Accounting and Tax for the Small Business

NOVEMBER 8, 2012

LOROFF ENTERPRISES, INC

• Owner – Maureen Lonien

• Incorporated in 1986

• Accounting, Tax and Special Project Services

• Registered Tax Return Preparer with the IRS

AGENDA

• Business Structures and Tax Benefits of Each

• Recordkeeping and Accounting

• Important Dates

• 2013 Tax Changes

WHY SHOULD YOU INCORPORATE• Personal liability is a key reason why its owner may decide

to form a corporation

• When you incorporate, you're creating a completely separate legal entity, one that shoulders the liability burden you had been carrying yourself (or, if you are a partnership, the burden you and the other partners were carrying)

• As a shareholder of your corporation, your losses would be limited to your investment in the company

WHY SHOULD YOU INCORPORATEForming a corporation allows you to:

• Reward and retain key staff by giving workers a piece of the business

• Have more options for raising funds. Instead of going into more debt, you can attract equity investors

• Shift tax liability away from you to the corporate entity

WHY SHOULD YOU INCORPORATEBut you'll have to weigh some disadvantages as well:

• It takes more time and money to incorporate than to form other types of businesses

• Corporations are subject to more regulation at both the federal and state level

• The management structure of a corporation is more rigid, giving you, as the owner, less flexibility to run things as you see fit

TYPES OF ENTITIES

• C Corporation– File an annual corporate tax return and are taxed on their

profits. There is no personal liability

– Typically for large companies

– Distributions are taxable to the Shareholder

TYPES OF ENTITIES

• S Corporation – This entity allows for pass through taxation

– All of the profits or losses of the company pass through to the shareholders

– Limited liability for shareholders

TYPES OF ENTITIES• LLC and Partnerships

– Formed by a business owner or multiple owners

– Personally liable for the business debt to the level of their own personal financial investment

– Earnings of most members of an LLC are generally subject to self-employment tax

– LLC is considered a partnership for Federal income tax purposes

TYPES OF ENTITIES

• Sole Proprietor– Owned and run by one individual

– Owner receives all profits - subject to self employment tax

– Unlimited liability for all losses and debts

Sole Proprietorship vs. C Corporation vs. S Corporation vs. LLC

  Sole Proprietorship

C Corp 

S Corp Limited Liability Company (LLC) 

FormationRequirements,

Costs

None Must file with state, state specific filing

fee required.

Must file with state, state specific filing

fee required.

Must file with state, state specific filing

fee required.

PersonalLiability

Unlimited liability. Shareholders are not typically held liable.

Shareholders are not typically held liable.

Members are not typically held liable.

Administrative Requirements

Relatively few requirements.

Election of board of directors/officers,

annual meetings, and annual report filing

requirements.

Election of board of directors/officers,

annual meetings, and annual report filing

requirements.

Relatively few requirements.

Management Full control. Shareholders elect directors who

manage business activities.

Shareholders elect directors who

manage business activities.

Members can set up structure as they

choose.

Term Terminated when proprietor ceases doing business or

upon death.

Perpetual: can extend past death or withdrawal of shareholders.

Perpetual: can extend past death or withdrawal of shareholders.

Perpetual, unless state requires fixed

amount of time.

  Sole Proprietorship

C Corp 

S Corp Limited Liability Company (LLC) 

Taxation Entity not taxable. Sole proprietor

pays taxes.

Taxed at corporate rate and possible double taxation:

Dividends are taxed at the individual level

if distributed to shareholders.

No tax at the entity level. Income passed

through to the shareholders.

No tax at the entity level. Income passed

through to members.

Double Taxation No Yes, taxed at corporate level and

then again if distributed to

shareholders in the form of dividends.

No No

Self Employment Tax

Subject to self employment tax.

Salary subject to self employment tax.

Salary subject to self employment tax, but

shareholder distributions are not

subject to employment tax.

Salary subject to self employment tax.

Pass Through Tax Treatment

Yes No Yes Yes

Tax Forms 1040 IRS Form 1120 IRS Form 1120SShareholders get K-1

for personal tax returns.

1 member: sole proprietor IRS Form

1040 - Schedule CPartnership: IRS Form

1065, Members get K-1

  Sole Proprietorship

C Corp 

S Corp Limited Liability Company (LLC) 

Transferability of Interest

No Shares of stock are easily transferred.

Yes, but must observe IRS regulations on who can own stock.

Possibly, depending on restrictions

outlined in the operating agreement.

Capital Raising Individual provides capital.

Shares of stock are sold to raise capital

(Securities laws apply).

Shares of stock are sold to raise capital. Limitations prevent S corp stock ownership

by corporations.

May sell interests, but subject to

operating agreement(Securities laws may

also apply).

Ease of Operation Easiest Must have annual meetings, Board of Directors meetings, corporate minutes,

and stockholder meetings.

Must have annual meetings, Board of Directors meetings, corporate minutes,

and stockholder meetings.

Easy, some states may require more

Recordkeeping and Accounting

• Keeping records is crucial for the successful management of a business

• Purpose of a good recordkeeping system is to provide management information to use in operating the business

• Setting up a basic recordkeeping system

Defining your Recordkeeping

• Chart of Accounts

• Cash v/s accrual recordkeeping/accounting

• Reports/journals/schedules

• Business financial statement checklist

IMPORTANT DATES

• January 31st W2’s and 1099’s due to employees and sub contractors

• March 15th – Corp tax returns due

• April 15th – Personal tax return due (includes LLC’s and Partnerships)

• April 15th, June 15th, September 15th and January 15th– Estimated tax deposits

2013 TAX CHANGES

• Long term Capital Gains and Dividend Tax Rates

• Mortgage Forgiveness will stay for 2013• Child Tax Credit• Itemized deductions• Residential Energy Efficient Property• Inheritance tax from $5.3m to $1m exclusion

QUESTIONS???