Small Business Profit Explosion

10 Surefire Ways to Make More Money and Keep it in the Bank!

Go to www.myprofitguru.com to listen to our free webinar that will show you the following 10 Surefire ways to make more money and keep it in the bank. This one hour webinar is jam packed with information that I have used over the last thirty plus years to help business owners increase their profits.

The following are the items I cover that I know can help you double or triple your profits this year:

1. See what the crowd is doing and do the opposite.
2. Focus your time on the work that increases profits, sales and cash flow.
3. Manage & improve every step of the sales cycle.
4. Increase sales to current customers.
5. Create a marketing system to get the big customer.
6. Speedup and improve all areas of the business transaction cycle.
7. Understanding & utilizing the most important rule of business.
8. Using 5 critical accounting numbers to increase profits, sales & cash flow.
9. Never totally trust your bookkeeper.
10. Be a lifetime learner.

At www.myprofitguru.com you will also receive a list with all legal business tax deductions (So you don’t ever miss a legal deduction again!), 65 tax cutting tips and a list of QuickBooks keyboard shortcuts.

Please let me know what you think of this free webinar.

Thank you for your continued support and let’s make this year our most profitable year ever!

 

Lessons Learned – Profits are all that matter!

The myth most business owners believe: The most important thing is to get the sale!

Why this myth causes a problem: It focuses on the wrong thing! The only thing that counts in a business is to make a profit. You didn’t start a business to make a sale and turn around and send all the cash out to vendors and employees. Most business owner’s started their business in order to at least be reasonably prosperous (some even wanted to be unreasonably prosperous).

Most business owners who have rapid increases in sales for the first time almost always run into cash flow problems. They have spent so much time focusing on increasing sales that they failed to have the financing and systems in place to support the increased costs in inventory and employees to deliver the product to the customer. The result is usually serious financial trouble and sometimes even bankruptcy.

The truth successful business owners learn the hard way! Successful business owners have learned that, in business, the only thing that matters is profits! A profitable business provides the means to support the business owner and their employees while also paying all vendors, bank loans, tax liabilities and investors.

 

Profits allow the company to have the strength to survive the tough times and to take advantage of good business opportunities when they appear.

 

The successful business owner starts every year by creating a profit plan. A sales and marketing plan that focuses on profitable sales is obviously a large part of that profit plan.

Lesson learned: Start each year by making a profit plan that maps out exactly how the business will hit the profit goal that the business owner has set. By focusing on what is really important in running a business you will greatly increases your odds of truly becoming successful.   

Thank you for your continued support and let’s make this year our most profitable year ever!

 

Marketing Tip of the Week – In an Ideal World

In an ideal world all you would have to do to generate profits is open a business and have an overflow of eager customer banging on your door. In an even more ideal world you would have someone on staff that could handle all of your marketing and had an in-depth understanding of consumer behavior. In the real world business owners have to work on luring customers to their business and most small businesses can’t afford marketing magicians to be on staff.

So what are you left to do? Educate yourself! Ideally, if you were able to take one day a week to just focus on marketing, learning new concepts, implementing marketing strategies, and anything else related to marketing your business, you would undoubtedly increase your profits! If you can’t devote a whole day, a few hours a week will still do wonders.  That is still more time than what you are currently spending.

If you are really interested in Jump Starting your marketing, I am launching a new webinar in 2012 focusing on Jump Starting your marketing. It is a 2 hour long webinar that goes over 15 steps that you can use to GURANTEE an increase in profits! It is only $97, a small price to pay for knowledge that will generate thousands in increased monthly profits. So start the year off with a spike in sales! Call us at 915-857-8158 to save your spot!

 

Life Time Value of a Customer – Part II -Up-selling and cross-selling

On Monday’s blog we showed how a $250 tax return client really has a life time value of $5,250. Now let’s look at how up-selling and cross-selling can massively increase this customer’s value. (Up-selling is adding related products or services to the original purchase. Cross-selling is getting this customer to buy a product or service totally unrelated to the original purchase.)

Your current customers are the easiest sale for you to make. They already know you, like you and trust you. So why do most businesses spend all their money and efforts trying to sell to new customers who don’t know them, like them and trust them? It’s because they do not understand how much up-selling and cross-selling can quickly increase their profits.

By training yourself and your staff to offer other services and products to customers, you can easily increase profits. By addressing your customer’s needs when they buy one product, you may know of other products that will further help them. This will instantly increase sales, profits and improve your relationship with your customers.

Let’s look at what happens to the life time value of my tax return client if I use up-selling and cross-selling:

1. Tax return preparation ($250 x 7yrs)                                     $1,750
2. Up-sell year-end tax planning ($750/yr x 7yrs)                    $5,250
3. One time QuickBooks training for their business              $1,250
4. Annual QuickBooks support  ($600/yr x 7)                           $4.200

                    For a total of                                                                         $12,450

     5.Two referrals with same services                                               $24,900

        For a total life-time value of                                                           $37,350

Up-selling and cross-selling increases the potential life time value of that one customer from $5,250 ($1,750 x 3 customers) to an amazing $37,350!

Thank you for your continued support and let's make this year our most profitable year ever!

Tax Tip of the Week- Employee Discounts

Discounts on your business’s goods or services may be given to employees and their families tax-free. You can provide anything your business makes or sells at a reduced price, but never below cost.

Services may be provided at a discount of up to 20%.

Discounts must be given across the board to employees and families (or even retired employees), not just to higher paid employees.

There are a few items specifically prohibited from being discounted without being taxed to employees – primarily, real estate and investment property.

  Like any good CPA, I need to add a disclaimer: unfortunately, it is impossible to offer comprehensive tax info over the internet, no matter how well researched or written. And remember, I love my readers but having me bookmarked on your computer doesn’t make you a client: before relying on any information given on this site, contact a tax professional to discuss your particular situation.

 

Life Time Value of a Customer – Part I

The life time value of a customer is one of the most important numbers every business owner must know and understand.  You calculate it by taking the average price that your customers pay for your main products or services and multiplying that average by the number of years they will remain a customer. Then add the value of the average number of referrals they will send you during their time as a customer.

Calculating this number often changes how much you would consider spending on each customer and how you and your staff treat them. In my case, the average personal tax return customer is charged $250. If I only look at this amount how much should I spend on advertising and how much time should I spend with each return?

But, let’s calculate the life time value of that new tax return customer. Assume that this new customer will stay an average of seven years and refer two other tax return clients during that time. The life time value of that customer is $5,250, calculated as follows:

 

• $250 times 7 =                                   $1,750
• Two referrals @ $1,750 =                    $3,500
• For a total of                                      $5,250

Now that I know that this new customer is worth an average of $5,250, not $250, how much should I spend in time and money to get this client and to keep them happy?

Thank you for your continued support and let's make this year our most profitable year ever!

 

Make a New Year’s resolution to learn a new language in 2012

I moved to El Paso in 1973 from Massachusetts, and I am embarrassed to admit I have never learned Spanish.  In these 38 years I have used the following “reasons” as excuses:

1. I’m too busy
2. My wife can translate for me
3. Well, to be honest, laziness

As I was sitting in a Spanish mass this Sunday with my wife and her mom, I thought about how much this has cost me in business (especially, since I live in El Paso). I have missed out on numerous opportunities because I can’t communicate with current clients and prospects.

This leads me to my point- for most business owners, accounting is a foreign language. Also, they either don’t make learning it a priority, decide that it is too much work or just leave it to their CPA or bookkeeper.

Yes you can, and should, outsource your bookkeeping and tax preparation; but, every business owner must know how to read and analyze their financial statement. Failing to do so can very easily result in lost opportunity or even bankruptcy due to unsolved cash flow problems.

I intend to make a New Year’s resolution to learn at least basic Spanish in 2012.

I challenge you to make your New Year’s resolution to acquire at least a basic understanding of how to read and analyze your own business financial statements.  This could have a huge impact on your bottom line!

 

Don’t take a Holiday from Selling!

Holidays are a great time to say thank you to your customers and to sell tastefully. Buy Christmas cards and sign each one personally. Also, have each envelope addressed by hand. If you have bad handwriting like I do, have someone else with good handwriting address them for you.

But, don’t just sign them. Add a personal note to each. Suggest lunch, write in your email address or your telephone number. Include a gift or a discount. This is a good way to introduce a new product or service.

Smart business owners never stop selling!

7.5 Year-End Ways to Slash Business Income Taxes

There is still time to cut your business income tax bill for 2011. Here are 7.5 tax cutters that you should consider implementing before year-end:

1. Buy equipment this year. For 2011, the maximum 100% deduction of equipment under Section 179 is $500,000. This is scheduled to be reduced to $125,000 for 2012. There is also a bonus 100% depreciation on new equipment (not used) will be in place for both 2011 and 2012.
2. Write-off your bad debts. If your business uses the accrual method, you should write-off any receivables that you deem to be uncollectable. Document your good faith effort to collect these debts. Remember, if you later collect an account that you wrote-off you will need to pick up the total amount as income. 
3. Write-off old inventory. Review your inventory and write-down old inventory to market value. Research what you could sell it for on the internet. (Better yet, sell it at a deep discount. Better some cash than just throwing it away!)
4. Donate old inventory.  Better even than throwing away old inventory – donate it. You will be able to deduct an amount equal to ½ the difference between market and the product cost. Assume you normally sell your product for $100 and it costs you $50. Your deduction would be $75.
5. Prepay 2012 expenses in December. Pay property taxes in December rather than January. Pay your January 2012 rent or building payment in December. Look for other expenses that you can pay early. If you are short of cash charge it to a credit card. Even if you are on a cash basis you can deduct these expenses in 2011.
6. Donate computers and other equipment you no longer use. You can write-off one half of the difference of the fair market value less your remaining basis (original cost less depreciation). Since most of the equipment you replace is likely to have been written off, your charitable deduction will most likely be half of the market value. Take digital pictures to prove the deductions and keep proof of what you could have sold the equipment for at the time of the donation.  
7. Look into creating a retirement plan. The vast number of tax deductible retirement plan options makes this a subject that is well beyond the scope of this blog. Call your CPA for more information on how this can help you. 
   
   7.5  Check out my FaceBook page for daily tax savings tips that we have been posting since 10/21/11 (http://www.facebook.com/#!/pages/Wayne-J-Belisle-CPA/185259446999).

  Like any good CPA, I need to add a disclaimer: unfortunately, it is impossible to offer comprehensive tax info over the internet, no matter how well researched or written. And remember, I love my readers but having me bookmarked on your computer doesn’t make you a client: before relying on any information given on this site, contact a tax professional to discuss your particular situation.

 

So How Do I Know If My Employees are Making a Good First Impression?

A couple of weeks ago I wrote a blog article about the importance of making a good first impression on your prospects (http://bit.ly/sblW7W). But, how do you know if your employees are losing possible customers by making a bad first impression? One of the best ways is to “Mystery Shop” your own business or practice.

You should do this with your employees’ full knowledge. Being open with them about it will:

1. Let them know it will happen. They will not know how or exactly when so they will automatically treat prospects better.
2. Let them know that the results will be part of their reward, bonuses, pay raises, etc.

You can hire someone yourself or can check out www.mysteryshop.org and www.shopreports.com to hire from businesses that specialize in mystery shopping (Disclaimer: I have not researched the quality or level of service they offer. You should still do your normal due diligence.)

Making sure your customers are receiving the best service possible is always your responsibility. Testing your staff isn’t dishonest, it’s good business practice.

Thank you for your continued support and let's make this year our most profitable year ever!

 

The six areas that every business owner must master in order earn massive profits.

James Malinchak is a motivational speaker and a star from last year’s ABC shows The Secret Millionaire. After the show he had a course that listed the four M’s that a business owner must master in order to be successful.

His four M’s are:

1. Master your mindset
2. Master your marketing
3. Master making connections
4. Master making a positive difference in other’s life.

 

To this list I would add the following:

1. Master your people management skills
2. Master your money management skills.

My experience working with business owners for the last 35+ years is that very few of them have become proficient in these six areas – never mind master them. Imagine how much your profits would increase if you did work hard to master these six areas?

 

Thank you for your continued support and let's make this year our most profitable year ever!

 

Lessons Learned – Not all customers are right for you!

The myth most business owners believe: Any customer is a good customer.

Why this myth causes a problem: When I was first starting my CPA firm I took every job that I could get. Heck, I had three little kids and had no money, no work and very few customers so I felt that I really had no choice. While selling QuickBooks training I quickly learned that not all customers are created equally!

Good clients were easy to train, appreciated my work, understood how what I was teaching them helped their business and, most importantly, paid my bill in full and on time.

Bad clients fought any change to their procedures (even though they hired me to help them make changes), took no responsibility to learn the program, withheld information or provided incomplete information and, worst of all, always tried to negotiate the bill down and then refused or slow paid the bill.

The truth successful business owners learn the hard way! The customer is always right – just not always right for you! Successful business owners learn that when they are meeting a prospect they should be interviewing the prospect in order to decide if they are a good customer for them.

Since our smart business owner knows that 80% of their revenue comes from 20% of their customers they also know that the smart thing to do is to concentrate their sales efforts on prospects who are similar to their best customers. They also learn what “bad for them” customers look like and make a conscious effort to avoid them.

Lesson learned: Being picky about who you take as a customer both increases your profits and reduces your stress.

The Sale Isn’t Complete Until the Customer Pays!

A recent study found that half of all small businesses are having trouble collecting receivables. During good times this is an annoyance. During bad times it is often the path to an appointment with a bankruptcy attorney.

Collecting receivables requires a plan and a system that addresses collections before the sale, at the point of the sale and after the sale.

Before the sale is complete you should:

1. Review the customer’s ability to pay. Big companies use credit reports. But, for most small companies the easiest method is to require a down payment from any customer who you do not have a track record with. How they pay the down payment is a good indication of their payment ability. Plus a down payment lessens your exposure, recovers your cost and speeds up your cash flow.
2. Make sure that your product has value to the customer that is equal to or (preferably) higher than the cash that the customer will pay. This is one of the top reasons for slow pay or non-payment. We have all fallen victim to the slick sales person who gets us to buy something that later we regret. The customer usually “gets even” by slow paying or refusing to pay.
3. Offer incentives to prepay. This can be with a discount but I would rather offer a bonus of some sort that actually increases the value to the customer if they pay early.
4. If possible, don’t deliver without receiving payment. At a bare minimum review with the customer your payment terms. The goal is to eliminate the excuse that they didn’t know about when the payment was due. At this point also keep an eye out for clues that something has changed in the customer’s financial ability between the order date and the delivery date.
5. Invoice quicker. Don’t wait till month end. Invoice as the work is completed.  

After the sale is complete you should:

1. At every step in the collection process remember to keep stressing the value that the customer received. Don’t stop selling!
2. Call shortly after the sale to make sure they are happy with the purchase. You are still stressing the value of the product or service they received. If you can’t call all customers you should at least call the largest sales. (This is often a great time to up-sell to the next level or to sell an add-on product!)
3. Have a system that includes some combination of calls and letters that automatically go out to any account that is past due. The squeaky wheel does get paid first. So squeak loudly! Of course remain polite and keep stressing the value of what they received.
4. At a certain point (60-90 days after the sale) the owner should call and
   1. Make sure the customer really felt they received value. If not, the owner should try to fix the problem. This may be your last chance to save a customer.
   2. Ask them for payment.
   3. If they can’t pay the owner should say, “You are a valued customer and I would like to help you by offering a payment schedule.”
   4. As a last resort – offer a reduced payment if the invoice is paid by a certain date.
5. If all else fails – write off the balance and forget about the customer. Don’t waste any additional time and money suing them.  Your time would be much better used learning what went wrong in your sales and collection process and getting better customers who value what you are providing and are willing and able to pay.

Thank you for your continued support and let's make this year our most profitable year ever!

Business Startup Tips: Concentrate On The Customer – Not The Product!

Most startup business owners start their business by thinking about the product or service they are offering. They fail to answer the most important question that every business owner must answer – Why should I, the customer, buy your product or use your service rather than all of the other options that are available to me?

To answer this question you really must have a vision of your ideal customer in your head. Better yet – write it down. Think about your ten best customers and answer the following questions about them (if you don’t have customers than you better do some research so you can answer these questions):

• What niche are they in?
• What industry are they in?
• What is their age?
• What is their gender?
• Where do they live?
• What is their education level?
• What do they read?
• What groups do they belong to?
• How did they first hear about you?
• Why do they continue to buy from you?
• And most importantly – What are their problems? Better yet, what are their pains that they wish they could solve?
• Why do they buy?
• What is the trigger that prompts your customers to buy?
• How are my competitors solving my customer’s (or potential customer’s) problems?
• Who else influences the customer’s buying decision?

Now think about your product or service and answer these questions:

• What can I do better, faster, different, than my competitors in meeting my customers’ needs?
• How does my product or service solve a problem the customer is having?
• How is your solution different than the solution my competitor is offering the customer?
• What guarantee or promise can I give that my competitor isn’t offering?
• How can I communicate this advantage to the customer in one sentence or less?

Answering these questions almost guarantees that you focus on your customer and how your product/service is such a “smart” decision that the customer really has no option but to buy from you.

Thank you for your continued support and let's make this year our most profitable year ever!

Lessons Learned – Six Ways Smart Business Owners Cut Their Income Taxes

The myth most business owners believe: Hiring a good tax preparer is the secret to paying lower taxes.

Why this myth causes a problem: The normal business owner believe that their work is done once they hire a tax preparer. They don’t do anything to control tax costs. This leads to them being surprised when they get their tax return and paying a much higher tax liability than smart business owners.

So, they blame their tax preparer and find a new one. Of course, this doesn’t change anything since they took the source of the problem with them to the new tax preparer.

The truth successful business owners learn the hard way! Uncle Sam is your partner. And, he is a bad partner! He does little work in the business and demands a third or more of the profits. Smart business owners also understand that income tax is an expense like any other. Thus, it can be planned for and managed.

Smart business owners cut their income taxes in the following six ways:

1. Smart business owners take year-end tax planning seriously. After the first of the year there is very little that can be done to reduce taxes. Before year-end is the only time where a business owner can effectively reduce their tax liability.
2. Smart business owners call their tax advisor before doing any major transactions. They call before selling assets, opening a business or taking money out of retirement accounts. Since they know in advance the tax consequences of their actions they don’t “Shoot-the-messenger” when they get their tax return and discover how much they owe.
3. Smart business owners keep good accounting records. They don’t drop off shoe boxes full of receipts to their tax preparer and they understand that good accounting records ensure that they deduct everything they spend in their business. With the current technology there is no good reason not to have good records in order to prepare your tax return.
4. Smart business owners get their records to their tax preparer early. I prepared close to fifty returns in the last two weeks. There is no way that they received the same amount of attention to helping them reduce their taxes that I was able to spend with clients earlier in the year. Smart business owners understand this and make time to meet with their tax preparer as early as possible.
5. Smart business owners save for taxes as they earn the income. Uncle Sam’s motto – pay me now or pay me more later. Smart business owners make their estimate payments. The smartest business owners put an amount into a savings account weekly that represents how much they will owe. (Hint: divide your total tax liability last year by your total sales from last year. Put this percentage amount in a savings account weekly.)
6. Smart business owners get a basic understanding of the income tax law. They don’t become experts. But, they do learn how the system works and how to use it to their advantage.

Lesson learned: Income taxes can be reduced like any other expense with proper management and planning. This allows the smart business owner to use the savings to grow their business, or support their family, plan for retirement, take a vacation, etc.  

Tax Tip of the Week: Year-end tax planning time is here!

Yes, I survived the 10/17/11 personal extension deadline. Barely! I, like most CPA’s, hate this deadline. We are dealing with the clients who have bad records, don’t plan, are surprised that they owe taxes and complain about how we must have missed something. (Obviously, I'm not talking about any of my clients!)

I tell them all the same thing, “After the first of the year we write history not fiction.”

Now we are entering a time most CPA’s enjoy - Tax planning season!

This is the time that smart business owners work to reduce their taxes for 2012. No surprise that the business owners who hire me to help them reduce their taxes are the same business owners who are expanding even during this economic downturn. They try not to be surprised by anything in their business and they understand that income tax is an expense that can be controlled just like any other cost.

I just recently finished initial tax planning for two of my clients. Together, we identified legal ways to cut their taxes by over 60% (Savings of $108,000 for one and $124,749 for the other). If you are in business you should be tax planning. Yeah, you might only cut your bill by a few thousand dollars. But, if you are like me, you can think of a few things your business or your family could use the savings for.

Tax planning starts by projecting your income to the end of the year and then exploring different tax strategies, loopholes and opportunities that are available to you. This can be intense and time consuming if you have a large business. So call your tax preparer for help.

I will be sending out a year-end tax savings tip each day from now to the end of the year. Signup for these daily tax planning emails by going to www.wjb-cpa.com and entering your email address in the box in the upper right hand corner. I will also be posting these to my FaceBook business page, Linked In account and Twitter account. So search for me there.

Finally, I have only a few tax planning spots available. Email or call so I can discuss with you if this is something that will help you and your business cut your taxes.

Like any good CPA, I need to add a disclaimer: unfortunately, it is impossible to offer comprehensive tax info over the internet, no matter how well researched or written. And remember, I love my readers but having me bookmarked on your computer doesn’t make you a client: before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Lessons Learned - How to Increase Sales Without Spending a Fortune on Advertising.

The myth most business owners believe: The best way to increase sales is by increasing my advertising.

Why this myth causes a problem: In this economy just about every business is experiencing a decrease in sales. Their business customers are cutting costs or closing down. And high unemployment, shorter work weeks and increased costs in almost everything is forcing the consumer to cut or eliminate almost all non-essential items.

Most small business owners don’t have the budget needed to launch an effective advertising campaign in order to replace lost customers. So, they do the worst thing possible – nothing! (Complaining doesn’t count as doing something).

The truth successful business owners learn the hard way! The easiest and cheapest way to increase sales is to concentrate on increasing sales to current customers. These people already know you, trust you and like you! This is a much easier sale than a cold call or advertising to non-customers.

Experienced business owners have a plan to:

1. Get their current customers to come back more often.
2. Get their current customers to buy more each time they are there.
3. Get their current customers to refer their friends.

The smart business owner focuses on these three things and has a written plan on how they are going to accomplish each of the three steps. And it almost always results in a big payoff for the owner. Even in this economy (I would argue – especially in this economy). I have personally helped business owners double their sales in a year just by focusing on these three things.

Lesson learned: New customers are required to keep a business growing. But, the road to quick sales and profit increase leads to selling more to your current customers.

Business Startup Tips: What type of business do you want to build?

Many of my clients each year are startups. This is the first in a series specifically for startups and the issues they face while trying to survive the tough early years.

One of the first things a business owner should do before they even open a business is to clarify what they want their business to look like.

If you decided to build a house you don’t just start construction. You would first meet with an architect and having them draw up blueprints based on what you want the house to look like.

This is just as true when you start your business. You could just open your business without this step but don’t be surprised if you end up in a few years running a business that you don’t like.

Before you launch your business you should have answers to the following questions:

• What is your long-term vision for this business? You will run it much different if your goal is to grow it to a point where you can sell it rather than the way you would run it if you plan to run the business for years into the future.
• What are your personal goals? How will opening your business help you reach these goals?
• Why do you feel this business is a good business opportunity? In simple terms   - why do you think you can make money in this new business?
• Who will be your customers? What is it they want? What do they look like? What motivates them to buy?
• Why will people buy from you? Or put another way – what will you offer that is so different from what the current businesses offer that customers will switch to you?

Your answers will most likely change as your business launches and you start to interact with your customers. But, thinking these items out in advance will help your startup company get moving in the right direction.

Lessons Business Owners Keep Learning the Hard Way! Just because you can sell it doesn’t mean you should!

The myth most business owners believe: I should sell my product or service to whoever wants to buy it.

Why this myth causes a problem? If a customer purchases your product or service and it doesn’t really meet their need they become disillusioned. Worst, they start telling everyone they know that you sold them something that did not solve their problem. And, with more people using social media this can easily be hundreds of people.

The truth successful business owners learn the hard way! Providing customers solutions to their problems is the best way to get satisfied customers and referrals.

My prospects come to me with a problem. For example they need bookkeeping. Yes I can easily sell them on the idea of letting us do it. I make more money doing that. But, they expect that as a CPA I will give them the best advice that fits them. And, this many times means buying QuickBooks and doing it themselves at a cheaper cost.

This is true even if you sell a product. You have a large variety of product types that have different features that provide different advantages & benefits for the customer. But, even if you don’t carry a product that best solves the customer’s problem, the smart business owner knows it is better to refer them to a competitor for a product that truly meets the customer needs then it is to sell them something that you have just to make the sale.

This customer will remember that you cared more about helping them then making the sale. Who do you think they will choose the next time they or a friend needs a service or product that you do provide?  Who will they refer their friends to?

Lesson learned: Selling your customer a product or service is not as important as solving the customer’s problem.

Client Question of the Week: When should I incorporate my business?

Question: When should I incorporate my business?

Answer: This week I had an appointment with the owner of a small trucking company who wanted to know if he should incorporate. He has been in business for about five years and had grown the company to about $700,000 in revenue but was still having small losses due to high fuel costs and a slow economy.

As I told him, there are really only four reasons to incorporate:

1. If you are in an industry that has a high legal exposure such as doctors, construction and trucking (due to possible accidents by his drivers). But, this may not be enough of a reason. A business owner’s first line of defense should be their liability insurance. Also, many startup business owners have very few personal assets so they are in effect “judgment proof”.
2. To save taxes. About 87% of small businesses who incorporate are formed as S-Corporations. The ability to save social security taxes is the big reason. The idea can be illustrated by considering a small business that has a schedule C (sole proprietor) income of $100,000. They would pay self employment (SE) tax of $15,300 (15.3%) on this business income. If they are an S-Corporation and the owner pays themselves a salary of $60,000 then the remaining $40,000 would be not subject to the SE tax for a savings of $6,120.
3. If the business has more than one owner. For these businesses I highly recommend that they start off incorporated and structured as a S-Corp. A partnership has shared liability by the partners. This basically means that your partner can borrow money or sign agreements that you are also personally liable for even if you don’t agree with it.
4. To look bigger then you really are. The idea here was that having the words “President” on your card made you look more attractive to your prospects. In the world of the internet and social media this really just doesn’t work anymore.

These reasons must be compared to the following extra costs related to incorporating. These include:

• The cost of having a good accounting system. For a schedule C all I need to prepare the income tax return are its income and expense items for the business. Once you incorporate I will also need good numbers for your assets and liabilities. This means spending the time and money to have a real accounting system. Something that I strongly believe every business owner should have anyways.
• You have the cost of incorporating. If you do it yourself online this will cost you around $500. If you hire an attorney to incorporate you this will cost you about $1,000 to $1,500.
• You will need to file a separate corporate return that will cost you at least $750 per year.
• In Texas, you also may have to pay a franchise tax return of 4.5% on your gross profit.

So what did my trucking company owner decide? Well, he decided I had given him a lot to think about and he probably will wait until the company starts to make money before he incorporates.

Like any good CPA, I need to add a disclaimer: unfortunately, it is impossible to offer comprehensive tax info over the internet, no matter how well researched or written. And remember, I love my readers but having me bookmarked on your computer doesn’t make you a client: before relying on any information given on this site, contact a tax professional to discuss your particular situation.