Forums: Discussions for entrepreneurs and small business.

It should become obvious. Assuming you become profitable, eventually you will have cash left over at the end of the month, and nothing else important to do with it other than to pay yourselves.

There are some technical issues here. You haven`t mentioned exactly how you are organized. Are you a partnership, a corporation, or an LLC? 

The organization type determines whether you receive wages subject to payroll withholding and receive dividends (corporations), or whether you just take distributions from your share of profits (partnerships). Partnership distributions are NOT subject to payroll withholding, partnership earnings are considered self-employment income.

LLC`s can elect to be taxed as a partnership or as a corporation, and that election determines the nature of the payments made to the owners. Salaries paid to corporate shareholders are deductible to a corporation. Payments to partners are normally NOT deductible to a partnership (exceptions do apply).

Your partnership agreement probably should spell out how and when  distributions are made. Actual profits rarely equal cash in the bank, so you and your partner are going to need to agree on how much of what`s in the bank is actually available to be paid out to you. Otherwise, you might decide to pay yourself, and not leave enough cash available to pay your partner. Not nice ...

Personally, I don`t see the point of two signatures. I mean if you don`t trust each other now, and don`t believe that each partner will act in the best interest of the partnership, then how do you expect the partnership to succeed?

Scott Reynolds 

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R Scott Reynolds, CPA
www.b2bcfo.com

I have to disagree Scott.  Internal control should be placed when there is cash involved.  The trust in the partner is not in question.  The protection of the company`s assets and the investors involved is at risk when there is no internal control placed.  Most small business today have no internal control established, and the trust these investor put in one or each other is a welcoming of misuse in company funds.  Just recently a current client of mine (public corporation) recently discovered (as addressed by my assesment of business activity in reconciling bank accounts) the CEO of the company had been charging his personal expenses to the business account (groceries, personal vacation trips, jewelry for the wife and cash withdrawals) that were not authorized, but only authorized by him.  Total personal expenses paid by the business without proper control as of Q4-06 $41,000, this does not include personal expenses already charged to the business in Q1-07 at a breaking point of $10,000.  He is the only authorized signor of the bank account.  These expenses were never disclosed as compensation to the CEO in their financial notes.  Not only is this stealing from the company but stealing from their investors.  Its these kinds of activity that SOX 404 was put into play in business activity and the transparency of their financial statements with accounting activity. 

Trust in the partner is not in question, it is the operating standards that is.  Rather than trusting each other, the investors or owners should put their trust in the operating structure and activity, a protection of their investment and the company`s assets.

Bree

Bree,
I agree with Scott... He never mentioned what was the legal structure of the business. Are they going to be a Parnership(sole proprietors, LLC, Corp, LLP) What is their status. Depending on their structure is how they need to handle things.
Although, yes I agree that there has to be some  of control of how money is going to be split, spent, and so forth. The control is only there to alleviate mis-understandings and arguing. What it comes down to is on their Legal Structure. Once they define their business Structure, then they can either pay each other a salary or bonuses... In reality it`s the legal structure of the business that defines how they are going to treat that.
Also, why two bank accounts? Why not Incorporate open 1 bank account and use that for the business? This way both of you have to sign the checks.  


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Edgar Monroy
Web Developer / Owner / Consultant
When starting your own business the need to "know-how" is greater than money!
http://www.nuevolution.net

I am aware that the structure of their business is the defining point of how operations are handled and the distributions of funds. 

I was disagreeing on not needing internal control. 

And I`m not suggesting internal controls aren`t in order. I`m saying that two signatures is probably not the norm, and that an embezzling business partner is not the norm either, so the extra hassle-factor of dual signatures might not be worth the effort as long as both partners have access to account statements, cancelled checks, etc. Of course, if the partnership handles LOTS of money then temptation might prove to be too great.

There are a lot of creative ways of getting money out of a company in an inappropriate fashion that are almost as easy as writing a check. Like misdirecting customer payments, misuse of company credit cards, submitting phony expenses, the list goes on. So even if you go with two signatures you still haven`t addressed other possible leaks.

Another issue is that much banking these days is done online - quicker, easier, more reliable. I`m not sure how EFT`s are handled in a dual-signature environment. Any thoughts?

Scott Reynolds

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R Scott Reynolds, CPA
www.b2bcfo.com

There are so many factors of embezzling in a company of course.  We can go on forever with a list of actual ways we in the accounting profession have encountered or discovered.  The start of internal control should start at the top and on down the organizational chart.  Sure companies have managed to be creative in their directing of funds illegally.  I may have not addressed the possible leaks that could occur, I did, however is address the need for internal control in the operating structures. 

Unfortunately the only control that a bank or any type of financial institution may have regarding EFT`s are verbal authorization from an authorized signor (from either).  They will have information although of who authorized the transfer and where the funds was directed to.  Yet another control.   A company may need a policy and procedure in their every day operations to abide by and especially in handling of funds. 

Bree

 

Wowww, Bree I need the services of you to help me with my business. I have an accountant but I`m not really happy with the service because most of my questions that I have go unanswered.  Everything I`ve learned about accounting and what I need to do I`ve taken from website forums and such. I`m going to open my corporate bank account but I`m not sure what I should look for in bank. Aside from the money I plan to deposit each month initially my deposits will be low until I get my business up and flowing and the profits start rolling in.

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Shantel L. Collins
Gabriel’s Romance
Discount designer fragrances at prices you`ll love
http://www.gabrielsromance.com

we will be an LLC but we will be "partners". thanks for all your help guys but at this time this is too overwelming. I need to hire someone to write up an operating agreement for us. We don`t want to waste time & money with each of us hiring separate lawyers. Any small business consultants out there can do this? Preferably in Southern California...

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Rebecka Melson | Virtual Business Services | www.vbsofok.com