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Do These 5 Things Before You Start Your Business

By

Matthew Mikel
Matt Mikel, CPA

You’ve finalized your business plan. You’ve acquired capital and assembled a rock-star team. You’ve designed your logo and set up your social media handles. You’re ready to launch your business.

Or, are you?

The thrill of starting a business can be overwhelming. But amid the frenetic joy and anticipation, it’s important to give attention to the less-than-exciting details, too. Here are five things every new business owner should put on their pre-launch to-do list. 

1.Gather a team of trusted professionals.

Having the support of professionals keeps you focused on what’s really important—running your business. Consider building a team that includes the following:

  • Attorney – to assist with required business filings and general legal advice.
  • CPA – to assist with entity type selection, tax planning and preparation, accounting and bookkeeping, and business advising.
  • Payroll Provider – to assist with payroll deposits and filing requirements on a monthly, quarterly, and annual basis.
accounting technology solutions st. paul - cpa firm st. paul

Be sure to tap into the expertise of other advisors, too. There are plenty of successful business owners who have gone before you, and they can offer you valuable advice.

2.Determine your business entity structure.

The most common business entities are LLC, S Corporation, and C Corporation. The structure you choose will impact how your income is taxed, how profits are distributed, and the type of personal liabilities you could face. Be sure to think about your business type as well as your long-term goals, as your decision could impact your business for years to come. Your attorney and CPA can provide insight to assist you with entity selection. Once you’ve determined your business entity structure, you’ll likely want to obtain an Employer Identification Number (EIN) from the IRS.

3.Open a business bank account and credit card.

Having a bank account and credit card that you use exclusively for your business helps with accurate recordkeeping and tax reporting. It can also keep you from missing any tax deductions. Plus, requesting that a check be made out to your business instead of your name enhances your credibility as an established business. When you open an account under your business name, the bank will likely require you to have an EIN.

4.Determine a recordkeeping method.

Good recordkeeping is necessary to make sure you’re taking advantage of the tax deductions for which you are eligible and to support what you’re reporting on your tax return. An accounting software such as QuickBooks can help you keep track of expenses, accounts payable, and even your time. An app that tracks your mileage is worthwhile, too. 

5.Set aside a portion of your net income to pay your quarterly estimates.

Once you become self-employed, you may no longer have an employer withholding payroll and income taxes on your behalf. To compensate for this, you may have to make quarterly estimated tax payments to the IRS and state taxing authorities—or else be vulnerable to penalties.

Secure the support you need for a successful launch.

Checking these five to-dos off your list can help you start your business on the right foot. We’re here to help, whether it’s outlining tax implications of an entity type or determining the amount you should pay in to the IRS and state each quarter. If you have questions about your next step as a new business owner, please don’t hesitate to give us a call.

You’re Ready to Establish an ESOP — Now What?

By

Kyla Hansen

By Kyla Hansen, CPA, CVA

The decision to establish an employee stock ownership plan, or an ESOP, should never be taken lightly. It’s important to not only understand if an ESOP is right for your business but also to determine if it’s even a viable option. If you’ve done your due diligence and are ready to move ahead, here are five steps to follow:

  1. Talk to a knowledgeable ESOP consultant.

This could be a trustee, a CPA, or an attorney who is experienced in ESOP transitions. This person can help you identify any preliminary issues with establishing an ESOP that you may have missed.

  1. Perform an ESOP feasibility analysis.

If you haven’t performed an ESOP feasibility analysis, this should be at the top of your list. You have to make sure your business has enough employees and annual revenues to make an ESOP work. Remember, a good rule of thumb to follow is 20 employees and at least $10 million in annual revenues. A feasibility analysis will help to verify that your company’s cash flow and testing ratios are sufficient.

  1. Organize your records. 

ESOP - Accounting Firms Minneapolis

You will be asked to provide a great deal of information during the ESOP transition. This information will primarily be used to gauge the feasibility of the transaction, but will also help to determine your sale price. The first piece of information you’ll need to produce will likely be your company’s financial statements for the past few years. Consider obtaining a review of your financial statements before this happens to ensure your numbers are accurate. Ideally, you should have three to five years of issued financials statements available to provide.

  1. Prepare projections.

When you sell a business, you are essentially selling its future cash flows. For this reason, the buyer (in this case, the trustee of the ESOP) will need this information to negotiate a sale price. Typically, you will be required to provide five years of projections.

  1. Create your team.

A successful ESOP transition requires a team. There are two teams for the transaction: one representing you, and the other representing the ESOP. The professionals you will need include a CPA firm such as JAK ; an attorney for your business, the ESOP, and you; a trustee; and a valuation company. Because you, as the business owner, are paying for both teams, an ESOP often becomes more expensive than other sale transactions.

Stay on track for a successful ESOP transition.

Following these five steps is key to ensuring the success of your ESOP. If you’re ready to begin the process, we can help you get started and provide support along the way. Give us a call today to learn more.

Thinking of an ESOP for Your Business? 4 Factors to Consider

By

Kyla Hansen

By Kyla Hansen, CPA, CVA

Establishing an ESOP, or an employee stock ownership plan, might be the right option for your business, you, and your employees. If you’re thinking of implementing an ESOP, here are four factors you should consider first.

  1. Your expectations for the sale.

Do you wish to turn over your business to your employees, even if it means potentially leaving money on the table? Selling your business to an ESOP will almost always net fewer proceeds than if you were to sell to a third party. It’s likely there will also be more costs associated with becoming an ESOP than with a third-party sale.

  1. The size of your company.

To make the cash flow and annual retirement contribution limitations work, you must have enough employees, annual revenue, and net income. An accepted rule of thumb for establishing an ESOP is to have at least 20 employees who are qualified to participate in the ESOP and annual revenues of at least $10 million. For this reason, it’s important to perform an ESOP feasibility analysis before you get too far into the process.

  1. The strength of your management team.CPA firm St. paul - Strength Of Your Team

After you exit the business, who will take the reins? Having a strong management team in place—before you establishing your ESOP—will make the whole process go much more smoothly and likely increase your sale price.

  1. Your employee turnover rate.

If your business has a high employee turnover rate, an ESOP may not be the right choice. Employee continuity is important for a successful ESOP. Without consistent employee numbers and leadership, an ESOP may not be a good fit.

Is employee ownership an option for your business?

The benefits associated with ESOPs apply only in the right situation. Before you decide to implement an ESOP, do your homework. Make sure it’s the right call for you, your family, and your employees. If you’re wondering if an ESOP would be feasible for your business, the CPA firm of JAK can help. Give us a call today to get started.

5 Reasons Why Employee Ownership Could Be Right for Your Business

By

Kyla Hansen

By Kyla Hansen, CPA, CVA

An employee stock ownership plan, or an ESOP, is a retirement program that allows its participants to be owners of the company for which they work. As a business owner, you might consider an ESOP as a way to provide a valuable benefit for your employees. But this isn’t the only reason why an ESOP might make sense.

Here are five reasons why an ESOP could be right for your business:CPA Firm Minneapolis - ESOP

  1. You’re ready to start thinking of an exit strategy.

If you’re looking to transition out of your business, you have a few options: you can sell to an employee or family member, you can sell to an outside party, or you can implement an ESOP. Setting up an ESOP lets you transition the ownership of your business to your employees. This may make sense for you if you value giving back to your employees more than getting top dollar for the sale of your business.

  1. You want to attract and retain quality employees.

It can be difficult to attract talented employees, especially in today’s marketplace. As a desirable workplace benefit, an ESOP can serve to differentiate your business from competitors. Giving your employees ownership can also help to increase engagement and workplace morale.

  1. You wish to diversify your investment.

Is your business your largest asset? If so, establishing an ESOP gives you a way to redeem all or some of its stock, allowing you to reinvest those funds in other investments or companies. Depending on the circumstances, you may be able defer the gain related to the sale of the business if you invest it in qualified property under IRC Section 1042.

  1. Gain a competitive advantage.

When contributions are made to the ESOP, they are allocated into the individual participants’ accounts. Taxes on these accounts are due at the individual level when redemption of their ownership occurs. In most cases, if a company is a 100-percent ESOP, it does not owe income tax on company earnings. This tax savings can provide extra cash to use for revenue-generating initiatives, such as expansion.

  1. Give back to your employees.

The success of any business depends largely on the people it employs. An ESOP provides a way for you to give back to those who helped your business become what it is today.

Let us help you understand your options.

If you’re considering an ESOP, the team at JAK can help you explore your options. Together, we’ll discuss the pros and cons of an ESOP as they relate to your situation. To learn more about the benefits we’ve mentioned here, please give our St. Paul office a call.

Now is the Time to Start the Transition Planning Process

By

By Todd J. Koch, CPA, MBT, CFP®

For business owners, the prospect of handing over the reins can be difficult at best, painful at worst. For this reason, many business owners avoid even thinking about it. But leaving transition planning on the back burner could leave your business in a perilous spot. Here are a few tips about when and how to start the transition planning process.

Recognize that planning for a transition is, in fact, a process.

There’s a lot more to taking a step back from your business than setting a retirement date. This is true whether you plan to sell to an outside party, a close family member, or a key employee.

Put the right people in place.

 Who will fill your shoes? If you have been the only face of the business, you’ll need to introduce your successor to the nuances of your job—and to your customers or clients. This applies even if you want to leave and still own; someone needs to have your skill set for the business to continue. And if you’re planning to sell to an outside party, remember: a strong staff is one of your biggest assets.

Present financial results in a way that shows others what they could do with your business.

 Now is the time to think about how someone else might run your business. Start by identifying and removing perks. And be honest with yourself. For instance, do those Vikings season tickets really deliver a financial benefit, or are you just a die-hard fan?

Next, take a look at your bonus programs. Do you have a set formula for these? If not, consider instituting one. It’s easier to explain a formal program to a prospective buyer, and it’s also better for your staff to have a goal to work toward.

Thinking of your financial results in more than a tax manner can help you better position your business—and staff—for the transition.

Get started while you’re in control of timing.

 There are a myriad of events, both positive and negative, that can cause you to lose control of timing. For example, if a buyer comes to you out of the blue with an offer you can’t refuse, it may be cause for celebration, but timing will likely be out of your control. On the other hand, an illness or death may force the transition to happen immediately.

Ideally, you should start planning for the transition three to five years before you want it to happen, as this is how long it takes for someone to learn your job. This should also give you enough time to make any necessary changes to your financial reporting.

Talk to someone who’s been in your shoes. 

 We’ve been through quite a few transitions of our own in the last 90 years, so we understand the process. We also understand that it has to be your idea—no one can talk you into it. Knowing you’re ready to take action is the first step. And the more time you allow yourself to complete the process, the more seamless it will be. When you’re ready, we can help you evaluate financial results and structure compensation programs, as well as simply answer any questions you may have.

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John A. Knutson & Co., PLLP

John A. Knutson & Co., PLLP, (JAK) is a Twin Cities-based accounting firm serving clients throughout Minnesota and beyond. A Team Committed to Quality Beyond Expectations