Chapter 3 Professional Associates – Profit

CHAPTER 3

Professional Associates

Congratulations, you have made it through the toughest part of understanding your business and making a P&L work for you. We will take a break from the arduous exercise of math and talk about choosing your professional partners.

I highly recommend that you utilize a CPA instead of a bookkeeper. You should look for a CPA who is handling other businesses such as yours. This will help you in several ways. For instance, he will not have to charge you to learn things about your business as he will already know them. Secondly, he can provide you with copies of the P&L that he has from his other businesses. I would expect him to erase the names of the companies and businesses as this would be confidential; however, the information can be useful to you in looking at how their businesses have been run and the types of numbers they are running as far as percentages and fixed costs are concerned. Another source for this type of information could be your bank. Hopefully, you are using a banker who is doing business with businesses such as yours.

One of the small businesses that I worked with was utilizing a bookkeeper and they ended up owing the state approximately $200,000 of sales tax that they had collected but had not remitted to the state. Needless to say, the state caught up with them. They did not have the cash and had to work out a short-term payment plan. . . . ouch!

Dovetailing with this advice, I also urge you to seek an attorney who is handling businesses similar to yours. Such a person can give you some insight and, again, it won’t cost you much as he already knows about the various aspects of your business, and he won’t have to go into in-depth research, which can be costly.

One of the major items to discuss with both your attorney and CPA is the type of business you are setting up. For instance, will it be a C corp., sub S, or sole proprietorship. I have noticed that a lot of CPAs recommend a sub S. As you probably already know, a sub S treats your company’s money and your money as one and the Internal Revenue Service (IRS) taxes it at your personal tax rate. This may make it easier for your accountant; however, it can cost you money in the long run. It doesn’t matter what business you’re in, as most businesses, over the years, run into a recession and lose money for a year or so. If you had been taking the profits out of the company and paid taxes on this income at your personal tax rate and then had to put money back into the corporation, you would have less than if you had left the money in the company (which has a lower tax rate, simply because you took some money out as income). If you had arranged for your company to be a C corp. and paid the lower tax rate on that profit, you would have more cash for supporting the company during the downturn. Let’s compare the two in the following table.

 

sub S

C corp.

Profit

$80,000

$80,000

Salary

$80,000

$40,000

Corporate profit

$0

$40,000

Tax rate

30%

20% on salary or $8,000

20% on profit or $8,000

Total taxes paid

$24,000

$16,000 and you have $32,000 of retained earnings or cash to support the company in the future

Note: These numbers and scenarios are just an example and need to be verified for your specific operation and business.

Some accountants will counter this discussion and state that with a sub S you get to take the depreciation and write-offs personally. However, all of the groups that I have been associated with have used a C corp. and have formed a separate partnership that takes advantage of the depreciation and write-offs for our personal taxes. For example, in our restaurant, we ran the businesses under a C corp. and then formed a partnership that purchased the equipment for the restaurant and charged a rent for it. By doing this we were able to take the depreciation for the equipment, which can be depreciated over 5 years. This was a very nice tax benefit.

Note 1. These numbers and scenarios are just an example and need to be verified for your specific operation and business.