Do some planning before you start your new business. Also, don’t overspend on things you don’t need at the outset.

QUESTION.
I wanted to ask you about the start up cost of a retail clothing store. Is it necessary to hire an accountant during start up? Is it better to take a loan that can cover 6 months of my living expenses? Or is it better to borrow 12 months? I’ll be a first time business owner. Is it wise to start off in a new building built from the ground up?

ANSWER.
So you want to start a retail business. I’m not a fan of starting retail businesses. They are capital intensive and seasonal in activity and sales. But if that is what you want to do – then so be it. I recommend you try to start some sort of a service business. The start up costs are lower, and the profits are generally higher.
 
In either case, you need to do market research and put together a sound written business plan. See guides 8 and 6 at www.jlippin.com/guidemania.html.
 
Look through the online table of contents for some of the books on the above lists. Consider contacting your local SCORE chapter and discussing your plans with two volunteer SCORE counselors.
 
You don’t need to hire an accountant. You need to learn the basics of accounting yourself. See Guide #1 at www.jlippin.com/guidemania.html.
 
I hope my comments are helpful to you. Good luck! Regards, -Jeff
 
Jeff Lippincott
SCORE.org Counselor
Princeton, NJ
scoreprinceto @ aol.com
www.scoreprinceton.org
www.jlippin.com

Choice of legal entity is so important to consider when starting a new business.

QUESTION.
My husband and I are in the process of starting a bakery and cafe.  We have a solid business plan, are engaged with a number of banks who seem willing to provide a range of financing.  We are buying a building.  Our immediate questions arise around what business formation type should we set up. An LLC? An s-corp? Or what? We are hearing that we may NOT be well served by the s-corp, and that we may need two LLCs – one for building and one for business. At this point we need guidance and some definitive answers (which we have not been able to find on the Net). Please help.

ANSWER.
A few years ago NJ enacted a law that required all NJ corporations to file a tax return and pay a minimum of $550 a year IN TAX regardless of extent of income earned. Therefore, it is not a particularly good idea for a small business owner in NJ to form a corporation if it is not required. An LLC is the alternative of choice to a corporation, and I don’t know of a special tax on them. But there might be? You have to check with NJ taxing authorities. While you are checking, see if you can form an LLC in NJ and “check the box” for Federal Income Tax purposes to be taxed as a corporation. Let me know if an LLC in NJ that is taxed as a corporation gets hit with the $550 a year tax by NJ. I don’t know how the law is written – does it apply only to entities that are registered in NJ as a corporation – or does it apply to any entity that files a NJ corporate tax return?
 
If the tax applies, then form two LLCs – one for your bakery and one to own you real estate. You will have the choice of forming single-member LLCs or multi-member LLCs when you form them. Single member LLCs are easier to handle since their revenues and expenses simply flow through to the owner’s Form 1040 tax return at year end. Only one tax return would have to be filed. But if you form multi-member LLCs owned by you and your husband each, then for each LLC you will have to file a Form 1065 partnership tax return at year end. My advice is to form an LLC owned by your husband and an LLC owned by you so no partnership returns have to be filed.
 
You will be less likely to get audited by the IRS if you form a corporation to own both of your LLCs because in that case you would not be filling out a Schedule C on your Form 1040. If you did, then all your salary expenses, healthcare insurance expenses, etc would be paid to you or for you through the corporation and would be fully tax deductible. Maybe the minimum $550 a year in tax would not be a concern. Your problem will arise if you start having losses or you fold. You will have to dissolve the corporation to avoid getting hit for $550 a year. Instead of forming the umbrella entity as a corporation I would recommend that you simply form a third LLC that owns the other two LLCs and check the box for tax purposes to have it taxed as a corporation. For tax purposes you get all the benefits of being a corporation and won’t likely get hit with an audit. However, all of your LLCs’ revenues and expenses will flow into your corporate tax return. And your umbrella LLC will have to issue you and the hub W-2s. Make sure at year end you give yourselves a bonus so “corporate income” is zeroed out. Otherwise what you leave in the umbrella will be subject to double tax when you distribute it as a dividend.
 
Consider taking a look at the following book:
 
Structuring Your Business
By: Michele Cagan
(c) 2004
ISBN: 1593371777
See also, CHOICE OF LEGAL ENTITY.

I think I have answered your question. Good luck! Regards, -Jeff
 
Jeff Lippincott
SCORE.org Counselor
Princeton, NJ
scoreprinceton @ aol.com
www.scoreprinceton.org
www.jlippin.com

Small business owner let the client get ahead of her in fees, and now she is having trouble collecting. What’s she to do?

QUESTION.
I am a small business owner (website design) and have two invoices outstanding from the same client.  The first invoice was sent on 22-DEC-2006 (due on 05-JAN-2007) for $475.  The second invoice was sent on 14-FEB-2007 (due on 28-FEB-2007) for $2675.  I’ve made and they’ve agreed to two separate payment arrangements, but haven’t received any payment.  After not
hearing from them since 05-FEB, I sent a certified letter (received 06-MAR) requesting payment to avoid legal action.  I received an email from them on 20-MAR stating that they would call me on 21-MAR to discuss payment.  I did not receive a call.  I would like to use a collection attorney, but would like to know all of my options.  I gave them a discount on services on the first invoice due to them being a non-profit agency.  Am I within my rights to revoke this discount?  I understand it will cost me money to collect this debt and would like to recover some of that cost.

ANSWER.
SCORE counselors are business coaches. We are not supposed to provide legal advice when we counsel/coach SCORE clients. What you are asking me to provide arguably is legal advice since it is law offices that typically provide collections services. But I cross the line a bit when I provide comments to SCORE clients.
 
As a small business owner you need to become expert in how to charge for your services, how to bill for them, and how to collect your fees. As a general rule you need to ALWAYS stay ahead of your clients when it comes to doing work and getting paid. If you estimate a job should cost the client $3000, then require a $1000 payment up front before work is commenced. When you are about to finish a third of the job, then you need to get another $1000 before you start on the second third of the job. And the same goes for the last third. Never do work without having the fee paid up front. If you do, then you will find yourself in a situation similar to what you “enjoy” right now.
 
Nonprofits are notorious for trying to get something for nothing. It’s in their blood. They are so used to asking for donations that they treat their providers as if they are donors, too. However, sometimes they have every intention to pay, but they have a cash flow problem.
 
My recommendation to you is to talk to the nonprofit about payment of your fee. Ask quite pointedly whether it is a cash flow problem. If you don’t get straight answers, then you might consider finding out who the chairman of the board is for the nonprofit. And maybe find out who the other board members are? Then contact the chairman and explain the situation. No nonprofit likes bad publicity. And a letter to the editor of the local newspaper where the nonprofit operates explaining that the nonprofit is a deadbeat would probably seriously hurt the reputation of the nonprofit. The chairman or the other board members most likely will pull the necessary funds out of their own bank accounts to pay you in order to avoid having their nonprofit damaged. They will write off the payments to you as personal donations on their part.
 
If you can’t get the funds from the executive director of the nonprofit or the chairman of its board, then you will have to sue the nonprofit. You can seek the full value of your services. You don’t need to provide the courtesy discount when suing in court. I don’t recommend you hire an attorney to file suit for you. Visit your county courthouse and visit the free law library there. The law librarian can show you the “How To” book on small claims matters. You’ll be able to bring the suit in most instances. The catch would be if you are incorporated and the local court rules do not allow you to represent your corporation in the suit. You can get around that problem by assigning the Account Receivable to you personal and then the account is yours rather than the corporation’s.
 
If you are uncomfortable doing the suit yourself, then you can hire an attorney. For the size of account you are talking about I can’t imagine an attorney bringing suit for you for less than 50% of the collected amount. They will work for 20% or so if you gave them volume of business. But I doubt that is the case here.
 
I hope my comments are helpful. Good luck! Regards, -Jeff
 
Jeff Lippincott
SCORE.org Counselor
Princeton, NJ
scoreprinceton @ aol.com
www.scoreprinceton.org
www.jlippin.com

Small business owner is having trouble figuring out how to access his money. Du-uh!

QUESTION.
How do I access funds in my sole proprietorship business?

ANSWER.
Normally a sole proprietorship business has its own separate bank account. Deposits related to sales are deposited in that bank account, and expenses are paid out of that account. You access that account the same way you would access a personal bank account. You can use an ATM machine, a check book, or show up at the bank teller’s window.
 
I hope my comments are helpful. Good luck! Regards, -Jeff
 
Jeff Lippincott
SCORE.org Counselor
Princeton, NJ
scoreprinceton @ aol.com
www.scoreprinceton.org
www.jlippin.com

New business owner did not realize the law on employees versus independent contractors. Oops!

QUESTION.
Hello!  I own a temp staffing agency.  I have been in business for less than a year.  I received bad advice from accountants and now I am stuck.  I have to pay unnecessary payroll taxes for temps that I originally registered with my agency as employees. But now, thanks to some good advice, I have registered them as 1099-Independant Contractors. Unfortunately, I do not have enough funds to pay these taxes (which are in the thousands).  I need advice about whether or not I can work out a payment plan with the IRS, will my business be shut down if I do not pay them, and more.  Your help will be greatly appreciated.

ANSWER.
I wish I could send you a more cheerful email. The employer-employee relationship is something you should be well-versed in BEFORE you open your doors as a temporary staffing agency. While it is true that an employer can sometimes choose between treating workers as employees or independent contractors, this is generally not the case for temporary staffing agencies. In just about EVERY situation regarding temporary staffing agencies the temps are employees of the staffing agency. See

http://www.irs.gov/pub/irs-pdf/p1779.pdf
http://www.irs.gov/pub/irs-pdf/fss8.pdf
http://www.irs.gov/pub/irs-pdf/p15a.pdf
 
The fact that you signed your temps up as employees at the get-go goes a long way in showing that the temps are your employees. You may have received some erroneous advice from your old accountant, but it was not advice concerning how to sign your temps up. It was erroneous because she did not impress upon you the importance of documenting payroll taxes and setting that money aside so you can pay it to the IRS when necessary. When you have employees you become a trustee regarding the payroll taxes due the IRS. And if you can’t pay over those taxes when due, then you breach your duty as trustee. That liability will follow you until you make sure that it gets paid. And the IRS usually does not accept promises to pay those dollars over time.
 
You are not going to lessen your problem by now treating your temps as independent contractors. The IRS can, and probably will, contest your classification of your temps as independent contractors. And if you continue to have temps and you continue to not collect payroll taxes, then you continue to dig yourself into a deeper hole financially.
 
I can’t go into all the law in this email regarding independent contractor status versus employee status and how the IRS views the two. As a SCORE counselor I am not supposed to provide free legal advice or accounting advice. But I will tell you that there is a checklist the IRS follows when questioning whether a worker is an employee or an independent contractor.
 
Self-employed people are independent contractors. They find their work and they do their work and they charge their clients a fee for the work they perform. Employees don’t find their work and they don’t charge their clients a fee for the work they perform – they get paid by their employer for doing the  work they do.
 
If a worker relies on you to find them work, then you either get a one-time finder’s fee for placing them in the job. Or you get a commission on every hour they work. If you get the finder’s fee, then there is no way to call that person your employee. But if you get a commission on every hour she works for the client, then you are that person’s employer.
 
I highly recommend you get a handle on the business model in which you operate. The cheapest route for you to go is to visit a law library and ask the law librarian to help you look up the law on the subject. Law libraries are usually in county courthouses, state government complexes, and at law schools.
 
I highly recommend you treat your temps as employees from here on out. Start socking away the payroll taxes you owe. And contact the IRS and explain the situation. They might let you enter into a payment plan since you are new to business. But you should have known better. You tell me you initially treated your temps as employees, and you still did not set the payroll taxes aside like you were supposed to do.
 
I hope my comments are helpful to you. Good luck! Regards, -Jeff
 
Jeff Lippincott
SCORE.org Counselor
Princeton, NJ
scoreprinceton @ aol.com
www.scoreprinceton.org
www.jlippin.com