Top Tax Planning Tips for Small Business Owners

“In this world nothing can be said to be certain, except death and taxes.”

— Benjamin Franklin

When you mention taxes to a small business owner, it can evoke heartburn and anxiety. And it’s true, taxes are complicated and may end up costing a pretty penny. The good news is that there are great resources out there to help you successfully file your taxes every year. One of the best resources available to a business owner is a Certified Public Accountant, or CPA. CPAs are licensed accounting professionals that advise businesses on tax planning and financial strategy. To use CPAs effectively, however, business owners must be proactive and provide adequate information. This week I interviewed Matt Hollander, a CPA at Daniels CPA Group, P.C., on some of the top tax planning tips for small business owners. Please note that this information is purely educational and is not professional tax advice.

Start Tax Planning Early

Try to meet with a CPA well before starting your business. Entrepreneurs and small business owners have varying levels of business experience and financial knowledge.  A lack of experience or knowledge can lead to poor business strategies, lack of business controls, ineffective tax planning, and even failure of the business.  Therefore, you should engage a CPA immediately to avoid any serious missteps.

Know Your Business Location

You’d be surprised how many business owners organize their company in their home state just because of the convenience.  Different states have different tax rules and requirements for conducting business as it relates to income, sales, and payroll taxes.  Use a CPA that understands these laws and can assist in finding the best location for your business.

Use the Right Technology

Almost all companies now use accounting software that makes bookkeeping more streamlined and efficient.  However, not all accounting software is applicable to all businesses. Some software packages are specifically intended to be used in certain industries.  Talk with a CPA about your company’s overall picture to find the right technology for your situation. 

Monitor the Results with Your CPA

Prepare quarterly reports and regular documentation for your CPA to plan the business’s tax filings accordingly so there are no surprises.  Strong preparation and open communication go a long way to avoid misery at the end of the tax year.   

Seek Other Professional Help

Hiring your weaknesses is always the best policy especially when preparing for tax season. It might mean employing a bookkeeper to manage your accounting software or outsourcing payroll entirely. By finding the best person for the job, you can optimize business processes and focus on running your company.

<em>About the Author</em>
About the Author

Joseph Shanley serves as the Principal Attorney and Consultant for Awen Innovations, LLC. Click the button below to learn more about Joe and how he could help you fulfill your business dreams.

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How to Use a Financial Pro Forma

Jason Niehaus

One of the most important aspects of business is financial planning. While that may seem obvious, many business owners tend to focus on day-to-day issues without a clear idea of their long term trajectory. A financial pro forma is an excellent tool for setting realistic expectations for the future.  I recently interviewed Jason Niehaus, an experienced healthcare executive, on how to use a financial pro forma. He regularly uses them to operate large healthcare corporations, acquire or turn around companies, and counsel startups.

What is a financial pro forma?

A financial pro forma is a forecast on how you expect a business to perform over a period of time. They use market assumptions to project a business’s future revenues, estimate costs/liabilities, and predict future cash flows.

Why is it important?

A pro forma gives startup founders and business owners a realistic view of how their ideas translate into a functional business. Operating a business requires careful consideration of the expenses and investments necessary to achieve growth. A pro forma anticipates these expenses and investments at scale so business owners can plan appropriately. Once the business goes live, management can evaluate how it performs relative to pro forma projections and adjust strategy accordingly.

How is a pro forma used in a startup?

 In addition to operations planning, startups can use a pro forma in a variety of ways. When doing market research for the pro forma, founders can assess the opportunity for the product or service they want to offer. From there, they can determine competitive go-to-market pricing based on realistic investment costs. Founders can also use a pro forma to secure financing from an investor or bank. These entities will look at pro forma elements such as cost structure or revenue projections to determine the viability of a potential investment. If the startup wants to exit, acquirers will use the company’s pro forma to evaluate historical performance and their potential return on investment.

Are there any drawbacks to using a pro forma?

A pro forma is only as good as the assumptions that it is based upon. Startup founders should ask questions when building their pro forma. Have I truly researched industry benchmarks? Have I tested my assumptions against market realities? Further, if the startup is seeking investment or wants to be acquired, the investor or acquirer will base their investment on pro forma projections. If these projections aren’t based on realistic assumptions, then the pro forma is not an adequate gauge of performance. This can result in getting unfavorable investment terms, losing acquisition opportunities, or failure of the business.

When should entrepreneurs and small businesses develop a pro forma?

Once a startup has a good understanding of its product and go-to-market strategy, then it should build a pro forma prior to launching the business. Startups should also complete the pro forma prior to receiving significant investment into the company.

Do you have any tips for building a pro forma?

Review industry trade association reports to identify realistic benchmarks. Learn the basics of accounting and finance to understand the components of a pro forma. And most importantly, get professional help. Building a pro forma requires some specialized expertise. Accountants, financial advisors, and attorneys are great resources for correctly putting everything together.

<em>About the Author</em>
About the Author

Joseph Shanley serves as the Principal Attorney and Consultant for Awen Innovations, LLC. Click the button below to learn more about Joe and how he could help you fulfill your business dreams.

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How to Hire an Independent Contractor

Small business owners tend to be a jack of all trades. Money is tight after all, so why spend on the extra help when you can do it yourself? The answer is that time is your most precious commodity. You only have 24 hours in a day and that time should be spent working on the value you deliver to customers. To succeed in business you must become a leading expert in your industry and that requires hiring your weaknesses. If you aren’t ready for employees, then retaining an independent contractor could be a good option. In this article, I discuss how to hire an independent contractor.

Employees v. Independent Contractors

Not all workers are the same (beyond our common humanity of course). It is crucial to understand the difference between an employee and independent contractor before hiring a new worker.

Taxes. In simple terms, employers generally withhold federal income taxes, payroll taxes, and unemployment insurance taxes on employee wages. Independent contractors generally pay these taxes without employer withholdings. If an employer mischaracterizes an employee as an independent contractor, then they may be responsible for that employee’s tax liability along with any associated penalties.

Control. Independent contractors are free agents. So employers cannot control the manner of their work performance as they would an employee. Under the common law, the IRS uses three primary categories to determine the classification of a worker for tax purposes: Behavioral Control, Financial Control, and the Work Relationship.

  • Behavioral Control: This form of control is the “when, where, and how” the worker performs their services. Examples of behavioral control include: When are they working? Where are they working? What tools or equipment are they using? What work must be done? Is there specific training required?
  • Financial Control: This form of control determines the business aspects of the worker’s job. Examples of financial control include: Are expenses reimbursed? Is the worker making a personal investment in the services? How is the worker paid? Are side hustles allowed? Can the worker make a profit or loss?
  • Work Relationship: These facts define the nature of the relationship between the employer and worker.  Examples of work relationship characteristics include: Is the work relationship permanent or project-based? Are the worker’s services fundamental business functions? Is the worker eligible for fringe benefits?

While this overview gives you a basic idea of these distinctions, there is a more complex analysis during an actual IRS audit (hint: it actually involves 20 factors!). So you should consult a labor & employment attorney or tax professional for more information.

But wait, there’s more! Keep on reading…

Michigan LLC Formation Essentials

Before beginning your journey as a business owner, you should form a legal entity. Legal entities offer business owners liability protection to facilitate responsible risk taking in the marketplace. They also establish statutory and contractual guidelines that define your relationship with partners, employees, and customers. Entity selection is complicated and must be tailored to the specifics of your business. In most cases, I advise entrepreneurs and small business owners to organize as Limited Liability Companies (“LLCs”) because of their flexible legal and tax structure. Here are some Michigan LLC Formation Essentials to consider when organizing your company.

Is the business name available?

There is always a possibility that another company is using the business name that you want to use. In Michigan, the easiest way to confirm name availability is to do a business entity search or contact the Department of Licensing & Regulatory Affairs (“LARA”). Your business’s name should include Limited Liability Company or LLC. If you are unsure about the name, consider filing an application to reserve the name with LARA, which is good for six months. If you intend to operate the business under another name (commonly known as DBAs), then you should file a Certificate of Assumed Name with LARA, which is good for five years.

File the Articles of Organization

The Articles of Organization officially register your business with the State of Michigan. The Articles require the duration of time you intend to operate, the LLC’s registered agent & address, the LLC’s management structure, and authorization from one of the LLC’s members or counsel. LARA offers an easy-to-use online filing system to submit the Articles, which requires a $50 filing fee or additional fees for expedited review times. You can also send the Articles and filings fees to LARA via mail or in person. These other methods may require more time to get started.

Draft an Operating Agreement

While Operating Agreements aren’t required for LLC formation, you should still have one in place. Operating Agreements help define expectations, relationships, and processes in your business. Common considerations in Operating Agreements include LLC capitalization, LLC member admissions/withdrawals/expulsions, LLC tax and accounting procedures, LLC management structure, LLC decision-making processes, LLC buy/sell provisions, LLC indemnities, and LLC dissolution. Not all Operating Agreements are created equally, so it is always best to consult an attorney to draft yours accordingly.

Get an Employer Identification Number

The IRS uses Employer Identification Numbers (“EINs”) to identify your business for federal tax purposes. Single member LLCs without employees don’t require an EIN and allow the use of the member’s social security number for tax filings. To get an EIN, you or an authorized representative must file form SS-4 online or by mail. If filed online and approved, you will receive your EIN immediately. Also note that if an authorized representative is not a member of the business, they will not receive your EIN immediately. Rather, the EIN is mailed to the address of the business owner or registered agent.

But wait, there’s more! Keep reading…

Top Four Reasons To Send an NDA

When contracting with others, you may need to disclose valuable commercial information to achieve the best results. To do this more efficiently and safely, you should consider sending a Non-Disclosure Agreement (or “NDA”) to the other party. An NDA is a legally binding agreement between two or more parties that ensures certain information will remain confidential. NDAs prevent others from disclosing that information to unauthorized parties. If confidential information is shared, a person may be held legally liable for breaching the NDA. In this article, I will discuss “The Top Four Reasons To Send an NDA“.

1) NDAs Protect Valuable Information

The image of the security guard emphasizes how an NDA protects your ideas.

As a business owner, you obviously want to protect confidential information that is commercially valuable. This information could be customer lists, commercial agreements, vendor lists, inventions, trade secrets, provisional patent applications, pricing information, or even strategic plans for the future. Disclosing confidential information could put your business at risk of losing customers or even empower your competitors. An NDA helps ensure that “what happens in your business, stays in your business” even if it’s not as fun as partying in Las Vegas.

2) Information Sharing = Better Outcomes

While protecting confidential information is critical, sharing that information with another party could benefit the business. Let’s take the example of Dr. Rouse. One night while playing piano after a trauma case, Dr. Rouse is struck with inspiration for a new idea. He wants to build a web app that efficiently schedules patients at Princeton-Marlboro Teaching Hospital. There is only one problem, he has no clue how to develop a web app. He retains one of New Jersey’s best web development firms to build his app, but knows that the project must align with the hospital’s confidential expansion plans (HIPAA-related issues aside). While the firm could build the app prototype without the plans, Rouse believes sharing that information could lead to a more successful integration. By putting an NDA in place, Rouse can use the firm to build an app that syncs with the hospital’s vision for the future.

3) NDAs Signal Seriousness

Sending an NDA is an indication that you take your business seriously. Remember, an NDA is a legally binding agreement that carries serious consequences if breached. By signing the agreement, the other party is put on notice that you’re prepared to take action if they don’t protect your information. Now you might tell yourself, “NDAs signal that I don’t trust people” or “I’ve known this person for years, they’d never tell anyone”. These are potential outcomes, but as the business owner you have an obligation to protect and grow your company. If someone isn’t willing to sign an NDA, you should think twice about disclosing confidential information or even working with them at all.

4) NDAs May Fulfill Duties to Other Stakeholders

This reason seems less obvious, but sending an NDA to a third party may be necessary to honor your obligations to other stakeholders. If you operate a business with shareholders, you have a fiduciary obligation to protect their business interest by acting carefully when transacting with others. Your existing agreements with vendors or customers may require that you hold their information in confidence or request permission for disclosures with safeguards in place. The NDA is a useful legal tool in both scenarios to make everyone feel safe and happy. And that’s all we want at the end of the day, right?

Consider Hiring a Lawyer

There you have it, “The Top Four Reasons To Send an NDA“. While there are many forms online, it is always best to have a licensed attorney draft an NDA. Not all NDAs are the same and you want one that suits your business needs. Consider using Awen Innovations or another law firm to craft a document that works for you. It’s a jungle out there, so a little planning goes a long way.

Voice-to-MIDI: A More Intuitive Way to Interact with Music

Joe Shanley recently co-authored an article for the MIDI Association of America as a co-founder of Bace Technologies, LLC. The article highlights the company’s music technology, Bace. Bace is a real-time AI technology that translates vocal sounds into usable drum MIDI notes for music recordings. MIDI is the technical standard for communication between musical instruments and computer software. By leveraging natural voice as a MIDI controller, Bace provides users a more intuitive way to interact with music. Check out “Voice-to-MIDI: A More Intuitive Way to Interact with Music” below!

Click here to see the full article!

Four Strategies to Turn Prospects Into Loyal Customers

Image Source: Unsplash

Getting prospective clients to show interest in your business in itself is a challenging task. Now, imagine how hard it would be to turn prospects into loyal customers. The prospect-to-loyal-customer way is something no enterprise should take for granted as, at any point along in this venture, the prospect can stop collaborating with you for even the vaguest reasons.

So how do you keep your clients loyal and happy? What are the best strategies an entrepreneur can implement without breaking the bank? Any successful business owner who built their enterprise from the bottom up will tell you that the secret to building a successful startup is by building customer loyalty. Read on to find out how you can do that.

Introduce a Loyalty Program

A loyalty program is an excellent and compelling customer retention strategy and, if implemented wisely, can keep your clients loyal to your business. Customers want to be appreciated and recognized for their loyalty; therefore, selling potential customers on the need to become loyal clients — while also telling them that their loyalty will be incredibly appreciated — will boost brand loyalty. You should also encourage repeat sales with an inventive or loyalty package.

Build Trust — Notify Your Customers of Changes

We are creatures of habit, and your customers are no different. If they are used to getting something but, without warning, they can’t get it anymore, they will be upset. It will take perhaps several positive service experiences to make up for it — assuming they even give you the chance to do so. Be forthcoming and honest with your customers about any changes because it’s all about respect and communication.

Use Social Media to Communicate

All entrepreneurs know the importance and power social media holds. Any small business worth knowing about has an Instagram, Facebook, Twitter, and LinkedIn page, among other industry-specific channels. Still, social media isn’t just another means for you to broadcast your marketing and advertising plans — social media creates a dialogue between people, brands, celebrities, and leaders.

Use yours accordingly: Engage with users by reacting, commenting, and participating in their conversations. Field customer service complaints and send them to relevant parties. Also, call for and share user-generated content to build relationships. As a result, your page will reflect your brand’s voice and create a strong community — both of which attract customers and give them more of a connection to your business than they would experience otherwise.

Use Various Tools

Running a business takes a lot of time and energy, and to be able to focus on your customers and become successful, you need to learn to delegate. Use automation tools for email campaigns and newsletters, accounting software to manage your financials, and other services to perform various tasks you can delegate.

When establishing a business entity for your startup, for instance, consult a seasoned business attorney. While it can be more expensive on the front end, a lawyer will be able to identify the best legal entity and tax structure for your business’s facts and circumstances.

Customers Help Your Business Thrive

Gaining new customers can be a highly challenging aspect of your business if you aren’t familiar with the basic strategies that work. Implement the tips mentioned above when doing business, and you can expect success. Still got questions? Visit our website to learn more about what Awen Innovations can do for your business.

Chelsea Lamb
Chelsea Lamb

Chelsea Lamb wants to share her knowledge with those who have decided to take on entrepreneurship. She co-created Business Pop to provide insight and advice to those who aspire to succeed in owning a business.

Click Here to Learn More!

Four Things to Consider When Raising Money

To raise money or not to raise money? That is the question. I find that a number of my startup clients want to bring on investors to jump start their business. It’s as if raising money is inevitable. With outside investment, however, comes added responsibility and organizational change. In this article, I am going to discuss four things to consider when raising money. I hope that reading these considerations will help you make the most informed investment decisions for your business.

Dollar Sign & Arrow

Should You Raise Money?

The first thing to consider when raising money is whether you actually need money. In many cases, an entrepreneur can “bootstrap” their way to revenue . For example, a fitness trainer hoping to start an online workout business might host local classes to find their initial subscribers. If enough people enjoy the classes, then the trainer knows that they have an audience and could begin recording workouts for their website. By starting small, the trainer retains control of their idea and can quickly pivot to better serve their customers.  

Is there a Market Opportunity?

All investors want a return on their investment, otherwise known as “ROI”. In order to maximize the ROI, you must demonstrate that there is a large market opportunity for your idea. If there is a small market opportunity, then the ROI is fairly limited. If the ROI is limited, then the investment is riskier. If the investment is riskier, then the investor might want more control over the company to protect their investment, or not invest at all. Conversely, if the market opportunity is large enough, the potential for return is larger giving the investor more confidence that you will grow their investment. Check out my article on establishing a market for your idea to learn more.

Seek Money AND Resources

It’s all about the Benjamins, right? Not necessarily. An investor is worth far more than their checkbook if they bring added resources to the business. These resources could include their business network, prior business experience to inform good decision making, and even potential customers. New business ventures have a high failure rate, so you need all the help you can get to succeed.

Be Realistic

You may have the best idea and all the resources to pull it off, but there is still a chance that it won’t work out. In fact, about 90% of startups fail, 10% of which fail within the first year*. Therefore, it is important to be realistic when raising money. Your grandmother may believe in you more than anyone, but is it worth risking her life savings to launch your idea? Probably not. A seasoned investor, on the other hand, understands these risks and might have a higher tolerance for failure.

There you have it, four things to consider when raising money. Now go out there and raise capital! Or not.

*Startup Genome, “The Global Startup Ecosystem Report 2019” (Accessed March 27, 2021).

The Business Model Canvas

You want to develop a business model and don’t know where to start. My advice is simple. You can’t develop a business model unless you know how to create value for customers. In order to create value for customers, you’ll need certain resources, partners, and activities known as business functions. In this article, I will discuss a great tool for defining those business functions. Introducing the Business Model Canvas! Quick side note, a great way to create value for customers is solving a problem in the marketplace. Check out my post on the Problem Paradigm to learn more!

The Origin of the Business Model Canvas

Alexander Osterwalder, a Swiss entrepreneur, wanted to develop a better way to think about business models. His idea was to create a visual chart describing core business functions that deliver value for customers. By seeing how these business functions work together, entrepreneurs and executives could better define their value proposition and execute accordingly. Enter the Business Model Canvas!

Pictured: The Business Model Canvas. Image by Strategyzer AG

The Elements of the Canvas

The list below describes the nine fundamental elements of a Business Model Canvas.

  1. Customer Segments: Customer Segments are a business’s customers or users.
  2. Value Proposition: Value Propositions are services or products that create value for customers or users.
  3. Customer Relationship: Customer Relationships define how a business engages or maintains their customer segments.
  4. Channels: Channels are touch points at which a business interacts with their customer segments and delivers value.
  5. Revenue Streams: Revenue streams are what customers will pay for a business’s value proposition and how a business captures that revenue.
  6. Resources: Key Resources are the infrastructure to create, deliver, and capture value for customers.
  7. Activities: Key Activities are a business’s relationships, channels, resources, or revenue streams required for value creation.
  8. Partners: Key Partners or suppliers help a business leverage its business model.
  9. Cost Structure: Cost Structure are the costs inherent to maintain or develop a business’s infrastructure.  

Four Levels of the Canvas

Once you understand the elements of a business model canvas, there are four levels for using the it.

  1. The Checklist: The Checklist is simply filling out the boxes according to the nine elements.
  2. The Story: The Story describes all the connections between the boxes.
  3. Pattern Recognition: Pattern Recognition is the connection between different potential business models found in one or several canvasses.
  4. Evolution: Evolution describes how hypotheses on the Canvas evolve into a final business model(s).

There you have it. A new way of looking at business models. Try it out! You never know what you’ll come up with. Thank you, Mr. Osterwalder!

Here are a few great resources for additional information.

The Corporate Transparency Act

The CTA Keeps the Mobsters at Bay

Shell companies, money laundering, financial crimes. Sounds like it’s time to heat up some lasagna and watch “The Godfather”. Today, we’re going to talk about the “Corporate Transparency Act” (the CTA), which was passed by Congress this past January. This article is intended to give a VERY broad overview of the purpose of the CTA and its general impact on business owners. This article does not constitute legal advice. Contact your business attorney immediately for more information on the Corporate Transparency Act and its implications for your business.

“SAY HELLO TO MY LITTLE BLOG!”

The “Lawfather”

The Purpose of the Corporate Transparency Act

The CTA creates reporting requirements for “beneficial owners” of newly formed and existing corporations, LLCs, or other corporate entities. The primary idea is that these disclosures will prevent the bad guys from pulling off the dirty deeds. I guess that means no more trips to the laundry mat.

Who is a “beneficial owner“?

In this section, I am going to discuss who is considered a “beneficial owner” and some common exceptions to the rules. First, a “beneficial owner” is any individual who directly or indirectly exercises substantial control over an entity. Second, a “beneficial owner” is any individual owning or controlling at least 25% of ownership interests of an entity. Your alarm bells start to go off. What about the about the CEO I just hired so I could play golf and enjoy retirement? My children are beneficiaries, do they have to report? What about Uncle Larry who gave us a simple $100,000 loan and doesn’t own any stock in our company?

Before you go into full panic mode, check out the exceptions below.

  • Children. The kids are cool so long as the parents or guardians report information properly.
  • Agents. Individuals acting on behalf of other individuals in the entity.
  • Employees. Employees who exercise substantial control over the entity due to their employment (e.g. the CEO you just hired to live out your golf fantasy).
  • Inheritors. Heirs, beneficiaries, the future of the world, etc.
  • Creditors. Creditors aren’t required to report unless they could be considered beneficial owners (e.g. generous Uncle Larry).

Are any companies exempt from the CTA?

Yes, your company may be exempt from CTA reporting requirements. Whew! Here are some examples of notable exemptions.

  • US-based companies with >20 employees and >$5 million in revenue.
  • Financial institutions that report to federal agencies.
  • Churches, charities, and non-profits.

What do beneficial owners need to report, and how often?

It’s all about the basics (e.g. name, date of birth, current address, passport number, etc.). Beneficial owners are required to report this information every year along with any amendments.

Where do beneficial owners send these reports?

Business owners should report to the Financial Crimes Enforcement Network (otherwise known as FinCEN). FinCEN is a bureau of the U.S. Department of Treasury and is given broad authority to implement and adopt necessary regulations to enforce CTA.

When to file?
  • Forming or registering a new entity? Immediately upon formation or registration.
  • New partners? Immediately upon change of ownership.
  • Existing business with no change in ownership? Must report within two years of January 1, 2021.
Any Penalties?

Violating CTA reporting requirements and unauthorized disclosures are big no-nos and can carry pretty hefty penalties.

  • Civil Penalties for non-reporting. Up to $500 in fines for every day the violation continues.
  • Criminal Penalties for non-reporting. Up to $10,000 in fines and imprisonment for up to two years.
  • Civil Penalties for unauthorized disclosures. Up to $500 in fines for every day the violation continues.
  • Criminal Penalties for unauthorized disclosures. Up to $250,000 in fines and imprisonment for five years.
One Last Note.

Required compliance with CTA doesn’t begin until January 2022. This is when the regulations are officially enacted. For more detailed information about the Corporate Transparency Act, please check out this awesome article from The National Law Review or contact your business attorney.