way for tax purposes

Though tax savings is an important consideration, the type of entity most suited to your business will depend on a variety of factors. We always recommend that you consult with a professional tax adviser to find the appropriate entity for your situation. If you’d like assistance in finding a great CPA or attorney for guidance on these issues, contact Formation Solutions. Also talk with other business owners, and do your research before making a decision.  If you’ve got any tax tips for new business owners, comments, or questions please share ‘em with us!

Share on Facebook

Are you ready to form a new corporation or LLC, but you’re waiting to file your Articles of Incorporation or Organization until January to avoid the $800 California Minimum Annual Franchise Tax?

Well, there are a couple things you might want to consider.

1. Do You Really Want to Wait?

First, if you need the protection of a legal business entity now, then you need it now. Sure, I can understand the desire to wait a couple months and avoid having to pay 2010 franchise tax. But if you are conducting business activities that you feel warrant the protection of an LLC or corporation, is it really worth waiting to save 800 bucks?  Maybe it is, maybe it isn’t. Please consult an attorney about the right timing for you.

2. Long processing times in January. File Now with Future File Date.

There have been budget cutbacks, and the California Secretary of State has closed offices and consolidate document processing unit. If January 2011 is anything like January 2010, if you file Articles in the January, plan to wait 45-65 business days to be officially formed. This wait could slow the launch or growth of your business and even put you at risk.

There is an option: file now with a “future file date.” You can file your Articles for your new LLC or corporation now, with a request of a specific file date. In fact, you don’t need to ask for January 1, 2011: any entity formed after 12/17 is considered to not have a 2010 tax year.

This should speed things up considerably. If you file now, with a 12/18 file date request, you might even have a 2011 LLC or corporation before 2011 is even here.

3. Bonus to this plan: 2010 Tax Deduction.

Business startup costs are tax deductible. So why not deduct these expenses from your taxes sooner rather than later?

Update: The following is a comment from Matthew Berger, an attorney based in Carpinteria, CA. We thank him for his contribution to the conversation and encourage you to see his website if you have questions for any attorney.

This works only if the entity doesn’t do any business until 1/1/11. The entity won’t avoid the minimum franchise tax (MFT): the issue is when the corporation or LLC is required to pay its first MFT, and that depends on when the government …considers the entity to have its first year. A corporation or LLC formed after 12/18/10 and not doing business until 1/1/11 will be deemed to have its first year beginning 1/1/11.

The rules for when the MFT is first due are different for corporations and LLCs. A corporation does not have to pay its MFT for the first year (until 4/15/12, if incorporated after 12/18/10 and not doing business until 2011), whereas the LLC doesn’t get its first year for free and will have to pay the MFT on the 15th day of the fourth month of existence, which will be 4/15/11 if deemed to have been formed on 1/11/11. By forming after 12/18/10 and not doing business until 2011, the corporation and LLC will not be deemed to have formed in 2010, and thus can put off payment of its first MFT to 2012 for a corporation and 2011 for a LLC.

Share on Facebook

Just a heads up. If you’re hoping to get a new corporation started quickly, plan on waiting at least a month, unless you are ready to pay substantial expediting fees.

Due to budget cutbacks, the Secretary of State has closed or consolidated a number of functions and several regional offices. They’ve been forced to close offices in San Francisco, San Diego and Fresno, meaning more documents are filed in the remaining Sacramento and Los Angeles offices.

They’ve also eliminated paid overtime for staff members and the use of temporary staffing to help with the workload especially during heavy filing periods.

So what does this mean for you, the entrepreneur filing your business documents?

Some perspective: in February of this year, we were seeing Articles of Incorporation, counter-filed in Sacramento, being processed in 5-8 business days. The turnaround time in May and June has averaged 28-30 business days. With holidays and weekends, plan for at least a month before your Articles are approved, you can obtain a Federal Employer Identification Number (FEIN) and open your business bank account.

Good news: in recent weeks, the LLC filings (Articles of Organization) have been processing faster, due to a light load on the LLC processing division. LLCs are being formed closer to 2 weeks.

Certificates of Dissolution for corporations and limited liability companies has been longer, but not as long as Articles: 12-15 days.  For Amandments to Articles of Incorporation or Organization (usually for a corporation or LLC name changed), these are also longer than they were last year, but shorted than Articles, also at about two week.

So…don’t wait. Get on it, and get that business of yours rolling. And best of luck building that dream!

Share on Facebook

Okay, maybe it’s not as fun as going to the dentist for a root canal, but  if you’ve just created a new company, there are quite a few details that are easy to overlook.

Palius + O’Kelley CPA’s Tony Vallejo and Matthew Burgess and Michael Neville of Formation Solutions, Inc. will be co-hosting a free seminar for people who have a new business.

Make sure that all of your t’s are crossed, and your i’s dotted, with the information and tools these companies will suggest during the seminar, to ensure that you will become an even more successful business owner! The topics that will be covered are as follows:

1) Registering with the proper tax authorities
2) Business entity selection
3) Payroll, sales and income taxes
4) Bookkeeping

The best part about this seminar is that it’s free! That’s right: learn how to run a successful business, network with other business professionals, and take advantage of the Q & A session after the presentation. Having the right information is always beneficial to your success.

Here’s the Scoop:

Time: Monday, May 17th, 5:30pm to 7:00pm
Location: Ramada Inn, 4770 Calle Real, Goleta
RSVP: Please contact Tony Vallejo at Palius + O’Kelley by email: tony [at] pokcpa[dot]com

http://www.sbentrepreneur.com/santa-barbara-events/new-business-owner-dont-miss-this-upcoming-seminar

Share on Facebook

Here are questions we hear frequently from our clients:

When I form my corporation, what are “authorized shares,” and how many shares should my corporation authorize?

How are authorized shares different from “issued” shares? How many shares should my new corporation issue?

To help with the idea of how many shares are needed, here’s a little primer on:

1. “authorized” shares
2. “issued” shares

The number of shares authorized, the number issued, and the value of each share are usually determined in a fairly arbitrary manner by the owners when they form the new corporation.

We always recommend that our clients check in with their attorney and accountant if they have questions on what is appropriate for their new corporation. But here is what we see in typical situations.

Authorized Shares

In the Articles of Incorporation, companies typically state the number of shares that are “authorized.” Think of this as a pool of shares that the board has at its disposal and can “issue” (sell) to the founding shareholders and any other shareholders that might buy into the business at a later date.

So you’ll want a number of “authorized” shares that leaves room to sell more shares later on.

A local attorney recently told us she recommends to most of her clients that they authorize one million shares, even if they’re only going to issue a couple hundred. She told us that the number is arbitrary.

We typically see clients “authorize” a number of shares that is roughly 10 times the number they will actually issue to founding shareholders. Then, if par value is required by the state of formation, par value is set to match the contribution (total purchase price) desired.

Issued Shares

Once the company is officially formed with the state, the Board of Directors is named. They then convene a meeting or agree by written consent to take a number of steps, one of which is to “issue” shares to the first shareholders.

These shares are purchased by the founders. The consideration can be cash, intellectual property such as a business plan, equipment, etc. The company needs to determine the value of each share. This number is also often considered arbitrary.

For example, let’s say there are 3 founding shareholders. If they each were contributing $1000 to the startup, and the ownership split was to be even between the three, they might each want to be “issued” 1000 shares, for a total of 3000 shares issued by the Board, with each share being worth $1.

Alternatively, it could be 100 shares each with the value set at $10 per share, or 50 shares at $20 per share…and so on. In the beginning, it’s arbitrary.

But in this example, since they want a little breathing room in case the company wants to sell shares to a 4th person later on, the company “Authorizes” 10,000 shares in its Articles of Incorporation. Or 100,000 or even a million shares. This is an arbitrary number, meant to be sufficiently higher than the 300 needed at the beginning.

Share on Facebook

It’s commonly know that real estate investors/owners often form an LLC – Limited Liability Company – or corporation. But it isn’t as well known why agents would want to form an LLC or corporation for their own business.

Real estate investors often form LLCs after purchasing one or more properties. Holding property through an LLC can insulate investors’ personal assets from judgement in lawsuits that might levied against them.

However, it can be just as important for real estate agents to separate their personal assets from their business income as it is for investors.

Why? Because their profession, like most businesses, has elements of risk in its day-to-day operations. Risk that create the need for strategic liability protection and insurance. Forming an LLC can be a smart choice for companies who require liability protection that goes beyond the scope of insurance alone.

Real Estate Risks

Real estate agents engage in a vulnerable line of work. Many clients expect their agent to fill many roles at once – lawyer, CPA, accountant, therapist, and friend. High-pressure environments that involve such intimate relationships are inherently filled with risk, which, if not handled correctly, can lead to lawsuits.

Just as owners might be sued for incidents occurring on their property, so too can real estate agents be sued by their clients.

Agents most commonly get sued for misrepresenting the value of a home or appearing to have breached any agreement made with client or potential buyer, although there are other factors to consider as well.

Routine situations for a real estate agent, such as using their personal vehicle to drive clients to properties, are also potentially hazardous.

Real estate agents typically protect against lawsuits by carrying errors and omissions insurance. This can protect the agent up to a certain point. However, once the insurance limit has been reached, there is nothing further to guard the agent’s personal assets from judgement.

Here’s a sobering list of all the ways you might possibly be sued (http://www.reiclub.com/articles/10-ways-get-sued). It’s not pretty.

Notice that the first item on the list is doing business as a sole proprietor.

If you work as a sole proprietor carrying only errors and omissions insurance, you will be held personally responsible for all debts and lawsuits incurred by the business. Forming a general partnership may leave you even more susceptible to bad debts, even if your partner files for bankruptcy.

Here’s a more cheery list of ways that real estate agents can avoid being sued (http://realtytimes.com/rtpages/20041115_avoidsuit.htm). A lot of the items are just plain old common sense, however one items is definitely of interest:

11. Incorporate.

Real estate agents could also consider becoming a professional corporation or a professional limited liability company. Though this will not keep you from getting sued, it can minimize the effect on your personal finances if you should ever get sued and happen to lose. Additionally, there are tax benefits that can be achieved if you set up a properly structured professional corporation.

This is where an LLC becomes important. An LLC combines the structure of a corporation with the routine of a partnership. Like with a corporation, members of an LLC cannot be held accountable for the company’s debts. Unlike a corporation, LLCs are not required to have strict operational procedures, such as board meetings and minutes. Forming an LLC can get rid of a lot of the headaches associated with other business types.

By transitioning your company to an LLC you will gain the following benefits:

• Extended asset protection
• Flow-Through Taxation
• No Self-Employment Tax
• 100% of paid health insurance premiums eligible for deduction.
• Unlimited members

In addition, doing business as an LLC increases your company’s professional cachet and could lead to an increase in new clientele.

Whether you’ve been working as a sole proprietor or have just started your real estate career, taking steps towards becoming an LLC or corporation could be a sound choice.

Final Word

Articles like this can be helpful on the broad strokes¹. But every situation is unique. To make the right choices, it’s critical that you speak with your accountant and attorney to determine the direction that is best for your individual business.

¹ Sorry, but this is as much for your good as it is for ours. Disclaimer:  Neither Formation Solutions, Inc., nor any of its owners, employees, agents, or affiliates for whom it is responsible provide any legal services, legal representation or legal advice. The information and suggestions contained herein have been developed from sources, including publications and research that are considered and believed to be reliable but cannot be guaranteed insofar as they apply to any particular individual, corporation, or taxpayer.  Moreover, because of the technical nature of this material and the fact that laws and statutes are never static, but ever changing, the assistance of a competent, qualified lawyer or accountant is recommended when implementing these documents.  This material does not constitute legal advice and should not be taken as or used as a substitute for the advice of competent legal counsel. Formation Solutions, Inc. specifically disclaims any liability, loss or risk, personal or otherwise, that is incurred as a consequence of the use and/or application of the information in these documents.

Share on Facebook

If you’re planning a 2010 filing for your new corporation, LLC, or nonprofit, NOW is the time to get the filings prepared.

If you wait until after the New Year, your entity formation will likely be put at the bottom of a very large stack. It could take months to form your business.

Formation Solutions is a registered service provider with the California Secretary of State. If we start the process for you now, your documents will be moved to the front of the queue.

If you wish to file your documents on January 1, 2010, the Secretary of State will stamp the documents with a January 1, 2010 file date.

When the Articles of Incorporation (for a corporation) or Articles of Organization (LLC) are sent to the Secretary of State, the state scans the document and holds the name on that document for the specified future file date.

The state will also look over the documents to see if any problems exist. If there are problems with the documents (like the proposed corporation or LLC name is taken or considered to similar to an existing company’s name), they will send the documents back so that the problems can be resolved. We will then return the corrected documents to the state for the specified future file date.

Start the new year off right. Contact us ASAP and we’ll work to have your business ready to launch on January 1!

Share on Facebook

What type of business are you?

Seth David, at the QuickBooks Help blog, addresses this question, and discusses how, as a financial accounting consultant, he helps his clients understand the issues and decide which business entity is right for them.

Sole proprietor? Seth says that sole proprietors are much more likely to get audited. When is an LLC the best form? When is it a bad idea. S corp, C corp? How do payroll, deductible expenses, pension contributions and other issues fit into this decision?

It’s a helpful article. And he gives us a little plug, which we can’t say we disapprove of.

What Type of Business Are You?

Share on Facebook

What lesson have so many sole proprietors found out…the hard way?

Why is a DBA just not enough to protect yourself and your business?

Many entrepreneurs decide to file a Fictitious Business Name / DBA for their business, and then run it as a sole proprietor, to save a few bucks on forming a corporation or LLC. 

I want to share a story…of an entrepreneur who worked hard, built a decent business, and yet lost it all, just as things were starting to grow.

The real heart-wrenching thing is that it never had to happen…

The story is far too common, but you may never hear it because these failed businesses just fade away quietly, unable to fight back against a situation that didn’t have to be.

It’s a story that I wish I would never hear. But we hear it all too often.
 

I started my business to follow my dream,
and it’s become a nightmare.

I love doing the work I do; it’s my passion. But things have been a little slower lately, and we got a little behind on paying one of our vendors.

They were getting a little testy, so I went over to their offices to talk to them. I explained that we’d make the payments and be caught up by next month.

I was hoping to get a little sympathy/leeway, so I told them how we just bought a condo, and how the mortgage payments were making things a little tighter.

“You understand, right?” He seemed to: “Yeah, tough times all around,” he said.

He wanted to know a little about our business so that they could “feel comfortable” about our promise to pay.

I explained that we have a couple clients that are behind on paying us, but that we’re supposed to get those payments this week.

He asked “Well, what if they don’t pay this week, as planned? Then what?”

So I told him that my father, who’d loaned me the startup money for the business, was going to loan the business a little more. When I get that loan, I told them, I’d be able to send a check, for sure.

We closed up the meeting on a friendly note, talking about our kids’ soccer team, and it seemed like everything was fine.

Then, a couple days later, we’re working in the office and a messenger comes in with an envelope for me. As I opened it, I wasn’t quite sure what it was. It looked like some sort of legal document.

Then suddenly, I understood. It was a lawsuit. Our vendor was suing us. As I grabbed a chair and read through the complaint, I felt like I’d been punched in the gut. They were saying all sorts of nasty things about us.

We owed them less than seven thousand dollars, but his suit was for $76,500!

There was all sorts of legal mumbo jumbo about damages, loss of business, willful this-and-that and who knows what.

I never would have thought this could happen to my business.

But when I flipped back to the front page, the real gut punch came. I read the front page again, and realized that they weren’t suing the business.

They were suing me. Me, personally.

And it got worse. My name wasn’t the only one there. Under my name was my husband’s…and under his name, was my father, and even my mother!

My husband doesn’t have anything to do with the business. (Other than being an awesome, supportive guy, of course.) So how in the world does he get involved in this lawsuit?

And my father and mother…what?!

Well…so I talked with a lawyer. And he talked to the vendor’s lawyers.

He explained to me that they were going after our personal assets to pay for this. Our car, our condo, my parent’s house, whatever they could get their hands on!

I asked him how they could go after our personal assets, since this was a business. He explained that I was a sole proprietor.

I had filed a DBA. But since I never incorporated, there is no protection.

Since this is a marital property state, my husband is being sued also. As far as my Dad: they claimed that since I “disclosed” to them that he’d funded the business, that he was a party to the debt. And my mom got roped in as part of the marital property thing.

Wow. I couldn’t believe what I was hearing. I thought filing the DBA protected us from this kind of thing.

“I’m afraid not,” said the lawyer. “The DBA doesn’t protect you one little bit.”

If we’d formed a corporation or an LLC, then the vendor
could only go after the assets of the business.

“Well geez,” I said, “we’d still have been in a spot. The business doesn’t have that much in assets, so the suit would put us out of business.”

“Well, I’m not so sure about that” said my attorney.
He said we might not have been sued in the first place if we were a corporation.

Seriously? This was getting surreal.

You see, the vendor knew we were a small business, with not much to go after. But when they heard about the condo and my father’s involvement, their lawyers got all bright-eyed and bushy-tailed.

If we were a corporation or LLC, they probably would have worked out a payment plan and made the best of it. But since I was a sole proprietor, they saw an opportunity to go after our personal assets.

This has been a heck of a learning experience. Not really an education I would have wanted, though, that’s for sure. I sure wish I’d found you guys before all this happened.

If you feel that you need the protection of a corporation or LLC, contact us, and we’ll help you get it formed properly.

And although Formation Solutions is here to form your entity–done right at the right price–please know it’s always important to seek the qualified legal advice of an attorney.

We’re not lawyers. We don’t just say that to cover our own hide: we say it because as entrepreneurs, we’ve learned again and again how invaluable good legal advice can be as you grow your business.

If you need help finding an attorney that can give you the legal advice you need, please let us know. We work closely with many great attorneys, and we can make a few introductions.

Share on Facebook