Today, we are learning all about trademarks. 

What are trademarks? What are the common trademark misconceptions?

Is it even worth trademarking your name and if so, what are the exact steps you need to take to get a trademark?

Keep reading because in this post, we’re going to uncover everything you need to know about how to trademark your business.

Let’s get right into it. 

What is a Trademark? 

A trademark is a word, logo, phrase, symbol, and/or design that identifies and distinguishes the source of the goods of one party from those of the others. 

Trademarks and issued and managed through the US Patent and Trade Office also called the USPTO.

They are intended to minimize confusion that could happen if two or more businesses have the same name, symbol, slogan, logo, or name. 

Trademark Your Business: Why Register For One? 

You actually are not required to register a trademark to have some legal protection. 

As soon as you begin selling your product or service, you become a trademark owner and can enforce your trademark in court, if necessary.

Simply by using your trademark (your name, your logo, slogan, etc.), you establish rights called common law ownership. 

This might make you wonder why people go through the hassle to register a trademark? Why do you need to trademark your business?

Well, the downside to common law ownership and not registering your trademark is that it only protects you within your geographic region. 

Which leaves your trademark vulnerable and eligible for use outside your region. 

If you open a bakery in New York, common law does not stop someone from opening a bakery with the same name and logo in California.

If you want stronger, nationwide rights, and the ability to sue someone federally for infringement, you want to register your trademark at the Federal level with the US Patent and Trade Office.

Additionally, trademarking your brand allows you to defend your brand against counterfeit products, domain squatters, and give you the freedom to use the Registered symbol with your logo. 

In total, there are 4 legal reasons, called a filling basis, to register a trademark. You are required to specify the basis you choose on your application. 

The two most common bases are:

• Intent-to-use basis

This means your business has not started using your trademark yet. Maybe you haven’t started your business yet but would like to get the application process started.

Note that while you can apply under an intent-to-use basis, your mark will not be registered until you convert the application to one based on the second filling basis – use in commerce. 

• Use in commerce basis

This means you are currently using your trademark while selling or transporting goods and services.

Strong vs Weak Trademarks 

There are actually different types of trademarks, and depending on the type, it may be easier to get your trademark approved or you may be denied completely.  

Let’s explore the different types. 

1. Generic Mark

Generic marks actually do not qualify for a trademark, as they are marks that are words and phrases that are commonly used when conducting business in that industry.

For example, the word “water”.

Water by itself could not be trademarked as it is a common noun that should be able to be used by all businesses who sell water. 

2. Descriptive Mark

Descriptive marks describe a product or its ingredient, quality, characteristic, function, feature, purpose, or use.

An example would be High Definition for TVs.

In general, descriptive marks do not qualify as a trademark unless it becomes so popular and distinguishable that the word becomes a secondary meaning for the brand.

An example of where this has worked is the “Sharp” brand of televisions. 

3. Suggestive Mark

Suggestive marks “suggest” something about the product or service without actually describing the product or service.

Examples include Airbnb or the car company Jaguar. For this reason, suggestive marks generally do qualify for a trademark as they are not common nouns.

Going back to Jaguar as an example, a jaguar suggests speed and sleekness but most people do not think of a car company when they hear the word. 

4. Fanciful Mark

Fanciful marks, also known as coined marks, are words or phrases that did not exist before.

Because of this, Fanciful marks are the easiest types of marks to obtain and offer the widest net of protection.

Nike or Google are amazing examples of a fanciful mark.

5. Arbitrary Mark

An arbitrary mark is a word or phrase that includes a common phrase but not one that is associated with an attribute of the brand.

Think about the term Apple. Though the word is common, it has nothing to do with computers. Arbitrary marks are also easy to obtain. 

Then there is the special category and type of mark called the…

6. Service Mark

A service mark is similar to a trademark but distinguishes businesses that provide services.

Many companies such as Apple or Starbucks will have both a service mark and a trademark as they provide products and services. 

7. Other trademark types

These include:

• Certification marks that show products, services, or goods have met a standard, and
• Collective trademarks that indicate membership in a group or distinguish products and services of members from non-members.

Other Unacceptable Trademarks

Now let’s briefly talk about the things that can not be trademarked!

• Generic trademarks

As mentioned previously, generic trademarks are words or phrases that are used commonly when conducting business in that industry.

As an example, Ben and Jerry’s can’t trademark the word ice cream. 

• Existing trademarks

You are not able to trademark a word or phrase that is already a registered trademark within the same class of products or services.

For example, multiple pizza businesses are not able to register the name Domino’s, but both Domino’s pizza and Domino sugar can trademark the word Domino as they are not in the same class of products and services. 

• Similar unregistered trademarks

Even trademarks not registered are often recognized by the federal government.

Once again, the goal of trademarks is to limit confusion and if another business in your industry or state has the same name, your trademark application can be denied.

Steps On How To Trademark Your Business

Step 1: Determine Approval Eligibility 

Consider the trademark category you are applying for to determining the likelihood that you will be granted a trademark.

In general, marks that are unique and descriptive have the best chances.

The last thing you want to do is spend the time and money on the application only to be denied or not have the protection you hoped for.

Speaking of money, if you want to learn how to start a business without money or how to raise money for a new business, then you can check out these posts next.

Step 2: Perform a Search

You will first want to search through the Trademark Electronic Search System (TESS) and review current trademarks to make sure your name or logo is not already trademarked.

Or there is not another that is extremely similar to yours. If it is, your application will likely be denied. 

Step 3: Apply For A Trademark

Once you are sure a similar trademark is not already registered, it is time for you to apply for a trademark. 

If using the Use in Commerce basis, the trademark application will have 5 requirements that must be met: 

1. The following statement:  “The mark is in use in commerce and was in use in commerce as of the application filing date;”
2. The date of first use of your mark anywhere on the goods or in connection with the services;
3. The date of first use of your mark in commerce on the goods or in connection with the services; 
4. One “specimen” or proof for each class showing how you use the mark in commerce with the goods and/or services, and the following statement:  “The specimen was in use in commerce at least as early as the application filing date;” and
5. Verification, in an affidavit or a signed declaration that the statements made, are true.

If using the Intent-to-use basis, it is a requirement that the trademark application must include a statement, verified with an affidavit or signed declaration that the 

The applicant has a bona fide intention to use the mark in commerce and had a bona fide intention to use the mark in commerce as of the application filing date.

If you’d like a complete breakdown of the entire application process, you can visit this USPTO web address here: https://www.uspto.gov/trademarks/basics/teas-nuts-and-bolts-videos

Step 4: Check the Application Status

Once you apply, you are able to check the status of your application by using the Trademark Status and Document Retrieval (TSDR) system. 

It typically takes between 6 – 16 months for approval, so it is best to check on the status of your application at least every 3 months. 

Well, there you have it, how to trademark your business!

If you need more guidance with your business finances or taxes, then head over to our CFO services and small business CPA tax services now.

The post How To Trademark Your Business Name & Logo appeared first on Small Business Accounting & Finance Blog.

Today, we are going to talk about how to pay yourself as a sole proprietor.

If you are a sole proprietor, or in other words, you are doing business and have not formally incorporated into an LLC, Corporation, or Partnership, then you are a Sole Proprietor.

And guess what, today’s episode is all about you.

Today, we’re going to walk you through, step-by-step, how to pay yourself as a sole proprietor.

We’re going to explain:

• Who is a sole proprietor?
• How sole proprietors pay taxes?
• How much to pay yourself as a sole proprietor?

And if you stick to the end, we will give you our framework for how sole proprietors should be paid.

So let’s begin!

What is a Sole Proprietor?

A sole proprietor is simply someone who owns an unincorporated business. So if you…

• earn money,
• you are not employed, and
• you haven’t registered as an entity with your state

…you are a sole proprietor.

So let’s say you wake up and decide to cut your neighbor’s yard in exchange for money, then the moment you get paid, you are a sole proprietor.

And if you’re wondering if that money is taxable, well you bet it is!

According to the IRS, all income received is considered taxable.

So let’s talk about how sole proprietors pay taxes.

For tax purposes, sole proprietors are considered disregarded entities.

All this means is that you do not have to file a business tax return when you file your taxes. Instead, you will file a Schedule C when you file your personal tax return.

This is good news because business tax returns are generally more expensive and have to be filed earlier.

Normally the deadline for filing a business return is March 15th, and personal deadlines are April 15th. Check out this post on tax season 2021 new update to learn more about these deadlines.

So as a sole proprietor, you get an extra month to file your taxes.

What Taxes Do You Have to Pay as a Sole Proprietor?

Generally, the main taxes are Federal income taxes, State taxes, and the big-ugly-fat 15.3% self-employment tax on your income.

By the way, you can limit self-employment tax exposure by incorporating it into an S-Corporation. 

Now, of course, you pay these taxes on your income, but what exactly is income when you’re operating as a sole proprietor?

A lot of people get this wrong so allow us to explain.

Your income is simply the amount of money your business earns, minus all tax-deductible expenses (or deductions) you can take.

Generally, it is your net profits from the business you’re operating.

Many people get this confused with the money they pay themselves from their business.

You are not taxed on the money you take out of your business.

So if your business earned $100,000 in profits, and you did not take a penny out of that business. Guess what? You’re going to pay taxes on the full $100,000.

Fair enough. Well then, you might think that the money you pay yourself from your business is tax-deductible.

So if you paid yourself $50,000 out of the $100,000, then that would mean that you should only be taxed on the remaining $50,000 right?

Wrong. The money you pay yourself is not tax-deductible. You do not subtract the money you pay yourself from your business from its income.

You are not an employee of the business, therefore in the eyes of the IRS, all the money the business makes is yours.

You are also not a 1099 contractor in your business. Your customers might issue you 1099, but that just means you are a vendor of their business.

They’re just writing you off as an expense to their business.

But you are not an expense in your own business, so when you file your taxes, you can’t deduct yourself.

Therefore, the transfers you make between yourself and the business are completely irrelevant for tax purposes.

So again, business revenue minus tax-deductible expenses equals your taxable income.

And that’s the tax-side in a nutshell.

You earn money. You deduct your expenses. And you’re taxed on the rest.

The only other tax piece is that, technically, you should pay your estimated taxes on a quarterly basis.

So let’s say you owed $10,000 in taxes last year, you’d simply divide this amount by 4, and pay $2500 each quarter.

As long as you pay 100% of what you paid last year in taxes on a quarterly basis, then you don’t have to worry about paying any penalties.

Or, if you pay 90% of what your tax liability will be this year, then you are also safe.

But to us, this is a little more tedious to keep up with as numbers fluctuate, so we prefer just paying 100% of our tax liability last year on a quarterly basis.

However, if you expect to earn much less in this tax year than you did in a prior tax year, then it might make sense to pay 90% of what you think you’ll owe this year.

That way you don’t have to put yourself in a position where you’re giving the IRS way too much money.

So as long as you understand that side of things, then you are pretty much covered on the tax side.

Now let’s discuss how to pay yourself in a sole proprietorship. Here are the steps you should take.

Steps on How to Pay Yourself as a Sole Proprietor

Step 1: Operate out of a business bank account

This is business 101. You do not want to commingle your business funds with your personal funds.

It’s going to make bookkeeping and finding tax deductions a nightmare. Furthermore, it can also complicate things if you get audited by the IRS.

Somehow they are going to have to make sense of the things you claimed for tax purposes, and if this is not clear, you can get into some serious trouble.

Step 2: Transfer money from your business bank account to your personal account

You can write yourself a check. You can wire funds to yourself. Or, you can go to the bank and just take out cash.

Remember, the money you pay yourself is your business. Your taxes are going to based on the business’s overall profits, not how much you pay yourself.

But does this mean you should take all of the business profits to pay yourself?

No, so let’s move on to step 3.

Step 3: Pay yourself, but don’t hurt your business

A lot of sole proprietors make the mistake of paying themselves too much.

They don’t leave enough money in their business, and then they find themselves going into debt to fund their operations, or just going out of business all together.

A lot of times it’s because they’re taking too much money out of your business.

You need to think about cash like fuel. If you run out of cash, you’re on E. The game is over.

You want to keep enough fuel in your business so you can make it to where you’re trying to take it.

So here is our framework to make sure this happens. And it doesn’t involve creating 7 different bank accounts or some of this other stuff we’re seeing out here.

Rule #1: Leave 3-months of operating expenses in your business.

This is your safety net.

If you always leave 3-months of operating expenses in your business, then you will be able to stomach any sudden or unexpected expenses that may come up.

Rule #2: Put aside money to pay your estimated taxes

Your taxes are not optional. Don’t be that person at tax time who does not have the money to pay their tax bill, because you’re driving it or spent it on a vacation.

Put yourself on a schedule to pay your estimated quarterly taxes. And also leave that amount in your business.

Rule #3: Put aside money to reinvest in your business

If your goal is to grow your business, then chances are that it is going to cost you some money to do this. This is especially true if you want to grow your business quickly.

So whether that’s upgrading your equipment, hiring employees to help you, or developing some type of software or process, be sure to leave this dollar amount in your business.

Rule #4: Pay yourself everything that is left

If you have money set aside for the first 3 things, then go ahead and rob the bank of everything that is leftover. It’s your money. You earned it.

And most importantly, you can have peace of mind in not worrying about Uncle Sam or your ability to pay your bills on time.

Now if you need some help with your taxes as a Sole Proprietor, work with our CPA tax services today.

Contact us at 470-240-1437 to schedule a meeting.

The post How to Pay Yourself as a Sole Proprietor appeared first on Small Business Accounting & Finance Blog.

You want to know how to write an LLC operating agreement and we’re going to walk you through how to do it step-by-step.

Starting right about…now!

A quick disclaimer that this is not legal advice, and you should get your operating agreement checked by an attorney of your choice.

What is an Operating Agreement?

An Operating Agreement is a legally binding document that outlines in detail the rights and responsibilities of the members of the LLC and how the business will operate.

Some states don’t require you to have an Operating Agreement but we suggest you always create one to minimize any misunderstandings and disputes.

Why is it Important?

Operating agreements, make it very clear how the business will operate and can be referenced later in times of uncertainty such as:

• member withdrawal,
• equity and distribution split,
• signing of contracts,
• member death,

…and more.

If you do not have an Operating Agreement, the default LLC rules of your State will apply which may differ from what you have in mind for your business.

How to Create Your Business’ Operating Agreement

So now that we understand what an operating agreement is and its importance, let’s walk through a template to help you write one for your company.

This will be a good starting point for your own operating agreement as it includes most, if not all, clauses recommended in most agreements.

If you want to learn (you probably do!) how to write your own Operating Agreement, then scroll up as we shared a walk-through guide in the video at the top of this post.

If things change in the future or you want to add-on to your operating agreement, you’ll be happy to know that Operating Agreements can be amended, if every member agrees and signs the amendment.

However, we would definitely get the agreement looked at by an attorney just in case you miss something specific to your type of business and/or State.

Wrapping Up

So if you have an LLC, or are thinking of establishing one, you might want to learn more about it. If you do, then check out these posts next:

• LLC Costs
• Tax Write-offs for LLC
• Disadvantages of LLC

And if you need help with your business taxes, accounting, or financial management, give us a call today. We’d be happy to help you!

The post LLC Operating Agreement: How to Write One For Your Business appeared first on Small Business Accounting & Finance Blog.

How to pay yourself in an S-Corporation?

According to the IRS, you need to pay yourself a reasonable salary.

But what in the world is a reasonable salary?

And shouldn’t you want to pay yourself the highest salary possible?

Like, why is this a thing?

Well, it’s a thing because by paying yourself a very low salary in an S-Corporation, you are effectively lowering the amount of taxes you pay.

And then, on the backend, you can pay yourself with distribution and not pay self-employment taxes because S-Corporations don’t have to pay them anyway.

So read till the end to learn the rules and stipulations regarding how to pay yourself in an S-Corporation.

In today’s post, we are going to fully explain how to pay yourself in an S-Corporation.

S-Corporations became a popular tax status because you do not have to pay self-employment taxes on its earnings, so long as you pay yourself a reasonable salary.

So let’s break this all the way down to make sure you understand this if you go this route.

What is an S-Corporation?

Let’s start by telling you what it is not.

An S-Corporation is not a legal entity.

When you form your business with your state, there is not an option for “S-Corporation”. You might be able to choose a partnership, LLC, or C-Corporation though.

An S-Corporation is a tax entity. We like to think of it as a tax status.

Why Elect an S-Corp Status?

Entities like LLCs and C-Corporations have the option to elect to be treated as an S-Corporation for tax purposes.

For example, a C-Corporation might choose to be treated as an S-Corporation to avoid double taxation, because they are taxed on both – a business and individual level.

While an S-Corporation is only taxed once on the individual level.

On the other hand, an LLC might choose S-Corp status to avoid self-employment taxes, because self-employment taxes do not apply to corporations.

Meanwhile, self-employment taxes do apply to all other pass-through entities, like sole proprietors, partnerships, and limited liability companies.

So by electing to be treated as an S-Corporation for tax purposes, you can limit your tax exposure and put that money in other places.

With that said, how should you pay yourself as an S-Corporation?

How to Pay Yourself in an S-Corporation

According to the IRS:

S-Corporations must pay reasonable compensation to a shareholder-employee, which is basically a shareholder who works in the business.

They go on to say that this compensation must be paid before non-wage distributions may be made to the shareholder-employee.

So basically, before you pay yourself or your partners a distribution of profits, you should be taking a reasonable wage from the business.

And for these wages, you will need to set up a payroll system to pay yourself through.

This is because the wage you pay yourself is subject to payroll taxes, like medicare, social security, state taxes, and individual taxes.

And although self-employment taxes are not assessed on S-Corporations, medicare and social security taxes are basically what self-employment taxes are for.

So in some sense, you are paying some type of “self-employment tax” if you are paying medicare and social security taxes.

But the good news is that you do not have to pay self-employment taxes on the business income. You’re only paying these taxes as wages.

For example, if your business made $150,000 in profit, and you paid yourself $50,000 in wages, then you would only pay social security and medicare taxes on the $50,000 you paid yourself in wages.

The remaining $100,000 would just be subject to federal and state income taxes.

So by electing S-Corp status, you would avoid a 15.3% tax on a big portion of your income.

But while the tax savings are pretty clear, what is not as clear is the whole “reasonable compensation” part.

What is Reasonable Compensation

This is what trips up most people in an S-corporation. They either pay themselves too little, or don’t pay themselves at all and just take distributions from their business.

This isn’t a surprise though. The guidance by the IRS is very gray when it likely should be black and white.

The IRS does not provide an exact amount or percentage of how much you should pay yourself in an S-Corporation, but they do give you some factors to consider.

Like the person’s training and experience, time devoted to the business, or what comparable businesses pay for similar services that the shareholder-employee provides.

So basically, consider how much you would pay an employee to perform the exact same job responsibilities that you perform.

For example, if you’re the CEO of your company, how much would you pay to hire someone as the CEO to run your business?

Considering that some CEOs make as little as $100,000 per year and some make as much as $50,000,000 per year, this might concern you.

But keep in mind that everything is relative to your company. The IRS is looking at the source of the gross receipts of your company.

In other words, your compensation should be reasonable considering the revenue your company makes and the portion of it that can be directly attributed to you.

The IRS says that payments should be classified as wages to the extent that gross receipts are generated by the shareholder’s personal services.

This might sound really good, but if you’re sitting there reading this post and really trying to figure this out, you might still be a little unclear on this.

So after reviewing some court cases and talking to other CPAs on this, let us give you a general rule of thumb to follow.

In general, reasonable compensation for a shareholder is about ⅓ of the net profits.

So if the business earns $100,000 after expenses, then a $30,000 salary may be considered reasonable.

Or a $100,000 salary if the business earns $300,000 in profits after expenses.

This, of course, may be modified based on your unique circumstances.

For example, if you’re only working in the business part-time, then perhaps you are really responsible for generating the gross revenue the company makes.

In this case, you might rationalize a lower salary to take as wages.

On the other hand, if you have no employees and literally run every aspect of the business…

…from sales to marketing to the delivery of your products and services, then you might take a slightly higher salary.

But ultimately, the general rule of thumb that almost every CPA we’ve talked to has been ⅓ of net income.

What do you think a reasonable salary is? Let us know in the comments below.

By the way, if you’re looking for reliable accountants to handle your business payroll, then check out our outsourced accounting services here.

We can take care of that, and more for your business. Contact us now!

The post How to Pay Yourself in an S-Corporation | What is Reasonable Compensation? appeared first on Small Business Accounting & Finance Blog.

So you decided to move forward with your business idea…

Whether that’s selling products online, being a consultant, investing in real estate, or being a 1099 contractor.

You decided that becoming an LLC was the best option.

That way, you have limited liability in case someone decides to sue your business.

And, your personal assets are not in jeopardy.

But what are the costs associated with starting an LLC?

If you’ve done any research into it, you’ve probably seen a lot of different fees and may not be 100% sure which are necessary

So today, we will go over LLC costs – the necessary costs of starting one and the costs that you can avoid.

But before anything else, let me mention that by no means are we giving you legal or financial advice as this post is for informational purposes only.

With that said, we’ll be sharing the costs associated with starting an LLC and some costs you can completely avoid.

Let’s jump right into it.

Costs #1: State filing fees

This is a necessary cost for your LLC as every state has its own filing fee.

In Arizona, it’s $50, Nevada $75, Georgia $100, New Jersey $125, and in Alabama, it’s $200.

As you can see, the fees generally range between $50 to $200, which is the case for nearly all 50 states.

The only outlier is Massachusetts who has an LLC filing fee of $500.

So what do the filing fees cover?

In most cases, the filing fee covers the costs of filing your articles of organization with the state.

Some business owners may want their articles of organization to be prepared by a lawyer.

In which case, you can expect to pay anywhere between $1,000 to $2,000.

Of course, there’s always a DIY option, but you run the risk of errors.

The articles of organization generally include:

• LLC name
• LLC’s address
• Registered agent name and address
• How the LLC will be operated and managed
• Statement of purpose

If you’re confident you can file this information correctly with your state, then you certainly can. It is NOT legally required that a lawyer prepare this for you.

So if you want to save $1-2,000, it’s completely possible for you to do so.

Costs #2: Annual maintenance fees

Once you register your LLC, there’s going to be an annual maintenance fee you have to pay to the state to keep your LLC active.

Similar to the filing fees, it varies by state but generally ranges from $20 to $300.

There are some more expensive states like Rhode Island with an annual fee of $450 or California being the highest of them at $800 per year in annual LLC fees.

Usually, you have to submit some kind of annual report with your annual fees indicating if any changes to the business have occurred.

Again, you could pay someone else to do this, but for the majority of you, this could be something you do on your own.

Unnecessary LLC Costs

Where we see LLC owners waste time and money, is registering their LLC in a different state from where they live.

Which we get since states like Michigan or Iowa have really low filing and annual fees.

However, if you register your LLC in a state different than the state you live in, you’ll be considered a ‘foreign LLC’ in your resident state.

As a foreign LLC, you’ll have to file a certificate of authority and pay registration fees.

And depending on the state, you may also have to pay state franchise taxes.

All of this is in addition to the filing and annual fees you’ll have to pay in the state in which the LLC is registered.

Unless you are a special case, it’s generally best to register your LLC in the state you live to save those additional costs.

LLC Costs #3: Publish a notice of formation

When you do file your LLC, there are some states like New York and Nebraska that require new LLCs to publish a notice of their formation in a newspaper.

Usually, the ad must run for a certain time period which can be costly and could cost you over $1000 in NYC.

Optional LLC Costs

So we’ve gone over the required costs in forming your LLC but there are some optional costs to consider.

1. Registered agent fees

If you recall, when you file your articles of organization, you have to include your registered agent’s name and address.

You can be your own registered agent but you may find it beneficial to pass this responsibility off to another organization.

A registered agent is a person or business that will receive legal and other documents on behalf of your business such as tax notices or subpoenas.

If you’re a business owner who travels a lot, or has off-site meetings, or just generally not around during regular business hours, Monday through Friday, it would be wise to hire an outside party to be your registered agent.

Also having an outside registered agent gives you some level of privacy.

Registered agent information is a public record that could be of concern if you have a home-based business.

To hire a registered agent will cost anywhere from $50 to $500 per year, and varies between companies.

2. Lawyer’s fee

Going back to the costs of hiring a lawyer. Usually, the lawyer’s fee will include other services besides just registering your LLC with the state.

Like applying for your EIN, setting up your bank account, or even being your registered agent.

However, you should know that it is completely free to get your EIN from the IRS by applying for it on their website.

The EIN is usually available within 24 to 48 hours.

You also don’t need to pay anyone to set up your bank account as we’re sure you’ve already set up a personal account on your own and your input is already needed to complete that anyway.

But some people are just not fully comfortable with performing these tasks and if that’s you, hiring a lawyer to help along the way is not a bad decision.

Though not required in forming your LLC is having an operating agreement, lawyers can assist with this as well, or you can find a template online for $100-$200

The only issue with these templates is that they may not directly speak to the operational details of your particular business.

So it is important to have an operating agreement that is catered to your business.

Other fees you may come across but are not completely necessary are

3. LLC name research fees

You can actually look up LLC names on your state secretary of state website and see if your LLC name is available.

4. LLC kit and seal

This is just a binder that holds your company documents and a seal used to emboss LLC documents.

If you use a third-party site to start your LLC, you may see them try to upsell you on this but it’s just not necessary.

5. Rush fees

Usually, when you first file your LLC, it takes about 10-14 days to be approved. The state will offer a ‘rush’ option for an extra fee.

This is completely unnecessary. Though if you are needing the LLC as soon as possible to execute a contract then this is a good option for you.

Conclusion

That’s it for today’s post! Hopefully, you understand now what fees are required and not required to start your LLC.

If you want to learn more about LLC before you start one, we have several posts you can read next such as:

• LLC vs S-Corp,
• Tax benefits of LLC, and
• Disadvantages of LLC.

And if you need more help with choosing the best business entity for you, contact us today.

Our expert accounting consultants will be happy to help!

The post LLC Costs: How Much Does it Really Cost to Start an LLC in 2021? appeared first on Small Business Accounting & Finance Blog.

Today’s post is all about how to pay yourself as an LLC.

Here at LYFE Accounting, not only do we help people pay themselves correctly as an LLC…

…but we’ve also started one of the fastest-growing LLCs according to Inc Magazine and the financial times in 2021.

So now, we want to walk you through how we pay ourselves as LLC owners, and how we advise our clients to pay themselves through an LLC.

Alright, so you are living the dream. You work for yourself, your business is earning money, and now it’s time to make some decisions – how do you pay yourself?

If you pay yourself too much, you might risk putting your business in a bad financial situation.

If you pay yourself too little, you might be overwhelmed by all of the taxes you owe as an LLC.

And speaking of taxes, how exactly does that work when you pay yourself? Should it be deducted from your paycheck, paid quarterly at tax time, or what?

If this is you, then stick around until the end because we are going to cover everything you need to know about both – the financial aspects of paying yourself and the tax side.

So let’s begin!

How to Pay Yourself as an LLC

You’ve probably heard of several ways of paying yourself from your business – like dividends, distributions, draws, W-2 wages, and so much more.

As an LLC, the best way to pay yourself is through an owner’s distribution, which is also known as an owner’s draw.

Think of an owner’s distribution as a transfer of money. You are simply transferring money from your business to your personal bank account.

You can literally write yourself a check, go to the bank, or simply wire funds from your business bank account directly to your personal bank account to pay yourself.

You don’t need to worry about setting up payroll accounts, withholding taxes, or anything like that, unless you are electing to be taxed as an S-Corporation.

How Taxes Work for LLC Pay

As the owner of an LLC, you are a shareholder, not an employee. Because of this, you do not have to pay yourself W-2 wages. Only employees are paid wages.

When you are an employee, taxes are automatically deducted from your paychecks before it hits your bank account.

But when you own an LLC, your taxes are not automatically deducted from your distributions.

In fact, your LLC taxes have absolutely nothing to do with how much you pay yourself from your business.

LLC taxes are based on the business’s taxable income.

This is simply revenue minus expenses. Or in other words, the money the business earns minus the business expenses it incurs.

As the owner of an LLC, your taxable income is based on what you own.

If you own 100% of the LLC, then 100% of the business income would be reflected as your individual income when you file your taxes.

Because you own the company, none of the distributions you pay yourself are tax-deductible.

You see, technically, LLCs are what are referred to as “pass-through entities”.

This means that the business’s taxable income is allocated directly to the owners, to pay on their individual tax return.

Basically, in the eyes of the IRS, the business’s income is your income.

For example, if your business earns $100,000 in taxable income, but you only pay yourself $10,000, you are still going to pay taxes on the full $100,000 that you earned.

We can’t tell you the number of times that we have had people tell us that their tax bill was wrong because they only paid themself X or Y from their business.

The IRS does not care how much money you pay yourself from your LLC.

That’s your business. Literally.

The IRS is looking at the income your business reports, and you report that income like it’s your own when tax time comes around.

Generally speaking, you will pay…

• federal income taxes,
• state income taxes, and
• self-employment taxes

…on the amount you report.

However, if you elect S-corp status, you can potentially limit the amount of self-employment taxes you pay.

How Much Should You Pay Yourself From Your LLC?

Because you’re taxed on all of your business income, you might think that it’s best to go ahead and pay yourself 100% of your business income since you’ll be taxed on it.

But it’s not so simple.

You have to think about what your business needs. And you should also plan to pay your estimated taxes.

So let’s talk about it.

First and foremost, let’s be clear – cash is the lifeline of your business. It’s the blood and heartbeat of your business. And if you starve your business of it, you will die.

This is a fact. 90% of businesses fail because they run out of cash.

Think of cash like fuel, the less cash your business has in the tank, the shorter the distance it can go.

And too many times, business owners take so much cash out of their business, that they don’t even leave enough to pay their expenses.

Like seriously, we’ve seen businesses pay themselves a ton of money and not have enough money left in the payroll to even pay their employees.

That aside, you’re also draining your business potential when you take too much cash out of your business.

Some of the fastest-growing companies grew quickly because they consistently re-invested capital into their business.

For example, a lot of people don’t know this but Amazon, which is now one of the largest businesses in the world, was technically “unprofitable” for the first 14-years of their business.

And it wasn’t due to poor budgeting or expense management.

They were consciously re-investing into their business.

So as a result, they grew exponentially faster than anyone could have imagined, have revolutionized their industry, and is now one of the largest companies in the world.

Jeff Bezos could have easily been greedy in his early years, but he wasn’t. And now, greedy people envy his success.

Anyway, our point here is that before you consider taking a dime out of your business…

…you need to make sure that your expenses will be covered, and that you’re not starving your strategic goals which require money to grow your business.

Now that that’s out of the way, these are the steps we take when paying ourselves from our LLC, and what we recommend for any other business.

Steps You Need to Take When Paying Yourself as an LLC

1. You should have at least 3 months of operating expenses in cash.

This will provide you security and peace of mind that your business can stomach any unexpected losses and stay afloat.

So if you lose your biggest customers, or the economy crashes, you weather that storm with this reserve.

2. You should set money aside to reach your strategic business goals.

Whether that’s more marketing, new products, buying new technology, or simply investing in your existing products or services to increase your satisfaction.

Whatever it is, set the dollar amount that you will invest in it, and leave that in cash.

3. You should set money aside to pay your estimated quarterly taxes.

You should pay at least 90% of what you estimate you will owe in the current tax year on a quarterly basis or 100% of the prior year’s liability.

Finally, you can pay yourself all that is left in your business.

Any excess cash can be paid to you in a distribution or divided amongst your partners according to your respective equity in the business.

Now if you want to make sure your LLC taxes are on the right track, then we can help you with that.

Check out our tax planning and tax preparation services here.

The post How to Pay Yourself As An LLC – CPA Explains the #1 Method appeared first on Small Business Accounting & Finance Blog.

In this post, we want to provide you with some more clarity on CPA services.

Now, CPAs can provide a number of services to small businesses.

But no other professional can provide all of the services that CPAs provide.

So then… what are CPA services? And what makes them so complicated?

Today, we’re going to break this all the way down.

What are CPA Services?

CPA services are accounting services that are provided by a Certified Public Accountant, also known as a CPA.

What is a CPA? CPAs are individuals that passed the hardest professional exam in the world while meeting rigorous educational and experience requirements.

Most CPAs have Master’s Degrees in Business or Accounting with at least a few years of experience under a CPA.

Now let’s take a look at some specific CPA services.

We’re going to break down CPA services into 2 categories – services that ONLY CPAs can provide and services that CPAs are best to provide.

1. Services That Only CPAs Can Provide

CPA accounting services most commonly include compilations, reviews, audits of financial information, and certain tax services.

• Compilations

Compilations are basically financial statements that are prepared by an outside accountant.

So for example, if you’re self-employed and are applying for a loan, the lender might require you to see financial statements that are prepared by a CPA.

• Reviews

Reviews are where a CPA merely reviews financial statements for accuracy.

So if you prepared your own financial statements, for example, you might hire a CPA to review your financial statements for accuracy.

The CPA would then be required by law to provide you with a limited assurance that your financial statements are accurate, and if it’s not, disclose it in their report.

• Audits

Audits are services where CPAs are required to audit your financial information in accordance with accounting and auditing standards set by the government.

It is the highest level of assurance that a CPA can provide.

The CPA must apply certain procedures to test for the accuracy, completeness, and existence of certain financial information to ensure that there is no fraud or material mistakes.

Audits are commonly performed for nonprofit organizations, publicly traded companies, as well as small businesses that may be applying for business funding or grants.

• Tax Services 

And lastly, there are very specific tax services that CPAs can provide that other financial professionals cannot unless you’re a tax attorney.

For example, a lot of people do not know this but CPAs can represent you in court in a tax matter with the IRS.

That’s how powerful the CPA designation is.

So those are services that ONLY CPAs can do for the most part.

Basically, the gist here is that if you want to make sure that your financial information is correct, hire a CPA.

And if you want the best tax advisor for your business, hire a CPA.

But there are other services that CPAs can provide that are not limited to their profession, but their credentials make them the most qualified for.

So let’s get into the services that CPAs are best at providing.

2. Services That CPAs Are Best To Provide

CPAs are best at providing… almost ALL accounting services,

Seriously, CPAs were tested on all facets of accounting including:

• bookkeeping,
• tax preparation,
• tax planning,
• budgeting,
• pricing,

…and even more technical stuff that we’re sure you’re not interested in.

They know the rules of accounting and can act as a trusted advisor to help you plan for taxes, manage your finances, and overcome business challenges that you’ve never experienced before.

But does this mean you need a CPA to do your bookkeeping?

Well, not necessarily. CPAs can be quite expensive, and you may not need to pay a CPA $150/hour to do more tedious work.

For example, at LYFE Accounting, you may speak to one of our CPAs.

But to offer you the best price, we hire bookkeepers to perform much of the bookkeeping work for our clients, giving you the best of both worlds at the lowest price possible.

How Does a CPA Differ From a Bookkeeper, Tax Preparer and Accountant?

• Bookkeeper

A bookkeeper is someone who keeps track of your business income and expenses throughout the year to generate financial reports.

They basically record all financial transactions that occurred in the past. Hence, the name, book-keeping.

• Tax Preparer

A tax preparer is someone who is qualified to file your tax returns.

This person accepts no responsibility for the accuracy of your tax return, as they are simply taking the financial information you provide and filing it with the IRS.

So for your business, your tax preparer would take the books that your bookkeeper prepared to file your taxes.

And if that financial information is wrong, it can be costly. This is why it is very important to make sure you hire the right person to do both, your bookkeeping and your taxes.

• Accountant

An accountant is a broad term but they could also do your bookkeeping, taxes, and more advanced accounting items.

Accountants typically have a degree in accounting, which means they can do more big-picture stuff for your business.

For example, accountants might handle complex transactions that your bookkeeper may not know how to do.

• CPA

And then there’s the CPA – the highest level in the accounting profession.

CPAs are required by law to keep up with accounting changes, tax laws, and other continuing education requirements to maintain their license.

Therefore, they can provide you with the highest level of assurance and guidance for your business.

Do You Need a CPA?

Here are some questions you should ask yourself to determine this:

• Have you read the tax code?
• Do you keep up with changes in the tax code?
• Are you 100% certain that your business entity is the best entity to save on your taxes?
• Do you have a budget?
• Is your budget working for you? Are you profitable?
• Are you sure your employees are classified correctly?
• Do you understand your financial statements?
• Do you have enough time to take care of all these accounting duties?
• And if so, is it worth your time?

In our experience, it’s always good to have a CPA in your corner when needed.

As you run your business, you will encounter challenges and a CPA can not only help you with those challenges, but they can give you the financial advice you can rely on.

With that said, let’s go ahead and wrap up today’s post.

Wrapping Up

Today, we discussed CPA services and what they are.

Again, CPA services are just accounting services provided by a Certified Public Accountant.

Then we discussed the types of CPA services.

There are some that only CPAs can and should do, like compilations, reviews, and audits.

But there are others that CPAs are really good at providing.

Since they are fully trained on all accounting principles required by law, they are more likely to provide the highest level of quality for most accounting services.

And if you need help from reliable and credible CPAs, LYFE Accounting got your back. We have CPA consultants and offer CPA services so don’t hesitate to contact us today!

The post What are CPA Services? And What Kind of Business Needs a CPA? appeared first on Small Business Accounting & Finance Blog.

What is a CPA?

And more importantly, what does a CPA actually do?

In this post, you’ll find the best answer to these two questions.

Today we’re talking about three letters: C-P-A.

What is it? Why does it matter? And who needs one?

Let’s begin.

What is a CPA?

A CPA is a Certified Public Accountant. And by the way, an accountant is someone who is responsible for recording and interpreting financial information.

CPAs are in the top-tier of accountants. There is no higher designation in the finance or accounting industry than the CPA license.

CPAs are trusted advisors that help businesses with all sorts of business matters, which ultimately have financial implications.

In order to become licensed as a CPA, you must pass rigorous requirements.

First, you have to meet educational requirements.

Most CPAs have Master’s Degrees or at least 150 credit hours.

But that’s actually the easy part.

The hard part is that you have to pass the hardest professional exam that exists, literally. 

It’s so hard that only 50% of people pass all parts of the exam on their first attempt.

And there are people with Master’s Degrees in accounting failing this exam with flying colors.

Then lastly, you have to meet certain experience requirements.

These requirements vary based on the state, but you basically have to work in the accounting profession for a period of time to obtain your certification.

According to the US Bureau of Labor Statistics, there are:

over 1.4 million accountants in the US,

over 1.5 million bookkeepers,

and at least 1.2 million taxpayers.

And how many CPAs are there? Just 600,000.

That’s less than 15% of accounting professionals.

So in short, CPAs are in high demand – especially for small businesses.

There are 2 things every business needs – a good lawyer and a damn good CPA.

What Does a Certified Public Accountant Do?

In one word – business.

Since accounting is the language of business, CPAs help businesses conduct themselves by analyzing and interpreting underlying numbers.

But let’s break this down. Let’s talk about what most people think of when they hear the letters “CPA”.

The role of a CPA largely depends on the role and environment in which they operate in.

In Fortune 500 corporations, CPAs might help prepare annual reports for shareholders and record very complex financial transactions.

In small businesses, CPAs might help you select the best entity, hire your first employee, tax plan, create a budget, set your pricing, prepare financial projections, or oversee your books.

For nonprofit organizations, which have completely different accounting rules, they might help you comply with those rules, or provide assurance and auditing services to ensure you are operating correctly.

We could go on and on here.

But ultimately a CPA helps you manage the money in your business while complying with government regulations that your business may be subject to.

What Can a CPA Do That Your Bookkeeper or Tax Preparer Cannot?

Your tax preparer cannot represent you in court on a tax matter, a CPA can.

Your accountant or bookkeeper cannot provide assurance, or in other words, certify that your financial statements are accurate and complete. A CPA can.

Your accountant or tax preparer does not have to keep up with new accounting or tax laws that may affect your business.

A CPA is required to do continuing education each year in order to keep their license status active.

These are just a few of the major things that separate a CPA from the average accountant or tax preparer.

Who Needs Certified Public Accountants?

The reasons differ based on your circumstance.

For taxes, a lot of people try to do their own taxes these days or use the cheapest provider. And for a lot of people with very simple finances, that’s completely fine.

But if you find yourself trying to do this when you own property, multiple streams of income and investments, and businesses, it’s best you seek the best professional for the job, a CPA.

One missed tax deduction or tax credit could be the difference in you paying thousands of dollars in taxes.

That’s much more than the few extra hundred dollars a CPA might cost you.

Not to mention that a CPA normally doesn’t just do tax preparation, which is synonymous with a server taking your order at a restaurant.

They also tax plan which means they can help you craft a plan to actually lower your taxes legally through the tax law.

On the accounting side, many small companies might choose their own books. But ultimately, you have to ask yourself, is it really worth your time?

You should probably be out there getting your Jeff Bezos on, not trying to figure out the best way to classify something you bought in QuickBooks.

This is why many businesses decide to outsource their bookkeeping to a bookkeeper. And bookkeeping services are a great option.

Though, even the best bookkeepers cannot provide the level of assurance that a CPA can.

So you may decide to use bookkeepers for recording your transactions and using a CPA to review your financial statements for accuracy before you file your taxes.

We see simple mistakes all of the time, like classifying the interest on a loan as a liability when it’s really an expense.

So there you have it, folks. That’s everything you need to know about a CPA.

Quick Recap

So here’s a quick recap of this post. Today, we answered the question “What is a CPA?”.

A CPA, which stands for Certified Public Accountant, are trusted advisors that help businesses with all sorts of business matters that have financial implications.

Then we talked about what a CPA actually does.

The role of a CPA varies based on the company. They can help public companies report to shareholders. They can help small businesses with new business challenges.

Then lastly, we talked about who needs a CPA.

Anyone who needs assurance, auditing, tax advice, or just the best hands-on finances should deeply consider hiring a CPA.

And also if you need a CPA, we offer small business CPA services at LYFE Accounting so don’t hesitate to contact us today.

The post What is a CPA, What Do They Do, and Who Needs One? Here’s Everything You Need to Know appeared first on Small Business Accounting & Finance Blog.

Paying employees in any business is a difficult task.

And it could be extremely stressful if you don’t know what you’re doing. Mostly because there are 3 sides to paying your employees:

1. Determining how much to pay your employees.

2. Designing your comp plan to actually motivate them to work hard for you and retain them.

3. Compliance, which is making sure you’re paying your employees correctly to avoid big hefty penalties from the government.

We’ve been through it all, from trying to figure out how to do payroll for our very first employee, to figuring out how much should we pay our employees.

And, we’ve suffered the consequences of getting this wrong. We’ve paid thousands of dollars in payroll tax penalties. We’ve lost employees. And we’ve lost a lot of money.

Luckily, we’ve flipped this around and created systems to not only hire employees but also incentivize them to work as well.

That’s why in today’s post, we’re going to help you understand how to do this in your business, so you don’t make the same mistakes we made.

In this post, we are going to go over employee compensation, the types of employee compensation, and the easiest way to start paying your employees if you’re doing it for the first time.

If you’re looking for ways to pay your employees, or you’re hiring an employee for the first time and just don’t know where to start, this post is for you.

Alright, now let’s talk about how to pay your employees.

Small Business Mistakes We Made

When we hired our first employee, well, at least we thought they were an employee anyway.

It was when we first started our first company, LYFE Marketing.

When we first started our business, we couldn’t hire any employees just like most bootstrapped small businesses.

When we did start making some money, the first group of people we hired were interns. We hired some college students as interns and paid them a few hundred dollars per month to help us with some of our client projects.

Eventually, this evolved into us needing someone full-time. So, we did away with the internship program and hired a single full-time person to absorb their responsibilities.

At the time, we could only afford to pay that person $10/hour.

Now, with this full-time person, you’re probably thinking that they were a full-time EMPLOYEE. Well, in the beginning, we did as well.

But no, we learned that this person was actually an independent contractor. Because we had no payroll system at the time and was literally paying this person by check, this person was not a W-2 employee.

This meant that their wages were not taxed at all. So if they made $1600/month, that’s the exact amount that went into their bank account.

And while that might sound good in theory, it did not sound good when tax time came.

Because they were a contractor, they received 1099 at the end of the tax year and ultimately, had to pay their taxes all at once to the IRS, instead of piece by piece with W-2 wages.

Obviously, that wasn’t ideal, so we converted this person into a W-2 employee. And then as we grew as a company, we were able to increase our wages to match the market for our employees.

And now, we’re doing much better.

So there are a few things to unpack here that our clients ask us all the time:

• What’s the difference between a contractor and an employee?
• What’s the EASIEST way to set-up a payroll system?
• What is the best way to set up compensation plans for your employees?

So let’s dig in.

Difference Between an Independent Contractor and an Employee?

An independent contractor provides specific services to your company as defined by a written contract.

These independent contractors may be freelancers, consultants, or any company or individual you hire for a specific job.

Now, when you hire an independent contractor, they generally have complete control over how they perform the job that you hired them to do.

The moment you start “controlling” the way they perform work, then technically they are an employee.

According to the IRS, a worker is an employee when the business has the right to direct and control the work performed by the worker.

The worker is also an employee if you have financial control or provide employment-type benefits to the person, such as benefits or tools to perform their job.

An employee, on the other hand, is an individual who works for your business. You provide all the tools, training, benefits, and other items so they can perform their job. But most importantly, you have CONTROL over the end product.

If you hire a contractor, they must complete a W-9 form and receive a 1099 form at the end of the year if you want the expenses you pay them to be tax-deductible.

If you hire an employee, then they must complete a W-4 form, and will receive a W-2 at the end of the year that reports their wages, taxes paid, and other items.

To learn more about this, then check out our post on 1099 vs. W-2 employees.

Now, let’s move on to the next major question.

What’s the Easiest Way to Set-up a Payroll System?

Let us first describe the payroll process.

When you hire an employee, you must pay payroll taxes. The employee is taxed, and the employer.

So, to do this, you have to do a few things:

• You need to have a Federal Identification Number (EIN) for your business. You can do this online with the IRS if you do not have one
• You need a State Income Tax number. You can set this up on your State’s Department of Revenue’s website.
• You need a State Unemployment Number. You can set this up on your State’s Department of Labor’s website.

Each department will require monthly or quarterly tax payments and tax filings at a specific frequency.

You should be familiar with them to make sure you comply with those requirements. If you don’t, you can end up paying big tax penalties.

Now, in the old days, employers had to do this entire process manually.

Imagine keeping up with all of the tax payments, tax filings, and mailing this into each department separately.

Or you could hire an accountant to do it for you. But if that accountant is anything like us, they probably wouldn’t want anything to do with it.

Not because we don’t want to help, but it’s not necessary. Because now there are payroll tools that do all of this for you, automatically.

All you’d have to do is have the correct accounts setup with each department you’re liable to, and connect your account numbers to a specific payroll system.

Then, if you choose the right payroll provider, they will automatically calculate your payroll taxes, pay them on your behalf, and file your payroll taxes each month.

When we first started doing payroll, we tried to do everything by ourselves. We logged into each department’s website to try to file them electronically. And, we did our best to stay on top of it.

Well, one-time, we were late by one day. And we have received a penalty for over $1,000. And ever since that day, we completely automated our payroll process so that we did not have to worry about this ever again.

There are several different full-service payroll providers out there like:

• ADP

• Gusto

• QuickBooks full-service payroll

…to name the most popular ones.

If you want to know which one we use, we have been using QuickBooks full-service payroll, which has been working perfectly well for us and automatically syncs with our accounting system.

Anyway, choose whichever works best for you and your business, but make sure you automate this process so it doesn’t cost you an arm and a leg down the line.

Alright, now let’s move on to the last but possibly most important aspect you need to consider.

How to Create Compensation Plans for Your Employees

How you pay your employees will determine how much of your talent you retain in your company.

So to do this correctly, you need to determine the best methods to pay your employees, whether that be with hourly pay or salary pay, or with commissions, bonuses, or profit-sharing.

Let’s quickly discuss the difference and things to consider.

• Hourly pay

Hourly pay is one of the simplest ways to pay your employees. They log-time, and you pay them a flat-rate per hour to perform the job.

With hourly pay, you have to keep overtime in mind. When you hire full-time employees, they may take longer to do their job to try to rack up their pay.

Also, many highly skilled workers don’t love hourly pay. They’d rather receive a fixed salary to deliver specific results to your company, regardless of it it takes 35 hours or 45 hours per week.

Regardless, hourly pay does have its place for many straightforward jobs that are not super complicated.

• Salary Pay

Salaries are fixed payments to your employees for performing their job.

Salaries are normally used to hire for highly-skilled jobs.

It’s also a simple way to pay your employees. And you don’t have to keep track of employee hours and time logs to do this.

Now, there is a fundamental flaw with salary pay.

And that is motivation.

In the words of Dave Ramsey, salary is the most boring way to pay people.

Paying your employees by salary could result in your employees becoming unmotivated, lazy, or just doing the bare minimum to receive their paycheck.

With that said, a hybrid model is normally recommended.

You should try to pay your salary-based employees with not just a fixed salary payment, but also with some bonuses or commissions that will motivate them to work harder to reach your business objectives.

• Commissions and Bonuses

Think about the sales profession.

Most sales jobs are a blend of salary and commission or just flat-out commission-based.

This makes sense for the sales rep because you’re ultimately paying them to generate sales. And if they aren’t generating sales for you, then they are effectively useless in your company.

Now, with this example in mind, you may design commissions or bonuses to incentivize your full-time employees as well.

You should design incentive plans around the KPIs, or key performance indicators, that drive your business.

If you do not know what your business KPIs are, then check out our post on small business KPIs.

But in short, every single job in your business should be connected to a quantifiable result.

Then, you can create bonus-based pay for your employees to hit that quantifiable result, which is also contributing to your business growth.

For example, if you’re hiring a customer service representative, then that might be customer satisfaction.

If your employee hits a certain level of customer satisfaction, then you might have a bonus for them hitting that target.

Now let’s move on to the ultimate incentive to unify your company which is profit-sharing.

• Profit-Sharing?

Profit-sharing, or revenue-sharing, is a single incentive that can unify and motivate your entire company to work towards your business goals.

The purpose of profit-sharing plans is to get everyone in your company to feel like a partner in your business.

They essentially have some skin in the game to be able to look at your business from your eyes, and not as someone who’s just coming to work to pick-up a check.

Now, while a profit-sharing plan is a great incentive, you need to design it in a way that your employees do not feel entitled to it.

And there are many ways to set-up profit-sharing plans that we’ll have to create another post for it.

For many businesses just starting, you probably won’t be able to afford a profit-sharing plan.

But as you grow and start hiring IRREPLACEABLE executives or managers in your company, you’ll probably want to consider having this in place as a way to motivate and retain them for their loyalty to your company.

So that’s the various types of compensation – hourly pay, salary, bonuses, commissions, and profit-sharing.

The last thing we need to discuss is how much to actually pay your employees.

How Much to Pay Your Employees?

They say to be rich, you need to always have 3x more money than what you have today.

And while we don’t know if this is true or not, what we do know is as a business owner, your employees will demand more money from you.

And no matter how much you pay them, they will want more as they grow in their career path.

Especially your top-talent – if they don’t feel like they have the ability to grow, they might jump back into the job market to find growth opportunities elsewhere.

So what can you do?

The best thing you can do is to find-out the market-rate for the employees you are seeking to hire.

That way, if an employee is demanding more money than anyone else is willing to pay them to do the same job, you can confidently reject your employee’s demand for more money.

And even if they don’t like it and go into the job market, they’ll be met with similar or lower payment options than they thought they were worth.

On the flip side, you also need to make sure you are paying your employees the market-rate.

Because if you are paying them below the market, then it’ll be very easy for someone to message your employees on LinkedIn and them leaving your company the next day.

We can’t count how many times it happened to us. We’ve just come into work and heard,

“Hey, I’m putting in my 2-week notice”, and then when we ask what’s going on it’s normally something like, “I wasn’t looking on the market, someone contacted me with an amazing opportunity that I couldn’t reject”.

And trust us, you’d rather lose your best employees to anything else other than money.

Now, for some people, we know what you’re thinking – you’re probably wondering – as a small business, how in the world are you going to be able to pay what the market is paying?

As small business owners, we’ve been there. And we used to think the exact same thing.

But, you actually have more options than you think.

First and foremost, if you can’t afford to hire a single employee for what the market is demanding, what makes you think that’ll change when you have 10 employees? Or 100?

You see, finding the money to hire good employees is normally not a business stage issue, it’s normally a budget or pricing issue.

When you decide on the prices for your products and services, and the budget for how you will allocate the money you receive, you should have already considered the cost of labor.

If you haven’t, then stop what you’re doing right now and read our post on small business budgeting.

But in short, you need to plan for growth in advance.

We made this mistake with one of our businesses.

We grew quickly to over 30 employees, but we still did not have the money to pay each employee what the market was paying.

And as a result, we ended up having to reorganize our entire company and layoff most of our staff to rebuild back the right way.

And we don’t wish that task upon any business owner – laying off our employees was one of the darkest days of our entrepreneurial life.

So on a more positive note, make sure you pay attention to the market when it comes to determining how to pay your employees.

You can easily do this by using tools like Glassdoor to get a general idea of what the market is paying.

And be sure to filter it down to your exact business size, area, and the years of experience you’re seeking for your job to get the most accurate results.

Quick Recap

So there you have it!

This is how you pay your employees from A-Z.

Now, let’s quickly recap.

Today we answered 3 big questions:

1. What’s the difference between a Contractor and an Employee?
2. What’s the EASIEST way to set-up a payroll system?
3. What is the best way to set up compensation plans for your employees?

The difference between an employee and a contractor all came down to control. If you exercise full control over any individual working for you, then they are an employee.

Next, we discussed the easiest way to set up a payroll system. You need to set up the correct accounts with the appropriate federal and state departments. Then, we recommended that you automate the payroll process with a platform like QuickBooks or Gusto, for example.

Finally, we discussed the compensation plans and how much to pay your employees. The best compensation plan is a hybrid model that includes salary and additional bonuses to incentivize behavior towards your business results.

And in terms of how much to pay your employees, we recommend that you study your market to make sure you’re not underpaying your employees, and also not getting taken advantage of by overpaying your employees.

If you want more guidance with your business financial management, then consider working with the experts in this industry. Call us today at 470-240-1437.

The post How to Pay Your Employees in a Small Business appeared first on Small Business Accounting & Finance Blog.

A lot of businesses mistake profit and cash flow for being the same thing.

It is not.

We repeat – cash flow is NOT the same thing as profit.

Getting this wrong can be the reason your business fails.

Because over 90% of businesses fail because they run out of cash, not profit.

There are many unprofitable businesses that are still standing. we can’t name one business that ran out of cash that is still standing.

In this post, we’re going to break down the difference between profit and cash flow.

By the end of this post, you will not have to think twice about cash flow versus profit.

With that said, let’s talk about cash flow vs profits.

Cash Flow vs Profit: What is Cash Flow?

Cash flow is simply the flow of CASH, aka MONEY, paper, bread, cheddar, and so on – in and out of your business.

Most people look at cash flow in terms of positives and negatives.

A positive cash flow means that your company is adding more cash to your account than it’s losing.

A negative cash flow means that your company is burning more cash from your account than it’s adding.

A positive cash flow is obviously ideal, but many business owners get this confused with profit.

Cash Flow vs Profit: What is Profit?

Profit is the financial gain or loss between the amount of money you EARNED and the amount of expenses INCURRED.

These two words, earned and incurred, are the biggest difference between cash flow and profit.

You see, you can EARN money but never receive it.

For example, you can cut someone’s grass and technically earn their money.

But if they don’t have the money to pay you, then you would not receive any cash despite you earning that money.

Likewise, you can OWE money for expenses but never pay it.

For example, we had a client that loved to pay us late.

Like VERY late – months late at the time.

We hated it. We’d perform a service for him, and he’d write us a postdated check that we could cash for weeks on end.

But he did this to manage his cash flow. He delayed paying his expenses because he did not want to jeopardize his cash flow and ultimately, mismanage his business.

The biggest mistake business owners make when assessing the financial health of their companies is that they put too much emphasis on the income statement, also known as the profit and loss statement.

However, this statement only shows you the revenue you earned minus the expenses you incurred, it tells you NOTHING about the lifeline that keeps your business open – cash flow.

So instead of looking at just the profit and loss statement, which is revenue minus expenses, you should also look at your cash flow statement.

Before we go into the cash flow statement, you need to understand how cash flow is calculated.

How is Cash Flow Calculated?

To calculate your cash flow for a period of time, start with your opening cash balance. This should be the balance that is in your business bank account.

Then add all CASH inflows to that account, minus all CASH outflows to your account.

Forget about all the money you think you EARNED or that you EXPECT to receive. Your current cash flow standing is right there in your bank account.

That’s your current reality, nothing more, nothing less.

What is a Cash Flow Statement?

A cash flow statement is a statement that outlines the cash flow in your business.

Ideally, you would look at this every month.

This report can be broken out into 3 major sections – operating activities, financing activities, and investing activities.

1. Operating activities

These are cash inflows and outflows from the normal operating activities inside of your business, like cash from customers or cash paid to suppliers.

2. Financing activities

These are cash inflows and outflows related to financing your business, such as receiving money from loans or paying interest on your liabilities.

3. Investing activities

These are cash inflows and outflows related to purchasing assets for your business, like buying property or equipment that will be utilized for some period of time.

So that’s what cash flow is and the major components of the cash flow statement.

But what if you don’t have access to a cash flow statement?

If you’re unable to generate a cash flow statement, then we’d recommend that you look at your Profit & Loss statement on a cash-basis.

This is another way to gain SOME understanding of your business cash position.

Typically, there are 2 ways you can look at your profit & loss statement – on an accrual basis or cash basis.

An accrual basis financial statement does not account for your cash flow at all. It simply looks at revenue earned minus expenses incurred.

A cash-basis financial statement does not account for your cash. Cash coming into your business would generally be considered revenue. And cash leaving your business would be considered expenses.

Unless it’s not of course – you can still classify loan payments and bank transfers as balance sheet items since those are liabilities and assets.

Now, how can you bridge the gap between your profit and cash flow, and increase your cash flow?

How to Increase Your Cash Flow?

There is a list of things you can do to improve the cash flow in your business. But here are the major things that we’d recommend.

1. Look at your cash flow.

If you don’t understand this, then nothing else we tell you will help.

2. Find ways to increase your speed of collections.

For example, instead of sending invoices for services or products you sell, ask for an electronic form of payment from your customers so you can charge them right away.

3. Find ways to decrease your speed of payments.

For example, you can negotiate payment terms with your vendors to pay them after services are rendered, or after 15-30 days.

But if you’re anything like us, then you probably hate owing people money and therefore, we’d only delay the speed of paying your vendors as the last resort.

Alright, now that you understand the difference between cash flow vs profit, let’s quickly recap today’s post.

Quick Summary

Today we defined the difference between cash flow and profit.

Remember, profit is the financial gain or loss between the amount of money you EARNED and the amount of expenses INCURRED.

Cash flow is simply the flow of CASH in and out of your business.

To understand your cash flow, look at your cash-flow statement every month, or a cash-basis profit and loss statement.

So that’s it for today’s post.

We hope you found this post useful and interesting. If you need help in managing your business financial statements then LYFE Accounting has a team of experts to help you.

Get in touch with us today at 470-240-1437.

The post Cash Flow vs Profit – What is the Difference? | Cash Flow Tips from CPA appeared first on Small Business Accounting & Finance Blog.