If you’ve been paying any sort of attention to the news this week, you’ll probably be aware that the Chancellor released his pre-budget report on Monday. This report is likely to have a major impact on your business, whether or not you are VAT registered. 

I’ve outlined the main points below:

VAT From Monday 1st December, the VAT rate will go from 17.5% to 15% for at least a year. If you are VAT registered, you will need to use the new rate as of this date. HMRC have issued detailed guidance on this.

The new calculation for working out VAT is now 3/23.

CORPORATION TAX The Government is deferring for a year the planned increase to the small companies rate of corporation tax. The rate will remain at 21% for 2009-10.

EXTRA LENDING UK small businesses should also be able to benefit from around £4bn of lending from the European Investment Bank (EIB) between 2008 and 2011. Approximately £1bn of these funds should be available by the end of 2008. The Government will launch a new Small Business Finance Scheme to support up to £1bn of bank lending, together with another guarantee facility for up to £1bn of bank support to small exporters. It will also make available a £50m fund to convert businesses’ debt into equity.

TAX PAYMENTS Businesses in financial difficulty will be able to spread payment of their tax bills over an indefinite time period. A new Business Payment Support service has been launched to help businesses calculate over what period they need to spread their corporation tax, VAT, PAYE, income tax and national insurance contributions in order to remain profitable.

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Many of the things that need to be considered when deciding to buy a business apply to any purchasing decision.  It is all about striking a sensible balance between risk and reward.  Consider a situation where you go into a store and buy something for $5, you get it home and find that it does not quite match your expectations.  You could take it back and get a refund or an exchange or you might just put it down to experience and write-off the $5.  After all, most people squander at least $5 on every tank of gas by the way they drive and waste similar amounts in other areas of their lives without even knowing it. 

So, you are now considering buying a business.  You may well be raising funds from the bank, probably secured on your assets such as your home or your pension plan, you may borrow money from friends and relatives and you will put in as much money as you can from your own resources.  You are now definitely into a high risk activity.  If it does not work you cannot just write it off, move on and put it down to experience, it could change your life forever.

I have often heard it said that many successful business people have had one or more failures in their past before becoming successful and as Friedrich Nietzsche said “That which does not kill us makes us stronger.”  While I am sure this is true and it is a great line to quote while licking your wounds over some failure or disaster, would it not be better to avoid the mistakes and move straight to your success story?

When considering buying a business you really need to know why you are doing it and to help you need to think about a few key things:

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As a business owner the business valuation process seems like a big black box. You insert lots of information into it and several weeks later you get a very thick and confusing report that tells you how much your business is worth. The problem is you don’t understand the process or the report and don’t know how to evaluate either. When reading the report, look for these common business valuation mistakes.         

Mistake #1 – Unqualified Appraiser

The most common problem with business valuation reports is that they have been prepared by someone who is unqualified. There is little, if any, regulation of the business valuation industry and it is often difficult to find firms that offer business valuation services. People tend to hire the first firm they find or their current accountant/tax preparer. Not all CPAs are competent in business valuation. In fact, many CPAs have very little or no business valuation experience or training.

Look for professionals that have at least one of the following major business valuation designations by searching their online directories.  

• Accredited in Business Valuation (ABV) - http://www.aicpa.org/credentialsrefweb/ABVCredentialSearchPage.aspx
• Accredited Senior Appraiser in Business Valuation (ASA-BV) - http://www.bvappraisers.org/find/
• Certified Business Appraiser (CBA) - http://www.go-iba.org/directory.php
• Certified Valuation Analyst (CVA) - http://www.nacva.com/dir/

Mistake #2 – Not Objective

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“Cash is king!” And, running out of cash is the most common reason that businesses fail.

This article is about practical tips to reduce your risk that slow or late-paying customers will cause a cash crunch in your business.

Finding out that a customer for whom you’ve just done a large project has gone into bankruptcy is bad news.

Here are some practical tips to avoid collections problems.

Tip 1. Put it in writing.

Contracts are important! The contract should clearly define the scope of work and payment terms. It should also clearly define the responsibilities of each party, including things you may not think of, such as permits and fees, necessities like scaffolding or temporary heat, and even responsibilities for trash removal may be clearly stated in the contract. When it comes to contracts, the more you define in advance, the better off you’ll be. If you have your agreement in writing, you are much better positioned to pursue your legal remedies if the customer doesn’t pay.

Tip 2. Accelerate the receipt of cash.

Require deposits or payment up front. Accept credit cards. Insist on ‘payment on delivery.’ Offer incentives for prompt payment (e.g., 2% discount if paid within 10 days). Be cautious about extending credit. Check credit history. You may even want to implement the use of a credit application with a personal guaranty. Ask for references.

Subcontractors and sub-subcontractors should be wary of the “pay when paid” clause, which would condition payment to you upon receipt of payment by the General Contractor from the Owner.

Tip 3. Set up a system.

Invoice promptly. Set up a system and follow up promptly on all late payments.

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LLC’s came in vogue approximately fifteen years ago when the state of Georgia enacted legislation allowing LLC’s (Limited Liability Company’s) to be established. Although the LLC does allow for some greater flexibility and ease of operation it often results in a higher tax obligation that might not have been incurred if the business was an S Corporation.

Tax law treats all the earned income from an LLC as being subject to both FICA & Medicaid taxes whereas an S Corporation has to pay those taxes reflected on W-2’s. For tax purposes, the law allows an S Corporation to legally convert to being an S Corporation as long as all active employee/owners pay themselves a fair and reasonable salary. This number is best determined by the facts, position, and profit of a business and the truest test of this calculation is what a business owner would have to pay someone else to perform their position.

All businesses are unique and therefore all saving opportunities are different. But even the smallest of businesses with the smallest of profits may save approximately $6,000 by converting from an LLC to an S Corporation. Already this year, we completed this process for an LLC saving them $25,274 of FICA/Medicaid taxes.

There are only four rules to qualify for being an S Corporation.  You must:

- Have a December 31st year-end.

- Have less than 100 shareholders.

- Have shareholders who are U.S. citizens or resident aliens.

- Have only one class of stock.

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Among the different ways of incorporating your business - C corporations, S corporations, and Limited Liability Corporations - there are practical reasons for choosing a given method, such as the number of shareholders or liability considerations. For many small business who are considering incorporating in Georgia, the tax advantage of the S corporation should not be overlooked.

Tax Advantages of S Corporations

As a LLC, LLP, partnership or sole proprietorship, you are subject to the 15.3% Self Employment/FICA tax on all of your net earnings. The S corporation, on the other hand, pays you a deductible salary (which is subject to FICA), and then the profits flow through your personal return via a Schedule K-1. This K-1 income allows for permanent deferral of the FICA tax. The S corporation allows small business owners to legally save taxes as long as they pay a fair and reasonable salary to themselves.
Please take a look at the following comparison. It shows the tax effects on a single year’s income for a LLC, LLP, partnership, or sole proprietor vs. a C corporation, and compares it to a subchapter S corporation. Due to the way C corporations are exposed to double taxation, the payments are spread out over two years, which is not the case for partnerships or S corporations.

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The Advantages and Disadvantages of Incorporating as a Subchapter S Corporation, C Corporation, Limited Liability Corporation or Partnership

When looking at what type of entity your business should be, we strive to balance the legal protection issues vs. the tax savings. Over the years, we have developed the mindset that there is no perfect election but there are ones that are better than others. The information below and the assumptions we make are based upon the fact that my clients tell me that they want to pay as few tax dollars as legally possible. Below are some very specific rules, as well as some generalities. If you are considering incorporating in Georgia, we suggest that you sit down with a tax professional to see how these guidelines relate to you.

About S Corporations

Subchapter S Corporations can have no more than one hundred shareholders and they all need to be U.S. citizens or resident aliens. This corporation type almost always has to have a calendar year as the fiscal year. S Corporation rules have been around since the 1950s and were set up to simplify the rules and regulations of being a business owner.

Liability Protection and Subchapter S Corporations

A subchapter S Corporation, like a C Corporation, affords the business owner personal liability protection from business risks. Some of the keys to maximizing that protection is to treat the corporation like one by doing all your business in the corporate name, signing all of your documents listing your corporate title, not co-mingling any personal issues/bills in the corporation, and by having your annual Board of Directors and Annual Shareholder Minutes Meeting.

Tax Advantages of S Corporations

No income taxes are paid with the corporate return.

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