by Jean Miller | Accounting News, News, Newsletter, Small Business
As a business owner, the business structure you choose will determine your company’s legal, financial, and operational aspects. It’s not a decision to take lightly, but also recognize that down the road you might find that shifting to a different structure makes more sense as your company evolves. In this article we’ll explore the four different types of business structures to help you make an informed decision.
Sole Proprietorship
A sole proprietorship is the simplest and most straightforward business structure, and as a sole proprietor, you have complete control over your business decisions and operations. This business structure involves no separate legal entity, so there’s minimal paperwork and administration. Additionally, income from a sole proprietorship is typically taxed at your individual tax rate, which can be advantageous in some situations.
The main disadvantage of a sole proprietorship is that you have unlimited personal liability. If your business faces financial difficulties or legal issues, your personal assets are at risk.
Partnership
When you start a business with one or more partners, you are entering into a partnership, where the workload and responsibilities are shared among partners. Most states require the partners to sign a partnership agreement to outline the distribution of profits and liabilities. Partnerships, theoretically, can bring together individuals with complementary skills and resources, making it easier to grow and manage the business. Like sole proprietors, partners report their share of business income on their individual tax returns.
Similar to sole proprietorships, general partnerships come with unlimited personal liability for business debts and legal obligations. Additionally, disagreements among partners can lead to conflicts and, in unfortunate cases, the complete dissolution of the partnership.
Limited Liability Company (LLC)
LLCs offer limited liability protection to their members, shielding personal assets from business liabilities. They also offer greater flexibility in terms of management structure and tax treatment. Members can choose to be taxed as a partnership, a corporation, or even as a sole proprietorship in some cases. Keep in mind that each state has different rules and regulations relating to LLCs, so be sure to evaluate the specific requirements in your jurisdiction.
As for disadvantages of LLCs, there is more of an administrative burden than sole proprietorships or partnerships, but the obvious tradeoff is more protection of personal assets. Additionally, LLCs cannot issue stock to raise capital, which might limit their ability to attract investors.
Corporation
This is the most complex business structure. One of the main advantages of a corporation is that it offers limited liability protection to its shareholders. This means that personal assets are generally protected from business debts and lawsuits. And unlike LLCs, corporations can raise capital by selling shares of stocks to investors, making it easier to fund business growth.
When it comes to disadvantages of corporations, know that they require a heavy load of paperwork and administrative work, which typically necessitates keeping detailed records. Additionally, it’s possible that corporations may face double taxation, where the company’s profits are taxed at the corporate level, and then shareholders are taxed on their dividends.
How to Choose the Right Business Structure
Each option has its advantages and disadvantages, and the choice should align with your specific business goals. Seek legal and financial advice to ensure you make an informed decision that sets your business on a path to success. Consider the following factors when making your choice:
- Liability Protection: If protecting your personal assets from business liabilities is a top priority, consider forming a corporation or LLC.
- Tax Implications: Consult with a tax professional to go over the tax implications of each business structure and choose the one that aligns with your financial goals.
- Ownership Managements: Partnerships and corporations offer more flexibility in structuring ownership and management within your business.
- Capital Needs: How do you plan to fund your business? If you need to raise significant capital, a corporation may be the way to go.
- Future Growth: Corporation and LLC business structures are better suited for growth and attracting investors, though you may run into some limitations in attracting investors with LLCs.
- Costs: Understand the costs associated with setting up and maintaining your chosen business structure, including registration fees, taxes, and ongoing administrative expenses.
by Jean Miller | Accounting News, Business Growth, News, Uncategorized
Securing the right funding for your small business is crucial for growth and stability. Asset-based lending is one option for financing for businesses that have strong assets and need access to working capital. But is asset-based lending the right choice for your small business? Below we go over the pros and cons of this approach to help you make an informed decision.
What Is Asset-Based Lending?
Asset-based lending (ABL) is a type of business loan that is secured by using a company’s assets as collateral. These assets can include a variety of tangible and intangible items that have value, such as inventory, accounts receivable, equipment, or real estate.
Asset-based financing can be easier to qualify for compared to other small-business loan options. However, if the borrower defaults on the loan, the lender can seize and sell the assets to recover their money.
The Process of Asset-Based Lending
In order to better understand your business’s financial health, your lender will first evaluate your business’s financial information, including its assets, financial statements, and credit history. Next, based on a thorough asset evaluation, your lender will offer a loan amount. This amount is typically a percentage of the value of the collateral, known as the “advance rate”. Generally, liquid collateral such as certificates of deposit or securities are more valuable to a lender because they can be easily converted to cash if you default on your loan. Finally, your lender will also establish the terms of the loan, including the interest rate, repayment schedule, and any associated fees.
Pros and Cons of Asset-Based Lending
Pros
- Access to quick capital. A primary advantage of asset-based lending is that it’s typically a quicker process than traditional loan approval. If your business needs funds urgently, such as covering unexpected expenses, this can be a significant advantage.
- Flexible terms. Because the loan is secured by business assets, this type of lending could be a better fit for businesses that don’t meet the strict criteria of conventional loans. Asset-based lending offers more flexibility than traditional loans, which can be beneficial for businesses that have a shorter credit history or imperfect credit scores.
- Lower interest rates. Because the collateral you provide reduces the lender’s risk, you’ll typically receive lower interest rates on asset-based loans compared to unsecured business loan options.
- Flexible financing. Funds from asset-based loans aren’t typically restricted. They can be used for various purposes, such as financing growth initiatives, covering operational expenses, or managing cash flow gaps.
Cons
- Risk of losing assets. If your business fails to repay the loan, your lender can seize and sell your business assets to repay the debt. If the assets you used as collateral hold strategic importance for your business operations, losing them could have adverse effects on your business.
- A thorough and time-consuming process. A lender’s assessment of your assets can be time-consuming and may require professional appraisals, audits, and legal documentation. Furthermore, some of your business assets may not qualify for an asset-based loan. Lenders generally prefer tangible and sufficient assets, so items such as specialized goods, perishable inventory, and equipment with high depreciation rates typically aren’t accepted as collateral.
- Costs and fees. While asset-based lending often comes with lower interest rates than other financing options, it’s important to consider other associated costs. Lenders can charge origination fees, appraisal fees, and ongoing monitoring fees, all of which can impact the overall cost of the loan.
Asset-based lending can be an effective tool for small businesses seeking access to capital, but the decision to pursue this type of lending should be made after careful consideration of your business’s assets, financial needs, and risk tolerance.
by Stephen Reed | Accounting News, Business Growth, News, Uncategorized
The Small Business Administration (SBA) recently changed the rules that apply to both the 7(a) and 504 loan programs. The goal is to streamline the loan application process, broaden the amount and variety of lenders, and relax regulations in order to reach more small businesses, particularly those in underserved communities. Below we’ll go over the recent changes to SBA loan programs.
SBA Loan Programs
The SBA is a lender of two small business loans. The most popular loan is the 7(a) loan, which can be used for real estate, equipment, acquisitions, and other working capital. It has a maximum borrowing limit of $5 million. The 504 loan is the other loan program offered by the SBA, and it is generally used for real estate or land loans, with fixed interest rates and maturity up to 25 years. It has a maximum borrowing limit of $5.5 million.
Expanding Approved Lenders
Prior to the Covid-era Paycheck Protection Program (PPP), the SBA had limited the number of approved SBA lenders to a select handful. This limit was lifted considerably with the PPP program, and the new rules do away with a cap on the number of approved lenders altogether. The goal is to increase the number of loans distributed and reduce the timeline of loan applications.
New Criteria
The SBA is simplifying the evaluation process for borrowers by removing some criteria. Previously, multiple factors were considered when assessing potential borrowers, including the character and reputation of the applicant, experience and depth of management, projected cash flow and future prospects, invested equity, and value of collateral. However, the new rules look at only the applicant’s credit report, cash flow, and equity or collateral. Removing “character and reputation” from the list of criteria helps to eliminate any individual bias in the loan process.
The new rules also allow borrowers to use 7(a) loan proceeds to fund partial changes in the ownership of the business. In the past, a 7(a) loan could only be used to fund a full change in ownership. This move grants borrowers more flexibility to restructure the business.
Finally, the SBA is implementing new technology to figure borrower eligibility. This should help curtail the burden on SBA lenders and simplify the process in order to boost lending.
New Determining Authority
When a small business 7(a) and 504 loan application or modification request is denied, either the Director of the Office of Financial Assistance or the Director’s designee(s) are authorized to make the final decision on reconsideration. Previously, only the Director of the Office of Financial Assistance had this authority. This change is to help enact fair and timely loan reconsiderations.
No More “Credit Elsewhere” Test
Finally, the “credit elsewhere analysis” that was a required component of the SBA loan process is reduced to a “check the box” with no need for corresponding paperwork. This was a step in the process that proved all other possible sources of funding had been exhausted, justifying the need to obtain SBA financing.
by Stephen Reed | Accounting News, Business Growth, News
Whether anticipated or unexpected, small businesses in every industry face a lot of challenges. Both veteran and new businesses need to be prepared, flexible, and adaptable in order to succeed. Here are the most significant business challenges in 2023.
Economic Uncertainty
The economy has been wavering for some time now, and it appears that we’re on course for the same in 2023. This makes long-term planning a difficult task. When the economy is more balanced, business owners are equipped to make better investments and more informed decisions. However, with rising inflation, as we have now, small businesses face the possibility of stalled growth. It will be imperative for small businesses to budget costs and manage their operations efficiently.
Inflation and Rising Costs
Small businesses are not immune to the effects of inflation. Increasing costs of raw materials, shipping, and energy can all influence the profitability of a small business. Whereas larger companies might be able to pass these costs onto customers, small businesses typically don’t have the pricing power to do so. To attend to this challenge, small businesses may need to reduce costs through more efficient operations, renegotiating contracts with suppliers, or exploring new revenue streams.
Hiring and Retaining Labor
Most industries have experienced a labor shortage since the onset of the Covid-19 pandemic. The inability to find and retain qualified employees could impact the ability of small businesses to deliver goods and services or focus efforts on growth. Small business owners should think about offering more competitive wages and benefits, improving working conditions, and investing in automation to help reduce the work load of employees.
Competition
Competition isn’t a new challenge to small businesses, but the pandemic accelerated the shift toward e-commerce and digital channels. It’s now up to small businesses to find a way to stand out from the crowd in order to retain existing clients and attract new business. They might want to consider investing in digital marketing and advertising, improving their website and social media outreach, and offering products or services that set them apart from competitors.
Funding
Securing funding will be difficult this year as lending firms await to see what the economy does. On the positive side, this is an opportunity for small businesses to stand out among the competition. Business leaders will need to come up with creative pitches that prove the value their company offers.
by Pete McAllister | Accounting News, IRS, News, Tax, Tax Planning
Filing taxes puts stress on small business owners, because most know that mistakes on business tax returns can affect your business’s success. Here are some common tax mistakes to avoid.
Mixing Business and Personal Expenses
Be sure not to report personal expenses on your small business’s tax return. It’s always a good idea to have separate credit cards, bank accounts, and filing folders for each. Sometimes an expense isn’t as cut-and-dry and you may have difficulty determining if it is indeed business or personal. In this case, turn to the IRS’s Publication 535 at www.irs.gov, which provides an overview of expenses that are and are not deductible.
Being Disorganized with Recordkeeping
This may seem like second nature to some business owners, but staying on top of tax documents, receipts, and copies of bank and credit card statements will go a long way toward avoiding overwhelm at tax time. While you don’t need to submit receipts or other proof of tax deductions to the IRS, you will need them on hand if the IRS decides to probe into your taxes further. If you get audited and you don’t have required documentation on hand to prove any claimed deductions, your tax bill could increase significantly.
Filing the Wrong Tax Forms
There are different types of tax forms required for different types of businesses (C corporations, S corporations, etc.), and if you have employees, you’ll need to fill out additional forms that document their payment through the year. Simply put, it can be a lot to track. A tax advisor can help you determine which forms you should be filling out.
Taking Too Many Deductions
Simply stated, taking deductions means that you get money back for certain purchases that assisted your business. Just keep in mind that too many deductions could raise a red flag for the IRS. If you’re unsure, a tax advisor can ensure that you’re adhering to deduction limitations and only claiming expenses that qualify.
Forgetting or Underestimating Your Tax Payments
Many small business owners are required to make quarterly estimated tax payments. Typically, the deadlines for these payments are the 15h of April, June, September, and January of the following year. How much you owe is based on your income. If you miss a payment, or if your payment falls short of your actual tax liability for the year, the government could saddle you with penalties, thereby increasing your tax liability. Furthermore, if the IRS suspects an intention to defraud it, the fine can be as high as 75%, and you could face criminal tax fraud charges.
