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Outsourcing payroll. Is it right for your small business?

SBOCTeam — Tue, 07 Sep 2010 15:49:00 GMT

If you find that processing payroll is becoming an increasingly burdensome task, it may be time to turn to one of the many payroll firms eager to do it for you

By Christopher Freeburn

One of the greatest burdens faced by small business owners is dealing with the voluminous amount of paperwork generated by their businesses. Even small businesses with just a handful of employees create enough paperwork to inspire dread in the most ambitious entrepreneurs. One of the most vexing sources of this endless cavalcade of forms, worksheets, timetables, reports, and compliance documents is payroll. The simple act of paying your employees requires completing a complicated thicket of bank, legal, and tax forms, and that's before the checks even get written.

Trying to go it alone
Even though filling out all the payroll paperwork takes many more hours than most small business owners would like, the overwhelming majority continue to handle payroll themselves. The National Federation of Independent Business (NFIB) recently surveyed hundreds of small businesses and discovered that roughly 64 percent performed all payroll functions in house. "The smallest enterprises are the ones most likely to prepare payroll in-house, while the largest small businesses more often send it out," says William Dennis, a senior researcher with NFIB. "Even then, half of the largest small businesses-those employing 20 or more workers-handle payroll themselves." According to the NFIB, in more than half of these small businesses-and in particular, those with fewer than 20 employees-the small business owner completed all payroll paperwork, personally.

Outsourcing the paperwork
If you dread the thought of having to tabulate tax withholdings, filling out tax forms, and writing checks, there is a solution to your conundrum: payroll outsourcing. The payroll preparation industry has expanded dramatically over the past two decades, with dozens of companies offering a myriad of payroll preparation options. The rise of electronic communications-especially the Internet-has greatly increased the ease and economy of such services.

The NFIB survey mentioned above found that most small business owners who did their own payrolls cited cost as a reason for keeping payroll in-house. However, the profusion of payroll preparation firms and the efficiency of Internet-based communication have lowered the cost of such services to the point that almost any sized business can afford them. Using any of the major payroll preparation firms, a small business with between five and ten employees, can expect to pay $100 or less, per pay period, for payroll services, including paychecks, direct deposit payments, employee tax and benefit calculations, and record keeping.

Reaping the benefits
In addition to reducing frustration, outsourcing payroll lets your business take advantage of the payroll firm's expertise in preparing tax documents like 1099 and W2 forms, which can be difficult for small business owners trying to do them on their own. Professional payroll preparation firms hire CPAs and tax experts who keep track of both minute and major changes to local, state, and federal tax and employment laws. Their knowledge of the laws and their experience in preparing and filing the paperwork associated with compliance with the applicable statutes greatly reduce the risk of errors or late filings, both of which can result in significant penalties. Payroll service providers will also complete and submit end-of-year tax documents like W2 and 1099 forms, correctly and on time.

Today's payroll services are also a lot easier to use. Almost all payroll providers allow small business owners to manage their payroll accounts online. This means you can sign up for additional services, add employees, change information, and adjust salaries, benefits, or pay periods, just by logging into your account.

Outsourcing your company's payroll options permits you as a business owner to focus your thinking on running your business and removes one more distraction. "Small business owners have enough to think about without having to ponder the intricacies of the tax code every time they pay their employees," says Dave Bowman of TTG Associates, a Los Angeles-based business-consulting firm.

Choosing an outside payroll firm
When looking for an outside payroll provider, there are a few things you need to keep in mind:

Choose an established firm with a good track record. Contact your local better business bureau to see if there have been any complaints made against the company.
Make sure the payroll company can handle your company's specific needs. Some payroll companies only handle federal and state taxes, but not city taxes. Other payroll companies will not handle companies with locations in multiple tax jurisdictions or states.
Ask how the company receives payroll information. Many large payroll firms now strongly prefer to receive payroll data over the Internet, or by email. But most will accept data via phone call. Make sure the payroll provider uses a means you are comfortable with.
What liability will the payroll provider accept? Will the payroll provider accept any tax penalties that arise from its own errors? Not all payroll companies do, and the government will hold your business, not the payroll provider, ultimately responsible for any mistakes, so make sure you know where the payroll firm stands on this.

Off-season training for your small business.

SBOCTeam — Tue, 31 Aug 2010 20:59:00 GMT

Running a seasonal business presents a particular set of challenges-and opportunities

By Max Berry

As summer winds down, so too do a lot of small businesses, and running a seasonal business may seem like an entrepreneur's dream: Work hard for part of the year and earn enough for the whole of it. But running a seasonal business, just like any other kind, is a yearlong endeavor-one that requires meticulous time management and an extra degree of financial savvy. Here are ten ways to get the most out of your seasonal business at every time of the year.

1. Take advantage of the off-season
Banish the notion of "down time" altogether: By developing an airtight business plan during your off-season, you can ensure that the money you earn once things pick up again is managed effectively. The off-season is also an excellent time to develop a marketing plan; while you have a minute, poll your patrons to better understand how to serve them and use the information you gather to develop new ideas. You can use your slow season to take care of logistical matters as well. Make sure your lease is in order, lock in your temporary, seasonal staff as early as possible, and negotiate pay rates before you draw up your budget.

2. Make the most of the on-season
One of the perks of running a seasonal business is that, during the busy period, demand for your product or service is high. But the accompanying cash flow can create a false sense of security heading into those lean months ahead. Be financially mature, no matter how booming your business is for those few months. Pay yourself a livable-but not extravagant-salary, put all the money you can into a business savings account or divert a good chunk into a six-month CD, and don't farm out jobs you could do yourself.

3. Diversify
Don't feel like your business is bound to one product or service. You can add to your income by hosting some "extracurricular" events to complement the services you already provide. If you run an art gallery, approach an artist whose work you're displaying about offering art classes at night. If you run a surf or ski shop, try offering lessons on the side.

4. Remember the locals
Even if tourists represent the bulk of your business, don't forget to cater to the locals too. This can be an especially effective way to drum up business in the off-season, when the tourists are gone. Seasonal restaurants, in particular, can treat the end of tourist season as its own kind of beginning. A well-publicized locals night, celebrating the end of a successful tourist season, will remind your year-round regulars that you're there for them too, and will strengthen your business' place in the community.

5. Have two business models
Rather than shutting down completely, adjust your business model to accommodate the seasonal shift in customer needs. Many summer camps keep revenue flowing in the fall and winter by renting space for special events, retreats, and conferences. It's also regular practice for restaurants that cut back on their hours in the off-season to remain open year-round for private events and holiday parties. While these events will provide a less consistent cash flow than the day-to-day business of your "on" season, patrons will pay more for private use of your space.

6. Make the scene
Be on the lookout for events to help promote your business; trade shows run year-round and taking part in local festivals, fairs, and holiday activities is a great way to increase brand visibility and make a personal connection with the people in your community. Include your goods or services in a local charity auction-whether it is during your busy season or not-to keep your business fresh in peoples' minds.

7. Appeal to the entire family
You may eliminate the off-season altogether by appealing to several demographics at once. Don't forget, if you run a restaurant, lounge, or other public community space, that every season is sports season. A television and a liquor license will attract a large crowd on game day, whether that game involves hoops, mitts, or helmets. But stay family friendly. Games and a special menu for the kids-as well as a smoke-free environment-will make your business a viable destination for anyone's night out.

8. Give them something to get into
If there is one particular season that sags for your business, give it some life by initiating year-round clubs and competitive leagues for your customers. Bars and restaurants can bring in business with billiards leagues or regular darts tournaments; bookstores can host regular book club meetings and creative writing workshops; and restaurants can offer a series of cooking classes specializing in local fare and holiday favorites.

9. Start a complementary business
Perhaps the surest way to survive a seasonal business' down period is to start another business for another season. Some landscapers, for instance, do interior floral arrangements and design work in the winter. As long as the two businesses are complementary, the reputation you've built through one will lend you credibility in the other.

10. Stay in touch
Stay fresh in your customers' minds by starting a mailing list. This way you can send periodic updates on developments in your business, new products, and information on when you'll be opening for the season. You can also send valued customers special offers and discounts to keep them coming back. A quality web site, with a section for similar news items and updates, will also give you a way to stay top of mind throughout the year.

Planning for the sunset: Defined benefit retirement plans

SBOCTeam — Thu, 26 Aug 2010 21:25:00 GMT

Why a defined benefit plan can help a small business owner be ready now for retirement later

By Christopher Freeburn

While many small business owners may hope to fund their retirement through the sale of their business to employees or partners, for most small businesses that simply isn't a realistic option. Furthermore, with ever-greater numbers of people launching their small businesses as a second career, many small business owners are facing the prospect of looming retirement with relatively few years to contribute to their 401k plans. The same problem looms in the minds of professionals who have spent years slowly building their medical, consulting, and legal practices into highly successful enterprises and now find themselves wondering if they'll have enough investment income to retire comfortably. A potential solution for such high-income earners comes in the form of defined benefit pension plans, commonly called 412(i) plans.

Defining defined benefit
Defined benefit pension plans are employer-sponsored retirement plans whose future benefits are calculated ahead of time and paid out at a predetermined rate and schedule. Specifically, Internal Revenue Code (IRC) section 412(i) defined benefit plans are plans that conform to the 1974 Employee Retirement Income Security Act (ERISA), and are thus known as qualified defined benefit plans. Under a 412(i) plan, a small business owner can make fairly large, tax-free yearly contributions to the plan, which is funded with a combination of life insurance and annuities, or annuities alone. Unlike traditional 401k plans, 412(i) plans permit a much higher yearly contribution (as much as $195,000 for 2010), which permits the beneficiary to build up a sizeable retirement investment much more quickly than would otherwise be possible. (For a brief rundown of defined benefit plan characteristics, check out the IRS Retirement Plans Navigator: http://www.retirementplans.irs.gov/choose-a-plan/defined-benefit-plan/defined-benefit-plan/.)

"Defined benefit plans allow the larger contribution because the life insurance and annuities that fund the plans have a guaranteed rate of return that is generally much lower than in more traditional plans like 401(k)s," explains David B. Mandell, principal at Jarvis & Mandell LLC. "The guaranteed rate of return in these plans usually ranges between one to three percent, as opposed to four to six percent or more in a typical pension or retirement plan. In the latter, the employee's contributions are invested in market-traded securities, which can generate a much greater return, provided that market conditions are favorable." Defined benefit plans base their future value on actuarial data compiled by insurance companies, which calculate the likely life expectancy of the plan participant and structure the plan to pay out a predetermined distribution according to how much income the participant estimates he or she will need after retirement. The annual contribution (or premium) to the plan is determined by the desired size of future distributions.

High income, high contributions
Contributions to 412(i) plans are fully tax-deductible, a prospect that attracts the interest of many business owners. "412(i) plans allow for the largest pre-tax contribution of any qualified plan," observes Clint J. Lowery, executive case director at The Hartwood Group, which specializes in creating defined benefit plans. "Custom designed 412(i) plans allow a small business owner to retain the highest percentage of contributions for his or her own benefit." However, Lowery explains that the advantages of such plans only accrue to small business people with fairly high incomes. "412(i) plans must be funded in equal amounts every year. A person who is highly uncertain about having consistent revenue over, say, the next five years should not consider a 412(i) plan."

"These plans usually work best when the company owner is 10 years or less away from retirement and is considerably older than his employees," Mandell observes. Moreover, he says the stability of business income is an important factor. Since 412(i) plans are funded through insurance and annuity contracts, the yearly contribution is set at the outset of the plan and generally remains inflexible. If a business suffers financial reversals and finds that its annual revenues can no longer cover its contributions, cancellation of the plan is the usual result.

"Every company builds its own provision inside the policy to allow for business hardship," Hartwood's Lowery says. "Usually the plan would be terminated. Any annuity portion would be rolled into an IRA and any whole life policy would be converted to a universal life policy." However, Lowery points out that the annual contribution to the plan does not have to come solely from a company's revenues. "The money could come from retained earnings, a contribution of capital from the owner, or even a loan. If the company does not have enough revenue to take the full tax deduction for the contribution in the current year, the left over amount will carry forward."

Defined benefit plans are not just for high-income business or professional practice owners themselves. Employees can be included in the plans. "Depending on the business, it can be very expensive to cover all employees," explains Ridlon. "A dentist or a doctor might want to cover the nurses in his office, but not the other workers." In that case, specific formulas govern the number of employees that may be excluded from the plan.

Retirement isn't always the end
Building a legacy matters to many small business owners. As they look forward to their retirement years, they hope to insure for themselves a comfortable standard of living-one that ensures that they will be able to pursue new goals and interests after they leave the businesses they created. Proper financial planning can assure retiring owners a steady stream of income to support their new lifestyle and plans.

How do I pay my business�s bills? Part 3: Online

SBOCTeam — Mon, 23 Aug 2010 18:21:00 GMT

In this three-part series, we describe the primary methods a small business can use to pay its bills and examine the advantages and disadvantages of each

Part 3: Online/Electronically

By Christopher Freeburn

The rise of the Internet has created myriad opportunities for small businesses to save money and compete with their bigger competitors in almost every area of business operations. Paying bills is no different.

As Internet usage spiked among consumers and businesses over the last decade, online financial transactions exploded. Driven largely by consumer pressure, online banking-financial transactions conducted almost completely over the Internet-has become common. According to Jupiter Research, more than 50 million U.S. households and businesses use some form of online payment system to purchase goods or services or to manage checking accounts.

Accessibility
You can make online bill payments from any of several different kinds of accounts, including checking, credit card, and electronic accounts like PayPal. These accounts allow you to manage your overall account, as well as make payments with a few clicks of the mouse. One of the biggest benefits of these accounts is 24-hour access to your financial data. You can login at any time-and in an age of WiFi-equipped laptops and smart phones-from virtually anywhere and check your account balance, transfer funds between accounts, or pay a bill electronically. You can even take note of which payments have been credited to your account.

The number of businesses and utilities that accept some form of online payment has grown dramatically as consumers and businesses embrace the technology. "Convenience is one of the factors driving online bill payment," says Boston-based banking consultant Jim Sheridan. "It's a big plus for small business owners to be able to track payments and make changes to their accounts whenever they feel the need. You just can't do that with a traditional checking account."

Flexibility and savings
Another reason that many small business owners have chosen to use online payment systems is the flexibility they offer. Many online payment systems permit you to choose the method of payment, meaning that you can shift between paying with credit cards, bank accounts, or other electronic accounts (like PayPal). This permits small businesses to select the right payment option to best manage the business's cash flow when paying a bill.

Online bill payment systems can also be configured to function automatically, charging a periodic bill to a specific bank, credit card, or electronic account at specified intervals or on certain dates. This feature frees the small business owner from the task of having to remember the upcoming bill, write a check, and mail it, thus conserving the business owner's time and eliminating the risk that the bill will be forgotten, or the payment lost in the mail. "The ability to automatically pay monthly bills is a great feature," says Sheridan. "It takes one more task off the business owner's plate and makes sure the business is never hit with fees or penalties for late or missed payments." Additionally, online payments are generally free, thus eliminating the postal costs of mailing payments. With postal costs rising sharply, this is a savings that can add up over time.

Easy to start
As more and more companies have adopted online payment systems, it has become a lot easier to get started. Virtually every bank now offers an online account system that allows you to access your checking and saving accounts, and keep track of account activity. "Online account access is something that banks are increasingly encouraging their customers to adopt," says Sheridan. "Most online account systems are relatively simple to use, and most banks are looking to steer their customers away from paper checks, which are costly for the bank to process, and toward cheaper, electronic payment systems." Credit card companies have adopted online account management as well, permitting small business owners to access their business credit card statements online with ease. For small businesses that have distributed credit cards to their trusted employees, online access permits the business owner to check the charges made on individual cards, as well as the overall account information, at any time.

Many utilities and most major companies-office supply vendors, retailers, and insurance providers, for example-will allow you to pay bills via electronic checks. Typically, this means creating an online account with the company in question and providing certain financial information: the name of the bank from which you wish to draw funds, the number of the account, and the routing number that appears on your checks. The online bill payment system then uses this information to withdraw the funds directly from your account. Alternately, most of these systems also permit payment via credit cards or other electronic accounts.

Security concerns
Small business owners who refrain from using online bill payment methods usually cite fears regarding the security of their accounts online as a reason for not participating. While hacking remains something of a concern, most of these accounts are password protected and very secure. Companies that maintain online payment systems have invested a considerable amount of time and money to put significant security measures in place designed to thwart hackers and identity thieves.

Why Start Now? Five reasons to start your business now.

SBOCTeam — Fri, 20 Aug 2010 16:06:00 GMT

Five good reasons to launch your startup in today's economy (and two reasons to think twice)

by Reed Richardson

In a still fragile business climate marked by stubbornly high foreclosure rates, uneven consumer demand, and tight credit markets, budding entrepreneurs might consider right now to be one of the worst times to start a new business. But launching a startup in the midst of ongoing economic struggles can actually be a roadmap to long-term success.

According to studies by the Kauffman Foundation and the outplacement firm Challenger, Gray & Christmas, the rate of entrepreneurial activity rose significantly between 2007 and 2009. But since the start of this year, the Challenger Job Market Index has found that the pace of new startups has cooled considerably, falling to 3.4 percent in the second quarter of 2010 from 9.6 percent in the last quarter of 2009. Clearly, the earlier statistics show that many people believed there were opportunities to be seized in a struggling economy, but perhaps a fear that it's now too late to take advantage of them has scared off some more recent entrepreneurs.

If you're among the latter, however, take heart; there are still many sound reasons for starting your small business today. Below are five arguments for jumping into the business waters right now.

1. Lower threshold to entry
Entrepreneurs don't need as much capital to launch right now because resource and overhead costs are at or near historic lows in nearly every category. For example, the commercial real estate market continues to suffer from high vacancy rates, so the rent or lease payments on, say, a new retail business's storefront location, might be had for a fraction of the price commanded just a few years ago. Similar gluts in durable goods and office equipment inventories likewise mean that everything from a manufacturer's source for its raw materials to a law firm's need for photocopiers and workstations can be found at pennies on the dollar.

Seth Levine, a managing director at the Boulder, Colorado-based venture capital firm Foundry Group, says that launching a business in this type of low-cost climate impresses upon entrepreneurs the critical importance of leveraging your startup's cash flow as far as it can go. "I think they get a practical advantage from having started their companies in an environment that often requires a certain amount of stinginess, which often serves companies well throughout their lives," Levine explains. "I think businesses have a tendency at all levels to spend too much. There's nothing like a really tight market to make you look more closely at every dollar going out the door."

2. Talent is cheap and available
Another critical small business resource that can be ripe for the picking in today's economy is people. With the Labor Department reporting unemployment rates near double digits and more than five candidates per job opening, now is definitely an employer's market. What's more, the deep and widespread nature of the financial crisis has left many workers, even those still employed at large corporations, uneasy about the future and suddenly more willing to entertain a lower-salary offer from a startup.

"People are finally realizing that we are all self-employed, regardless of our work configuration," explains Pamela Slim, who authored the book Escape from Cubicle Nation and writes about the topic on a blog of the same name. "In my experience as a start-up coach, I have seen a significantly larger number of corporate employees working on a ‘side hustle,' (a small business which provides supplemental income), which can act as insurance in case of a layoff, or as the early testing stage of a full-scale business." In addition, Levine points out that the significant decline-or complete dissolution, in some cases-of many employees' 401(k)s and stock portfolios makes it even easier now to recruit from the ranks of the currently employed for a startup business.

3. Taking a risk isn't so risky
Many a successful business can trace its roots back to a particularly ignominious period in the American economy-16 of the 30 companies in the Dow Jones Industrial Average, including household names like McDonalds, General Electric, and Procter & Gamble, began during a recession or depression. For millions of Americans who have lost their jobs in the past two-plus years, being laid off became the unexpected impetus that sparked their entrepreneurial passions and, just maybe, will lead them to similarly out-sized success. And there's good reason to adopt this ‘never look back' attitude, according to Indiana University business professor David Audretsch.

"People understand that there's something different about this recession," Audretsch explains. "In the past, being laid off might have been a temporary situation, until the inevitable recovery comes. But now people are finding that many of those old jobs were not sustainable. Those jobs have disappeared for good and so they can't count on going back to the same old company and picking up where they left off." Besides, adds Audretsch, a clever business idea is still clever in a boom or a bust cycle. "Real serious entrepreneurs don't pay much attention to the business cycle."

4. Your established competition may be already weakened (or gone)
It's human nature to want to preserve what you already have, and the same phenomenon often occurs within the business world as well. That's why, in tough times, many established companies retrench, pull back advertising, and focus on keeping their current customers instead of pursuing new ones. This pullback strategy sometimes backfires completely, sending a struggling company tumbling into bankruptcy and clearing the field for a startup, or, more often, creating a market vacuum that a new small business can fill and exploit.

Moreover, new startups aren't constrained by past performance, existing infrastructure, and future expectations the way large companies often are. Instead, they are free to experiment with new products and innovative solutions, which can take more conventional businesses by surprise. Some examples of this, startup coach Slim explains, involve early-stage financing and social media marketing. "If you can't get access to credit from mainstream institutions, you have to find a way to get money directly from consumers, without spending too much on materials or infrastructure. This [phenomenon] is creating highly functional and streamlined business models," she notes. Likewise, she adds, "the dramatic increase in social media users also means that you can expand your market far beyond your own geography."

5. Nowhere to go but up
A small business that makes use of a slow economy as a trial period-to perfect their product or fine-tune their marketing-may be in a significantly stronger position once good times return. "The business cycle has been with us as long as anyone can remember," points out Prof. Audretsch. "When the full recovery does arrive, you want your small business to be positioned to take maximum advantage of it, instead of just moving in, hiring, and starting to set up shop."

In addition, Slim notes that small businesses that survive tough times often gain something of a psychological advantage, one that, she says, can carry over to customers as well. "Consumers are looking for confident market leaders who can help pull us all out of the economic spiral," she explains. "When they see businesses starting and growing in one of the most challenging markets in generations, that instills deep trust. Those [businesses] who already have trust will be well positioned for growth when things do pick up. And they will."

Despite the aforementioned reasons in the affirmative, a fair-minded assessment must also acknowledge that there are some obvious drawbacks to starting a small business right now. Here are two significant obstacles that budding entrepreneurs should prepare for before hanging out their shingles.

1. Hard to raise money
Capital is the fuel that propels the engine of business and there's no denying that, right now, much of the economy is still sputtering along on fumes. Credit markets remain constricted, meaning that your startup may have to take a more modest, measured approach rather than rolling out a million-dollar product development and marketing campaign simultaneously. To combat this, many small business owners are embracing a spartan startup mentality known as bootstrapping, but this approach won't necessarily work for every kind of business. As a result, an undercapitalized startup could easily stall out prematurely and fail or be quickly poached by a better-financed competitor, even if it is selling a fantastic new product or the next killer app.

2. Getting lost in the crowd
As the Kauffman Foundation survey found, millions of Americans have decided to strike out on their own and start a new business in the past few years. For many, this moment is the culmination of years of preparation and planning, but for some, launching a startup may simply be a matter of joining in what appears to be the latest fad. "There is a such a thing as an entrepreneurial bubble," notes Indiana Univ. Prof. Audretsch. "If everyone you know is starting a business, a kind of herd mentality sets in."

Pamela Slim agrees. "I have noticed a lot more people trying out business ideas, or launching a small business after being laid off, instead of looking for another job.
Just like you can never guarantee a corporate job will last forever, you cannot guarantee a new business will be successful," she points out. This surge of entrepreneurship will undoubtedly help drive innovation forward, she explains, but, inevitably, it will also leave lots of failed small businesses in its wake. But even in those cases, Slim sees a silver lining. "The way you gain insight and experience as an entrepreneur is by trying a lot of things, failing often, learning, and trying again," she explains. "There is no perfect time to launch, so why wait? Get out there and see if your great idea holds water in the real world."

How should I structure my business? - Part 4

SBOCTeam — Tue, 17 Aug 2010 14:52:00 GMT

In this four-part series, we examine the different ways to structure your small business, comparing the various advantages and disadvantages

Part IV - C Corporation

By Reed Richardson

Incorporating a small business can be a shrewd move or an unnecessary complication depending on your company's short and long-term goals. The main attraction of incorporation involves the liability protections it offers to the company's shareholders. Because a corporation is treated as a separate entity from those who run it-both in legal and tax terms, federal and state laws treat corporations as "persons"-corporate officers and stockholders have limited liability when it comes to debts or risks incurred by the company during the normal course of business. The corporate business structure also offers small business owners a myriad of ways to structure partnerships, raise capital, and survive changes in leadership, but its rather high regulatory and tax burdens make it a course of action that an entrepreneur should carefully consider before undertaking.

Operations - Corporations are, first and foremost, statutory structures regulated by state law. So, incorporating your small business will require following the rules of your local state business corporation act. For most small businesses, this will mean incorporating in the state where your company is located or does a majority of its business. Although one can find numerous do-it-yourself "incorporation kits" available on the Internet at the relatively low cost of a few hundred dollars, it's probably worth the extra money to approach a law firm that specializes in this work. Depending on your home state, the cost to incorporate a small business typically runs between $500 and $5,000.

Once incorporated, there are additional cost and time requirements. Most state laws mandate that a corporation hold at least annual shareholder meetings, keep minutes of these meetings, establish a set of corporate by-laws, and document all major company decisions. In addition, most states require the election of company officers such as a president or CEO, as well as a treasurer or comptroller.

All this complexity does bring with it some advantages, however. Well-established company rules and by-laws for dividing shares make it easier to tailor your company's operations to your needs. For example, C corps can issue stock of various classes and, unlike with LLCs or S corporations, there is no limit to the amount of shares or partnerships that a C corporation can have. Likewise, the air of permanence and legitimacy that comes with incorporating often makes a company more attractive to potential sources of outside capital, like venture capitalists or angel investors.

Some of these administrative hurdles can be avoided by incorporating in so-called tax haven states such as Delaware (http://corp.delaware.gov/) or South Dakota (http://www.sdsos.gov/busineservices/corporations.shtm) that have much lower financial and regulatory requirements. But if you do take this tack, it's important to remember that your corporation will still have to qualify to do business in your home state no matter where it's incorporated. For many small companies, this tactic won't be worth the extra hassle as it will require hiring a separate corporate agent to handle official notices and paperwork in the incorporated state.

Tax - Because corporations-and specifically C corporations-are separate legal entities, they are taxed under the IRS's corporate tax structure. Unlike in sole proprietorships, LLCs, or even S corporations, individual partners or shareholders do not have the company's net profits taxed on their individual returns. Technically, there are no "owners" of a corporation, only shareholders and company officers or directors, who are considered corporate employees. And because of this, the officers or directors in a small corporation have the flexibility to decide how much of a business's net profits will go toward employee salaries versus how much will stay with the company. This tactic of "income-splitting" can significantly reduce a company's tax burden and allows for more robust reinvestment back into the business.

Personal liability - Incorporating your small business provides the strongest protection from personal liability available, shielding the company officers, directors, and shareholders from risks-operational or financial-incurred by the business. However, it's important to weigh the financial and administrative burden of incorporating, against the relative freedom offered by LLCs, which effectively do the same thing without the requisite corporate rules and restrictions.

Benefits - Other advantages to incorporating involve the benefits that a corporation can offer to its company officers and employees. Fringe benefits like health and life insurance policies purchased by the corporation for its employees are not considered taxable salary and so the officers and employees receiving them do so tax-free. And often, the corporation can deduct the cost of providing these benefits.

How should I structure my business? - Part 3

SBOCTeam — Fri, 13 Aug 2010 14:49:00 GMT

In this four-part series, we examine the different ways to structure your small business, comparing the various advantages and disadvantages of each

Part III - S Corporation

By Reed Richardson

The notion of a forming an incorporated business that would also enjoy many of the same pass-through tax advantages as a sole proprietorship or general partnership was what prompted the IRS to first create S corporations more than 50 years ago. At the time, S corporations were a fairly effective way for small business owners to hedge against liability while still retaining more control over their companies and profits. However, the popularity of S corporations has waned noticeably in recent years. "[Limited liability companies] have largely replaced S corporations," noted tax attorney and author Anthony Mancuso, in his book LLC or Corporation? "The LLC provides substantially the same benefits as an S corporation without several of the significant restrictions of S corporations." What are those restrictions and how do the two business structures compare? We weigh these in our point-by-point discussion below:

Operations - Both the S corporation and the more traditional C corporation (for more on C corporations see Part IV in this series) are established using the same procedures. First, the new company must establish a corporate charter naming its shareholders. Only then can the new corporation elect to convert itself to an S corporation through a filing of Form 2553 (http://irs.gov/pub/irs-pdf/f2553.pdf) to the IRS. Similarly, S corporations must abide by all the normal rules of corporate governance involving the issuance of stock, election of company officers, holding of regular (at the minimum, annual) meetings of a board of directors, keeping of minutes of these meetings, and following any other rules established by your state's corporation code. While many of these amount to little more than a formality for a very small business, they do add to the administrative burden of the small business owner. LLCs, by contrast, are largely free of these administrative hassles.

Tax - What is most important to understand about S corporations is that there is really no difference between them and a regular C corporation in legal terms. The major difference between the two business structures involves how they are taxed under federal law. (The "S" actually stands for "subchapter S," which is the applicable part of the U.S. Tax Code that covers S corporations.) As with a sole proprietorship, general partnership, LLC, or LLP, S corporation profits can pass through to the shareholders and be reported on their individual tax returns, making for a much easier filing process come tax time. And while an S corporation pays no federal corporate taxes, one must still file a corporate return (Form 1120S) for informational purposes only. However, keep in mind that some states still require payment on S corporation profits in addition to taxing the passed-through profits on a shareholder's individual return-in effect, taxing those gains twice-so it's imperative to check with your state's tax division and weigh the impact before electing to go the S corporation route. Again, LLCs and LLPs typically avoid this potential for an additional tax burden, although some states do require LLCs to pay a roughly equivalent "franchise tax" in addition to the individual income taxes paid on company profits.

One other somewhat arcane, yet important, point related to taxes: Shareholder debt in an S corporation cannot be passed through unless each member has personally guaranteed it. As a result, a shareholder's tax basis in an S corporation does not increase when the company borrows money. LLCs, on the other hand, allow shareholders to enjoy the tax benefits of this business debt whether or not they've personally guaranteed it, making it less likely that they'll be taxed on the business's profits in the long term.

Personal liability - Per the rules of incorporation, an S corporation automatically provides shareholders personal liability from risks-operational or financial-incurred by the business. However, LLCs effectively do the same thing without the requisite corporate rules and restrictions.

Raising capital/adding partners - Unlike a standard C corporation, S corporations are limited to a maximum of 100 shareholders, can only issue one class of stock, and only U.S. citizens or residents may participate. LLCs, on the other hand, let pretty much anyone or anything-U.S. citizen, foreign citizen, another LLC, or corporation-become a member. For most entrepreneurs, the 100-shareholder limit isn't much of an operational constraint, but it is an important consideration if your start-up business is expected to grow rapidly or seek out large sources of outside capital. In that case, the inability to create large private or public stock offerings or issue preferred shares could be a potential drawback. Note, though, that the federal tax code does allow a husband and wife to treat their joint stock holdings as those of a single shareholder.

Be sure to come back for Part IV in our business organization series, which deals with the pros and cons of the C-Corp structure.

How do I pay my business�s bills? Part 2: Credit Cards

SBOCTeam — Mon, 09 Aug 2010 20:14:00 GMT

In this three-part series, we describe the primary methods a small business can use to pay its bills and examine the advantages and disadvantages of each

Part II: Credit Cards

By Christopher Freeburn

Credit card use is rising not only among consumers, but among small business owners as well. According to the 2009 National Small Business Association (NSBA) survey, 59 percent of small business owners had used credit cards within the past 12 months to fund the ongoing operation of their businesses.

Part of the reason for the rise in credit card use is the ease and convenience of using them. But credit cards also provide financial flexibility that other means of payments including checks, simply do not offer.

Business credit cards

While using your personal credit cards to operate your business may seem convenient, doing so exposes you to some significant disadvantages. Putting your business's expenses on your personal card runs up your personal debt and raises the percentage of your available credit in use, an important metric that the three major credit rating agencies closely track to determine your creditworthiness. If the gap between your credit used versus credit available shrinks too much it could result in a lowering of your individual credit score and a raising of your credit card interest rates.

"Too many small business owners-particularly very new business owners-think that their business is too small to qualify for a business credit card, so they don't even apply for one," explains Jim Sheridan, a Boston-based business consultant. This is a mistake. "Banks view small businesses as an important market and are aggressively marketing all sorts of financial products to entrepreneurs, especially business credit cards," Sheridan adds.

Competition among credit card issuers has produced a myriad of different business credit cards with differing introductory interest rate offers and discounts on business supplies and services. Properly used, these can mean significant savings for small business.

Maximizing cash flow

Perhaps the biggest benefit of credit cards for small businesses is the ability to keep operations going during periods of low revenues and stagnant cash flow. This is particularly true for businesses that have cyclical periods of operation, or do especially well during certain holidays. During these peak periods, revenues increase and the business has excellent cash flow. During off-peak periods, however, revenues contract. Credit cards permit the business to purchase needed supplies and services during these off periods and briefly defer payment until revenue ticks up again.

Recurring bills

Most businesses have recurring monthly bills, including telephone, Internet, cell phone, utility, and rental payments. Writing checks to cover each of these bills is time-consuming and generates lots of paperwork. Credit cards, on the other hand, permit a business to automate these necessary, but cumbersome monthly payments. Most business-service providers will allow you to charge your bill on a credit card and are only too happy to configure your account so that the bill is automatically charged to your credit card on a specific date every billing period. Not only does this relieve you of the distraction of opening the bill, writing a check, and mailing it back, but it saves you from the pitfall of forgetting the bill or sending in the check too late and thus incurring penalties from the service provider. As an added benefit, credit card billing provides clear and comprehensive records of the transaction. Your business will also save money on stamps and checks.

Shop around for deals

"Virtually every bank has some sort of program tailored to small businesses," says Gerri Detweiler, author of The Ultimate Credit Handbook. In order to get the most out of the various incentive programs, Detweiler says that a business should have several different credit cards. "Different cards offer different sets of discount and rewards programs," she explains. "One card might offer discounts on office supplies purchased at specific retail chains like Staples or Office Depot, another card might feature discounts on airline fares or gasoline purchases." Perhaps not surprisingly, last year's NSBA credit card survey found that nearly half-46%-of small business owners had three or more business-related credit cards.

Aside from discounts, some cards offer "reward points" for specific purchases. These points are redeemable for other goods or services, based on the amount charged on your cards. Given the great variety of cards on offer, Detweiler recommends shopping around for the best deal. "You need to compare interest rates, paying particular attention to the rate after the introductory period expires, as well as any discount programs offered. Look at as many cards from as many banks as you can."

Better control

Most business credit card programs will allow multiple credit cards for the same account, permitting you to give company credit cards to your trusted employees. In addition to permitting those employees to make purchases on behalf of the company, thus freeing you from the task, these cards also provide tangible evidence to the employee of just how valuable you consider their efforts for the company.

For your company's protection, you can generally set up controls on cards handed out to employees. Such controls include spending limits and restricting the card to certain types of purchases (office supplies, etc.) or even specified vendors. Still, you will remain responsible for any charges made by an employee using your company's business credit card, even if the charges are unauthorized. So it is best to limit company credit cards to your most trusted and senior employees who are already in a position to make purchases for the company. It is also wise to personally review the charges made on each company credit card (which can be listed individually in your overall statement) to make sure there are no suspicious charges. Many business credit cards feature some sort of alert feature that will trigger an email or phone call in the event of a questionable charge.

Be sure to come back for Part III in our series, which examines online payments as a means of meeting a business's financial obligations.

How do I pay my small business�s bills? Part 1: Checks

SBOCTeam — Tue, 03 Aug 2010 21:17:00 GMT

In this three-part series, we describe the primary methods a small business can use to pay its bills and examine the advantages and disadvantages of each

Part I: Checks

By Christopher Freeburn

Paying the bills doesn't make anyone's list of favorite things to do. But, like it or not, bills come due and must be paid. No one knows that better than small business owners, who face a myriad of bills every month, ranging from office supplies and equipment leases to office rent, insurance, and marketing services.

Small business owners not only have to pay their bills, but must do so in a way that lets them best manage their company's cash flow, insuring that there will be enough cash available to the business at any one time to meet all immediate obligations. In order to achieve this, small business owners must choose among the available payment options in order to select the one-or the combination of several-that best serves their business's needs.

The paper option
By far the most popular way for small businesses to pay their bills is the simple, old-fashioned paper check. Drawn against a bank account, checks have been the primary means of bill payment for both small businesses and consumers for decades. But that is now changing.

"Checks are facing stiff competition from other forms of payment," says Jim Sheridan, a Boston-based banking consultant. "Credit cards and electronic payment systems are growing quickly. Most businesses still use checks to pay bills, but the trend is definitely heading toward plastic and electronic payment systems. The last stronghold for paper checks are bills that are sent through the mail, but even there we are beginning to see movement away from paper checks."

Nevertheless, there are good reasons why checks remain a popular method of bill payment by small businesses. "There are some advantages to using checks over credit cards or electronic payments," says Sheridan.

Riding the float
Paper checks still offer small businesses a short period of time-from one to three days, typically-between when a check is written and when the money is actually transferred out of the issuing business's account. This time lag is often referred to as "float." During this time the money is still available to the business, and depending on the type of checking account, may still be accruing interest. This float period varies based on a number of variables. A check sent to a utility company, for example, will be marked as received when the check arrives in the mail, but the utility may not send the check to the bank for several days.

The leeway provided by float periods is decreasing, however. Several years ago, Congress passed a law permitting banks to send electronic images of checks to each other instead of having to send the actual checks for processing. Under the law, electronic scans of paper checks became equivalent to the actual checks themselves. Since electronic transmission of scanned checks is significantly faster than actually shipping paper checks back and forth between banks, float times have fallen considerably as more banks adopt the system.

Accounting and control options
The traditional paper check also provides definite accounting advantages since the check itself becomes physical proof of a transaction. It is difficult for another party to dispute the receipt of payment if you have a copy of the cancelled check. In recent years, many banks have moved away from returning the actual cancelled checks along with your monthly account statements in favor of printed images of the checks. "It is far more cost effective for banks to print a scanned image of the cancelled check on your statement than it is to physically send you the actual check," explains Sheridan, "both in terms of the resources needed to transport the actual check to your local bank and then send it out and the mailing costs of doing so." The scanned images on your monthly statement, however, still constitute valid evidence of a completed transaction.

Checks also allow a small business owner to change his or her mind and cancel the payment, even after the other party has received the check. A "stop-payment order" placed on a particular check will cause the bank to decline it. This ability can prove useful to small business owners if a given product or service is found unacceptable after the check has been written. However, most banks charge a fee for a "stop-payment" order, and these fees are usually among the highest charged by most banks, ranging from $15 to $35 per stopped check. "Stop payment fees are like an insurance premium for the bank," explains Sheridan. "If you issue a stop payment order on a check and the bank accidentally pays the check, which does occasionally happen due to miscommunications, then the bank is liable for the amount of the check, not the customer."

Disadvantages of checks
The once unassailable dominance of paper checks as a means of paying bills has been eroding because of the clearest advantage of credit cards and electronic payment methods: cost. Depending on your bank and type of account, your bank may charge you a small fee for processing every check you write. Purchasing blank checks also requires paying a fee (again, depending on the bank and type of account). These fees can add up.

Additionally, paper checks need to be physically presented to the payee. For the most part, that means sending them in the mail. With postage costs rising sharply over the past few years, small businesses that mail a lot of checks are beginning to notice the cost. "Rising postage prices are a significant reason why so many businesses and consumers are turning away from paper checks for regularly recurring expenses like credit card and utility bills," Sheridan observes. "Equally, it takes a lot less time to pay these bills electronically and avoid the bother of writing a check and mailing it." Credit card and electronic payment systems can also be set up to pay bills automatically at a specified time each month, thereby eliminating the possibility that a payment might be forgotten or lost in transit, which could result in penalty fees or loss of service.

Be sure to come back for Part II in our series, which examines the use of credit cards as a means of paying a business's bills.

Feeling overworked? How to beat small business burnout.

SBOCTeam — Thu, 29 Jul 2010 18:56:00 GMT

By Christopher Freeburn

Stress is a fact of daily life, especially for small business owners. Starting your own company and managing its growth forces you to deal with a myriad of never-ending problems, make quick decisions, smooth over employee interactions, deal with customers, suppliers, and business partners-not to mention bankers and insurance companies. Some people thrive on stress, using it as a tool to propel their performance; others find that, over time, it takes a toll on their productivity and erodes their sense of well-being.

The stressed-out workplace
There is no question that stress is a major issue in today's world. Indeed, in 1992, the United Nations declared stress the "20th Century epidemic." In fast-moving modern societies, where every day involves hundreds of complex decisions and constant interruptions, stress-inducing obstacles seem to litter life's landscape. But nowhere is the rise in stress more evident than in the American workplace, where stress-induced health issues, absenteeism, employee turnover, and lower productivity cost our economy an estimated $300 million a year. On average, according to data from the Center for Economic and Policy Research, adults in the United States work longer hours and take less vacation than workers in any other industrialized nation. Perhaps then, it's no surprise that a recent study of 2,500 American workers by CareerBuilder.com found that more than three out of four-77 percent-feel overworked and burned-out at their jobs.

Entrepreneurs, however, often carry a much heavier burden than the average worker. Pouring all of their passion into keeping a small company afloat amidst extremely challenging economic conditions, small business owners often pay an exceptionally high price in terms of stress. In fact, a Brother Small Business Survey from this past March found that more than half-51 percent-of small business owners reported their stress level as either higher than usual or the highest it's ever been. And nearly half-48 percent-acknowledged that they think about their business even while trying to fall asleep at night.

Causes of stress at work

Technology-much of it meant to reduce labor-has actually increased the amount of work we can do and, thereby, added additional stress. "Computers and cell phones and email all increased productivity," says Dave Bowman, a human resource expert at TTG Consultants, "but this also means you can do more work in a day, and that you end up expecting to get more work done every day."

Bowman also says that the combination of the deep recession and the highly competitive business environment has exacerbated this problem. "Companies are paring down their workforces to remain competitive, even as they increase the demands on their employees," he explains, noting that job stress is rising at all levels of the workforce. "It's not just the middle manager, or the executive vice president that feels stressed," he adds, "even production line workers and clerical staffs feel it too." Business owners under the strain of stress can lash out at their employees, become overbearing, or even create a hostile workplace, making them ripe for a lawsuit.

Rosemary Haefner, vice president of human resources at CareerBuilder explains that our society's connectedness also makes it harder to shut out stress from work once we go home. "The lines between work and life can be very blurry these days-17 percent of workers said they feel like their work day never ends because of technology connecting them to the office," she noted recently in another CareerBuilder worker survey from last year. "To reduce burnout and avoid potentially risky behavior, workers should allot technology-free time when away from work."

Dealing with workplace stress

All this stress-whether it's weighing on your shoulders or your employees-can cost a business significant profits, something that most companies now realize, according to Barry Hall, principal at Buck Consultants. "Employers increasingly realize they must address the rising tide of employee stress, and not just to improve employees' well-being," noted Hall in a recent "Stress in the Workplace" study. "Those who ignore stress will take a hit to their bottom line, in higher costs and lower productivity." As a result of this awareness, two-thirds of the more than 200 companies participating in the survey have implemented four or more strategies to mitigate workplace stress. (For more on this survey, go to http://news.xerox.com/pr/xerox/Buck-Consultants-A-Xerox-Company-Stress-in-Workplace-Survey-161678.aspx.) Below, are a number of these stress-busting tactics, plus a few others, that your small company can employ to avoid burning out your employees and yourself.

Employee assistance programs
Implemented by 78 percent of businesses in the Buck Consultants survey, employee assistance programs (EAP) are a very popular stress mitigation tactic. As something of a catch-all wellness benefit, EAPs offers workers the resources to deal with a wide range of personal issues before they begin to undermine work performance. (For more info on EAPs, check out http://ncadi.samhsa.gov/govpubs/workit/ts8.aspx, or to find a directory of certified EAP providers near you, go to http://www.eapassn.org/.) Studies of some large corporations have found that they experienced less absenteeism, lower medical claims, increased productivity, and a reduced rate of employee lawsuits after implementing EAPs. But entrepreneurs shouldn't dismiss EAPs as only something big businesses offer; many small companies have banded together into consortiums in order to offer EAP services at a cost of between $10 and $25 per employee.

Better time and resource management - A considerable amount of office stress results from poor time management, with too much time devoted to less important issues and not enough devoted to critical projects with impending deadlines. A better, more productive method, one that also accommodates the increased family responsibilities facing many employees and employers, might be to institute flexible work hours or even telecommuting at your business. This tactic is also an increasingly popular way for employers to minimize the stress from tight cash flow and avoid layoffs. In fact, last summer, a Monster Meter poll found that 55% of U.S. workers experienced flexible hours.

Take that vacation - Work is a critical part of most Americans' daily lives, particularly small business owners, who have often staked their personal energies and their financial futures on the success of their startups. Though working long hours, often seven days a week, and refusing to take any time off is common among entrepreneurs trying to make that first profitable dollar, no business owner can (or should) be all work, all the time. Nor should they expect their employees to be, either. In fact, some health surveys, like the Framingham Heart Study, have found a high correlation between people who rarely take vacation and their likelihood of suffering a heart attack. As a result, some businesses have begun offering three weeks or more of annual vacation time as a way to keep health costs low, improve morale, and prevent burnout from affecting productivity. Brian Scudamore, the CEO and founder of 1-800-GOT JUNK, who started his business at age 18 with just one truck, now gives staffers at the company's corporate offices five weeks of vacation a year after only two years on the job. There is one catch, though-they have to take time off for two consecutive weeks. "Extra vacation time helps prevent burnout," he explained in an interview on ABC's Good Morning America, adding, "which can lead to losing employees-a very high price to pay."