Acuity Blog

What’s the best entity choice for your business?

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A principal consideration for any new or existing business is choosing an appropriate legal entity. Available options in most states include C corporations, S corporations, general and limited partnerships, limited liability companies (LLCs), limited liability partnerships (LLPs) and sole proprietorships.

Tax implications

Each entity type has advantages and disadvantages. It’s important to consider the tax implications. A certain type of entity can minimize your taxes. Understanding the total tax situation, including income tax, payroll tax, and estate tax exposure, is essential when determining the choice of entity.

Personal liability protection is often an owner’s main objective in choosing the appropriate entity. Operating as a proprietorship or general partnership offers no owner liability limitation. Limited partnerships, LLCs, LLPs, S corporations, and C corporations provide varying degrees of liability protection for the owners, depending on state law. For sole owners, the single-member LLC is a popular liability-limiting alternative to a proprietorship.

If a business is owned by more than one individual, it cannot be run as a proprietorship. If all owners provide management services, a limited partnership is not a viable option, because that would jeopardize their status as limited partners. Limited partnerships,
LLPs, LLCs, C corporations, and S corporations allow for management by multiple individuals without limitations.

Get ready for succession

In many cases, an entity status change is sought to accomplish a transition in ownership. Whether the objective involves moving ownership to a successor via gifts, an installment sale, a stock redemption, a bequest, or a combination of methods, it is often necessary to use a different form of entity to meet these objectives. Each entity selection situation is unique. The business owner’s objectives must be systematically matched with the various entities’ attributes. All major tax and nontax issues must be considered and alternatives explored before choosing the appropriate structure for your business.

As with most business decisions, planning can have a positive, lasting effect on your venture. Contact us with questions about the appropriate entity structure for your existing business, a business you intend to purchase, or a contemplated new start-up business.

© 2016

 


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Subsequent events: To report or not to report?

The young surprised man with his laptop computer on gray background

Financial statements reflect a company’s financial position at a particular date and the operating results and cash flows for a period ended on that date. But major events or transactions sometimes happen after the reporting period ends but before financial statements are finalized. Do your financial statements need to address these so-called “subsequent events”? This is one of the gray areas in financial reporting. Fortunately, the AICPA offers some guidance.

Recognition

Financial statements often aren’t available to be issued for a few months after the close of the reporting period, because it takes time to schedule and complete fieldwork. Unforeseeable events may happen during this period in the normal course of business. Examples include disasters such as fires, buyouts, and changes in foreign exchange rates.

Chapter 27 of the AICPA’s Financial Reporting Framework for Small- and Medium-Sized Entities classifies subsequent events into two groups:

  1. Recognized subsequent events. These provide further evidence of conditions that existed on the financial statement date — for example, a major customer files for bankruptcy, highlighting the risk associated with its accounts receivable.
  2. Nonrecognized subsequent events. These reflect conditions that arise after the financial statement date, such as a natural disaster that severely damages the business.

Generally, the former must be recorded in the financial statements. The latter aren’t required to be recorded, but may have to be disclosed in the footnotes.

Disclosure

To decide which events to disclose in the footnotes, consider whether omitting the information about them would mislead investors, lenders and other stakeholders. Disclosures should, at a minimum, describe the nature of the event and estimate the financial effect, if possible.

In some extreme cases, the effect of a subsequent event may be so pervasive that your company’s viability is questionable. This may cause your CPA to re-evaluate the going concern assumption that underlies your financial statements.

Gray area

We can help take the guesswork out of reporting subsequent events. For more information, contact us.

© 2016


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Employers: Take payroll tax withholding responsibilities seriously

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Employers must withhold income and employment taxes (including Social Security) on wages paid to their employees. The taxes must then be paid over to the IRS according to a deposit schedule.

Some business owners and executives facing a cash flow crunch may be tempted to dip into payroll tax withheld from employees. They may think, “I’ll send the money in later when it comes in from another source.” Bad idea!

A harsh penalty

If a business makes payments late, there are escalating penalties. And if an employer fails to make them, the IRS will crack down hard. With the “Trust Fund Recovery Penalty,” also known as the 100% Penalty, the IRS can assess the entire unpaid amount against a “responsible” person.

The corporate veil won’t shield corporate officers in this instance. Unlike some other liability protections that a corporation or limited liability company may have, business owners and executives can’t escape personal liability for payroll tax debts.

Once the IRS asserts the penalty, it can file a lien or take levy or seizure action against personal assets.

Who’s responsible?

The penalty can be assessed against a shareholder, owner, director, officer, or employee. In some cases, it can be assessed against a third party. The IRS can also go after more than one person. To be liable, an individual or party must:

  1. Be responsible for collecting, accounting for, and paying over withheld federal taxes, and
  2. Willfully fail to pay over those taxes. That means intentionally, deliberately, voluntarily and knowingly disregarding the requirements of the law.

The easiest way out of a delinquent payroll tax mess is to avoid getting into one in the first place. If you’re involved in a small or medium-size business, make sure the federal taxes that have been withheld from employees’ paychecks are paid over to the government on time. Consider hiring an outside service to handle payroll duties. A good payroll service provider relieves you of the burden of paying employees, making the deductions, taking care of the tax payments and handling recordkeeping. Contact us for more information.

© 2016


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Sustainability reporting: Have you joined the bandwagon?

The earth inside heart made up of human hands

More than 80% of S&P 500 companies issued sustainability reports in 2015, according to a recent study by the Governance & Accountability Institute (GAI). That amount has more than quadrupled since the GAI began tracking the prevalence of sustainability reports in 2011. Providing information about sustainable business practices has become increasingly popular as a way to gain a competitive advantage and demonstrate industry leadership. This is particularly true when sustainability information is combined with financial data into an integrated report that’s audited by an objective third party.

Financial statements tell only part of the story

Companies publish sustainability reports to show the economic, environmental and social impacts caused by their everyday activities. They aren’t mandatory in the United States, but the Securities and Exchange Commission requires U.S. public companies to provide some sustainability-related disclosures in their financial reports.

If you have any doubt about the interdependence of financial and nonfinancial issues, consider this: Environmental issues (such as pollution or carbon emissions), social issues (such as union relations or health and safety matters), and supply chain issues (such as human rights violations or use of conflict minerals) can all lead to fines, remedial costs and reputational damage. And the sale of toxic or unsafe products can result in product liability lawsuits, recalls and boycotts.

Benefits often outweigh costs

Measuring, managing and disclosing environmental, social and governance performance can yield many significant benefits, including:

  • Stronger financial performance,
  • Enhanced trust,
  • Improved access to capital and lower borrowing costs,
  • Better risk management, and
  • Greater employee loyalty.

Tracking sustainability also helps companies identify ways to reduce their energy consumption, streamline their supply chains, eliminate waste and operate more efficiently.

We can help

Sustainability reporting can create long-term value and improve your relationships with investors, employees, customers, suppliers, regulators and the general public. Contact us for help preparing an integrated sustainability report for 2016 — or auditing your sustainability report.

© 2016


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DOs and DON’Ts for deducting business meal, entertainment, auto and travel expenses

Cork, Ireland

If your business claims deductions for meal, entertainment, vehicle or travel expenses, be aware that the IRS may closely review them. Too often, taxpayers don’t have the necessary documentation to meet the strict requirements set forth under tax law and by the IRS.

Be able to withstand a challenge

DO keep detailed, accurate records. Documentation is critical when it comes to deducting meal, entertainment, vehicle and travel expenses. You generally must have receipts, canceled checks or bills that show amounts and dates. In addition, there are other rules for specific expenses. For example, you must record the business purpose of entertainment expenses, as well as the names of those you entertained and their business relationship to you. If you reimburse employees for expenses, make sure they comply with the rules.

DON’T re-create expense logs at year end or wait until you receive an IRS deficiency notice. Take a moment to record the details in a log or diary at the time of the event or soon after. Require employees to submit monthly expense reports.

DO keep in mind that there’s no “right” way to keep records. The IRS website states: “You may choose any recordkeeping system suited to your business that clearly shows your income and expenses.”

DO respect the fine line between personal and business expenses. Be careful about trying to combine business and pleasure. For example, you can’t deduct expenses for a spouse on a business trip unless he or she is employed by the company and there’s a bona fide business reason for his or her presence.

We can help

If you’re hiring employees for summer positions, you may wonder how to count them. There’s an exception for workers who perform labor or services on a seasonal basis. An employer isn’t considered an ALE if its workforce exceeds 50 or more full-time employees in a calendar year because it employed seasonal workers for 120 days or less.

However, while the IRS states that retail workers employed exclusively for the holiday season are considered seasonal workers, the situation isn’t so clear cut when it comes to summer help. It depends on a number of factors.

We can help

These are general rules and there may be exceptions. If your records are lost due to, say, a fire, theft or flood, there may be a way to estimate expenses. With guidance from us, you can maintain records that can stand up to IRS scrutiny. For more information about recordkeeping, contact us..

© 2016

 


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