535 Fifth Avenue, 30th Floor
New York, NY 10010
Phone: 212.785.9700

3458 Ocean View Boulevard
Glendale, CA 91208
Phone: 818.634.2276

info@kbl.com

KBL Business Bytes

KBL BUSINESS BYTES

 
 

 

Question:
Spoke to different attorneys about switching my company from a single member LLC to a multiple member LLC or an S Corporation. What's your recommendations on this?

Answer:
One of the purposes of adding a member to your single member LLC is to reduce the chances of an IRS audit. Single member LLCs report their activity on the member's Schedule C on their personal tax returns, showing all of the revenue and expenses of the company.

Schedule C filers have the highest audit rates of all business filers. S corporations and multi member LLCs that file separate business tax returns have IRS audit rates of around 1%. Accordingly, many single member LLCs choose to either become S corporations or add at least one additional member to make their single member LLC a multi member LLC which requires the company to file a separate return for the LLC.

The profits or losses from the LLC then flow through to the members and is represented as single net amounts on one or more lines on the members' tax returns as opposed to showing the entire activity of the company. Thereby making for a rather boring personal return and significantly reducing the risk of audit.

There is no real tax avoidance since the tax under both scenarios is probably about the same in over 95% of the cases.

Moving the single member LLC to an S corporation can be more complex than simply adding a new member depending on how your lawyer handles the transaction. It may require getting a new federal employer identification number for the S corporation which requires setting up new payroll tax filing accounts, bank accounts, and may require that the LLC's contracts be legally moved to the new S corporation. In addition there are federal and state S election request forms that have to be both filed and approved by the IRS and the applicable state taxing authority.

Adding a new member to the LLC results in the entity maintaining its current federal employer identification number, contracts, etc. thereby resulting in no interruption of the company's business affairs. A simple operating agreement should be sufficient to accomplish this.

The important thing to note is that one should give the new member a reasonable amount of equity. One percent may be too little. Five percent or more may be a better way to go.

KBL Business Bytes represents short answers to common questions that we receive from the owners of emerging businesses. The information contained in KBL Business Bytes should not be used in any actual transaction without the advice and guidance of a professional adviser who is familiar with all the relevant facts.

 
 
Logo  
Website www.kbl.com Contact us at info@kbl.com
             
 
Our Areas of Practice
     
  Audit and Assurance
Tax Advisory and Compliance
Business Advisory Services
  Finance & Accounting Outsourcing
Mergers & Acquisitions Advisory
Litigation Consulting & Forensic Accounting
Spacer
Services Provided To
       
  Emerging Businesses
Publicly Held Companies
Fortune 500 Companies
Closely Held Businesses
Global Enterprises
Government & Municipalities
  Not-For-Profit
Sports, Media, & Entertainment
High Net Worth Individuals
Retirement Plans
Family Owned Enterprises
Investment Community
 
 

Question:

Is there a general range of how many multiples of earnings a service company is worth?  I'm hearing between 1.5 and 2 times revenue is very basic and fair usually.

Answer:

It depends first on the industry.   And then the company's subset in the industry. 

So, in the services industry, valuation of an accounting firm is different from a law firm, is different from a technology firm, is different from a medical practice.  If you are a technology firm, then it depends on what type of technology firm.  Are you a software developer?  A service company?  A combination of both? 

Then you should look at quality of earnings.  What percentage of revenue is written off to bad debts?  What percentage is 30, 60, 90, 120 days’ collectible?  What percentage of billings are one time engagements vs ongoing legacy engagements?  What percentage of ongoing legacy engagements are 2 year, 3 year, 5 year, indefinite contract periods?

Then there is the company's debt.  How much debt exists?  What are the debt covenants?  What is current vs non-current?  Then there are the lease terms for the operating lease.  When does the lease expire?  What will future rent be? 

These are just some of the factors that are looked at when coming to a final number.

So, a company may fall into the 1.5 to 3 times revenue bucket based on the industry it is in.  But upon due diligence, when all of the above items are factored in, it may end up settling at 2 times revenue. 

Point being that the industry standard for a company may be, say 1.5 to 3 times revenue.  But that is just a starting point for the conversation.  Once you get through due diligence and factor in the specifics of the company that gets drilled down to a more specific number.  And that factor amount is the basis for valuing that specific company.

KBL Business Bytes represents short answers to common questions that we receive from the owners of emerging businesses. The information contained in KBL Business Bytes should not be used in any actual transaction without the advice and guidance of a professional adviser who is familiar with all the relevant facts.

 
 
 

Question:

I have a home office. What types of expenses are deductible when one has a home office?

Answer :

With more and more people expected to be self-employed and working from home, here are a number of tips to help home-business-owners be sure they were properly calculating home office deductions:

Business Only

TOne of the most important things to be sure of before you try to claim the deduction is that some part of the home has to be exclusively and regularly used as the principal place of business. A mixed-use area, like a kitchen, wii not qualify.

The Simplified Option

Self-employed folks with an office in their home do not need to do a lot of calculations and add up all their home-office-related expenses. The IRS now offers a simplified option based on the size of the office. Under this simplified option you take a standard deduction of $5 per square foot of workspace, up to 300 square feet.

You can go with individual expenses or the simplified option, whichever is larger, and you can change from year to year.

Common Deductions

Some of the business owners heating, electric and utility bills can be deducted, and phone, internet and other information services may also qualify. Separate Internet connections and phone numbers can help keep track of expenses.

An office isnot an office without office supplies -- which is why computers, printers, toner, paper, paper clips, staplers, staples, staple removers and other critical equipment may also qualify. Furniture and upgrades to the home itself, if related to the office, may also be deductible.

Leaving Home

Many of those with home offices will find themselves travelling for business purposes even if its just driving across town to a client. Parking, tolls and mileage (at 54 cents a mile for business-related travel) may all be deductible, to say nothing of airfare and hotel rooms.

Recordkeeping

We recommend keeping expense records for at least three years after filing, or two years after paying taxes, whichever is later. Among the records home-business-owners should be holding onto are cancelled checks, bank statements, vendor invoices, bills, receipts and mileage logs.

More information on having a home office is available in IRS Publication 587.

KBL Business Bytes represents short answers to common questions that we receive from the owners emerging businesses. The information contained in KBL Business Bytes should not be used in any actual transaction without the advice and guidance of a professional adviser who is familiar with all the relevant facts.

 
 
Logo
Website www.kbl.com Contact us at info@kbl.com
         
 
Our Areas of Practice
     
  Audit and Assurance
Tax Advisory and Compliance
Business Advisory Services
  Finance & Accounting Outsourcing
Mergers & Acquisitions Advisory
Litigation Consulting & Forensic Accounting
 
Services Provided To
       
  Emerging Businesses
Publicly Held Companies
Fortune 500 Companies
Closely Held Businesses
Global Enterprises
Government & Municipalities
  Not-For-Profit
Sports, Media, & Entertainment
High Net Worth Individuals
Retirement Plans
Family Owned Enterprises
Investment Community
 
 
 

Question:
We process our sales tax within QuickBooks using their sales tax platform. However, the sales tax payable liability reflected in QuickBooks does not zero out after payment and the sales tax payable liability in QuickBooks keeps increasing.

What are we doing wrong?

Answer:

We have a client that pays sales tax to several states and we set up a system where the QuickBooks sales tax payable balances are reconciled to the sales tax paid and filed monthly. Prior to that it never matched up.

Turns out the reason was that after the sales tax returns were processed there were instances where invoices were entered afterwards into the system for dates prior to the sales tax reporting date.

So for example, let's say that the sales tax due for the period ended June 30 was processed and paid. There were instances that after processing, invoices were then entered into the system that had a date of June 30 and before. Which resulted in an increase in the sales tax payable liability. But because the invoices were reflected June 30 and prior and after the sales tax for that month had been processed they ended up not being reported and not paid to the government subsequently. And the sales tax liability would keep growing for these types of amounts.

Our fix for it was that immediately after the sales tax returns were processed QuickBooks was password closed. This stopped additional processing of invoices prior to the date of closing. Then when the client checked the sales tax payable balance at the end of each period the sales tax payable liability in QuickBooks would zero out.

KBL Business Bytes represents short answers to common questions that we receive from the owners emerging businesses. The information contained in KBL Business Bytes should not be used in any actual transaction without the advice and guidance of a professional adviser who is familiar with all the relevant facts.

 
 
Logo
Website   www.kbl.com Contact us at info@kbl.com
         
 
Our Areas of Practice
     
  Audit and Assurance
Tax Advisory and Compliance
Business Advisory Services
  Finance & Accounting Outsourcing
Mergers & Acquisitions Advisory
Litigation Consulting & Forensic Accounting
 
Services Provided To
       
  Emerging Businesses
Publicly Held Companies
Fortune 500 Companies
Closely Held Businesses
Global Enterprises
Government & Municipalities
  Not-For-Profit
Sports, Media, & Entertainment
High Net Worth Individuals
Retirement Plans
Family Owned Enterprises
Investment Community
 
 
 
 

Question:
I have been invited to invest on a friends and family level with a start-up, and was wondering if anyone could share experience on how to evaluate such an "opportunity".

Answer:
The majority of these financing opportunities result in no return. Unless the company is mature and possibly going public I wouldn't do it. Unless you need a future tax write off and have passive income to offset any losses generated from the investment . My experience in these types of situations is summarized with three words from the movie Forest Gump: "Run Forest, Run".

KBL Business Bytes represents short answers to common questions that we receive from the owners of emerging businesses. The information contained in KBL Business Bytes should not be used in any actual transaction without the advice and guidance of a professional adviser who is familiar with all the relevant facts.

 
 
Logo
Website   www.kbl.com Contact us at info@kbl.com
         
 
Our Areas of Practice
     
  Audit and Assurance
Tax Advisory and Compliance
Business Advisory Services
  Finance & Accounting Outsourcing
Mergers & Acquisitions Advisory
Litigation Consulting & Forensic Accounting
 
Services Provided To
       
  Emerging Businesses
Publicly Held Companies
Fortune 500 Companies
Closely Held Businesses
Global Enterprises
Government & Municipalities
  Not-For-Profit
Sports, Media, & Entertainment
High Net Worth Individuals
Retirement Plans
Family Owned Enterprises
Investment Community