Frequently Asked Questions
- Should I structure my business as a corporation, a partnership or a proprietorship?
- What is the difference between an audit, a review and a compilation?
- What factors should be considered when planning to start my own business?
- When should I file for an extension for my individual income tax return?
- When should I set up a trust to accumulate funds for financial planning purposes and for my children's education? What types of trusts are available?
- I am in the market for a bank loan. What kinds of information should be included in the business plan I present to bankers?
- What are five good ways to reduce my overall expenses in doing business?
Q: Should I structure my business are a
corporation, a partnership or a proprietorship?
A: The structure of a business depends upon the long and short term
intent of the entrepreneur. For small business owners, the entity of
choice would be an "S" corporation, because of the tax benefits and
shelter from personal liability. However, other types of entities
should be considered depending upon the nature and purpose of the
business and the owner's objective.
See our Newsletter on Starting Your Own Business...
Q: What is the difference between an
audit, a review and a compilation?
A: An audit provides the highest level of assurance. It involves
extensive validation of the financial statements of an organization.
An opinion letter on the financial statements accompanies an audit.
Audits are usually necessary when requested by a third-party (i.e,
potential funding agencies, lending institutions, etc.). Audits can
also be used by management as a means of internal control.
The next level of assurance is a review. A review involves an analysis of the financial statements. Account balances are not reviewed in depth. Trends, comparison of prior year amounts, and ratio analyses are the means most employed in reviews. A letter accompanies a review providing limited assurance on the organization's financial statements.
The lowest level of assurance, a compilation is a gathering of information for financial statement or tax preparation.
Q: What factors should be considered
when planning to start my own business?
A: Starting a business is a serious undertaking. Therefore, many
factors should be considered. The following are some ideas and
suggestions you might want to keep in mind.
- Before considering starting a new business from the ground up, think about searching to see if an existing business is available in your location.
- Always prepare a thorough business plan. You might want to consult with your CPA prior to this undertaking.
- Prepare or have your CPA prepare a detailed personal financial statement. If your personal financial ratios and indexes are not good, you may want to focus on strengthening these prior to venturing out and establishing a business. Remember, a business is an extension of your personal financial life and management capabilities.
- Make sure you select the right and proper entity to operate your business. It might be beneficial to form a corporation rather than operate as a sole proprietor.
Q: When should I file for an extension
for my individual income tax return?
A: The due date for an individual income tax return is on or before
the 15th of the 4th month of the tax year (April 15). To obtain an
extension for filing Form 1040, 1040A, or 1040EZ, you must file an
application (Form 4868) on or before the due date of the tax return.
You must also include a proper estimate of the tax liability that is
due for the year. It must be postmarked no later than April 15,
unless that date is on the weekend. Remember, interest and penalties
accrue on any unpaid taxes from that date until they are paid. Under
certain conditions, you might qualify for an abatement.
Q: When should I set up a trust to
accumulate funds for financial planning purposes and for my
children's education? What types of trusts are available?
A: A trust can be set up at any time. A trust, like a corporation,
limited liability company or limited partnership, is a creature or
fiction of your state's laws. There are many types of trusts
available today. Some commonly established trusts are 2503(c) Trust
(used for educational purposes), Charitable Lead Trust (used to
accumulate money and property) and the Charitable Remainder Trust
(used to donate appreciated property and to eliminate capital gains
tax).
Q: I am in the market for a bank loan.
What kinds of information should be included in the business plan I
present to bankers?
A: A well prepared business plan should include detailed
explanations of the business market, management team, operations,
financial structure and projections, and a source and use statement
explaining the use of the funds to be borrowed.
Q: What are five good ways to reduce my
overall expenses in doing business?
A: It is always good to prepare an annual budget prior to the next
operating year. In doing so, the following areas should by
critically reviewed and evaluated for cost saving opportunities:
- Look to outsource functions that require a high level of expertise and compliance (i.e., payroll services, maintenance and repair functions, computer upgrades, internal audit functions and in some cases billings and collections). These functions should not be a part of the normal day-to-day operations.
- Consider self-insurance for health, life and dental benefit plans. Consider a policy in which individual employees enroll in health, life and dental plans rather than group plans. As always, a careful study should be done in this area.
- When evaluating the need to purchase new equipment or redecorate the office, consider forming internal committees or teams to evaluate the need or plan for such activity and expenditure. Do not always engage the service of an outside "consultant". More often than not, your employees are your best consultants. Save money!
- Utilize e-commerce for bids and purchase of routine and specialty items (i.e., office supplies, furniture, computers, etc.). In many cases, some of the best economical purchases are done interstate. Pending no change in sales use tax laws, such purchases, if purchased interstate are exempt from sales tax. Shipping and handling in many cases are minimal.
- One of the best ways to reduce costs is by offsetting non-operating income against operating costs. A good way to generate non-operating income is to fully utilize excess cash in the bank. Arrange with your bank a "repurchase agreement" (commonly referred to as "Repo" agreement or overnight investment of excess cash in an operating account).
Answers to these questions are meant to be general in nature and must be discussed with your tax, financial and legal advisor before any action is taken.
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