Accurate financial statements
Owning and operating a business is difficult enough at the best of times and even more difficult when starting. As a business owner, whether you like it or not there are laws to follow and those include both Federal and State laws including the tax requirements of the Internal Revenue Service and state taxing agencies whether it is just to collect sales and use taxes or as we have in California, personal and business taxes.
One recurring theme I’ve learned from owning and selling businesses is to start out by keeping it simple. As the business grows and evolves, get tax advice from a professional to make sure mandatory requirements are not being missed that could jeopardize the future of the business.
At the moment I am dealing with two different businesses that the owner wants to sell but both have tax issues that threaten the very existence of the business let alone the value of the business the owners are seeking to gain from it being sold. In one case, the business grew so quickly the owners did not create an accurate set of financial statements. In their case they were exceptionally lucky as 11 months into their fiscal year I was able to see that their financial statements were not accurate. As a result, they hired a CFO and book-keeper and totally rebuilt their financial statements. The lucky part is that just on 2 months into this huge project they received a letter from the IRS saying they had put a lien in place over their business and removed money from one of their business accounts due to unpaid taxes.
If you own and operate a business and want to enjoy the rewards from your efforts, consider the following.
- When a business starts, for good reasons, Keep It Simply Simple (KISS.) I know it is Keep It Simple Stupid but no business owner is Stupid so I thought I would adapt it. The best way to keep it KISS is to start as a Sole Proprietor and file a Schedule C as part of your personal tax return. Not only does it keep your legal and accounting costs down as there are no forms to complete, it saves you time worrying about which entity to choose, filing the necessary paperwork and working out what else needs to be done so you are in legal and tax compliance. For example, a bank won’t open a business account for you without a copy of your legal entity and so it goes on.
- Another good reason to start as a Sole Proprietor is how you pay yourself. If you are a Sole Proprietor you simply take an owners draw and don’t have to worry about payroll taxes, filing quarterly and annual payroll reports with the IRS etc.
- If you open for business, make sure you check with your local city or county to see if they have any business name registration or filing requirements. Once again, they are pretty simple but get them done. It’s also a time to be proud that you are opening your business and want your local community to know.
- Does your business require any occupational and/or business permits to operate? If you have occupational license requirements you should already know those as you would have learned during your training. Business permits are also a local government requirement so give them a call or do a Google search.
- Worried about lawsuits from customers or neighbors? Well done. The solution is very simple. Get an umbrella insurance policy by contacting the insurance agent that has your insurance on your home and/or vehicles.
- We all work from habits. It takes 21 days to change a habit. Put a simple method in place to handle your petty cash and accounting. Every business has to know its weekly numbers or at least, its monthly numbers. Those numbers tell you a story about the performance of your business. If sales numbers grow each month…great. If your expenses increase at a rate a little less than your sales numbers… that too is great. If you don’t like book-keeping, which most entrepreneurs don’t as they don’t have the time and inclination, get help and get it right. It’s that important.
- It’s common to hear the statistic that 80% of businesses fail in the first year. It keeps being repeated and so I think it’s a statistic that because it’s been repeated enough must be true. I’m not sure it is. By definition an entrepreneur has an idea, takes it to market and adapts accordingly. Most entrepreneurs learn being in business because there are very few classes that teach how to be a successful entrepreneur. There are classes to teach medicine, law, accounting, engineering etc but these don’t teach business; they teach and pass each discipline.
Once your business gains momentum and its future is more stable and secure, now is the time to talk with your accountant and attorney to find out your options, hear their recommendations and then for you to decide. It also triggers a bunch of paperwork to get things set up correctly and if that’s not enough, you’ll have to do reports and other notifications on a regular basis to government agencies and won’t be able to open lines of credit with supplier, bank accounts, payroll processing services and more.
Starting a business and doing all the above from scratch is intimidating. A better option can be to consider buying the rights to a franchise and following its processes and procedures. A second option is to find an existing business for sale and pick up the momentum of an existing business; but that’s another situation for another time.
If you would like more information about selling a business, buying a business, buying a franchise or a related service such as valuing a business, please visit my web page Services and choose from the drop down menu the information you would like.
For more immediate help, you are welcome to send an email to Andrew Rogerson or give me a call on 916 570-2674.