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General Business

Family Business and Next Generation

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family business next generationCreating a business that can be passed down to the next generation is a great way to build a legacy in the family and set up future generations.

Having your children work in the family business is a great way to teach your kids about work ethic and money management, and to kick-start their retirement or college savings plan.

It can also enable you to pay your children resulting in less taxes, providing a great tax planning strategy.

However, is having your children work in your family-owned business a blessing or a curse? Mixing business with pleasure and doing so with family can go from an exciting event to a decision you may regret (but not always).

Below are five tips for making it a blessing and preventing it from being curse:

Have them work elsewhere for at least five years. They need time to mature, becoming their own individuals, and to gain confidence learning and doing things as distinct human beings rather than just children of successful parents. Kids need to learn how to work, to be punctual, to earn their own money and to be held accountable. Everyone wins when potential successors have excellent training and gain skills and confidence outside the nuclear family.

Consider this scenario: A family-owned restaurant in a small town occasionally has three generations working together on a Friday night. The children are under the age of 16. Assuming that child labor laws have been taken into account, the family is content that they are passing on a tradition and family trade. The kids work one or two nights during the weekend.

In this example, the family is limiting the number of hours, and their expectations are reasonable. It’s a way for children to learn the family business and helps them gain self-respect. Indeed, one adult who remembers working with his mother in a greenhouse when he was 12 and 13 recalls that the job was hot, dirty and exhausting. However, he recalls he got paid for the work he did, and it gave him a greater appreciation for the work his parents did to support their family.

Understand generational differences. Today’s young people are far more likely to want to work to live rather than adopt their parents’ “live to work” attitude. That’s why your adult children don’t want to work 80-hour workweeks. Younger children and other employees are most likely looking for a different workplace experience.

With that said, if they have incentive to see the family business succeed, they will put the time and effort necessary to ensure this happens. Thereby, taking pride in the family business.

Give psychometric assessments to make their personalities/capabilities fit their jobs. One child may be temperamentally unsuited for a position demanding detail and strict deadlines; he or she may be more of a big-picture, laissez-faire personality. Assessing such things will go a long way to improving both business function and family harmony.

Hold them accountable, but not to an unreasonable standard. Give your kids crystal-clear roles and responsibilities and regular reviews so they know whether they’re living up to their job descriptions. The biggest morale killer in small businesses is under-performing or dysfunctional family members who are allowed to meander through various roles with virtually no accountability and to inflict themselves on others in your organization. In that case, pruning the family tree almost always results in improved business productivity.

Communicate formally and regularly with a third-party facilitator. Virtually every family employee thinks he or she works harder and contributes more than anyone else and stews over this. Family businesses have a greater need for formal communication to resolve perceived contribution issues, especially if you decide a family member is ill-suited to working at your company. You need to be able to discuss volatile topics constructively and productively. Seek the help of a talented facilitator to get the most from your family business.

It can be a wonderful experience for all involved to have your children work with you. Just remember that it’s a delicate balancing act that needs your attention.

BGMF CPAs offers consulting services to assist in situations surrounding family businesses.  Contact our team today to see how we can help ensure your family business is set up for future generations.

Winning Over a Larger Competitor

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Winning over larger competitorRunning a small business isn’t easy. You probably wouldn’t have it any other way. The ability to survive and thrive is a source of great pride for small business owners.

So when a competitor moves in — especially a big one — it can feel like battle lines have been drawn.

Competition is a good thing. That is why you see you multiple fast food restaurants on the same block. If you are set up properly you will be able to not only compete, but win with your business.

Don’t fear competition and realize that smaller can mean moving faster and more efficient, but you have to be set up for that.

Below are a few tips on how to win over a larger competitor. Our team can help you strategize to ensure you’re in the right position to win if competitors move in!

Sharpen Your Edge

Before you do anything, accept the fact that you can’t compete on the same level as a large national chain. But that doesn’t mean you can’t win the battle. Study what the competition does and how they do it. Then use that information to define — and sharpen — your company’s competitive edge.

You will need to know what your USP is and what your strengths are to succeed against competition.

A large competitor will almost certainly have lower prices and a deeper inventory. But you can connect with customers in ways the competition can’t. You can add value to every customer interaction by being attentive and providing expertise and personalized service.  Price should not be what you’re competing on.

Perhaps your biggest edge is your size. Being small means you can respond to market trends and customer requests more quickly. You can also change and adapt policies and procedures faster.  Larger companies move at a much slower pace in many cases.

Rally the Troops

You have another big advantage; you have an established customer base and you know what they need. Establish a timeline to reach out to your customers directly via snail mail or e-mail (or both) with special offers.

If you have a loyalty program, consider doubling rewards for a period of time that overlaps with the competition’s opening. Get feedback from customers and employees on areas of improvement or wants they would like to have.

Look for Advantages

Having a big competitor move in may have some unexpected benefits. The new company validates the need for what your business offers and may do a fair amount of advertising.

If your marketing budget allows, this could be a good time to do some strategic advertising of your own. Use technology and social media to continue to get the word out and build a following.

The competition also may create some unexpected opportunities in the future. The new company will change the dynamics of the marketplace, which may lead you to steer your business in a new direction.

Don’t get left behind. Contact us today to discover how we can help you keep your business on the right track. Don’t wait, give us a call today.

Why You Need a Business Continuity Plan

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business continuity against disasterWhat if disaster strikes your business? An estimated 25% of businesses don’t reopen after a major disaster strikes.1 Having a business continuity plan can help improve your odds of recovering.

Here in the Midwest we have recently been stricken with some major weather including flooding, a multitude of tornadoes and other factors outside our control that have the potential to devastate a community including the businesses.

As auditors, part of our process is to analyze risk exposure within a Company. This includes having a plan in place in case of a disaster that would cripple the business if proper steps were not implemented in a timely fashion.

Business continuity plans can be simple and efficient or complex and costly depending on the type of organization.  Below we provide an overview of how a continuity plan works and why there should be one in place.

The Basic Plan

The strategy behind a business continuity (or disaster recovery) plan is straightforward: Identify the various risks that could disrupt your business, look at how each operation could be affected, and identify appropriate recovery actions.

Make sure you have a list of employees ready with phone numbers, email addresses, and emergency family contacts for communication purposes. If any of your employees can work from home, include that information in your personnel list. You’ll need a similar list of customers, suppliers, and other vendors. Social networking tools may be especially helpful for keeping in touch during and after a disaster.

Risk Protection

Having the proper insurance is key to protecting your business — at all times. In addition to property and casualty insurance, most small businesses carry disability, key-person life insurance, and business interruption insurance. And make sure your buy-sell agreement is up to date, including the life insurance policies that fund it. Meet with your financial professional for a complete review.

Maintaining Operations

If your building has to be evacuated or destroyed, you’ll need an alternative site. Talk with other business owners in your vicinity about locating and equipping a facility that can be shared in case of an emergency. You may be able to limit physical damage by taking some preemptive steps (e.g., having a generator and a pump on hand).

This aspect is critical to ensure you continue to operate or get back up and running quickly.  There are different tiers of disaster recover that can be utilized as part of your business continuity plan.

You’ll want to analyze the business impact to identify functions and resources that are time-sensitive. You will review what critical business functions must be recovered and what steps to take. You should consider having a continuity team in place to help devise and manage this plan. Finally, ensure the team is well-trained and worked through all procedures.

Protecting Data

A disaster could damage or destroy your computer equipment and wipe out your data, so take precautions. This could include a natural disaster or a malicious attack on your organization to get into secure data. Invest in surge protectors and arrange for secure storage by transmitting data to a remote server or backing up daily to storage media that can be kept off site.  With today’s technology, work with your IT consultants to plan around protecting your data in the most efficient way possible.

Protecting Your Business

If you think your business is too small to need a plan or that it will take too long to create one, just think about how much you stand to lose by not having one. Meet with your BGMF CPA for a full review and begin mapping out a plan that makes sense for your situation and budget.

Source/Disclaimer:

1Source: U.S. Small Business Administration, www.sba.gov/content/disaster-planning.

10 Things to Know About an LLC

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Whenever we meet with clients who want to start a business or invest in real estate, the discussion of what type of entity to select is always part of the discussion. The LLC has become a very popular entity for businesses for many reasons including protection, tax planning, flexibility and other reasons we won’t cover in this post.

An LLC may not always be the right choice for entity selection, but that is something we discuss during those consultations.  Below we share some insights to help you decide if an LLC is the right way to go for your business.

You probably know of several businesses whose formal names end with the acronym LLC. And you probably also know that LLC stands for limited liability company. Here are 10 things you may not know.

  1. An LLC generally protects its owners from personal liability for business obligations in much the same way a corporation does, but an LLC is not a corporate entity.1
  2. Like a corporation, an LLC can do business in multiple states, although an LLC must be organized in a specific state.
  3. The owners of an LLC are called members. There is no limit on the number of members an LLC can have, and members don’t necessarily have to be individuals. Members’ management roles are typically spelled out in an operating agreement.
  4. Upon formation of an LLC, the members contribute cash, property, or services to the LLC in exchange for LLC shares or units.
  5. An LLC may borrow money in its own name and is responsible for repayment of the debt.
  6. An LLC is usually treated as a partnership for federal income tax purposes if there are two or more members. If there is a sole member, it is considered a disregarded entity for tax purposes.

    (The remaining four points assume partnership treatment.)

  7. Like partners, LLC members are not considered employees of the company. However, an LLC can have non-member employees.
  8. LLC members are taxed directly on company income. The LLC itself doesn’t pay federal income taxes.
  9. If an LLC has a loss, its members generally can deduct their share of the loss on their own tax returns.
  10. For tax purposes, an LLC’s income and losses are divided among its members according to the terms of their agreement. Tax allocations must correspond to economic allocations of profit and loss.

An LLC is but one structure you might consider using for a business venture. The input of a professional may be helpful in determining which type of arrangement will best meet your objectives.

BGMF CPAs can help guide you through the entity selection process as part of your planning and strategy to start and operate your business or real estate venture. There are some great tax planning strategies that can be utilized through the LLC that can also be discussed.  Talk with one of our advisors today.

Source/Disclaimer:

1Each state has its own laws governing LLCs. Consult with an attorney before establishing an LLC.

Home Office Deduction

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Home office deductionDo you take advantage of the home office deduction?

Under the new tax laws, with the increased standard deduction where many taxpayers won’t obtain deductions for their mortgage interest and real estate taxes, they can potentially take advantage of a portion of those deductions against their business income.

If you haven’t considered this deduction due to being informed this was a red flag with the IRS or other factors, you should re-consider your position.

Working from home can potentially deliver some attractive tax advantages. If you qualify for the home office deduction, you can deduct all direct expenses and part of your indirect expenses involved in working from home.

Direct expenses are costs that apply only to your home office. The cost of painting your home office is an example of a direct expense. Indirect expenses are costs that benefit your entire home, such as rent, deductible mortgage interest, real estate taxes, and homeowner’s insurance. You can deduct only the business portion of your indirect expenses.

What Space Can Qualify?

Your home office could be a room in your home, a portion of a room in your home, or a separate building next to your home that you use to conduct business activities. To qualify for the deduction, that part of your home must be one of the following:

Your principal place of business. This requires you to show that you use part of your home exclusively and regularly as the principal place of business for your trade or business.

A place where you meet clients, customers, or patients. Your home office may qualify if you use it exclusively and regularly to meet with clients, customers, or patients in the normal course of your trade or business.

A separate, unattached structure used in connection with your trade or business. A shed or unattached garage might qualify for the home office deduction if it is a place that you use regularly and exclusively in connection with your trade or business.

A place where you store inventory or product samples. You must use the space on a regular basis (but not necessarily exclusively) for the storage of inventory or product samples used in your trade or business of selling products at retail or wholesale.

Note: If you set aside a room in your home as your home office and you also use the room as a guest bedroom or den, then you won’t meet the “exclusive use” test.

Simplified Option

If you prefer not to keep track of your expenses, there’s a simplified method that allows qualifying taxpayers to deduct $5 for each square foot of office space, up to a maximum of 300 square feet.

The home office deduction can help reduce your tax liability as long as you follow the regulations. In today’s marketplace many individuals are running businesses from home. This reason and the new tax laws make this potential deduction more viable in your tax strategy.

Contact our firm today to review if you’re taking advantage of all deductions available to you!

Is a Sole Proprietor the Best Option

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sole proprietorSole Proprietor versus Other Entity Structures…

Are you thinking of starting a business or currently operating as a sole proprietor? We want you to consider this may not be a viable option for your business moving forward.

Below are a few reasons why being a sole proprietor is a poor choice for operating your business and we want to explain why and help you understand how to solve this problem.

One major reason is you’ll be personally liable if an accident were to occur. Let us tell you a story of how this would work in real life…

Consider you have recently opened a small boutique in your town that you’ve dreamed of your entire life.  You’ve saved, planned and now the dream is finally coming to fruition.  You’ve waited for the day you could quit your job and do something you were passionate about knowing you could add more value to others.

Start-up capital is tight due to initial expenses during the opening. You decide to go against advice and not form an entity (even a simple LLC) to save money and figure you would do this once you had revenue. It’s your grand opening and you are excited to finally throw open your doors with a big smile and welcome the public into what you’ve put your blood, sweat and money into over the previous months.

Not a half hour into your opening someone slips and falls hurting themselves in your shop. You feel horrible for this person and do what you can to help them get immediate assistance. You go out of your way to ensure they’re alright. Unfortunately, a few days later you are served with a lawsuit because of this incident and before you know you are nearly out of business before it truly began.

Listen, you may be saying that’s not my type of business. We appreciate that thought, but there are additional reasons why operating this type of entity is a poor choice.

Let’s discuss those reasons now…

  1. You put everything you own at risk if a lawsuit or judgement arises against the business.
  2. You will pay self-employment tax at 15.3% on the taxable income from the business.
  3. By operating in this manner, you aren’t building credit for the business.
  4. You are more likely to be audited compared to other entity structures, especially if you are running at a loss (thereby risking hobby loss rules).
  5. Based on the new 20% qualified business deduction, you are subject to phaseouts if your taxable income is above $315K.

Forming an LLC is one great option to pursue, but you will be taxed (if it is just one member) the same as a sole proprietor. This will give you asset protection, but you’ll have to deal with the other four issues.

Please note, this isn’t always the worst way to operate and we analyze that when we sit down with you to discuss your business that allow you to make decisions based on facts and figures.

If you would like to discuss starting a business, review your current operations or get help setting up the proper entity, please contact our of business advisors today!