Business

Small businesses need assistance in a number of areas including business plan development, credit negotiation, estate planning and family ownership succession. Golden Gate Advisors, Inc. provides these services for California enterprises.

Avoid Unexpected Tax on Loans to Your Corporation

Cash Management for Small Businesses

Tips To Help Your Business Get Paid on Time

Top Business Health Care Savings Ideas

S Corporations and Estate Planning

Tips To Help Your Business Get Paid on Time

The following suggestions can help your business tighten up its credit and collections policies and improve its cash flow. Although some of the tips discussed here may not be suitable for every business, they can serve as general guidelines to help improve cash flow.

Define Your Policy. It’s important to have a clear credit policy. Your sales force should not be able to sell to customers who are not credit-worthy, or who have become delinquent. Define and stick to concrete credit guidelines. You should also clearly delineate what leeway sales people have to vary from these guidelines in attempting to attract customers.

Tip: A system of controls for checking out a potential customer’s credit should be in place, and it should be used before an order is shipped. Further, there should be clear communication between the accounting department and the sales department as to current customers who become delinquent or otherwise contravene credit policy.

Tell Customers About Your Payment and Collection Policy. Communicate your policy to customers. Invoices should contain clear written information about how much time customers have to pay, and what will happen if they exceed those limits.

Tip: Make sure invoices include a telephone number customers can call with billing questions and a pre-addressed envelope.

Tip: The faster invoices are sent, the faster you will receive payment. For most businesses, it’s best to send an invoice with a shipment, not afterwards in a separate mailing.

Follow Through on Your Payment and Collection Terms. If your policy is that late payers will go into collection after 60 days, then you must stick to that policy. Someone — not a salesperson — should call all late payers and ask for payment. Accounts of those who exceed your payment deadlines should be penalized and/or sent into collection, if that is your stated policy.

Train Staff Appropriately. The person you designate to make calls to delinquent customers must be apprised of the seriousness and professionalism required for the task. Here is a suggested routine for calls to delinquent payers:

• Become familiar with the account’s history and any past and present invoices.
• Call the customer and ask to speak with whoever has the authority to make the payment.
• Demand payment in plain, non-apologetic terms.
• If the customer offers payment, ask for specific dates and terms. If no payment is offered, tell the customer what the consequences will be to him.
• Take notes on the conversation.
• Make a follow-up call if no payment is received, and refer to the notes taken as to any promised payments.

Avoid Unexpected Tax on Loans to Your Corporation.  You already know you can be taxed on money you take out of your corporation. But not all corporate owners know they can be can be taxed on money put into the corporation, if it's a loan.

Stockholders who lend to their corporations are expected to charge interest on the loan at the market rate. Those who charge less, or nothing, can be taxed as if they charged at a rate periodically determined by IRS under a federal law. Specifically, the difference between that rate and the lesser (or zero) rate actually charged by the stockholder is taxable to the stockholder as interest income-and the corporation is allowed a corresponding deduction. This "below market loan" rule is triggered once the total loan balance goes over $10,000. Paying your corporation's bills, without getting reimbursement, also counts as a loan.

IRS agents are alerted to such loans by the corporation's tax return, which asks about "Loans from stockholders."

TIP: Review any loans or expense advances to your corporation. Consider whether the outstanding balance should be reduced to $10,000 or less.

TIP: You may want to convert all or part of the loan to a capital contribution or purchase of stock. Consider seeking professional advice on how your business should be capitalized.

TIP: You might decide to regularize the transaction by fixing an interest rate and payment schedule. Your tax advisor can suggest an acceptable interest rate that will stop IRS from taxing you at a higher rate later should interest rates rise while the debt is outstanding.

Note: Loans to unincorporated businesses normally aren't subject to this below-market-loan rule.

Cash Management for Small Businesses Cash is the lifeblood of any small business. Here are some tips to help ensure that your business maintains a sufficient cash flow to meet its financial goals and keep running efficiently:

Toughen up your credit policies. Review the payment terms you offer to customers, and tighten them up if slow payment is a problem area for your business. For instance, how long are customers given to pay? What action will be taken if a payment is missed? Be sure your credit terms are communicated effectively to customers before transactions are entered into.

TIP: Consider requiring advance payments--at least in part--for new customers.

TIP: For many businesses, a routine credit check should be performed before a sales or service transaction is entered into with a new customer.

Come up with a budget—and stick to it. Surprisingly, many small businesses do not engage in the budgeting process. A budget can be extremely effective in helping you keep track of whether cost- and revenue-related goals are being met. Depending on the size and complexity of the business, the budget process might be informal or formal, lengthy or simple. Projected revenues and expenses should be broken down by months.

TIP: If you don't already do so, budget for revenues and expenses at the end of each year.

Tighten up billing. If collecting bills has become a problem for your business, you might want to consider increasing the intervals at which customers are billed--e.g., from three months to one month, or from one month to two weeks.

TIP: Review your accounts receivable weekly or even daily to make sure slow payers are not allowed to slide.

• Market every plan every year to every viable vendor.
• Provide accident and critical illness coverage.
• Self-fund dental and hospital co-payment.
• Increase LTD elimination period and replace with STD.
• Add voluntary vision plans.
• Reduce life insurance and increase AD&D benefit.
• Get your broker to do more of your job

Bill Lavis, Sitzmann, Morris & Lavis - Oakland, CA

S CORPORATIONS and ESTATE PLANNING
Congress made S corporations easier to set up and operate under the Small Business Job Protection Act it passed in August 1996. More corporations will be able to qualify as S corporations, governing rules are simplified, and S corporations will be easier to pass on to the next generation.

An S corporation is a business form that retains many of the benefits of a C corporation, but whose income is taxed at the shareholder level much like a partnership (thus avoiding the double taxation of C corporations). Under the  provisions, most of which took effect the start of 1997: An S corporation may now have up to 75 shareholders instead of the previous limit of 35. (Nonresident aliens still can't be S corporation shareholders.) A new type of trust can hold S corporation stock along with grantor trusts, voting trusts, certain testamentary trusts, and qualified subchapter S trusts. This trust is called an "electing small business trust." The important feature of this trust is that it can have more than one beneficiary, which is not allowed in the other types of trusts.

Estate planning experts say this means that "sprinkle" or "spray" trusts may hold S corporation stock, and that it will be easier to pass on S corporation stock to beneficiaries such as family members. Only individuals or estates are eligible to be beneficiaries, with the exception of charities that hold a contingent remainder interest. Beneficiaries can receive the stock only through gift or bequest, not through purchase. Each beneficiary is treated as a single shareholder.

The big drawback to this rule is that S corporation income flowing into this new type of trust is subject to the highest income-tax rates imposed on estates and trusts (35 percent for ordinary income and 28 percent on capital gains).
Tax-exempt organizations such as qualified pension plans, profit-sharing plans, and foundations may now hold S corporation stock, but the income (or loss) will be treated as unrelated business taxable income, which can be taxed.

S corporations may hold more than 80 percent of the stock in another S or C corporation (but a C corporation can still not hold stock in an S corporation), which should allow more flexibility for companies with subsidiaries. The Internal Revenue Service is permitted, at its discretion, to allow an S election that otherwise might be invalid because of a technicality. It couldn't do so before 1997. Moreover, this rule change is retroactive to tax years starting in January 1, 1983. Corporations turned down for S status back then can reapply for an IRS waiver. Corporations that terminated their S status could not, without IRS approval, reapply for S status for five years. However, the 1996 act allows any corporation that terminated its S status before 1997 to reapply for S status regardless of the five-year rule. S corporations that terminate in 1997 or later will have to wait five years.

It is easier to terminate a shareholder's interests in an S corporation. Terminating such an interest before meant having to close the books for all the shareholders, with their consent. Now the books may be closed with just the consent of the affected shareholders. Grantor trusts may now hold S corporation stock for up to two years after the grantor's death instead of only 60 days.
                                       -Financial Planning Assoc. 1997 updated 2003

IRS CIRCULAR 230 NOTICE: To the extent that this message or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.