As you likely have heard, California passed a new tax law last week that created quite a stir, and resulted in Amazon.com terminating its affiliate program in the state effective immediately.

What you may not know, though, is that this type of law - an Affiliate Nexus tax law - could require you (not just big companies like Amazon) to pay sales taxes on revenues generated via online sales in the places like California.  It is critical for you to understand the rules so you don’t run into trouble with the tax man.

Let me first say that I’m not a tax lawyer or CPA, so make sure you confirm how these rules apply to your business with your own tax professional. However, I do want to give you some background here so you have a basic understanding of the rules.  Historically speaking, sales taxes are required when your company has a sufficient connection with that state. The technical term is a “nexus.”  Up until recent years, a nexus was defined by most states as having some kind of physical presence in that state, either by having an actual office or brick and mortar presence there, or employees physically in that state.  Online transactions were not taxed unless the retailer also had a physical store in that state.

However, in recent years, a number of states have extended the definition of nexus to include online sales via affiliates.  In essence, those states are treating affiliates as an extension of the retailer, similar to an employee.  Amazon and other companies object to that definition.  Their position is that the affiliate is a marketer or advertiser and nothing more.  No matter which argument you agree with, the reality is that California joined the ranks of the states using the affiliate definition of “nexus” for purposes of collecting sales tax on transactions in the state.  Let me put it another way:  California will now impose a tax on any sales revenue generated in the state just by virtue of the affiliate being physically in the state (not the retailer).  Online retailers with California-based affiliates are now required to collect and pay state sales tax on purchases made by California customers.  As I understand it, this includes all revenue, not just affiliate revenue - the affiliates’ presence in the state just gave the state the “nexus” it needed in order to claim that Amazon and other online retailers were connected enough with the state to justify taxing their activities.

So, for example, even though the affiliate is not an employee or agent of Amazon.com, because Amazon had affiliates physically in the state, that results in a tax burden in California for Amazon.com.  Amazon’s reaction was to immediately terminate its affiliate program in California so that it no longer had the “nexus” required to enable the state to tax their online sales to California residents.  Other online retailers did the same thing, including Overstock.com and BlueNile.com.

This is important because it doesn’t just affect companies like Amazon.  It affects you if you have an affiliate program of any kind for your company.  If so, you need to make a decision about how you want to proceed.  If you want to continue your affiliate programs, you must know which states require you to pay sales taxes on internet-based sales (all sales to residents of that state, not just sales through affiliates) and you need to make sure you are operating your company in compliance with each of those state statutes.  The states that have these affiliate tax rules currently are:  Arkansas, California, Connecticut, Illinois, New York, North Carolina, Rhode Island.  Other states are considering similar legislation.

Please contact your tax professional immediately to make sure you are in compliance with all of these state rules going forward.  And if you keep your affiliate program, then make sure you stay informed about any new Affiliate Nexus tax laws that pass in other states.

You can choose one of six options: Sole Proprietorship, General Partnership, Limited Partnership, Limited Liability Company, C Corporation or S Corporation. You will find that each of these differ to the degree of liability that you, as an individual will have and also how each is subject to taxes.

• A Sole Proprietorship means that you, and you alone, own the company and are responsible for both its assets and its liabilities. This is the most common and by far the simplest of structures, but as a sole proprietor, you can be held personally liable for the debts and financial obligations of the company. This risk also extends to any monetary obligations or penalties gained as the result of an employee of yours. Business financing will be much harder to come by and will also have more risk attached, as investors will not usually invest in sole proprietorships. Both a good and bad point, depending upon how you feel about it, is that you will be completely in charge. You will have the responsibility for making every type of business decision there is, from inventory, to suppliers, to employees, to the type of toilet paper you put in the restroom and if it will roll over or under. Some of the pros for having a sole proprietorship include the fact that if you decide to sell or transfer, you don’t have to get anyone else’s approval. There are few legal costs associated with forming a sole proprietorship and there are few formal business requirements. You also will not be responsible for corporate tax payments, but if this is the only reason that you are considering a sole proprietorship, you might want to think again.

• A General Partnership is when you contract with one or more other people in order to run the business with equal responsibilities and liabilities. These can be operative or financial and must be spelled out in regard to who has what responsibility and how much financial liability each partner has. These are formed by individuals and are taxed much the same as a sole proprietorship is taxed. Some of the advantages include the fact that business financing is more readily available as you can pool your financial resources, though don’t plan on looking to investors for business financing. General Partnerships are also situations that investors go into very cautiously. Finding business financing through an investor may be difficult, if not impossible. You also have others whose expertise and strengths you can depend upon to provide ideas and take on projects that may be beyond your own scope. A General Partnership comes with limited startup costs and there are few formalities to go through in order to form one. Some of the disadvantages are the difference of opinions that can occur. Partnerships can be fraught with discord as the parties have differing visions or goals. Partners are also personally liable for the business’s debts and financial liabilities, something I have counseled against over and over. It is also a situation where it is “One for all and all for one”. In other words, if one of you makes a business blunder or even breaks the law, all of you can be held liable.

• A Limited Partnership can be formed to bring in more expertise or skills or even money, but in this situation there must be at least one general partner that shares equally in the business’s financial obligations and responsibilities. Limited partners are often silent partners to the extent that they are not necessarily involved in the day-to-day running of the business, but may have other interest, financially or otherwise, and they will share in the profits of the business. Various reports will have to be filed with the Secretary of State for your particular state and each state has laws on the books that regulate the responsibilities and obligations of the partners in this type of business. Again, additional business financing may be difficult to come by, as investors are also cautious of this type of business structure, but with the partners in place, additional business financing may not be necessary and you are more likely to attract investors to a Limited Partnership than to a Sole Proprietorship or General Partnership. The reason for this is that the general partner in this relationship can be a corporation or LLC, which can be attractive as far as mitigating financial liability. The con is that the corporation or LLC can also be a part of and have a vote in the major decisions that affect the partnership. Your biggest problem may be in finding the general partner required, as they assume personal liability. Limited partners, on the other hand, can leave the business or be replaced without having to dissolve the Limited Partnership.

• A C Corporation is a traditional business structure that leaves you with little or no personal financial liability. It is established as a unique business entity and is a for-profit, state-incorporated business. Fees are paid and numerous legal documents filed, to include the Articles of Corporation. Unlike the above structures, business taxes are filed separately from personal taxes with the IRS and corporate taxes are paid on a quarterly, bi-annual or annual basis. Any debt the corporation incurs will not be the personal responsibility of the owner or owners. Business financing can be obtained by the corporation, not by the individual, and the corporation can own property, enter into business deals or even file law suits independently of the owners or shareholders. A big plus in having a C Corporation business structure is that the corporation can take advantage of corporate benefit health plans and group life insurance plans, up to a specified amount per employee. Retirement options are often better than those offered by non-corporate plans. The biggest downside is the double taxation that takes place. Besides paying corporate income taxes, the dividends paid to shareholders are also taxed at the applicable tax rate. Though the corporate tax rate can be higher, the initial taxes can be much lower. The first $50,000.00 is taxed at a rate of 15%, while a sole proprietor will be paying 28% on his or her personal income tax from the first dollar.

• The S Corporation, which happens to be my favorite business structure option, is much the same as the C Corp in reference to liabilities, but an S Corp is not double taxed. An S Corporation is only taxed on the personal level, which for the first $50,000.00 may be higher, but in the long run will be lower than what a C Corp will ultimately pay. It is also really easy to convert from an S Corp to a C Corp if your business grows to such an extent that you wish to change your business structure. Most of the paperwork will already be in place and the financials will be well-documented, so converting from one to the other is fairly easy and pain-free. An S Corp can have no more than 100 shareholders, for example, which would be one reason to convert to a C Corp. An S Corp also has residency requirements that a C Corp will not, but as long as you meet the criteria, I would definitely look at structuring your business as an S Corporation as opposed to any other. Business financing is usually the easiest to obtain when you are an S Corp, though both the S and C Corps commonly receive investor financing. The biggest difference between an S Corp and a C Corp is in the taxation and the additional risks associated with the higher taxation.

• A Limited Liability Company, or LLC, is a relatively new business structure that basically incorporates the advantages of a Sole Proprietorship with that of a Corporation. Basically, it operates as a separate legal business entity, but without having to incorporate and be subject to the rules, regulations and taxation of a Corporation. A fairly simple operating agreement is drawn up and agreed upon by the members, and then filed with the state, but shareholders are not required and the formalities that a corporation must adhere to are not upheld in the case of an LLC. Most LLCs must have two or more members, but some states are doing away with that requirement and allowing a single member to form an LLC. This is kind of a “you can have your cake and eat it too” form of business structure, and though I personally don’t care for an LLC, I can appreciate the advantages of an LLC, such as the personal liability protection and the more relaxed requirements when it comes to paperwork. Business financing is more readily available than for an SP, GP or LP, but not as easy to come by as if you had a Corporation. Some investors though are becoming much more comfortable with this newest form of business structure, just making sure that the structure of the LLC is designed to provide the investor with a specified amount of control.

So, do your research. I definitely suggest obtaining the services of either a business attorney or a financial advisor, especially if this is your first look at business structure and how it could possibly affect your business financing. And, I’d like to remind you that I always recommend separating your business finances from your personal finances; more than ever in today’s economy, well-informed decisions and erring on the side of caution will give you some form of financial protection.

Time and attendance options come in all shapes and sizes. They range from simple card swiping systems to biometric reading systems. It all depends on the security level and how many employees you have.

Mobile Option
There are now mobile time clock software solutions for those businesses that have many employees out in the field. BlackBerry has a GPS enabled application called SmartServices Solution Suite. SmartServices Solution Suite allows your employees to record, “the exact number of hours recorded by the system. For employees login and logout as per their work schedule and personal work, only the number of hours put in by employees will be accounted for by the system. “

Since we are all human and make errors, this is a great way for field workers to stay up to date on their hours and streamline the process to your phone.

Smart Cards
Smart cards are also a great way for businesses to keep track of their employees. Smart cards can have other information such as employee expense accounts stored on them. Tensor WinTA Time Management system for example, has actually started manufacturing smart keyfobs.

A hospital that has already implemented these keyfobs says that, “Having an electronic system that, once the rules are put in, will work across all functions is particularly good”.

Although these are just two of many options for time and attendance software and hardware options, keep in mind the options seem to be endless. Many systems can be implemented for very little cost, and some Internet based systems can be started right away.

I just moderated an expert panel on video as part of the Wells Fargo Webcast Series on this very topic and believe it’s a great way to get a snapshot of residential and commercial real estate realities and strategies. The program discusses how real estate can be a tool for reducing expenses as well as generating revenue. It also sheds light on the new rules of the road, including federal initiatives that impact us. Learn about:

• Lowering monthly payments by refinancing or renegotiating
• Mitigating commercial property tenant vacancies
• Reducing overall operating expenses and discovering true cost savings for your business
• Adapting to the current residential and commercial property markets

TurboTax Business is tax preparation software that asks easy questions about your personal and small business income, finds business write-offs, checks for errors and helps decrease the risk of an audit.

This is all part of the bigger picture in which StartupNation continues to help you save time, save money, make more money and reach your goals in business more efficiently. Nice to have a company like Office Depot on board with the same objectives!

If you want your shot at winning a free copy of TurboTax Business, here’s what you do:

Simply enter a comment below about how a product like this from Office Depot could help you file your taxes.

This contest starts today and ends at midnight eastern time on Friday, April 10.

We will randomly pick 20 winners from all comments provided by small business owners. CPAs and other tax professionals are asked not to participate so as to allow those with lesser tax filing resources and sophistication to have the best chances to win this invaluable software. Only one comment is allowed per contestant.

The 20 winners will be announced Saturday, April 11, and copies of the software will be express mailed to them promptly. Winners must by 18 years of age or older and must be based in the U.S.

All StartupNation spam rules apply, and StartupNation retains the right to delete any blog comments it deems to be inappropriate. If contestants do not provide a website link–with contact information available at their website–in their comment, we will have no means to contact them, and, accordingly they will not be included in the random drawing. Note that the comment posting process in our blogs give you an opportunity to list and link to your website in a convenient way.

Jump in! Become a winner! We look forward to reading your comments.

As always, we want you to start it up, and we hope this TurboTax software giveaway helps!

Below are the emailed questions I received from the producers in advance of my most recent appearance. They take this and turn it into what’s called a “rundown”, which is essentially an outline of the show with talking points, many of which end up on the teleprompter. I figured the process, as well as the actual advice, might be illuminating for you. Enjoy!
—

Financial:

What are the biggest financial mistakes that SBOs make?

·         Not prioritizing the spending

·         Not keeping track of available cash this month and in the months and year ahead

·         Forgetting that it’s easier to raise money when you don’t need it

·         Buying new instead of “used”.

·         Ignoring what I call the “2X Factor” which makes the point that things usually take twice as long and cost twice as much than you expect

·         Buying too much inventory or spending too much on advertising without testing out what works best

·         Not paying attention to building business credit

·         Accumulating “fixed costs” instead of “variable costs” which are far more flexible to changing status of the business

·         Receiving investment and not ensuring that there’s a unified plan and timeframe. This is called, “alignment of interests,” and is critical to create.

What resources are there for people when they are in a hole?

·         there are consultants who will help you build up your credit, personal and business

·         utilize an accountant. Don’t just check in at tax time – make it a quarterly check-in.

·         PR firms are helpful in managing any external-facing issues

Should they use their credit cards?

·         Credit cards are a last-resort solution to financial problems. More often than not, they simply dig a deeper hole for you.

Should they go to a bank for a loan?

·         Going to the bank for a loan BEFORE crises occur is always smarter.

Where do you turn when you can’t get a loan?

·         Your rich uncle

Friends and family? Pitfalls / pros?

·         Friends and family are a great way to go as long as you treat any loan or investment professionally and set expectations and communicate regularly and thoroughly about status of their investment

FYI, one of the most common laments we hear on our radio show is, “how do I get a loan if I don’t have good credit?” That’s a huge impediment and reality out there…

Legal:

What are the biggest legal pitfalls that SBOs fall into?

·         Not being protected or insulated from a lawsuit – this is easily achievable by moving from “sole proprietorship” to “LLC” or “S Corp.”

·         Ideas are copied by someone else b/c the ideas, known as “intellectual property” weren’t protected or enforced properly.

·         Non-compete clauses are not entered into with a partner or key employee at the time of engagement and when they depart they use their experience with you to become a competitor. They can poach clients/customers, too.

·         Not having people sign a Confidentiality Agreement whenever possible

·         Making representations that are too grand and unrealistic with investors, which can lead to shareholder hostility and worse

How important is an attorney to a small business?

·         Very. That’s why attorneys are so damn wealthy – they’re needed!

If a SBO finds themselves in a legal matter are there any resources they can go to for help?

·         Attorney is first stop. If no attorney, call around people who you trust and ask for a referral.

·         Internet is valuable but can be hit/miss in terms of reliable information

·         If a legal issue arises, I recommend making that your leading priority until you’re certain that it’s not a significant threat. Left untended to, a legal situation can drown you. This is one area where you always want to be extremely vigilant.

Insurance

What are the biggest insurance mistakes SBOs make?

·         Not getting coverage, especially basic liability coverage

·         For investors, it’s effective to indicate to them that you’ll have “Key Man” insurance. Helps them manage their “downside” in the event that you’re incapacitated.

·         Not getting coverage for a home-based business b/c you assume your homeowner’s insurance covers all your stuff.

·         Skimping on healthcare coverage. When a medical situation arises, don’t let it eat your finances. As pricey as it is, it’s better to bear the burden of healthcare costs over a longhaul than it is to get slammed all at once.

What is the bare minimum that a SBO needs?

·         Healthcare

·         Liability coverage

·         Short-term/long-term disability

Natural Disaster

Obviously, these are unforeseen, but how can SBOs prepare for them?

·         Have an emergency procedure in place for you, your team and customers who may be present/impacted.

·         Establish communication and rendez vous points

·         Sounds crazy, but each year thousands of people get blind-sided. You always think, it happens to other people, not me… but alas…

What resources are there for disasters?

·         www.Ready.gov – they provide both business and personal disaster planning advice and materials

Management / Employee

What are the biggest management / employee problems?

·         Most employee problems result from poor selection and management

·         Theft of intellectual property

·         Sharing of proprietary information

·         Stealing

·         Working under influence of drugs

·         Employee-employee discord

How do you handle a major employee crisis?

·         If there’s mutiny on the bounty or one bad apple, individual meetings complemented with group meetings are effective. Anytime something goes awry, it can be a great learning opportunity for everyone else as long as embarrassment is avoided.

·         If the employee has an emergency (is that what you mean?!), treat them like a family member.

It may have taken the shape of a loss of data, or a short-fall in needed cash. Perhaps it was a lawsuit or a personal medical situation. Who knows - it could’ve been an unexpected tax hit or maybe even a key customer pulling back from a large order that you’d considered “in the bag”.

We had our own crisis last month when this website was attacked and disrupted by a “hacker-bot”, a new term for me and one I’ll always wince at when I hear it in techie conversations.

This coming week I’m going back on CNBC’s The Big Idea to discuss how to deal with crises like those mentioned above. I’m wondering if any among you would like to be featured on the program to ask your burning question about how to deal with a crisis you’re experiencing. The show will air next week on Tuesday, barring any pre-emption.

So, anyone dealing with a crisis at their business? Been through one recently and want to avoid similar situations in the future? Please share your comments below and/or volunteer to be considered for the show by satellite uplink from your town’s local TV station.

If preferred, as an alternative, you can use this link to contact me, too.

Rich

Yes, in my last blog I told you about the many benefits of an LLC and why most small businesses would benefit from them. But now comes an interesting comparison. The LLC v. the S-Corp.

What is an S-Corp you ask? Well, it is simply a business that elects to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. The reason a business owner might choose to be taxed as an S-Corp is that it provides the same pass-through taxation of a partnership or LLC, but it has some added tax benefits, including the fact that it greatly reduces the amount of revenues on which the business owner(s) will have to pay self-employment tax.

Sounds good, right? Well, if handled correctly, it can be.

Now, I am not a CPA, so please verify what I have to say here with your own tax advisor and confirm the rules that apply in your state. That said, the benefit of the S-Corp form is that it can save a business owner a large amount in self-employment taxes, something that cannot be said of the LLC. With an LLC, every penny of revenue is subject to self-employment tax.

The S-Corp is looking pretty good right about now, isn’t it?

If you were waiting for the other shoe to drop, listen closely.

I can think of some major reasons why the S-Corp is not for everyone.

First, once you have made your S-Corp election (please run, don’t walk, to your favorite CPA and discuss how to do this, and whether it is the right choice for your situation), there are some heightened requirements that the business owner must satisfy yearly in order to maintain the S-Corp status. For example, the shareholders or members must (I repeat must) adhere to what are called “corporate formalities.” Corporate formalities include holding regular and special meetings, keeping minutes of those meetings at the corporate headquarters (even if that is in the garage next to the treadmill that is used as storage), and using a formal, written corporate resolution to document every single significant decision made on behalf of the organization by those running it. These are not impossible to maintain, and many companies do so happily. In fact, I recommend that even LLCs maintain corporate records on the level of those kept by Corporations and S-Corps. But with an S-Corp, a failure to do it can cause you to lose your S-Corp status. That can mean a whole host of not insignificant tax ramifications, not the smallest of which is that you cannot enjoy the S-Corp status again for another 5 years, even if your company would otherwise qualify for it. What that also means is that your business revenue will then be taxed as a regular corporation, not as a pass-through entity.

And converting from an S-Corp to an LLC (if it became clear that being an LLC was the better option for your business) carries inherent challenges and likely financial penalties to make the switch. Switching from and LLC to an S-Corp is much easier and doesn’t carry the same monetary risks.

The second reason why an S-Corp might not be for everyone is that the shareholders of an S-Corp cannot generally receive special allocations of profits and losses. The details of this go beyond this blog entry today (and remember: I am a lawyer and was “told there would be no math.”), but suffice it to say that it seems to me that it would be much more difficult to raise capital through investors if those investors cannot write off all business losses on their individual tax returns (versus only those in proportion to the amount of their investment).

In contrast, with an LLC, business debt increases the membership tax basis generally. That means that the members can deduct more losses from the business on their individual returns. And the higher the investor or member’s basis, the less capital gains are possible, which ultimately means less tax when he or she sells his or her interest or sells the business. So, although the S-Corp provides the benefit of lower self-employment taxes for its members, it seems to that an inability to utilize business losses and debts could easily off set the benefit of having a smaller self-employment tax.

Regardless of which entity you choose, choice of entity is a state specific thing, and so it is important to consult with a local attorney (or an attorney in your jurisdiction of choice, such as Delaware) to determine which entity is the right one for your business.

Being that I’m no CPA, I welcome comments on how business owners have availed themselves of the benefits of the S-Corp status. And if there are any war stories about how businesses have struggled with or lost the S-Corp status, those would be equally illuminating, so bring them on!

www.sba.gov/stimulus is a new site set up to help you understand just how.

Included at the site are:

1. A fact sheet that provides a clear explanation of the small business tax benefits.
2. A deprecation calculator that provides an estimate of the first-year depreciation available under the provisions.
3. An online seminar that provides a brief tutorial summarizing the tax benefits and concludes with the depreciation calculator.   

You might be surprised to learn that the stimulus package contains the following tax incentives for businesses: a 50% bonus depreciation allowance on equipment purchased and placed in service in calendar 2008 and an almost 100% increase in the amount (from $128,000 to $250,000) that a business can expense for equipment purchased and placed in the business tax year beginning in 2008.

Maybe you should buy that laptop after all?

Not only that, but you are so proud of yourself, because you have done exhaustive market research, completed a fabulous and no-fail business plan and are already taking orders from your home office.

WAIT! Step away from that business loan application and listen.

While a great majority of new businesses start as sole-proprietorships, most of them should not. While there are ease-of-use and tax advantages to a sole-proprietorship, the ever-present exposure to liability can render those benefits useless. I would venture to guess that most small start-ups could benefit from becoming an LLC as soon as possible. Here is why:

• Operating as a sole-proprietorship exposes you to all the debts and liabilities incurred by your company. That means that your personal assets (your house, your car, that collection of vintage Barry Manilow LPs that you secretly love) are all vulnerable to creditors and potentially injured customers, suppliers or third-parties if you end up in a dispute or are unable to pay your company’s debts.

• An LLC generally (see below) protects the business owner from business debts and liabilities, while also providing pass-through tax benefits (consult your friendly neighborhood CPA for more information on what entity form provides the right tax treatment for your business).

• A single-member LLC will be treated by the IRS as a sole proprietorship, so you haven’t lost that benefit by forming an LLC.

• Like the simplicity of a sole-proprietorship, an LLC does not require the maintenance of corporate formalities or certain corporate activities to maintain its status. It is a relatively maintenance free way to operate…aside from the business of running the business, that is.

• An LLC also allows you to grow and add additional members as needed by your company. Of course, if that happens, you will be treated by the IRS as a partnership and no longer as a sole-proprietorship. But that would happen even if you were moving from a sole-proprietorship to having more than one owner.

Now for the big but…

Not all debts and liabilities will belong to the LLC, even if you go through the trouble of forming one to house your new business. That is because many new businesses are only able to obtain credit/loans by providing a personal guarantee for that debt. If you provide your social security number or personal financial information to obtain financing or credit, you can bet that you will be personally liable for that debt, even if your LLC is unable to pay it back.

Also, even under a properly formed LLC, a member still faces personal liability for damages or injury resulting from his or her negligent or tortious behavior. And the issue of “limited liability” is more intricate to fully discuss in an entry such as this one, but is an important one to understand fully as you move into your new venture.

That is why I strongly encourage you to consult a reputable small business attorney before you form your entity. I have nothing against the low cost and efficiency of the internet-based entity-formation services out there, but as a lawyer who has spent many years cleaning up or working to resolve disputes for small businesses on the back-end, I’d rather see a small business owner spend a few hundred dollars for proper and customized legal advice before making such irreversible decisions about their companies.

It will be worth the peace-of-mind to know you set your business up properly, and you can get on with doing the work you love.

Now you ask, “How do I find a good small business lawyer?” That, my friend, is a different topic for a different time. Stay tuned!