Operating Agreements

May 13, 2010

Here are a couple of bullet points why its Important for you to have Operating Agreements for your LLC.

It helps to ensure that the courts will respect your personal liability protection by showing that you have been conscientious about organizing your LLC as a legitimate business.

It sets out the rules that govern how the distributions of profits will split up, how major business decisions will be made, and the procedures for handling the departure and additions of member’s.

It helps to avert misunderstandings among the owner over finances and management. In the case of a single member LLC the operating agreement will help separate your LLC from you as an individual. Without the formality of an agreement the LLC would look a lot like a sole proprietorship.

It allows you to create your own operation rules rather than being governed by the default rules in your state’s LLC laws, which might not be to your benefit.


10 Essentials For A Strong Business Plan

May 11, 2010

Here is a guide for what your business plan should include.  Remember if your not comfortable doing this yourself don’t be afraid to ask for help, or better yet have a Professional do it for you.

  1. Cover Page. Include a short identification and a description of your business activities.
  2. Table of Contents. This allows lenders, investors, or partners to reference a specific section of your plan.
  3. Executive Summary. Provide a total overview of your plan and outline the steps you will take to start and grow your business.
  4. Business Background. Don’t forget to highlight your skills and experience in your industry.
  5. Marketing Plan. Describe the products and services you offer, your market and pricing strategy, and plans to advertise your business.
  6. Action Plan. Outline your specific action items to create and deliver your products and services.
  7. Financial Management, Statements & Projections. Include your sources of startup capital, monthly budget, anticipated expenditures, expected return on investment (ROI), projected balance sheets, and accounting strategies.
  8. Operations. Describe your hiring procedures and expected costs for insurance, leasing, and equipment.
  9. Closing Statement. Restate your goals.
  10. Appendix. Include statistical analyses, sample marketing materials, and resumes.

Basic SBA Loan Requirements

April 23, 2010

The documentation you’ll need to show a lender.

You’ve decided you are ready to run your own small business. You’ve done your homework, have a business plan, know why unsuccessful small businesses fail and have sworn not to make those mistakes. Now you’re shopping for an SBA-backed loan to finance your business. What will you need to show the lender?
Even though the SBA-qualifying standards are more flexible than other types of loans, lenders will generally ask for certain information before deciding to use an SBA loan program. Generally, according to the SBA, a business will need the following documentation to evaluate your loan request:

Business profile. A document describing type of business, annual sales, number of employees, length of time in business and ownership.
Loan request. A description of how loan funds will be used. Should include purpose, amount and type of loan.
Collateral. Description of collateral offered to secure the loan, including equity in the business, borrowed funds and available cash.
Business financial statements. Complete financial statements for the past three years and current interim financial statements.
Personal financial statements. Statements of owners, partners, officers and stockholders owning 20% or more of the business.
The strength and accuracy of your financial statements will be the primary basis for the lending decision, so be sure that yours are carefully prepared and up-to-date.
The most important documents in your financial statements are: Balance sheets from the last three fiscal year-ends.
Income statements revealing your business profits or losses for the last three years.
Cash flow projections indicating how much cash you expect to generate to repay the loan.
Accounts receivable and “payable aging,” breaking your receivables and payables in to 30-, 60-, 90- and past 90-day old categories.
Personal financial statements from you and your business partners listing all personal assets, liabilities and monthly payments, as well as your personal tax returns for the past three years.

Does my LLC need an operating agreement?

April 20, 2010

This is a question that I get a lot when I talk to clients so here it is.  Although most state’s laws don’t require a LLC to have a written operating agreement, you shouldn’t consider starting business without one. Here’s why an operating agreement is necessary:

  • It helps to ensure that courts will respect your personal liability protection by showing that you have been conscientious about organizing your LLC as a legitimate business.
  • It sets out rules that govern how profits will be split up, how major business decisions will be made, and the procedures for handling the departure and addition of members.
  • It helps to avert misunderstandings among the owners over finances and management.
  • It allows you to create your own operating rules rather than being governed by the default rules in your state’s LLC laws, which might not be to your benefit.

If you would like to know more just leave me a comment.

For NonProfits

April 20, 2010

Your small nonprofit may need to file the new Form 990-N or risk losing its tax-exempt status.

Most small nonprofits must now file an “e-postcard”: IRS Form 990-N. Experts fear that, by failing to file this simple form, as many as 500,000 small nonprofits will automatically lose their tax-exempt status as of May 15, 2010. That’s right — up to half a million nonprofit businesses may be required to pay federal income taxes to the IRS. And it won’t just affect the nonprofit businesses themselves; donors won’t be able to take a tax deduction for contributions made to nonprofits that fail to file Form 990-N.

How could this happen? Until tax year 2007, nonprofits with annual gross receipts under $25,000 did not have to make any yearly filings with the IRS. That meant many small nonprofits never had to file anything with the IRS. But in 2008, the IRS introduced a new form just for small nonprofits: Form 990-N (called the Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required To File Form 990 or 990-EZ).

Congress passed this new tax filing requirement in response to concerns that smaller nonprofits were not keeping the IRS up-to-date on new business addresses and changes to other key information. In fact, the IRS suspects that thousands of small nonprofits have closed their doors without notifying the agency. The new 990-N should allow the IRS to maintain an up-to-date database of basic information on all active nonprofits. This will help the IRS meet its administrative goals, but it will also come in handy for donors who want to make sure they are giving money to recognized nonprofits.

Who Must File Form 990-N?

Starting with tax year 2007, all nonprofits with gross receipts “normally” under $25,000 must file Form 990-N. Your receipts will satisfy the “normally” requirement if they averaged $25,000 or less in the prior three consecutive tax years, including the year in which the return would be filed. For tax year 2010, the $25,000 threshold for filing will go up to $50,000, so more small nonprofits will be eligible to file the e-postcard in 2011.

How to File Form 990-N

Filing Form 990-N is so simple that, technically speaking, the IRS doesn’t even consider it to be a tax return. It should take you no more than 10 or 15 minutes to complete. You don’t even need to pay for a postage stamp to mail it to the IRS, because it must be sent electronically — paper copies of the form will not be accepted. This is why the IRS calls the form an “e-Postcard.”

Form 990-N is filed online through a website operated by the Urban Institute, a large nonprofit that has helped the nonprofit community with IRS compliance issues for many years. You do not need any special software to file the form, just access to the Internet and an email address for your nonprofit. Once you log on to the Urban Institute’s website at http://epostcard.form990.org/, you will be asked to create an account before you can access the system to complete and submit your Form 990-N. You will need your nonprofit’s employer identification number (EIN) to do this. You then complete an online form that asks for your nonprofit’s legal name, address, website address (if any), EIN, name and address of a principal officer (usually the president, vice president, secretary, or treasurer), and tax year (either the calendar year or a non-calendar fiscal year). You will also be asked whether your nonprofit has terminated or gone out of business.

After the form is completed, you just need to click on the “Submit Filing to IRS” button to file your Form 990-N with the IRS. The IRS will notify you by email once your e-Postcard is accepted or rejected. If your e-Postcard is rejected, the IRS email will contain instructions on who to contact to resolve the problem. If your Form 990-N is accepted, you can see a copy by clicking the “view” button. Be sure to print out a copy of the Form 990-N for your own files. You can get more information on filing Form 990-N (e-Postcard) from the IRS website atwww.irs.gov/charities/article/0,,id=169250,00.html.

What If You Don’t File Form 990-N?

The IRS is really serious about getting all small nonprofits to file Form 990-N. If you don’t file the form for any single year, the IRS will merely send your nonprofit a reminder notice. But if you fail to file your Form 990-N year after year, things will get tougher. If your nonprofit is required to file Form 990-N but fails to do so for three consecutive tax years, it will automatically lose its tax-exempt status on the filing due date of the third year. For example, if your first Form 990-N is due on May 15, 2008 (for tax year 2007) and you do not file in 2008, 2009, or by May 15, 2010, your nonprofit will lose its tax-exempt status on May 15, 2010. The IRS will not send additional notices once your tax-exempt status is automatically revoked.

If your nonprofit loses its tax-exempt status, you’ll have to apply for your federal tax exemption all over again. That means filing IRS Form 1023 again and paying the hefty filing fee that comes with it (not to mention the headache of all that unnecessary paperwork).

Many nonprofits that may have been affected by the new Form 990-N filing requirements are no longer open for business. But thousands of active nonprofits will lose their tax exemptions by failing to follow the new filing rules. Make sure your nonprofit isn’t one of them. If you haven’t filed a Form 990-N in 2008 or 2009 (assuming your nonprofit was in existence in 2007), make sure you file one by May 15, 2010 — and continue to file a Form 990-N at least once every three years after that.

Texas State Franchise Tax

April 14, 2010

Taxable Entities

Rule 3.581

1. What entities are subject to the franchise tax?

The revised franchise tax applies to partnerships (general, limited and limited liability), corporations, LLCs, business trusts, professional associations, business associations, joint ventures and other legal entities. TTC 171.0002.

2. What entities are not subject to the revised franchise tax?

The revised franchise tax does not apply to:

sole proprietorships (except the tax does apply to single member LLCs filing as a sole proprietor for federal income tax purposes);

general partnerships directly and solely owned by natural persons (except the tax does apply to all limited liability partnerships);

entities exempt under Subchapter B of Chapter 171; and

passive entities (as defined under TTC 171.0003).

3. Is a general partnership whose partners consist of natural persons a taxable entity?

A general partnership directly and entirely owned by natural persons is not a taxable entity. TTC 171.0002(b)(2).

4. Is a general partnership owned directly and entirely by natural persons that elects limited liability status a taxable entity?

Yes, even if a general partnership is composed entirely of natural persons, if it elects limited liability status it is a taxable entity. TTC 171.0002(b)(2).

5. Is a general partnership whose partners consists of natural persons and one general partnership a taxable entity?

Yes, a general partnership must be composed directly and entirely of natural persons to be a non-taxable entity. TTC 171.0002(b)(2).

6. Will an estate of a deceased partner involved in a general partnership make a general partnership made up of natural persons subject to franchise tax?

The estate of a natural person is not a taxable entity. Therefore, a general partnership composed entirely of natural persons will not become a taxable entity because of the estate of a deceased partner. TTC 171.0002(c)(2).

7. Is a limited partnership whose partners consist of natural persons a taxable entity?

Yes, to qualify as a non-taxable entity, the partnership must be a general partnership. TTC 171.0002(b).

8. Are family limited partnerships subject to the franchise tax?

A family limited partnership is a taxable entity unless it meets the criteria of a passive entity under TTC 171.0003.

9. Are sole proprietorships subject to the franchise tax?

A sole proprietorship that is not legally organized in a manner that limits its liability is not a taxable entity. A single member limited liability company filing as a sole proprietor for federal income tax purposes is a taxable entity. TTC 171.0002(d).

10. What is a natural person?

A natural person is a human being as distinguished from a purely legal entity given recognition as the possessor of rights, privilege, and responsibilities, such as a corporation, limited liability company, partnership or trust. TTC 171.0001(11-a).

11. Are passive entities taxable entities?

A passive entity as defined by TTC 171.0003 is not a taxable entity. TTC 171.0002(b)(3). (See FAQ#8 under Passive Entities Rule 3.582 for possible reporting requirements.)

12. Is a non-Texas entity that owns a royalty interest in an oil and gas well in Texas subject to the franchise tax?

Yes. A royalty interest in an oil and gas well is considered an interest in real property. Therefore a non-Texas entity that owns a royalty interest in an oil and gas well in Texas is considered to own real property in Texas and is subject to the franchise tax unless it is a non-taxable entity.

13. The taxpayer is a disregarded entity for federal purposes. Do they have to file franchise tax if they have nexus in Texas?

Yes. The determination of responsibility for Texas franchise tax is based on the legal formation of an entity. An entity’s treatment for federal income tax purposes does not determine its responsibility for Texas franchise tax. Therefore, each taxable entity that is organized in Texas or doing business in Texas is subject to franchise tax, even if it is treated as a disregarded entity for federal income tax purposes. The entity is required to file a separate franchise tax report unless it is a member of a combined group. If the entity is a member of a combined group, the reporting entity may include the disregarded entity with the parent’s information; in that event, both entities are presumed to have nexus. (Updated 04/10/08)

14. Is a limited liability company that was set up to collect lottery winnings subject to the franchise tax?

Yes; a limited liability company that is organized in Texas or is doing business in Texas is subject to the franchise tax. (Updated 06/19/08)

15. Are trusts subject to the franchise tax?

Yes; unless the trust falls under one of the statutory exclusions in TTC 171.0002(c) as a non-taxable entity, it is a taxable entity. (Updated 06/19/08)

16. Is a bankruptcy estate of an individual a taxable entity?

The bankruptcy estate of an individual is a separate taxable entity for federal tax reporting. As a result, the estate will not be considered an extension of a natural person. If the estate holds an interest in a general partnership, the partnership will be a taxable entity. (Updated 06/19/08)

17. Is a joint venture wholly owned by natural persons a taxable entity?

No; a joint venture that is wholly and directly owned by natural persons is not a taxable entity. (Updated 06/19/08)

New Rules for Credit Cards in 2010

April 12, 2010

New protections for credit cardholders take effect in February 2010.

A new law governing credit card accounts and terms — the Credit Card Accountability and Disclosure Act of 2009 — was passed by Congress and signed into law by President Obama in May 2009. Also called the Credit CARD Act, the law provides new protections to credit cardholders by limiting interest rate hikes, providing more disclosures in plain language, eliminating some unfair billing practices, and limiting the availability of cards to consumers under the age of 21.

Most of the changes are effective as of February 22, 2010, although some took effect on August 20, 2009, and a few others are slated to be in place as of August 22, 2010. Here are some highlights of the new federal credit card bill.

Limits on Interest Rate Increases

In the past, credit card issuers could increase the annual percentage rate (APR) on a credit card at any time, with minimal advance notice to consumers. The new Credit CARD Act places restrictions on APR rate hikes. (The APR is the cost of credit expressed as a yearly rate, including interest and other charges.)

Note: The new credit card law does not put a cap on the APR that banks can charge. This means that it’s still important to shop for a card with the best terms for you and to use your cards wisely.

No APR Rate Hikes in First Year

As of February 22, 2010, card issuers are banned from increasing the APR rate on a new card for one year. There are only four exceptions to this rule:

The bank discloses at the time the account is opened that the APR will increase sooner. (This exception addresses “teaser” rates — low introductory rates intended to entice the consumer to get a new card. The initial rate, and how long it will last, must be clearly disclosed and the teaser rate must last at least six months.)

The card has a variable rate.

The consumer fails to comply with a workout arrangement agreed to by the card issuer, or

The consumer doesn’t make the required minimum payment on the card within 60 days.

No Retroactive Fee Increases After the First Year

If the card issuer raises the APR rate after a year, the new rate can only apply to new transactions.

Advance Notice of Rate Hikes or Term Changes

As of August 20, 2009, if the card issuer changes the interest rate (in accordance with the new restrictions) or account terms, it must provide the consumer with notice at least 45 days in advance. Previously, the card issuer only had to provide 15 days’ notice. The consumer may cancel the card before the changes take effect and repay the remaining balance under the old terms and interest rate.

More Time to Pay Bills

As of August 20, 2009, card issuers must mail or deliver statements at least 21 days before payment is due. This longer grace period provides consumers with more time to make payments — and a better chance to avoid additional fees and other penalties for late payment. This provision also applies to home equity lines of credit.

In addition, credit card payments must be due on the same date each month. Deadlines that fall on a weekend or holiday are due the next business day. Card issuers can no longer set early morning deadlines for the payment day –- instead they are required to post any payment received by 5 p.m. on the due date.

Restrictions on Certain Billing Practices and Fees

The Credit CARD Act limits or bans several billing practices and fees commonly used by the credit card companies.

Rules on Applying Payments to Multiple Interest Rate Cards

Some consumers have different interest rates for different balances — a low rate for a transferred balance and a higher rate on new purchases, for example. If a consumer makes a payment that is larger than the minimum amount due, the new law requires the card issuer to apply the excess portion to the balance that carries a higher interest rate.

No “Double-Cycle” Billing

Double-cycle billing (also called two-cycle billing) happens when a credit card company calculates interest charges on the current balance by factoring in the average daily balance from the previous billing cycle — even if a portion of that previous balance was paid. The new credit card law bans this practice. Card issuers may only apply interest charges to outstanding balances and not to previous balances already paid.

Limits on “Over the Credit Limit” Fees

Effective February 22, 2010, credit card companies cannot charge fees for purchases that put the account over its credit limit, unless the consumer agrees to allow the company to process over-the-limit transactions. If a consumer does not opt in, transactions that put the account over the limit would be rejected, and the consumer would avoid fees.

Better Disclosure of Terms

Effective February 22, 2010, card issuers must provide clearer disclosures of account terms and costs. The idea is to arm consumers with information so that they can make better choices as to what cards work for them and avoid costly fees and interest charges.

Disclosures on Monthly Statements

The new law requires monthly credit card statements to:

Include a box showing cardholders how much interest and fees they have paid in the current year

show the due date for the next payment (and the fee for late payment)

display how long it will take to pay off the existing balance (and the total cost of interest) if the consumer makes only the minimum payment due, and

show the monthly payment required (and the total cost of interest) if the consumer were to pay off the balance within 36 months.

Internet Access to Credit Card Contracts

Credit card issuers must post their standard credit card agreement on the Internet. This will make it easier for consumers to compare and understand credit card account terms.

Protections for Young Cardholders

The new credit card law includes provisions that are meant to protect young people from racking up credit card debt.

Restrictions on Cards for Minors

Credit card companies cannot issue a credit card to anyone under the age of 21 unless: (1) the applicant has a co-signer, or (2) the young person provides proof of sufficient income to repay the credit card debt.

Marketing Restrictions

Card issuers cannot send pre-screened cards to consumers under the age of 21, unless the consumer agrees to receive the offers. Credit card companies must also stay a certain distance away from college campuses if they are offering free food or gifts to potential customers.

Beware of New Creative Credit Card Fees

The credit card industry has responded to the Credit CARD Act by coming up with ways to increase fees using tactics that aren’t covered under the new law. According to a report by the Center for Responsible Lending, some credit card companies have:

imposed a “floor” on variable rate cards, so that increases have no limit, but decreases cannot go below a certain number

imposed minimum finance charges (which can be higher than the actual calculated interest)

charged inactivity fees to cardholders that don’t use their card regularly

increased foreign transaction fees, and

increased fees for balance transfers and cash advances.

As always, be sure to read the fine print of all new credit card offers and any change of term notices your credit card issuer sends you.