Stock Can Help Raise Money But At A Cost

If your new company is in need of capital, stock can provide you with the opportunity to raise money. Owners can then use this money to fuel business growth, allowing them to do things such as:

• Rent an office
• Purchase equipment
• Pay employees
• Pay debts

The downside, of course, is that incorporators are giving up a portion of the company when they issue stock. Each stock is worth a percentage of the company, as pre-defined by the board. However, the stock is also representative of the value of the company. Say, for instance, a new corporation issued stock at $1 per share. They decide to release one million shares. This means that they value the company at $1 million.

As a new company, this is likely not the case. Investors will request to see the company’s financials and realize that incorporators have overvalued the company. So, when a new corporation issues stock, it should be sure that the price per share and total shares are proportionate to the value of the company. Also, owners should remember that the more shares they issue, the more they will dilute their own holdings.

Common Stock V. Preferred Stock

If your new corporation is interested in issuing stock, you’ll also want to consider which type of stock to grant. Owners have the choice of issuing either common stock or preferred stock. Common stocks pay shareholders in both valuation and dividends. Rising share prices will create value for investors. Additionally, common stockholders receive proportionate votes on corporate issues, such as electing directors to the board.

Owners will want to keep this in mind when issuing stock because it can determine the future of the company. For instance, if one individual holds more than 50 percent of the shares that have been released, he or she can single-handedly control the company. So, for instance, if owners wanted to issue stock to raise capital, they should be careful not to provide investors with more than 50 percent of the shares. Otherwise, they’ll give up control of their new corporation.

On the other hand, there could be significant concerns about transparency were owners to hoard more than 50 percent of the shares. This could give the perception that each person’s vote is not equal and that those buying into the company will have no say in its direction because the owners are still in charge. This is a delicate balance that owners should be mindful of when issuing common stock.

The other option owners have is to issue preferred stock. When an individual owns preferred stock, they too own a share of the company. However, preferred stock pays a dividend that’s already been predetermined. The profits that a preferred stock pays are typically rather exorbitant and more substantial than the dividends that common stock pays. The other significant difference is that preferred stockholders do not vote on corporate matters.

The other significant difference between common stock and preferred stock should hopefully never have to come into play but is worth noting nonetheless. If the corporation were to go under and assets are liquidated, preferred stockholders would be able to redeem their shares before common stockholders. This means that preferred stockholders have a better chance of mitigating potential losses than common shareholders.

New corporations also do not have to issue one class of stock exclusively. Many new businesses choose to issue both common stock and preferred stock. The board of directors is in charge of issuing stock, although incorporators may need to provide a breakdown on the shares they wish to release on the Articles of Incorporation.

Is There An Alternative To Issuing Stock

Some owners may not want to give away ownership of the company but would still like to raise capital. In this case, owners may want to consider selling long-term debt in the form of bonds. When a company does so, it agrees to pay investors their money back, plus interest. For instance, a corporation could raise cash by issuing $1,000 bonds with a five percent rate. This means that the corporation will need to pay the investor $1,050 when the bond expires.  

Issuing debt could be beneficial because the government considers the interest that the corporation returns as a tax-deductible expense. Some investors may find bonds attractive because there is less uncertainty than with shares.

Bond-holders know precisely how much money they’ll give, how much they’ll receive in return, and when they can expect payment. However, bond-holders do not vote on corporate matters, so they do not play an integral role in defining the company’s direction. Another critical thing to consider is that the corporation can issue bonds at any time.

Technically, it can issue stock at any time it wants as well. But most corporations elect to only issue stock once, as doing so multiple times dilutes the value of shares that investors have already purchased. If the sole purpose is to raise capital for the company, new business owners could look into issuing long-term debt initially and then issuing stock at a later point when they are financially stable.

Key Reminders When Issuing Stock

If your company decides to issue shares, one of the other critical things to remember is the stock ledger. The stock ledger keeps track of every transaction of shares. It helps promote transparency and could prove beneficial for future investors. A new corporation will want to keep a detailed stock ledger that shows every purchase, sale, and distribution of shares the board has made throughout the company’s history.

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Defining Private Stock

Private stock is beneficial for those corporations who are not yet ready to go public. Contrary to popular belief, an overwhelming majority of United States corporations are private. Less than one percent of corporations in the US are public.

Releasing private stock involves trading ownership in the company in return for equity or capital. If you’ve ever watched an episode of “Shark Tank,” you have likely seen investors and business owners negotiate a “loan” for a percentage of the company. Terminology such as, “I’ll give you $20,000 for a 10 percent stake in your company” is likely referring to a private stock exchange.

This is noticeably different than stock that a public-traded company issues. If a corporation is public, they must first go through an initial public offering. During this time, anyone can purchase shares. Purchasers will likely invest in common shares, which gives them the right to vote at corporate meetings. Public corporations do not have much control over who purchases common stock, while private companies do have control over who buys their common stock.

Raising Capital V. Giving Up Ownership

If a new corporation is private, owners will face a dilemma. They will need a way to raise capital to fund their new operations. However, doing so will likely require them to contact investors who will be seeking a share in their company. Owners must weigh how much of the company they are willing to give up. It’s a common catch-22, in that founders must give up ownership to grow the company.

If owners do decide to issue private stock, they should be careful about how much they release. They likely won’t want to give up more than 49 percent of the company’s valuation. Otherwise, outside investors would have a majority stake in the company, allowing them to determine the direction in which the company will go. Giving up a majority stake in the company could prove your dreams to be over before they even started.

There are some alternative options available, such as issuing long-term debt in the form of bonds. In this scenario, investors provide you with initial upfront capital. The corporation agrees to pay the entirety of the loan, plus interest, upon expiration of the bond.

However, this too has its downsides. For one, it may not be an attractive option for investors, especially if they believe in your company. Additionally, it could be harmful to a new business to add significant debt to its balance sheet in the early stages. Although it could provide owners with capital, the long-term debt could reduce their chances of acquiring money from other sources, such as a bank.

Who Invests In Private Stock

If they are looking to raise capital, many owners first seek out their friends and professional network. If that proves unsuccessful, owners could perhaps target individuals flush with money, such as:

• Angel investors
• Small business attorneys
• Bankers
• Trusts
• Insurance Companies

Even though the issuing is not public, the Securities and Exchange Commission still maintains strict regulations regarding who can purchase private stock. These regulations are not as tight as they are for those going through an initial public offering, but it’s still vital that companies follow them nonetheless. Otherwise, your new corporation could be hit with stiff fees and penalties.

The SEC requires private investors to be “accredited.” This refers to wealthy individuals who make more than $200,000 per year or have a net worth exceeding $1,000,000. Your corporation will not need to file paperwork with the SEC upon completion of the transaction. But, was the SEC ever to investigate your company or if the company were ever to go public, they’d check to ensure that all private investors meet eligibility requirements. This is not a risk worth taking.

What Paperwork Should Owners Provide During A Private Stock Sale

Upon selling private stock to accredited investors, corporate owners will need to provide and complete relevant paperwork. It’s also critical that the business maintains this paperwork in a safe location. The corporation will also need to create a stock ledger in which they’ll log the transactions. It’s perhaps in a new company’s best interest to store the completed paperwork with the stock ledger.

The corporation will first need to provide its bylaws. Many investors will also request to see similar documents, such as a copy of the Articles of Incorporation and the corporate bylaws. This will demonstrate that the business is operational and compliant. High-quality documents can also lend significant credibility to your company.

Corporations will also likely want to provide a Private Placement Memorandum. This document explicitly explains the terms and conditions the company is offering to prospective investors. The best way to think about this document is as a flyer or brochure. The report will highlight critical aspects the company wishes to share with investors. It could also touch on how much capital the company is looking to raise and the reason for doing so.

Once an investor has agreed to buy into the corporation, owners will need to provide a Subscription Agreement. Essentially, this is the contract that between the company and the investor that completes the sale. The Subscription Agreement must highlight how much capital the investor is providing and the percentage of the company they’re receiving in return.

Lastly, the corporation should require the investor to complete an Accredited Investor Questionnaire Form. This serves as a type of “background check” that allows companies to ensure the investor meets the requirements set forth by the SEC. If an investor is not willing to complete this form, it could raise a red flag to the corporation. The Accredited Investor Questionnaire Form can save companies from significant problems in the long-term.

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If you’re looking to incorporate a business, you should have an idea of the paperwork required to do so. Although paperwork requirements may vary from state to state, the documents listed below are some of the most commonly-required forms. By having an idea of what they’ll need to submit, young entrepreneurs can begin gathering the required information and preparing these forms so that they can incorporate and run their business without complications.

Paperwork Requirements For Starting A Business

If you are incorporating a business, there are many critical documents and paperwork requirements with which you’ll want to be aware. One of the most essential is the Articles of Incorporation or the Articles of Organization. The type of document that you must file will depend on the state in which you’re submitting and the kind of company structure you seek.

The state in which you file will likely require this document to contain information such as who your registered agent is and from where they will be operating. Business owners must also include the name of the company, the name of the members of the company and the intended structure of the company.

You should pay careful attention to the requirements set forth by the state in which you’re filing. States often have different requirements for the fees associated with filing, the preferred method of filing, and the information that is needed within the documents. Be sure to look further into your state’s initial filing requirements so that you are well-prepared before filing.

A perfect example of this is an Initial Report Filing. Annual business reports are necessary for a company to continue conducting business – more on that below. Initial Reports contain the same information as Annual Reports, except business owners file them immediately upon opening their company. However, only a handful of these states require companies to submit Initial Reports. Again, it’s vital that entrepreneurs pay close attention to their state filing requirements.

Paperwork Requirements When Expanding Your Business

If a business wishes to open an office in another state, they must file paperwork in the new state. However, companies will register as a foreign entity as opposed to a domestic entity. To do so, companies will likely be required to file a Foreign Qualification form. One of the most critical parts of these form is the Certificate of Good Standing or the Certificate of Status.

Business owners can obtain these documents from the state in which they registered domestically. These documents inform the new state that the company is in good standing, meaning they have filed paperwork promptly and are up-to-date on all fees. Once obtained from the domestic state, the business can move forward registering in the foreign state.

Paperwork Requirements For Operating Your Business

Depending on where you conduct business, you will likely have to file an Annual Report or Biennial Report with your respective Secretary of State’s office. States use these forms to ensure that businesses are operational. There are often strict deadlines associated with these forms. Failure to file promptly could put your business at risk of steep fines, and even the possibility of dissolution.

In most states, you cannot make changes to your registered agent information when filing your Annual Report. If you wish to make changes to your registered agent information, including the name of your agent or the address at which they operate, you will likely need to file a Change of Registered Agent form. However, this information can vary from state to state. It’s imperative that entrepreneurs meet the requirements set forth by the state in which they conduct business.

Paperwork Requirements To Dissolve Your Business

Many business owners believe that when it is time for them to close their business, they can merely walk away without any consequences. Unfortunately, this is not the case. Even when shutting down a company, business owners are required to file paperwork with the Secretary of State’s office.

There’s a good chance that the state in which you operate will require you to file Articles of Dissolution or a similar type of document. There could also be fees associated with filing this paperwork as well. Additionally, business owners are required to submit paperwork in states in which they’ve registered as a foreign corporation, not just their state of domestic corporation. Failure to do so could again subject your business to fees that you are liable to pay even.

Don’t Miss Any Critical Paperwork

Once you incorporate your business, paperwork will be something with which you must become accustomed. Not only is paperwork necessary to incorporate your business, but you’ll also likely need to file annual reports in the states in which you conduct business. If you wish to begin operations in another state, you’ll have to require paperwork there as well. You’ll also have to file paperwork when you make changes to your registered agent or seek to close your business.

However, when you’re trying to run the day-to-day operations of your business, it could become overwhelming trying to worry about completing paperwork with state governments on time. For that reason, you should consider hiring DoMyLLC, a third-party professional services company.

DoMyLLC has extensive knowledge of the paperwork requirements for starting, operating, and closing a business in all 50 states. No matter which state you conduct business, we are here to help guide you through the entire process. Not only can we help you complete the required forms, but we can also remind you of upcoming deadlines as well. At DoMyLLC, we handle your paperwork needs so that you can dedicate yourself fully to running your business.

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C-Corporations Will File Under A Lower Rate

One of the most significant changes under the new business tax law is the fact the corporate tax rate dropped significantly. In year’s past, the corporate tax rate was 35 percent. Under the new tax code, the rate is 21 percent. This is a significant change that could impact how businesses conduct business. Retaining more of their profits could allow small business owners to invest in growth that would not have been possible before this year.

If you are a young entrepreneur who has recently started a company, you may not see any drastic changes quite yet because, if nothing else, many startups are not profitable in their first few years. But, the new tax code will be in place for at least the next decade. Factoring this rate into your business decisions could alter your long-term strategy.

Lastly, the fact that the corporate rate was reduced could impact how new business owners could choose to register their company. For instance, many small business owners elect to register as an LLC, which allows for pass-through taxation. However, any individual income earned more than $38,700 is taxed at a 22 percent rate.

So, some new business owners may find it more beneficial to form their company as a C-Corporation rather than an LLC because the tax rate is lower. Each individual’s situation could vary, and owners will want to consider dynamics such as double taxation. We recommend talking with an accountant or similar tax expert who can advise on which formation strategy is best. That’s because, as you’ll see in the section below, there are some new perks for LLC and S-Corp owners as well.

Some S-Corporations And LLCs Could Be Eligible For A Reduced Tax Rate

Under the new tax code, S-Corporation and LLC owners could qualify for a 20 percent deduction on “any income attributable to the entity.” However, the company must not be listed on a particular exclusions list. Generally speaking, any company whose sells to customers based on the reputation of the owner is excluded from this deduction. For instance, a small coffee shop would be eligible for the deduction but “Jane Doe’s Consulting” or “John B’s Financial Advice” would not. Excluded services and entities include:

• Health companies
• Consulting services
• Law
• Financial services
• Athletics
• Brokerage service industries

However, if the taxable income for an owner is less than $157,500 for single filers or $315,000 for joint filers after pass-through, they can still take the deduction. No one, regardless of the industry in which they work, can take the 20 percent deduction if income exceeds $207,500 for single filers or $415,000 for joint filers.

There Is No More Alternative Minimum Tax

In the past, the alternative minimum tax was a significant part of corporate taxation. Those who made more than the AMT exemption amount were required to calculate their taxes twice. Prior to the new law, five million Americans were impacted. Now, only an estimated 200,000 tax filers will be affected. Additionally, there is no longer an AMT for corporations. Contact your tax professional to see if you could potentially be someone impacted by the AMT.

Equipment Depreciates Faster

If you’re a small business owner who purchases expensive equipment for your company, you could be in luck thanks to the fact that the new tax code increases the rate at which items depreciate. Under the former law, business owners were required to amortize the cost of equipment over the useful life of the asset.

Under the new law, owners can fully deduct up to 1 million in equipment in the year in which the company purchased it. Those who have current tax liabilities and substantial fixed asset costs will benefit most from this change. The depreciation of assets is only in effect over the next five years, as it will phase out after 2022. Until then, business owners will find that they can expense nearly twice as much as they could previously.  

Owners Can No Longer Expense Transportation And Entertainment

If you’re a small business owner who frequently treated clients to concerts and sporting events, we have bad news for you. Whereas you could deduct these expenses in the past, you can no longer deduct them from your taxes. Your meals, however, remain 50 percent deductible, just as they were in the past. Additionally, owners can no longer deduct travel to and from work. This also includes bicycle commuting reimbursements, which were formerly allowed.

Family-Paid-Leave Credit

If you’re an employer who provides your employees with paid medical or family leave, you could benefit from a deduction over the next two years. In 2018 and 2019, employers can deduct up to 12.5 percent of the wages they pay during this time. Additionally, those employers who pay employees more than half of their regular salaries are eligible for an even larger credit.

Many stipulations determine who is eligible for this program, however. For instance, if an employee’s total wages exceed $72,000, employers will not be able to take the credit. Additionally, the policy that declares paid medical and family leave must be written in a document such as the Employee Handbook.  

Consult A Tax Expert

Taxes are already tricky for small business owners, but they will become much more challenging this year because of new regulations. We highly recommend that business owners contact a trusted tax professional to help guide them through the process. Licensed professionals can help maximize your return and profits, allowing you to invest more money in your company. They’ll also ensure you remain compliant with the new regulations which were put in place.

The post Tax Tips: How Will the New Business Tax Law Impact Small Businesses appeared first on DoMyLLC.com.

What Is An Employee?

Before detailing how to hire employees, it’s critical that you first understand what an employee is. According to Investopedia, “an employee is defined as any individual who is hired for wages or salary.” The company must pay taxes on an employee’s wages and could potentially have to pay health insurance as well.

This is noticeably different than an independent contractor. An independent contractor is also paid for work. However, independent contractors do not work for the company directly. They work for themselves and are paid by the company for services they provide. This is often done on a contractual basis. Most importantly, LLCs do not pay taxes on any monetary payment they make to a contractor. Independent contractors must pay the entirety of the tax burden.

Tax Prerequisites When Hiring Employees

If you’re interested in hiring employees, there are a few tax-related things you’re going to want to do beforehand. First and foremost, you must ensure that you have an employer identification number. You should have received this number when you formed your company, as it allows you to pay taxes and open a business bank account. However, if you don’t yet have an EIN, you’ll need to secure it immediately. It is mandatory to have an EIN when hiring employees.

You should also be mindful of the fact that you’ll likely need to secure a similar number at the state level. While the IRS issues the EIN, many states require companies to obtain additional numbers when filing state taxes. Each state is different. We recommend starting with your local Secretary of State’s Office to learn more about securing a state employer account number.

You’ll also want to establish a quality record-keeping system. The Internal Revenue Service can audit your company at any point within four years of filing. This means that your company must have records of employment taxes on hand for at least four years. You should establish where you plan to keep these records for safekeeping. Although the minimum requirement is four years, LLCs should expect to keep the records for at least six years, if not longer.

Lastly, LLC owners will also need to set up records that allow them to withhold taxes. There are three different withholdings with which they should be aware. The first is federal income tax withholding. To establish this, owners will need new employees to complete a Form W-4, otherwise known as an Employee’s Withholding Certificate. Employers will then need to complete a Form W-2 for each employee that they hire.

The Form W-2 outlines all wages that an employee has earned, as well as all tax they’ve withheld during the year. At the end of the calendar year – no later than January 31 – the LLC owner will need to send a copy of this form to the employee. They’ll also need to submit the paperwork to the Social Security Administration by February 28. The W-2 is unique to employees. If you were to hire independent contractors, you would need to complete a Form 1099.

Employees also have the option for state withholdings as well. State withholding forms are similar to the Federal W-2 and W-4 forms but are unique from local government to local government. Be sure to repeat the above process at the state level as well, based on your state’s requirements.

Other Employment Factors

Before LLC owners set up tax records for their new employees, they first must determine who to hire. After choosing the ideal candidate, there are a few legal requirements that LLC owners will need to fulfill. The most critical is ensuring that a potential employee is eligible to work in the United States. The first thing that owners should do is have the employee complete a Form I-9. This form includes information such as an employee’s eligibility and Social Security number.

In addition to the I-9, employees will also need to provide you with valid identification. The I-9 lists three columns of identifications that would suffice. Employees can either provide one item from List A, or a combination of one piece from List B and a second item from List C. Items on List A includes Permanent Resident Cards and passports. List B contains items like driver’s licenses, while List C includes things such as a Social Security card.

In specific scenarios, employers may also have to complete the federal E-Verify program. This is an added measure to ensure the information that employees provided is accurate. Some states mandate that employers run an employee’s information through the E-Verify system.

Although it is not required under law, LLC owners may want to conduct a background check on a potential hire as well. This is especially critical for small business owners who are hiring employees. As a growing company, their reputation is vital. Running a background check, otherwise known as pre-employment screening, allows you to protect:

• The company
• Customers
• Employees

Even though a background check is not mandatory, there are laws that employers must follow should they choose to conduct one. For instance, employees must authorize an employer to perform a background check. Many of the legal requirements are determined at the state level, so be sure to consult with the Secretary of State’s or Employment Office to learn more about the conditions surrounding background checks.

For example, some states limit the type of criminal history into which employers are allowed to look. Other states protect the credit history of prospective employees, allowing employers only to pull these records if the job meets particular criteria. LLC owners may want to look into hiring a third-party agency who specializes in conducting background checks.  

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Protect Yourself From Liabilities

As an independent contractor, you expose yourself to tremendous liability. Clients would be able to go after all of your assets if something were to go wrong with a deal, including those not related to your day-to-day contracting obligations. This includes things such as your:

• Savings account
• Personal vehicle
• Home

However, working under the LLC umbrella practically eliminates this. That’s because the business organization is responsible for its own debts and liabilities, even if you are the sole owner and only employee. This, in turn, protects your personal assets were anything to go wrong with a contract. Were your business to have debts, the clients typically cannot come after your personal assets.

Simplify Taxes

One of the most significant benefits that self-employed contractors can gain when forming an LLC is the fact that their taxes will become much more straightforward. LLCs offer pass-through taxation. This means that the owner can claim anything the company earns on their personal income statements. LLC owners won’t have to worry about double taxation, as they would with a C corporation.

So, owners will end up protecting themselves from liabilities without having to give up any income. And, taxes become easier to file because LLC owners merely report a profit or loss on a Schedule C, which they attach to their personal income returns. The Internal Revenue Service, for tax purposes, views LLCs just as they do general partnerships and sole proprietorships.

Additionally, LLC owners can opt to be taxed as an S-Corporation, which would allow them to reduce their self-employment tax. Depending on how much money you earn as an independent contractor, this could be in your best financial interest. We strongly advise you to seek out a trusted account or similar financial professional who can advise you on the tax implications of registering as an LLC.

Credibility

Forming an LLC demonstrates to clients that you are professional and that you take your work quite seriously. Think about how much better it looks if a customer were to call, say, “John Doe’s Content Marketing LLC” as opposed to “John Doe.” This is especially true when the LLC could direct the client on how to wire money to their business account. The bottom line is that other companies will take you more seriously if you form an LLC.

Open A Business Bank Account

Registering as an LLC also allows self-employed contractors to open a business banking account. Currently, you may find it easy to keep track of employment funds. Perhaps you’ve allocated a personal credit card and account strictly toward self-employment income. If so, this is excellent, as you’re already on the right track.  

However, if your business were ever to grow, it would be difficult to add a non-family member to this account. A business bank account allows you to do so. It also allows you to track everything much easier. No longer will you forget small expenses or miscalculate income. With a business banking account and credit card, you’ll have a detailed financial report at the end of the year of all business income and expenses.

We’ve spoken with many self-employed contractors who said that before creating an LLC, they did not put much time into running cash flow statements or similar financial analysis. But once they started a company and opened a business bank account, they found it much easier to calculate figures such as their profit margin.

Also, remember that the IRS can audit you at any time. With a dedicated business bank account, it’s significantly easier to go back and track your financial history during a given year. This becomes much more challenging if you’re using a personal bank account for your business funds.

You Can Accept New Forms Of Payment

One of the other significant financial perks to opening a business bank account upon forming an LLC is the fact that you can accept new forms of payment. For instance, you can allow clients to pay with a credit card. They could also wire the funds to your business account directly. Some corporations have regulations about wiring money to a personal bank account, which is why this would be nearly impossible if an independent contractor chose not to create an LLC.  

You Could Gain New Clients

Lastly, 1099 contractors could want to form an LLC because it could put them in touch with new possible clients. Unfortunately, many companies have grown weary over the past couple of years of using 1099 contractors. This is primarily because the IRS has caught companies using the 1099 designation to skirt employment requirements, such as FICA taxes and health insurance. Now, many companies have said they won’t work 1099 contractors as a result.

Allow Someone To Handle Your Administrative Needs

When forming an LLC, one of the requirements is that you designate a registered agent to serve on the company’s behalf. The agent receives all legal correspondence on behalf of this company. Registered agents could prove to be integral to a company’s success. Hiring a quality registered agent could allow you to focus strictly on business dealings, instead of having to worry about tracking down relevant forms and information.

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