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Accounting and Tax for the Small Business NOVEMBER 8, 2012.

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Presentation on theme: "Accounting and Tax for the Small Business NOVEMBER 8, 2012."— Presentation transcript:

1 Accounting and Tax for the Small Business NOVEMBER 8, 2012

2 LOROFF ENTERPRISES, INC Owner – Maureen Lonien Incorporated in 1986 Accounting, Tax and Special Project Services Registered Tax Return Preparer with the IRS

3 AGENDA Business Structures and Tax Benefits of Each Recordkeeping and Accounting Important Dates 2013 Tax Changes

4 WHY SHOULD YOU INCORPORATE Personal liability is a key reason why its owner may decide to form a corporation When you incorporate, you're creating a completely separate legal entity, one that shoulders the liability burden you had been carrying yourself (or, if you are a partnership, the burden you and the other partners were carrying) As a shareholder of your corporation, your losses would be limited to your investment in the company

5 WHY SHOULD YOU INCORPORATE Forming a corporation allows you to: Reward and retain key staff by giving workers a piece of the business Have more options for raising funds. Instead of going into more debt, you can attract equity investors Shift tax liability away from you to the corporate entity

6 WHY SHOULD YOU INCORPORATE But you'll have to weigh some disadvantages as well: It takes more time and money to incorporate than to form other types of businesses Corporations are subject to more regulation at both the federal and state level The management structure of a corporation is more rigid, giving you, as the owner, less flexibility to run things as you see fit

7 TYPES OF ENTITIES C Corporation – File an annual corporate tax return and are taxed on their profits. There is no personal liability – Typically for large companies – Distributions are taxable to the Shareholder

8 TYPES OF ENTITIES S Corporation – This entity allows for pass through taxation – All of the profits or losses of the company pass through to the shareholders – Limited liability for shareholders

9 TYPES OF ENTITIES LLC and Partnerships – Formed by a business owner or multiple owners – Personally liable for the business debt to the level of their own personal financial investment – Earnings of most members of an LLC are generally subject to self-employment tax – LLC is considered a partnership for Federal income tax purposes

10 TYPES OF ENTITIES Sole Proprietor – Owned and run by one individual – Owner receives all profits - subject to self employment tax – Unlimited liability for all losses and debts

11 Sole Proprietorship vs. C Corporation vs. S Corporation vs. LLC Sole Proprietorship C Corp S Corp Limited Liability Company (LLC) Formation Requirements, Costs None Must file with state, state specific filing fee required. Personal Liability Unlimited liability. Shareholders are not typically held liable. Members are not typically held liable. Administrative Requirements Relatively few requirements. Election of board of directors/officers, annual meetings, and annual report filing requirements. Relatively few requirements. ManagementFull control. Shareholders elect directors who manage business activities. Members can set up structure as they choose. Term Terminated when proprietor ceases doing business or upon death. Perpetual: can extend past death or withdrawal of shareholders. Perpetual, unless state requires fixed amount of time.

12 Sole Proprietorship C Corp S Corp Limited Liability Company (LLC) Taxation Entity not taxable. Sole proprietor pays taxes. Taxed at corporate rate and possible double taxation: Dividends are taxed at the individual level if distributed to shareholders. No tax at the entity level. Income passed through to the shareholders. No tax at the entity level. Income passed through to members. Double TaxationNo Yes, taxed at corporate level and then again if distributed to shareholders in the form of dividends. No Self Employment Tax Subject to self employment tax. Salary subject to self employment tax. Salary subject to self employment tax, but shareholder distributions are not subject to employment tax. Salary subject to self employment tax. Pass Through Tax Treatment YesNoYes Tax Forms1040IRS Form 1120IRS Form 1120S Shareholders get K-1 for personal tax returns. 1 member: sole proprietor IRS Form 1040 - Schedule C Partnership: IRS Form 1065, Members get K-1

13 Sole Proprietorship C Corp S Corp Limited Liability Company (LLC) Transferability of Interest No Shares of stock are easily transferred. Yes, but must observe IRS regulations on who can own stock. Possibly, depending on restrictions outlined in the operating agreement. Capital Raising Individual provides capital. Shares of stock are sold to raise capital (Securities laws apply). Shares of stock are sold to raise capital. Limitations prevent S corp stock ownership by corporations. May sell interests, but subject to operating agreement (Securities laws may also apply). Ease of OperationEasiestMust have annual meetings, Board of Directors meetings, corporate minutes, and stockholder meetings. Easy, some states may require more

14 Recordkeeping and Accounting Keeping records is crucial for the successful management of a business Purpose of a good recordkeeping system is to provide management information to use in operating the business Setting up a basic recordkeeping system

15 Defining your Recordkeeping Chart of Accounts Cash v/s accrual recordkeeping/accounting Reports/journals/schedules Business financial statement checklist

16 IMPORTANT DATES January 31 st W2’s and 1099’s due to employees and sub contractors March 15 th – Corp tax returns due April 15 th – Personal tax return due (includes LLC’s and Partnerships) April 15 th, June 15 th, September 15 th and January 15th – Estimated tax deposits

17 2013 TAX CHANGES Long term Capital Gains and Dividend Tax Rates Mortgage Forgiveness will stay for 2013 Child Tax Credit Itemized deductions Residential Energy Efficient Property Inheritance tax from $5.3m to $1m exclusion


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