Tuesday, July 21, 2009

The Business Plan

The website Articlebase provided this interesting guidance on preparing a business plan. While the writer refers to a bookkeeping business, her ideas are pretty much transferrable to other business models, and the simplicity of her approach will not intimidate the new business person.

Admittedly, a bookkeeping business does not usually have to present the plan to potential investors or lenders, and if your business involves manufacturing costs, or a distribution network, or the roll out of a new product, you will have to provide details for those aspects of the plan, and flesh out the plan with projections, analysis, and a roster of key persons. However, even for those requiring a more rigorously developed plan, I think the "one page" approach is a good place to start, and then to be developed.

Here's a link for advise on developing the kind of business plan you may eventually need to take to the bank or prospective investors, but please constuct a one page plan first. I especially like the authors advice regarding the "vision statement". At this point you should not be toning down your optimism for fear of skeptical reviewers.

PS One other thing. I like to recall the words of one self starter. I don't try to figure out what I can do, or what I like to do; I think of what I would pay someone to do.

The One-page Business Plan for Your Bookkeeping Service

Author: Linda Hunt

Sometimes the thought of sitting down to draft a business plan sends me running for the hills, even though I preach the importance of planning to all of my clients! Small business advice: Without planning, your bookkeeping business goes nowhere fast. When you fail to plan, you plan to fail

What I have come to learn as a business coach is that business plans don’t have to be long to be good. In fact, a single page can contain all the essential elements you need to show where you’re taking your bookkeeping business and how you’re going to get there. The most important reason to have a business plan is to clarify your thinking about where you are taking your business. When it’s in writing, others will know and understand your vision and your plan

Here are a few characteristics of an effective one-page business plan for your bookkeeping business.

• Simplicity. A one-page plan takes a complex subject and makes it simple

• Focus. It focuses on what’s important. There is no room for fluff or filler.

• Versatility. It is a communication tool for employees, prospective employees, partners, shareholders, investors and bankers.

• Consistency. It sends the same message to every person who receives it, unlike a verbal presentation, which may change every time you speak.

• Flexibility. It is easy to change and update.

The Five Elements of the One-Page Business Plan

1. The Vision Statement – What are you building
This is the place where you describe your vision —your way. Most business coaches will tell you that vision statements should be expansive and idealistic. They should stimulate thinking and communicate passion, while painting a detailed picture of the bookkeeping business you want. The key to capturing your vision is to refrain from restricting the flow of thoughts.

2. The Mission Statement – Why does this business exist
The mission statement describes the purpose for which your product, service or business exists. Great mission statements are short and memorable. They communicate in just a few words the company’s focus and what is being provided to customers. They answer the question, “Why will customers buy this product or service?” The mission statement should also reflect the owner’s passion and commitment. When the business satisfies an owner’s passion for creativity, independence or the need to serve, there is substance and staying power in the mission.

3. The Objectives – What results will you measure
Objectives clarify what you are trying to accomplish in specific, measurable goals. Some of the best small business advice that I can give you is this: for an objective to be effective, it needs to be a well-defined target with quantifiable, measurable elements. There are many types of objectives, and your plan should include a variety of them. For many businesses the two most important categories will be the financial and marketing objectives. It is important, however, to tailor your objectives to cover the full scope of your bookkeeping business, focusing on the goals that are most critical to your success

4. The Strategies – How will you grow your business
Strategies set the direction, philosophy, values, and methodology for building and managing your company. Strategies also establish guidelines for evaluating important business decisions. In most industries there are four to six core strategies that successful businesses follow. These core strategies are easy to understand, remain relatively constant over time, are used by market leaders and result in profitable growth. Here are two examples of a core strategy: “Price isn’t everything,” and “Attract the very best employees and give them a stake in the business.” What are your strategies

5. The Plans – What is the work to be donePlans are the specific actions the business must implement to achieve the objectives. Plan or action items should contribute to the growth of your bookkeeping business. Each plan or action item is, in effect, a project. Plans should be action-oriented, list specific tasks and have definitive deadlines or due dates

Once your plan is in writing, it is now time to put that same plan into action. Putting the plan into action is the most important step because the actions deliver the results you wanted when you started this process. For most entrepreneurs, this is easy — you are already action-oriented!

Here is some business advice, as well as a few suggestions, to help you put (and keep) your bookkeeping business plan in action
• Keep the plan with you.
• Use it as a decision-making tool.
• Update it with new thoughts.
• Share it with people you trust and whose opinions you value.
• Measure your progress at least quarterly.
• Prepare a budget to match the plan.

Thursday, July 2, 2009

LLCs and S Corps

Folks have been talking to us about LLC's (limited liability companies)as an alternative to the more familiar business organizations, such as partnerships and either S or C corporations. Since the state charges for registering an LLC are roughly double what they would be for the other forms of organization, I tend to question the perceived advantages to our clients. I'm attaching an article which provides a comparison of advantages of the business forms.

Most importantly, "members" (shareholders) of an LLC can be other LLC's, corporations, partnerships or individuals; the number of members is not limited by law, and alien non-residency status is not a bar to membership. To me it appears the best opportunity to benefit from the LLC business form is for rental real estate owners who can set up each property as a separate LLC, limiting liability arising from any one property to that property only. The state of Illinois allows registration of Series LLC's, whereby a parent LLC and several subsidiary LLC's (eg separate properties)can be set up with one registration.

Tax advantages are hard to identify, since the Internal Revenue Service has not treated LLC's as a distinct business form, and LLC's have the option of filing federal returns either as corporations or partnerships.

S Corp. Notes (abstracted from My Corporations Weblog site)

Let’s First Start off with Explaining What an S-Corporation is….An S-Corporation begins its existence as a general, for-profit corporation upon the filing of Articles of Incorporation at the appropriate state office. Once formed, a general for-profit corporation that has not requested “S-Corporation Status” with the IRS will be required to pay income tax on taxable income generated by the corporation. In addition, any dividends distributed to shareholders may be subject to taxation as dividend income to that shareholder as well (hence the problem of “double taxation” that can occur in a ‘Non-S-Corporation’). However, after the corporation has been formed, it may elect “S-Corporation Status” by timely submitting IRS form 2553 to the Internal Revenue Service. Certain states require that your corporation file state-specific forms to qualify for S-Corporation status in that state for state taxation purposes. In addition, S-Corporation status is not available for purposes of state tax liability in certain states. Please contact your state’s taxing authority for further information. Once this filing is complete, the S-Corporation is taxed in a manner similar to a sole proprietorship or partnership, rather than as a separate entity. Thus, the income is “passed-through” to the shareholders for purposes of computing tax liability. Therefore, each shareholder’s individual tax return will report the income or loss generated by the S Corp.

Who typically elects S-Corporation status? Most entrepreneurs prefer the S-Corporation structure for the following reasons: • The S-Corporation combines many of the advantages of the sole proprietorship, the partnership, the corporation, and the LLC into one entity. • Unlike sole proprietors and partners in a partnership, shareholders of an S-Corporation are afforded the same level of limited liability and personal asset protection as are the shareholders of a general, for-profit corporation. • In an S-Corporation, shareholders avoid the “double-taxation” common to shareholders of non-S-Corporations because all income or loss in an S-Corporation is reported only one time on the personal income tax returns of the S-Corporation’s shareholders. Where a corporation claims income from a passive investment (e.g. from real estate owned) for three consecutive years that exceeds 25% of the corporation’s gross receipts, S-Corporation status may be terminated by the IRS. Most real estate investors, for example, prefer placing real property in an LLC (Limited Liability Company) rather than an S-Corporation for this very reason.

Are There any Requirements to Qualify as an S-Corporation that I should know about? To qualify for S-Corporation status, the corporation must • Be filed as a U.S. corporation. • Maintain only one class of stock. • Maintain a maximum of 100 shareholders. • Be comprised SOLELY of shareholders who are individuals, estates or certain qualified trusts, who consent in writing to the S-Corporation election. • NOT have a shareholder who is a non-resident alien. Please note that failure to observe ANY of the above requirements could revoke S-Corporation status.

That Sounds Great but what are the differences between an S Corporation and an LLC? While on the surface the S-Corporation and the Limited Liability Company (”LLC”) may seem similar, but please note the following very significant distinctions. The following are some of the differences between the two types of corporate entities: • S-Corporations are limited to 100 shareholders, while LLCs have no limit to the number of members. • S-Corporation shareholders must ALL be individuals who are U.S. citizens or permanent resident aliens. LLC members (owners) may be individuals, corporations, partnerships, many trusts, and even non-reident aliens.

Are there any Tax Advantages to forming an S-Corporation? In an S-Corporation, only earnings actually paid out to an owner as compensation for services are subject to payroll taxes. Any money left in the business for reinvestment or distributed to the shareholder as a dividend is not subject to payroll taxes…and not subject to self-employment tax. Let’s review an example: “John” operates his business as an unincorporated, sole proprietorship. John has a net income (gross income less expenses) of $60,000 during the year. During the course of the year, John withdraws $40,000 as his personal salary leaving the remaining $20,000 in the business. If John operates as a sole proprietorship, he’ll owe self-employment tax on the full $60,000 (($60,000 x 15.3% = $9,180). However, if John forms a corporation, elects S-corporation status, and withdraws the same $40,000 as compensation for his services, he would only owe self-employment taxes on the $40,000 in salary ($40,000 x 15.3% = $6,120). Thus, forming an S-Corporation would save John $3,060 in payroll/self-employment taxes.