Corporate Tax

COBRA – Continuation Health Coverage

Are You Covered?

Congress passed the Consolidated Omnibus Budget Reconciliation Act that has health benefit provisions since 1986. This law amends Employee Retirement Income Security Act, Public Health Service Act and Internal Revenue Code. The goal of COBRA is to continue health coverage for groups that must be terminated otherwise.

COBRA has provisions giving former retirees, employees, dependent children and former spouses the right for temporary continuation of coverage on health insurance plans in terms of group rates. However, the coverage can only be made available when this is lost because of specific needs. The Group health plan coverage for participants in COBRA is more expensive than the health coverage of employees who are currently active. Usually, it is the employer that pays the portion of the premium for the employees who are currently working while the COBRA participants pay the full premium themselves. Surprisingly, it is less expensive than the usual health policies.

Employers who have 20 or more individuals in their company are required to provide COBRA coverage for them. It is also their responsibility to notify the employees that this coverage is available. COBRA also applies to the health plans that have been maintained by the employers in the private sector as well as those that are sponsored by local governments and most state.

Who are entitled to COBRA benefits?

There are three qualifications for COBRA benefits. In fact, COBRA has already established specific and clear data for the policy plans, qualifying events and qualified beneficiaries.

Plan Coverage: Employers who have 20 employees under their wing for more than half of the typical business days in the year before are required to be under COBRA. Both the part time and full-time employees are included in the tally of determining whether the health plan is more suitable for COBRA> Every part-time employee is a fraction of the other employee, therefore what one gets is equal to what the others guest, if they share the same number of rendered hours. The calculation is the hours that part time employee rendered divided by hours that the employee will work if he will be rendering full time hours in the future.

Qualified Beneficiaries: To be considered as a qualified beneficiary, the individual must be covered by a health plan for groups on the very day before an even that is considered to be qualifying by either the employee, the spouse of the employee or the dependent child of the employee. There are cases wherein the retired employee or the spouse of retired employee and dependent children of retired employee are also qualified beneficiaries. Aside from this, a child that was born or placed through adoption with an employee who is covered during COBRA coverage is also regarded as a beneficiary that is qualified. Independent contractors, agents and directors who are part of the health care for groups can also be eligible beneficiaries.

Qualifying Events: As mentioned earlier, these are events that cause the employee to lose or discontinue his health coverage plan This kind of qualifying event can also determine who among them will be qualified beneficiaries as well as the time duration that the plan will be offered to cover them through COBRA. The plan, using its discretion, can also provide a longer period of coverage that will continue for a long time.

These are qualifying events specifically for employees:

  • Voluntary termination as well as involuntary termination of the individual’s employment due to reasons aside from gross misconduct.
  • Reducing the total hours of the individual’s employment.

These are qualifying events specifically for the spouses of the employees:

  • Voluntary termination as well as involuntary termination of the individual’s employment due to reasons aside from gross misconduct
  • Reducing the total hours that are worked by the employee who is covered by the plan
  • The individual who is covered by COBRA is entitled to get Medicare
  • The legal separation or divorce of the individual who is covered
  • The death of the individual who is covered

Qualifying events for the dependent children of the individuals who are covered are similar to that of the spouse but has this addition:

  • Losing the status of being a dependent child as listed in the rules of the specific plan.

 What are the Benefits Covered Under Cobra?

 The qualified individuals and beneficiaries must also receive a coverage that is similar and available to those who are situated in the same beneficiary as those not receiving the coverage of COBRA. In general, this is the similar coverage that an eligible beneficiary has as immediately as possible before he or she has qualified for a coverage that continues. If there is a change in benefits due to the specifics of the plan for an employee who is currently working, this will still apply to the beneficiaries who qualify. Qualified beneficiaries can also make similar choices that are offered to the individuals who are not under COBRA, like periods of enrollment in the plan in an open setting.

Who is charged for the COBRA coverage?

The beneficiaries are required to pay for the coverage under COBRA. This premium may not go beyond the 102% of the total cost of the plan especially for individuals who are similarly situated but have no incurred the qualifying events as specified. This also includes the portion that is covered by the employees as well as the portion that the employer has already paid for even before the event that qualifies, atop the 2% rendered to cover the administrative costs.

For beneficiaries who qualify, they receive the 11-month disability that is the extended duration of the coverage. This is also the premium targeted for the additional months that can also increase to as much as 150% for the total cost and coverage of the health plan.

COBRA premiums can also increase if there are costs to the said plan that also increases but these can also be fixed when set in advance for every premium cycle of 12 months. The plan can also let the qualified beneficiaries pay the premiums indicated on monthly basis if they requested for this. The plan can also let them make the payments in other intervals, the choices are weekly basis and quarterly basis.

The initial payment of the premium can also be made during the 45 days after the COBRA election date of the qualified beneficiary. The payment can also cover the coverage period after the COBRA election date that is retroactive to the loss of coverage date because of the event that is considered to be qualifying. The premiums for successive coverage periods are due and set on the date that is stated and mentioned in the plan coverage with 30-day minimum for grace period payments. Payment is also considered to be made accordingly on the specific date that is directly sent to the plan coverage.

If the premiums have not been paid on the first day of the coverage period, then the plan can opt to cancel the coverage until the payment for this has been received and immediately reinstate the coverage as retroactive to the start of the coverage period.

If the amount of payment that was made to the coverage was conducted in error but not significantly lower than the amount due, then the plan requires to be notified by the beneficiary that is qualified and report it as a deficiency. The individual will then be granted a period that is reasonable, which is usually 30 days, to pay for the difference. The plan coverage is also not required to send the individual monthly notices of the premium.

The COBRA beneficiaries stay as subject to the rules especially to the plan and must also satisfy the costs that are related to deductibles and co-payments. These are also subject to benefit limits.

The Federal Government and COBRA

The continuing coverage of COBRA as administered by the several agencies like Department of Treasury and Department of Labor have jurisdiction especially on the private-sector and health group plans. Meanwhile, Department of Health and Human Services also administers the coverage as it continues because it has an effect on the plans for the health of the public sector.

The regulatory and interpretative responsibility of the Labor Department can be limited to the notification requirements and disclosure of COBRA. If further information is needed about ERISA in general, then the individual can just write to the office of EBSA that is nearest to him or her. It is also possible to consult the US Department of Labor as well as the US Government for the listing in the phone directory of the office near them. EBSA is Employee Benefits Security Administration under US Department of Labor.

The Department of Treasury as well as the IRS has also issued regulations on the provisions of COBRA that is related to the coverage, eligibility and premiums. Both the Department of Treasury and the Department of Labor share the jurisdiction for enforcing the said provisions.

COBRA coverage and the Marketplace

When the individual loses the insurance that is received from his job, then he is also offered the continuation coverage of COBRA by his or her former employer, if the latter opts to do so.

If the individual chooses not to take the coverage of COBRA any longer, then he or she can just enroll in the Marketplace plan. Losing the coverage from the job-based health premium lets the individual qualify for the Special Enrollment Period. This is a period of 60 days that allows the individual to enroll the health plan and this can be done even if it is outside the Open Enrollment Period.

Is it possible to change from COBRA to a Marketplace Plan?

If the individual’s COBRA is running out, he or she can still change during Open Enrollment. It is also possible to change outside Open Enrollment as long as the individual qualifies for the Special Enrollment Period.

If the individual is ending his or her COBRA coverage earlier than expected, he or she can still change to the Marketplace plan during Open Enrollment. It is however a different case outside Open Enrollment. The individual can no longer change from Cobra to Marketplace in this scenario. He or she has to wait for the COBRA to run out and for him or her to qualify for the Special Enrollment Period in one way or another.

If the COBRA costs have changed because the individual’s former employer have also stopped contributing and is required to pay the full cost of the coverage, the individual can still change to the Marketplace Plan during Open Enrollment. It is the same during outside Open Enrollment. He or she can still change especially when he qualifies for the Special Enrollment Period.

More information on COBRA

COBRA also qualifies as the health coverage or what is also regarded as the minimum essential coverage. That being said, if the individual has the COBRA coverage, then he or she does not have to pay the complete fee that other people who are not covered by COBRA are required to pay.

If the individual has already signed for COBRA coverage but then eventually finds the premium and payments to be too expensive, his or her options depend entirely on whether it is the Open Enrollment Period. He or she can change to the Marketplace but that can cost him or her more than usual because he or she has to opt out of the coverage.

As for people who are wondering if it is possible to switch to Medicaid from their COBRA coverage but outside the period of Open Enrollment, it is important to note that it is also possible to apply for as well as enroll to be covered by Medicaid at any time. The process is to drop the COBRA coverage earlier than expected and to check if the individual qualifies for both Medicaid and CHIP. This is done by people who leave the employers and those who find the COBRA coverage more expensive than expected.

Treatment of Transportation Expenses When Not Traveling Away from Tax Home

When you ride a cab or get in your own car to do business somewhere, have you ever thought of your transportation costs and how much of it you can actually write off? So many materials have been written about deductible expenses when people travel away from their tax homes for business, but those that tackle deductible expenses when not traveling away from home are scarce.

Here, let’s focus on your transportation costs when you are technically not traveling away from home. But before we go to your expenses, remember first that you are considered traveling away from home if you meet the following criteria:

  • Your business or job requires you to be away from your tax home considerably longer than your ordinary day at work.
  • You need to sleep to meet the demands of your work.

If you don’t meet the above mentioned criteria, then you are not traveling away from home so this chapter is for you.

You probably know that the law mostly does not allow deductions for personal expenses, so we’re talking about business expenses here.

Transportation Expenses

By definition, transportation expenses cover your cost of transportation– may it be by rail, bus, taxi or air, as well as the cost of maintaining and driving your own car.

According to the IRS rule, these expenses include all ordinary and necessary costs of the following:

  • Going from one location to another while conducting business or performing your profession, as long as you are traveling within the general area of your tax home.
  • Visiting your customers or clients.
  • Going to a business meeting that is not within the area of your regular workplace.
  • Temporarily going from your home to a workplace when your business or job requires you to have more than one regular place of work. Here, it doesn’t matter whether your temporary workplaces are within the general area of your tax home or not.

Remember that generally, the transportation expenses that will be discussed in this chapter do not include those that you incur when you travel away from your tax home overnight, though the rules here apply when you use your own car to travel away from home overnight as this will cover car expense deductions.

Basically, the transportation expenses that you incur daily when traveling from your home to one or more of your regular workplaces are considered nondeductible. That means that if you ride a bus to travel from your home to one of your regular workplaces, you are generally not allowed to write off the commuting expenses that you incur. However, there are certain exceptions to this rule.

If you go between your home and your temporary workplace outside the general area of your residence, you are allowed to deduct the transportation expenses that you incur. You can also deduct your daily transportation expenses in the following situations:

  • If you have at least one regular work location away from your home.
  • If your home is your regular workplace or place of business and you incur transportation expenses when you go to your home and another work location. However, that work location should fall in the same industry or business, regardless of the distance and regardless of whether the work you do there is permanent or temporary.

When Transportation Expenses are Deductible

Before we go into the finest details, here is a summary of the key locations you should consider and the instances when you can and cannot deduct your transportation expenses:

  • This home is not necessarily your tax home but the place where you live. The transportation expenses that you incur when you travel to and from your regular or main place of work are considered personal commuting expenses and are therefore nondeductible.
  • Regular or Main Job. This refers to your main place of work or business. In the event that you have more than one job, you can determine which of your workplaces your main workplace is by considering the time you spend at each, as well as the activities you have at each and the income you earn at each. While your transportation expense from your main job to your home are nondeductible, your expenses from your main work location to your temporary work location or second job and vice-versa are always deductible.
  • Temporary Work Location. Your temporary work location is any place where you are expected to perform your job in a year or less. You can only write off your transportation expenses to your temporary work location if it is not within your metropolitan area, unless you have a regular workplace or place of business.
  • Second Job. You are allowed to deduct your transportation expenses when you get from one workplace to another if you have more than one job and are required to regularly work in more than one place in a day. Whether or not your two or more jobs are for the same employer, your transportation expenses are always deductible. However, you cannot deduct your transportation expenses if you’re coming from your home going to your second job. Remember that you have to go directly from your first job to your second job for your transportation expenses to be deductible. If you go somewhere else after leaving your first job, the amount you spend for your transportation going to that place is nondeductible.

The above-mentioned rules apply when you incur transportation expenses since you have a regular job away from your home. If your main workplace or place of business is your home, do not use the rules for reference.

How to Know if Your Work Location is Temporary

 If your regularly incur commuting expenses because you have more than one regular work location in the same business away from your residence, you can write off the transportation expenses that you incur for your daily round trip between your home and your temporary workplace, regardless of how near or far that workplace is from your home.

In case you are expected to complete your employment at a particular workplace in a year or less, then your employment is considered temporary. Your employment is not considered temporary if your employment at a work location is expected to last for more than a year.

But what if your employment was initially expected to last for less than a year, but due to unavoidable circumstances, you are suddenly expected to work for more than a year?

In that case, your employment will be treated as temporary and same rules on tax deductions apply. If your temporary workplace is not within the general area of your regular workplace and you stay there overnight, then you are considered traveling away from home and the treatment of your transportation expenses depends on the rules under the Traveling Away From Home section of the IRS Publication 463.

 If You Do Not Have a Regular Place of Work

 If you do not have a regular place of work but usually works in the metropolitan area of your residence, you can write off your daily transportation expenses between your home and temporary workplace that goes beyond that metropolitan area. The IRS defines this metropolitan area as the area which covers the area within the city boundaries, as well as the outskirts of the city.

Keep in mind that you cannot write off your daily transportation costs if your temporary workplace is located just within the metropolitan area because these expenses are considered nondeductible.

When You Have Two Places of Work

 Some people have more than one job in a day, and therefore have to go to two work locations in a day. If you are one of them, you are allowed to deduct your transportation expenses when you get from your first work location to the other and vice-versa. That is regardless of whether or not your two jobs are for the same employer.

But what if for some personal reason you fail to go directly from your first work location to the next?

In that case, you are not allowed to deduct your transportation expenses because the rule states that you cannot write off more than the amount it costs you to go directly from your first workplace to the next.

For instance, it’s your day off from your main job and you incur transportation expenses when you go between your home and your part-time job, such costs are considered commuting expenses and are therefore nondeductible.

When You are a Member of the Armed Forces Reserve Unit

 Specific laws are set in place for people who are members of the Armed Forces reserve unit.

Say you have a meeting in that unit. If that meeting is held on a day when you are not off from your main job, then the venue of the meeting is considered as a second place of business and the transportation expenses you incur in getting there from your main workplace are deductible.

However, if the meeting is held on a day when you don’t work at your regular job, your transportation expenses become nondeductible.

The story is different if the place where the meeting is held is temporary and you have more than one regular place of work.

Say you regularly work in a certain metropolitan area but not at any specific location in that area, and the meeting is temporarily held outside that metropolitan. In that case, you are allowed to deduct your travel expenses.

Your transportation expenses also become deductible if your being a reservist requires you to travel more than 100 miles away from your residence. If you travel that distance in connection with your performance as a reservist, you can deduct some of your costs not as itemized deductions but as an adjustment to your gross income.

Commuting Expenses

 Generally, commuting expenses are the transportation costs you incur when you commute from your home to your main place of work and vice-versa. The costs of taking a trolley, bus, taxi or subway between your home and your regular work location are nondeductible since the law sees them as personal commuting expenses.

Regardless of how far your residence is from your regular place of work, you cannot deduct your transportation expenses.

You may ask, what if you still work during the commuting trip?

Performing your job during your commuting trip does not change your commuting expenses from personal to business expenses.

Take this as an example. You use your phone to make business calls while commuting. Or you have your own car and colleague rides with you on your way home. During you travel, you engage in a business discussion. In both cases, your transportation expenses remain personal and nondeductible.

When you commute to and from work, your taxi fare usually is not the only cost covered by your transportation. Take a look at these accompanying commuting expenses:

  • Parking Fees. When you bring your own car to work and pay to park your car at the parking lot of your business location, the parking fee is nondeductible. The only parking fee that is considered deductible is that which you pay for when you visit a client.
  • Advertising Display on Car. Just because you put display material advertising your company does not necessarily mean that your car is for business use, so the expenses you incur for putting such displays on your car are all nondeductible.
  • Car Pools. When you use your car in a nonprofit car pool, you still cannot write off the cost of doing that. You should not include the payments that you receive from your passengers in your income. However, you may do otherwise if you operate a car pool for a profit. In that case, you may include their payments in your income and then deduct your car expenses.
  • Hauling Tools or Instruments. Hauling instruments in your car when you are commuting to and from work does not make your transportation expenses deductible.

 When Your Home Qualifies as a Principal Place of Business

 If you consider the place where you live as your main place of work or business, your daily transportation costs between your home and your other work location are deductible. Take note, however, that the work you do in your home and in the other workplace must be in the same business.

All things considered, it is safe to say that nothing in tax law is straightforward, no matter how easy you may find identifying deductible transportation expenses is.

Meal Expenses: How Much Can You Deduct?

Treating your customers and employees occasionally is one of the best ways to build your business. Going the extra mile to make them feel valued goes a long way, although you may not see that now. If you worry about the expenses you may incur taking them out for a meal, you shouldn’t because meals are considered a legitimate business tax deduction. In fact, even your own meals can also be deductible. But of course, there are limits on what you can write off.

Meals become a legitimate tax deduction only in these two situations:

  • You are traveling away from your tax home for your business or job and need to stop to get considerable rest somewhere so you can perform your duties well.
  • The meal is related to your business or job.

If you satisfy either of the two situations, then your meal becomes a deductible expense.

Now let us set aside business-related meals and focus on the first situation. The IRS law states that when you are traveling away from your tax home for work–may that be for your job or business—your meal expenses become deductible. Does that mean that you can eat whatever you want while on duty and completely write everything off? The answer is no.

Actually, there are meals that you can completely write off, while there are meals that are only subject to 50% deductions. You can also not eat too lavish or extravagant meals and expect them to be deductible. In that case, you purchase your meal at your own expense.

Too Lavish or Extravagant Meals

 The law states that meals that are too lavish or extravagant are never deductible. But how do you gauge the lavishness or extravagance of a meal?

Simple. As per the IRS Rule 463, “An expense isn’t considered lavish or extravagant if it is reasonable based on the facts and circumstances.” Just because you conduct business at a high-end restaurant does not necessarily mean that you are being lavish. In fact, the law won’t disallow your meal expenses just because the meal takes place at a deluxe restaurant or hotel.

If you are treating a potential client you are trying to close a deal with, treating him to a sumptuous meal at a high-end restaurant is reasonable enough. However, if you are only conducting a business meeting with your employees to discuss your Christmas party, treating them to a buffet restaurant doesn’t seem reasonable at all. Again, it depends on the facts and circumstances.

Now it’s clear that you cannot deduct expenses for lavish and extravagant meals. However, that is not the only exception. While lavish meals are totally not subject to deductions, some meals are subject to deductions but only to a certain limit.

50% Limit on Meals

 In the law, there exists this 50% limit when it comes to meals and other entertainment expenses. Determining which of your meal expenses are subject to this limit is necessary to know how much you should write off. You use the following methods to figure your meal expenses:

  • Actual Cost.
  • The Standard Meal Allowance.

Notwithstanding the method that you use, remember that you are allowed to deduct only 50% of the unreimbursed cost of your meals. In case you are reimbursed for the cost, how you apply the limit solely depends on the reimbursement plan of your employer. Is it accountable or non-accountable? On the other hand, if you are totally not reimbursed, the limit applies regardless of what the unreimbursed meal expense is for. That means that whether your meal is for business entertainment or business travel, your unreimbursed meal expense is always subject to the limit.

Now let’s go back to the two methods that you can use to figure your meal expenses–the actual cost and the standard meal allowance.

Actual Cost

 This method is less complicated compared with the other method. You simply use the actual cost of your meals to determine the amount of your expense before reimbursing the cost and applying the 50% limit on deductions. If there is one important thing that you should remember when using this method, it’s that you should always keep your records to prove your expenses.

Standard Meal Allowance

 If you do not want to use the actual cost method, you are free to use this method in figuring your expenses for meals.

Generally, this alternative method lets you make use of a set or fixed amount for your daily meals and incidental expenses (M & IE) instead of backing up your actual costs with records, particularly receipts. Well, of course you can still keep receipts for future reference, but you won’t need them as much as you will need them when you use the actual cost method. Under this method, the set amount hugely depends on where and when you travel.

The standard meal allowance method makes mention of a fixed amount for daily meals and incidental expenses. You may probably ask, what are those incidental expenses?

Incidental Expenses

 According to the IRS Publication 463, incidental expenses refer to the fees and tips that you usually give to baggage carriers, porters, hotel staff and the likes. Since they are only incidental, they are not your main expenses. However, these incidental expenses supplement your main expenses.

While these expenses are only considered supplementary expenses, they do not include the money you spend for laundry, lodging, pressing of clothes, mailing cost and telephone or telegram charges.

Incidental-Expenses-Only

 There are days when you do not get to incur any expense for your meals. If that is the case, then you may use the incidental-expenses-only method in determining the amount of deductions you are entitled to. This method is an optional method that you can use instead of the actual cost method if you want to write off your incidental expenses only. When you use this method, you can deduct $5 a day from your expenses if you did not spend anything for your meals.

You should also note that you cannot use the incidental-expenses-only method just whenever you want, or on any day that you apply the standard meal allowance method in determining your deductions. The proration rules for partial days strictly apply to this method. However, it is not subject to the 50% limit on meal deductions.

But how will you know if your meal allowance is subject to the 50% limit? Well, this limit is a bit tricky so you have to learn the ropes.

50% Limit on Meal Deductions

Say you are not reimbursed after applying the standard meal allowance method for your meal expenses, or you used the same method but are reimbursed under a non-accountable plan. In that case, you are allowed to write off only 50% of you standard meal allowance.

This goes the same way if you are reimbursed under an accountable plan and are writing off expenses that are more than your reimbursements. In that case, you are allowed to deduct only 50% of the excess amount.

Are You Allowed to Use the Standard Meal Allowance Method?

 Whether you are an employer or an employee, you are free to use this method. It also doesn’t matter whether you are recompensed for your traveling expenses or not because either way, you can use the same method. But while the law is somewhat lenient when it comes to the use of the standard meal allowance, you should remember that there is also a limit as to where you can use it.

If you are traveling for investment or other income-generating activities, you can use this method in treating your expenses. If you travel for qualifying educational purposes, that is also acceptable. However, if you travel for charitable or medical purposes, you cannot use this method in figuring the cost of your meals.

Is There Any Standard Rate for the Standard Meal Allowance?

 The standard rate for the standard meal allowance is equivalent to the federal M & IE rate. As of 2016, the standard amount for travels in most of the small localities in the United States is set at $51 per day. This rate does not apply to the country’s major cities and localities, which are considered high-cost areas. In their case, higher standard meal allowances apply.

If you want to know the amount of standard meal allowance in the state you are in, you may visit www.gsa.gov/perdiem for the per diem rates of each state for the current fiscal year. You just have to enter the zip code of the city or state that you want to know the per diem rates of through the dropdown menu.

What if You Travel to More Than One Location in a Day?

 If that is the case, then you have to use the applicable rate in the location where you stayed longer to take a rest or sleep. However, the same rule does not apply if you are working in the transportation sector. Workers in the transportation industry are entitled to special rates and are not covered by the mentioned rate for the standard meal allowance.

But how do you know that you are working in the transportation industry? Take a look at these requirements:

  • Your job directly involves transporting goods or people by plane, bus, train, ship, barge or truck.
  • You are regularly required to travel away from your tax home and in one single trip, you become eligible for different standard meal allowance rates.

Once you confirm that you are actually working in the transportation sector, remember that you are allowed to claim a standard meal allowance of $63 a day for your travels. You become entitled to this special rate so that you no longer need to know the standard meal allowance that applies to each and every area where you stop for sleep. When reporting on your income tax return, make sure that you use this special rate for all your travels and not the regular standard meal allowance rates for each state.

When it comes to the federal government’s fiscal year to use, it’s up to you. Once you visit the GSA website to check out the list of the per diem rates of each city or state, you may either choose the rates from the 2016 fiscal year table or the 2017 table to report your travels, which is crucial in determining your income tax return for one fiscal year. However, you have to be consistent. If you use the 2016 table in reporting one travel, then you must use the same table for all the other travels you are reporting.

What if You Travel Outside the U.S.?

 The Department of Defense has assigned locations which can be considered foreign areas and non-foreign areas. The standard meal allowance rates mentioned above do not apply to these areas.

There are special rates that apply to non-foreign areas like Alaska, Hawaii, Puerto Rico, Guam, the Northern Mariana Islands, U.S. Virginia Islands, American Samoa and Wake Island, as well as to non-foreign areas which are geographically located outside the continental U.S.

If you travel to a non-foreign area outside the U.S. and want to know the per diem rate that apply to your travel location, go to www.defensetravel.dod.mil/site/perdiemCalc.cfm. But if your travel location is a foreign area, you must go to www.state.gov/travel/. Under the Foreign Per Diem Rates, click on Travel Per Diem Allowances for Foreign Areas. You will then see the list of per diem rates in the area that you are looking for.

 Whether you are allowed to use the standard meal allowance, entitled to special rates, travel in the U.S. or outside the U.S., it is always critical that you maintain proper records to substantiate all your meals. Always be on the safe side by making sure that you have something to present to back up your expenses once the need for an audit arises in the future.

Getting Started with Your Very Own Business Venture

A great start-up business always starts out as an idea, but you have to transform that idea into action. That’s where many individuals can start to feel overwhelmed. It’s understandable to freeze up at the deluge of things that are required to get a business started, but getting going is actually easier than you might think.

Like any big goal, if you start by breaking it down into smaller tasks, you’ll be able to tackle enough of the actions necessary to get started. Here are six ways to break down the process and simplify getting started with your own small business.

Right now, aspiring entrepreneurs all across the country are planning their paths to business ownership. It’s a journey that requires a lot of hard work, and many people end up failing. But if your company survives, the rewards of entrepreneurship are well worth the obstacles you’ll face on the road to success.

Choose your Industry

Every new business starts with an idea. Maybe there’s something you are really knowledgeable and passionate about, or perhaps you think you’ve found a way to fill a gap in the marketplace. Wherever your interests lie, it’s almost guaranteed that there’s a way to turn it into a business. If you know your strengths and what you enjoy, you are more likely to tackle a business problem that is best suited to your skills and interests and is less sensitive to your shortcomings. Capitalize on your strengths, and accept input from advisors and the team on decisions outside your range. Everyone will see you as a better listener and a stronger leader who is not autocratic and knows how to tackle the many unknowns of a new business. Too many people fail because they are working on someone else’s problem. You won’t be happy in the wrong business.

Another option is to open a franchise of an established company. The concept, brand following, and business model are already in place; all you need is a good location and the means to fund your operation.

Once you’ve narrowed your list of ideas down to one or two, do a quick search for existing companies in your chosen industry. Learn what the current brand leaders are doing, and figure out how you can do it better. If you think your business can deliver something other companies don’t (or deliver the same thing, but faster and cheaper), you’ve got a solid idea and are ready to create a business plan.

Writing the Business Plan

During the brainstorming, you should also start thinking about your business plan. A smart entrepreneur has a vision of where he/she sees herself and the business in the foreseeable future and writing it down in a business plan helps you stay on track and focus on your goal. A business plan is an essential road map for business success. This living document generally projects 3-5 years ahead and outlines the route a company intends to take to grow revenues.

Among the possible sub parts of your business plan includes the:

  1. Executive Summary which is the snapshot of your business plan as a whole and touches on your company profile and goals. This section briefly tells your reader where your company is, where you want to take it, and why your business idea will be successful. If you are seeking financing, the executive summary is also your first opportunity to grab a potential investor’s interest.
  1. Company Description provides information on what you do, what differentiates your business from others, and the markets your business serves. This section of your business plan provides a high-level review of the different elements of your business. This is akin to an extended elevator pitch and can help readers and potential investors quickly understand the goal of your business and its unique proposition.
  1. Service or Product Line answers questions like what do you sell? How does it benefit your customers? What is the product life cycle? Get tips on how to tell the story about your product or service. If you have any existing, pending, or any anticipated copyright or patent filings, list them here. Also, disclose whether any key aspects of a product may be classified as trade secrets. Last, include any information pertaining to existing legal agreements, such as nondisclosure or non-compete agreements.
  1. Funding Request and Financial Projection tackles the possibilities if you need funding. This provides financial projections to back up your request is critical. You should develop the Financial Projections section after you’ve analyzed the market and set clear objectives. That’s when you can allocate resources efficiently.  If you are planning to make your new business your full-time job, it’s wise to wait until you have at least some money put away for startup costs and for sustaining yourself in the beginning before you start making a profit.
  1. Marketing & Sales reveals how you plan to market your business? What is your sales strategy? Marketing is the process of creating customers, and customers are the lifeblood of your business. In this section, the first thing you want to do is define your marketing strategy. There is no single way to approach a marketing strategy; your strategy should be part of an ongoing business-evaluation process and unique to your company. After you have developed a comprehensive marketing strategy, you can then define your sales strategy. This covers how you plan to actually sell your product.

Selecting Your Preferred Business Structure

An important step in forming a new business is to choose the type of business structure you will use. There are several types of business entities to choose from, including sole proprietorship, partnership, corporation, limited liability company, and limited partnership. Each has its own advantages and disadvantages, as well as tax consequences of which you should be aware. When beginning a business, you must decide what form of business entity to establish. Your form of business determines which income tax return form you have to file. Legal and tax considerations enter into selecting a business structure.

You have to decide which of these entities best suits your business objectives and needs. You can get help in making this decision from a tax practitioner, such as an accountant, enrolled agent, or attorney. A tax practitioner can also provide information about how to establish the business structure you choose.

As an entrepreneur, you will have no place and no one to hide behind. Knowledge of yourself is the key to confidence, and confidence builds leadership. Building a new business requires good leadership to develop the market, attract customers, motivate the team and conquer the unknowns.

Register your Business

Obviously, you need to register your business and declare proprietorship to it. But before you can do that, you have to settle on what to call it. Naming your business is an important branding exercise, but if you choose to name your business as anything other than your own personal name then you’ll need to register it with the appropriate authorities. This process is known as registering your “Doing Business As” (DBA) name.

Choosing a business name is an important step in the business planning process. Not only should you pick a name that reflects your brand identity, but you also need to ensure it is properly registered and protected for the long term. You should also give a thought to whether it’s web-ready. Many businesses start out as freelancers, solo operations, or partnerships. In these cases, it’s easy to fall back on your own name as your business name. While there’s nothing wrong with this, it does make it tougher to present a professional image and build brand awareness.

After you register your business, the next step is obtaining an employer identification number (EIN) from the IRS. While this is not required for sole proprietorships with no employees, you may want to apply for one anyway to keep your personal and business taxes separate, or simply to save yourself the trouble later on if you decide to hire someone else.

Take Care of the Legalities

To run your business legally, there are certain federal and state licenses and permits you will need to obtain. For some other industries like buying and selling liquor, special certificates are needed before you start operating or else you might find yourself and business in an unnecessary trouble. The form of business you operate determines what taxes you must pay and how you pay them. The following are the five general types of business taxes according to Internal Revenue Services.

 Income Tax

All businesses except partnerships must file an annual income tax return. Partnerships file an information return. The form you use depends on how your business is organized. The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. An employee usually has income tax withheld from his or her pay. If you do not pay your tax through withholding or do not pay enough tax that way, you might have to pay estimated tax. If you are not required to make estimated tax payments, you may pay any tax due when you file your return.

Estimated tax

Generally, taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. If the amount of income tax withheld from your salary or pension is not enough, or if you receive income such as interest, dividends, alimony, self-employment income, capital gains, prizes, and awards, you may have to make estimated tax payments. If you are in business for yourself, you generally need to make estimated tax payments. Estimated tax is used to pay not only income tax but other taxes such as self-employment tax and alternative minimum tax.

If you don’t pay enough tax through withholding and estimated tax payments, you may be charged a penalty. You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return.

Self-Employment Tax

Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. Your payments of SE tax contribute to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

It should be noted that anytime self-employment tax is mentioned, it only refers to Social Security and Medicare taxes and does not include any other taxes that self-employed individuals may be required to file.

 Excise Tax

This section describes the excise taxes you may have to pay and the forms you have to file if you do any of the following. Excise taxes are taxes paid when purchases are made on a specific good, such as gasoline. Excise taxes are often included in the price of the product. There are also excise taxes on activities, such as on wagering or on highway usage by trucks. One of the major components of the excise program is motor fuel.

  • Manufacture or sell certain products.
  • Operate certain kinds of businesses.
  • Use various kinds of equipment, facilities, or products.
  • Receive payment for certain services.

 Form 720 – The federal excise taxes consist of several broad categories of taxes, including the following.

  • Environmental taxes.
  • Communications and air transportation taxes.
  • Fuel taxes.
  • Tax on the first retail sale of heavy trucks, trailers, and tractors.
  • Manufacturers taxes on the sale or use of a variety of different articles

Employment Taxes

When you have employees, you as the employer have certain employment tax responsibilities that you must pay and forms you must file. Employment taxes include the following:

  • Social security and Medicare taxes
  • Federal income tax withholding
  • Federal unemployment (FUTA) tax

Aside from national laws that your business needs to abide by, there are also local state laws that you need to be aware of and observe for a smooth sailing operation. It is very important where your establishment located, and what government rules apply.

 

The good and the bad news is that as an entrepreneur, you won’t have a manager charged with directing your efforts or peers helping you implement, and your new team will be quick to tell you only what you want to hear. Thus the burden is on you to capitalize on your strengths, find co-founders and team members to fill the gaps and find mentors and advisors you trust.

Know What Kind of Documents are Needed When Claiming Business Travel Expenses

It is clear that taxpayers can deduct regular travel expenses when the trip is entirely business related. Additionally, if the taxpayer is on a domestic business trip and made personal side trips or stayed longer than the business purpose required, then the expenses must be allocated between business and personal. The portion of the trip dedicated to business activities is deductible. Any portion related to personal activities is not deductible.

However, if a trip is primarily for personal activities, such as a vacation, then the only deductible business expenses are those incurred at the destination that is directly related to the trade or business and none of the expenses for traveling to the destination are deductible.

IRS parameters

In general, all trip expenses must be recorded on the travel expense statement including procurement card expenses. If a trip is paid for entirely by procurement card, a travel expense statement must be completed and approved. It is not necessary to enter this travel report in AIS; however, the statement and documentation must be retained in the department. As a best practice, the supplemental procurement card expenses form should be used to detail procurement card activity. If the supplemental form is not completed, all procurement card expenses should be clearly marked on the travel expense statement. Procurement card expenses should be deducted from the total expense using line #22. The original procurement card receipts should be kept in the department or school procurement card files.

Even if the expense is clearly deductible the deduction can be denied if not substantiated. Taxpayers must keep adequate records and documentary evidence. However, the taxpayer can use the per diem method of deducting expenses and still satisfy the substantiation requirements for the amount of the expense. The time, place, and business purpose must still be substantiated through adequate records and documentary evidence. The per diem method can be used by employers, employees and self-employed individuals. Self-employed individuals and employees can only use the per diem method for a meal and incidental expenses, not lodging. Additionally, a taxpayer, whether employer or employee or self-employed can alternate during the year between the per diem method and the actual expense method. The per diem rates for travel can be found at www.gsa.gov/perdiem.

Taxpayers in the transportation industry may use a special per diem rate. A taxpayer eligible for this rate is in the transportation industry if the work directly involves moving people or goods by airplane, barge, bus, ship, train or truck and often requires travel during a single trip to localities with differing rates in the per diem tables. These rates, if chosen, must be used for the entire year.

According to the streamlined guidelines set by the Internal Revenue Services (IRS), there are a couple of documentation that should always be kept, regardless of circumstances or situation, to make sure that you can have an easier time in proving that your trip was primarily for business purposes. While it is best to log in everything, these ones below are the most crucial documentations needed to stake your claim.

Gross receipts are the income you receive from your business. You should keep supporting documents that show the amounts and sources of your gross receipts. Documents for gross receipts include the following:

  • Cash register tapes
  • Deposit information (cash and credit sales)
  • Receipt books
  • Invoices
  • Forms 1099-MISC

Purchases are the items you buy and resell to customers. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Your supporting documents should show the amount paid and that the amount was for purchases. Documents for purchases include the following:

  • Cancelled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred
  • Cash register tape receipts
  • Credit card receipts and statements
  • Invoices

Expenses are the costs you incur (other than purchases) to carry on your business. Your supporting documents should show the amount paid and a description that shows the amount was for a business expense. Documents for expenses include the following:

  • Cancelled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred
  • Cash register tapes
  • Account statements
  • Credit card receipts and statements
  • Invoices
  • Petty cash slips for small cash payments

Travel, Transportation, Entertainment, and Gift Expenses. If you deduct travel, entertainment, gift or transportation expenses, you must be able to prove (substantiate) certain elements of expenses.  For additional information, Publication 463 of the IRS document provides more details with regard to Travel, Entertainment, Gift, and Car Expenses.

Assets are the property, such as machinery and furniture that you own and use in your business. You must keep records to verify certain information about your business assets. You need records to compute the annual depreciation and the gain or loss when you sell the assets. Documents for assets should show the following information:

  • When and how you acquired the assets
  • Purchase price
  • Cost of any improvements
  • Section 179 deduction taken
  • Deductions are taken for depreciation
  • Deductions are taken for casualty losses, such as losses resulting from fires or storms
  • How you used the asset
  • When and how you disposed of the asset
  • Selling price
  • Expenses of sale

The following documents may show this information.

  • Purchase and sales invoices
  • Real estate closing statements
  • Cancelled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred

Meals

Amounts paid for food and reasonable restaurant gratuities while traveling away from home are another deduction. The IRS gives taxpayers two methods to calculate meal costs. It publishes daily per diem rates applicable to various geographic areas that you can use without regard to the amount actually spent. Alternatively, you can keep records of all meals and list the total costs paid. Regardless of the method chosen, the total allowable meal expense gets a further 50 percent deduction. Calculate this reduction before applying the 2 percent adjusted gross income limitation.

Instead of keeping records for meal costs, the taxpayer can claim an IRS meal allowance, which is referred to as the M&IE per diem rate (for meals and incidental expenses). The M&IE rate includes tips for service people such as porters, and hotel maids, but does not include the cost of laundry, cleaning, or pressing of clothing, which can be deducted separately with the proper documentation. Self-employed individuals can claim the M&IE allowance, but employees may only claim the allowance if they are not reimbursed under an accountable plan, if their employer is not related to them, and if they do not own more than 10% of the employer’s outstanding stock.

The standard meal allowance for travel within the Conterminous (or Continental) United States (CONUS), meaning locations within the continental United States, is $46 per day, although higher rates may apply to more expensive localities such as major metropolitan areas and resort areas. Outside of the Conterminous United States (OCONUS) rates apply for travel to Alaska, Hawaii, Puerto Rico, United States possessions, and foreign countries. Generally, only 75% of the allowance can be claimed for the 1st and last days of the trip. Workers in the transportation industry who are subject to the Department of Transportation hours of service limits, such as interstate truck drivers and pilots can deduct 80% of their meal costs. CONUS rates can be found by zip code or by city and state.

If meals are not claimed on a particular day but the taxpayer had other incidental costs, then instead of using actual costs, an allowance of $5 per day can be claimed for the incidental expenses, even if the actual expenses were less than that.

Important documentation features

Substantiate is a fancy way to say: the taxpayer has to prove it. Taxpayers must keep evidence of business travel expenses in order to deduct them. The information that must be noted:

  1. The date. The date the expense was incurred will usually be listed on a receipt or credit card slip; appointment books, day planners, and similar documents have the dates pre-printed on each page, so entries on the appropriate page automatically date the expense.
  1. The amount. How much you spent, including tax and tip for meals.
  1. The place. The nature and place of the entertainment or meal will usually be shown by a receipt, or you can record it in an appointment book.
  1. The business purpose. Show that the expense was incurred for your business — for example, to obtain future business, encourage existing business relationships, and so on. What you need to show depends on whether the business conversation occurred before, during, or after entertainment or a meal.
  1. The business relationship. If entertainment or meals are involved, show the business relationship of people at the event — for example, list their names and occupations and any other information needed to establish their business relation to you.

Cautions

Trying to write off your personal vacation as a business expense isn’t worth the risk. “You have to recognize that travel and entertainment is a highly suspect area,” Barbara Weltman, a tax and law expert and the author of JK Lasser’s Small Business Tax Guide, said. “It’s an area that the IRS is on the lookout for because of the potential of crossing the line a little bit and claiming business write-offs for what are really personal expenses. You can assume that if you get audited the IRS is going to look very closely at this area, so you want to make sure you do things right.”

When traveling or entertaining for business purposes, it’s important to document everything.  It’s not enough to just keep receipts, you also need to document who you spoke with, what you spoke about, and how it was related to your business. For travel, the IRS also requires you to keep a written or electronic log, made near the time that you make the expenditure, recording the time, place, amount and business purpose of each expense. This once took the form of expense reports. Increasingly, online programs and even apps, like Tax Tracker, are available for documenting business expenses.

Weltman also suggests creating a paper trail that can be traced if you are audited by the IRS. Take notes on meetings you attend while traveling, keep programs of conferences you attend, sign into conferences, and keep e-mails sent to those you met with during business meetings.

As with all deductible business expenses, you are also expected to keep receipts for travel and entertainment purchases. For meals, make sure that the receipt includes the exact cost of the meal as well as the name and location of the restaurant. Get in the habit of writing down who was present (names and business relationship) and what business was discussed.

For entertainment expenses, document: the amount of each separate expense; the date of the entertainment; the name, address, and type of entertainment; the business reason for the entertainment; and the name, title, and occupation of the people who you entertained.

Whenever business expenses are claimed it is a good idea to keep detailed records and receipts for everything. Business expenses can be charged to a practice credit card, receipts should be obtained from taxi drivers or other modes of transportation, and a detailed copy of the hotel bill should be kept. For the show, meeting or conference, a copy of all charges, as well as a copy of the convention schedule/agenda, can help prove it is relevant to your practice.

 

The safe way to go in all of this is to just diligently record all your business-related travel expenses in a log complete with dates, times, descriptions, locations and amounts. Include your travel expenses, lodging expenses and the costs of your meals. Also include taxis, fees, tips and any other incidental expenses.

No matter how you document your expenses, you are supposed to do it in a timely manner. You don’t need to record the details of every expense on the day you incur it. It is sufficient to record them on a weekly basis. However, if you’re prone to forget details, it’s best to get everything you need in writing within a day or two. Just make sure to keep all supporting paper documentation of the recorded expenses. This way, when you present.

How to Effectively Manage Business Risks

Risks are normal in any business. Even the most successful businesses today had to deal with certain threats in the past that almost laid their success on the line. Sometimes, it is tempting to wish that your business no longer has to take any calculated risk and be as smooth sailing as possible, but that just cannot be.

In the real world, business is tantamount to risk-taking and you can’t just wish to keep risks at bay. Why? Because business does not work that way. Taking risks is necessary in any business for without it, growth is never possible. Remember, it is through risks that you get to meet new clients, discover new sectors and learn new things. Without risks, business loses its essence.

Risk Management

 People in the business sector are pretty familiar with the term risk management. By definition, risk refers to the probability of an event and its consequences. When you manage risks, you use certain methods, processes and tools to deal with these risks.

Running a business involves different types of risk, and while some risks can go only as far as causing serious but manageable damage to your business, there are risks that are beyond repair and have the potential to destroy your business. That is why businesses, no matter how big or small, need to be equipped with the right methods and tools to prepare for these risks before they strike. While preparing for risks does not guarantee 100% that your business will be free from risks, such preparations can moderate their impacts on your business.

Risk management involves determining what could go wrong with your business and evaluating which of the possible risks you should deal with. After doing so, you implement strategies that will help you manage those risks. Managing risks before they strike is the most cost-effective way of dealing with them.

Potential Business Risks

 Before you try to understand Risk Management as a process, it is important that you familiarize yourself with the different types of risk that businesses usually face.

  • Strategic Risks. Strategic risks are risks that have to do with how you operate in the industry where your business is in. These risks usually arise from changes in demand, mergers and acquisitions and other changes in the industry. For instance, a big U.S. company is acquiring your major Canadian competitor. If the acquisition activity happens, then your competitor will have the potential to have a distribution arm in the U.S. So, what should you do?

 Now that you know that this potential acquisition activity can pose a risk on your business, you have to prepare how you will respond once the risk is already at hand. As you do this, you may consider researching if there is any U.S. company that is big enough to do the acquisition and which among your Canadian competitors might be a target of this U.S. company.

  • Compliance Risks. As the name suggests, these risks have to do with your need to comply with certain regulations, as well as your need to act in such a way that your customers and potential investors will be pleased. To manage compliance risks, you must consider whether certain safety or health legislations can force charges in your business or increase your overheads.

When it comes to legislative risks, you may want to ask yourself if certain legislations, particularly tax laws, can make your products and services less marketable. For instance, some tobacco businesses were threatened when legislations pushing up the costs of tobacco products were passed. The significant increase in the cost of their products reduced their appeal and made it difficult for tobacco business owners to promote and sell their products.

  • Financial Risks. Financial risks are associated with the overall finances of your business, including your financial systems and the transactions that your business enters into. Some examples of financial risks are customers who did not pay you for your services, or the growing interest of your business loan. But how do you prevent such risks?

The first and most important thing you should do to prepare your business for financial risks is by regularly examining your financial operations, most especially your cash flow. Being too dependent on one customer is not good for your business, because if that customer fails to pay you, that could have some serious implications when it comes to the viability of your business. Aside from cash flow, some of the other things you should examine are the ones who owe you money, the way you extend credit to your customers, and the things you should do to recover your owed money.

  • Operational Risks. Operational risks are the risks that have to do with the operations and administrative procedures taken by your business, including recruitment of employees, supply chain, IT systems, accounting controls, regulations and the composition of your board.

As you run your business, it is necessary for you to examine each aspect of your operations and make provisions for every possible risk that may turn up. For instance, being too reliant on just one supplier may pose operational risks for your business. Imagine if your sole supplier goes out of business. Where does that leave you? You can minimize this risk by looking for some other suppliers that you can do business with and not depending too much on the one that you currently have.

One of the most common operational risks today has to do with information security. As a business, you keep track of necessary information. That is why part of your responsibilities as a business owner is ensuring that every bit of information is protected from hackers who may break into your IT system and steal valuable data from you. Many business owners have experienced losing large sums of money from their accounts to hackers due to poorly secured IT systems.

Aspects of the Risk Management Process

 The process of managing risks is one of the most crucial parts of any business. It is often considered an indispensable part of strategic management because it helps you identify the risks confronting your business and address them. By doing so, you are able to increase the likelihood of your business’ success.

The risk management process basically involves micro processes, such as systematically identifying the risks facing your business, evaluating the possibility of the occurrence of an event, understanding how you should respond to these events, setting up systems to tackle the consequences of these events, and monitoring how effective or ineffective your risk management processes are.

 How Risk Management Benefits Your Business

 While risk management does not totally guarantee the success of your business, it makes the risks manageable enough. Among the common results of the risk management process are the following:

  • It allows you to allocate your resources more efficiently
  • It allows you to project or expect what may go wrong with your business, hence minimizing the impact of risks and preventing considerable financial loss
  • It helps improve your planning and decision-making
  • It increases the chances that you will be able to conduct your business according to your business plan and budget

 If you are the type of business owner who always loves to try something new, knowing how to manage risks efficiently can benefit your business a lot. For instance, you plan on launching a new product. Two of the risks that you should consider in this case are the competitors that follow you in the market and the existing technologies that can possibly make your new product redundant.

Evaluating Risks

Part of the risk management process is risk evaluation. This technique particularly lets you identify the significance of potential risks to your business and decide whether you are going to accept these risks or prevent them. But how do you evaluate these risks?

Evaluating risks basically involves identifying them and ranking them afterwards. You can do this by determining the consequence and probability of each risk, such as asking yourself if their consequences and probabilities are low, medium or high. Businesses that efficiently assess their risks can attest to the advantages of this practice.

It helps to include a risk evaluation in your business plan, in which you determine the risks that can impact your objectives and assess them in the light of costs, concerns of investors and even legal requirements. In cases when the cost of preventing a potential risk is too high, not preventing the risk at all makes more sense. So, it is important that you assess these risks and weigh which will cost you more—preventing them or mitigating them once they’re already at hand?

In evaluating potential risks and assessing them based on cost, concerns and legal requirements, it is best to plot a risk map and include there the likelihood of the risk’s occurrence. In this risk map, you rate each risk on a scale of 1 to 10, with 10 meaning that the risk is of major concern to your business. You can also include in the risk map the probability scale of each risk, which you do by assessing if the risk:

  1. Is very likely to occur
  2. Has some chance of occurrence
  3. Has small chance of occurrence, or
  4. Is not likely to occur

By plotting this map, you are easily able to visualize all the possible risks in relation to each other and see the extent of damage they can do to your business.

 Four Ways to Deal with Risks

 Since risks are normal in every business, they are not supposed to make you nervous. As a business owner, you have all the freedom to plan around these risks, limit their impacts and prevent the worst from happening. You only have four options when dealing with risks—mitigate it, avoid it, transfer it, or accept it.

  • Mitigating the Risk. To mitigate a potential risk, you should come up with contingency plans before the risky situation arrives. So, when it’s already there, you can easily carry out your Plan B. For example, you have an upcoming promotional event for your new product and you expect several investors to attend. Since the event is set in an open area, the risk is that it might rain. Rain can be considered a risk since that may affect the number of people to attend the event. To mitigate the risk, you may consider renting a large tent to shelter your guests or giving out free umbrellas to them.
  • Avoiding the Risk. There are certain instances when you find the risk consequences to be too high. In such cases, it is best for you to cancel that high-risk initiative altogether. One example would be a product launch that could exhaust all of your company’s finances. Instead of letting this new product cripple your business financially, cancel the launch and avoid the risk of being broke.
  • Transferring the Risk. This strategy is very common in insurances. Since it involves passing the risk on to someone else, it mainly applies to risks and situations that you can put in black and white, such as in contracts. A good example is insuring yourself against the risk of a car accident. In this case, your insurer will carry the financial risk in case you get caught in such an accident.
  • Accepting the Risk. In managing risks, remember that you always have the choice of doing nothing. However, you have to make every conscious effort possible to understand the risk and to decide whether it is fine to accept it. If you think the risk is insignificant and won’t have any impact on your business, then you can choose to take no action at all.

When you manage potential risks to your business, you can take advantage of any of these four strategies independently or in combination. Just like in any endeavor, business requires careful planning. Even if you think that a risk is not likely to happen, it is still best to prepare yourself for it.

Employment Matters: The Difference Between Contractors and Employees

When there’s extra work that needs to get done and there are no sufficient employees to do the job, companies usually hire more workers to keep up with the customer rush. If you happen to find a job in a company, make it a point that you understand your status in that company. That way, you will know how you are supposed to be treated by your new employer.

More often than not, problems arise because independent contractors think of themselves as employees, and vice-versa. For some, knowing whether they are contractors or employees doesn’t matter because all that matters to them is that they got a job and an income. However, they don’t realize that not knowing which classification they belong to—independent contractor or employee—will put them at the risk of tax troubles in the future.

But how does the law classify contractors vs. employees?

Telling Between Contractors and Employees

On the surface, you probably cannot tell what sets contractors apart from employees because most of the time, they do the same work. However, the law views them differently. The law also views the companies that hire them just as differently.

Basically, the thing that makes contractors different from employees is their degree of independence and control over the work that’s assigned to them. Usually, while an employee performs tasks that are dictated by others and are provided trainings to effectively do the job, an independent contractor has more than one client and sets his own hours at work. A contractor typically does not have a boss and he uses his own tools in performing his job. Also, his salary doesn’t automatically come at a definite date because he invoices for each of his completed assignments.

While that seems pretty much understandable, there can sometimes be gray areas, too.

In many cases, companies prefer hiring contractors instead of employees so they can save on labor costs. Financial-wise, hiring contractors makes more sense because contractors are not entitled to benefits. Also, companies save considerably on taxes since in hiring contractors, it no longer becomes necessary for the employer to pay portion of the state unemployment taxes.

Companies that follow the law and take the employee route usually regret their decisions at some point in the future because of the cost that making someone an employee entails. That explains why small businesses that operate on tighter margins are often tempted to hire contractors instead of employees, even when the job that needs to get done calls for an employee.

To minimize their costs, business owners make people believe that it is more advantageous to be a contractor than an employee since contractors’ take-home pays are bigger. While that may be true on the surface, that is not as simple as it seems.

The Tax Implications of Contractual Work 

If you are an employee, your employer is the one that pays half of your Social Security and Medicare taxes and withholds half of these taxes from your salary. That and the withholding of your federal and state income taxes are the reasons why those employees who work at $9 per hour at fast-food restaurants take home less every payday.

So, does that prove that being a contractor is better than being an employee?

The answer is not necessarily. Why? Because independent contractors pay 100% of all their Social Security and Medicare taxes when they file their tax returns, and pay all the income taxes that were not withheld. And if you are a contractor and you failed to make estimated tax payments every quarter to cover your taxes, prepare yourself for an unfortunate surprise come April. This only goes to show how tax responsibilities affect the amount that employees take home during payday versus the amount taken home by contractors.

Contractors Escaping Taxes

 Sounds common, doesn’t it? Many contractors believe that one of the advantages of being an independent contractor is that they get to escape taxes. Actually, they don’t. Well, that’s always possible. But that is not legal.

If you are a contractor and are paid in cash, don’t think that that already lets you get out of paying taxes and not report it. Whether your pay comes in the form of a check, cash, digital transfer or barter, and regardless of its amount, remember that every pay you get for each work that you do is taxable income.

Many contractors get all the more confused about taxable contract income because of the amounts that the IRS uses to require reporting of earnings. Remember that when you are a contractor, you get Form 1099-MISC to lay down the details of how much you have made for each job. Form 1099-MISC is what you need, not a W-2. However, as a contractor, an employer does not need to send you a form 1099 if your earnings during the tax year in question is less than $600.

The law can’t stress enough that the abovementioned rule is just a reporting requirement and has nothing to do with your taxable income. However much you earn, your earnings are always legally taxable and should be reported either on Schedule C or as other income on Form 1040.

For your FICA taxes, which refer to your Social Security and Medicare taxes, these taxes are self-employment taxes which you are responsible for in full. If you are an independent contractor, you should report the amount of your FICA taxes and pay them via Schedule SE.

While being an independent contractor has its share of advantages when it comes to taxes, there are instances when a business hires a contractor who is eventually deemed as an employee. In such cases, both parties lose significant amount of taxes, interests, penalties and premiums.

Since the relationship between a company and a worker sometimes tends to be a gray area, it is imperative that you protect your status as an independent contractor. Well, that is if you are really an independent contractor. To make sure that your work as a contractor remains independent of your employer, it should be able to pass the Four Point Test.

Determining Your Status

 If one asks you now whether you are a contractor or an employee and what makes you think so, do you know how to answer?

In Canada, a four-point test helps workers to determine their relationship with the business that you are working for. The agency clearly sets out a method that lets tax payers and workers identify the nature of their relationship with their companies.

The four-point test makes clear-cut distinctions between contractors and employees based on their control, tool ownership, risk of loss and integration.

  • Here, the issue is who controls the worker. If the employer has all the right to hire or fire you, determine your salary, decide on the time and place of your work as well as the manner in which you should perform your work, then you are an employee. Even if the employer does not directly control how you do your job, if he still has the right to do so, then an employer-employee relationship exists between the two of you.

 On the other hand, if you are a contractor, it is not necessarily the employer that runs the ship. As a contractor, you decide how you are going to perform your job and you maintain your right to decide where and when you are going to get the work done. In short, you are the only person responsible for planning the job that you need to get done.

  • Ownership of Tools. When it comes to tool ownership, the common notion is that what sets contractors apart from employees is that contractors supply their own tools. While that may be true, the problem is that it is also customary for other employees to provide tools for themselves so they can perform their jobs, such as in the case of garage mechanics and painters.

If that is the case, then how does tool ownership differentiate a contractor from an employee? According to CRA, the cost of using the tools is a better indication of whether you are a contractor or an employee. As per the CRA rule, you are considered an independent contractor if you purchase or rent large tools that call for major investment and expensive maintenance. Otherwise, you are an employee. Another good example of a self-employed, independent contractor is a home-based IT worker who uses his own computer to perform his job.

  • Chance of Profit/Risk of Loss. Here, determining which type of relationship exists between the business and the worker heavily depends on the financial involvement of the latter. Take a look at these questions:
  •  Do you have a chance of gaining profit?
  • Are you at risk of incurring losses due to damage to materials, delays or bad debts?
  • Do you cover the operating costs?

If your answer to all of these three questions is a Yes, then you are considered an independent contractor.

  • This criterion seems to be an attempt to presume the intention of the involved parties. According to CRA, a business relationship exists if the worker integrates the payer’s activities to his own commercial activities. On the other hand, an employer-employee relationship exists if the worker integrates his activities to the commercial activities of the payer.

The CRA does not lay out how to determine such integrations. However, an obvious way of proving that you integrate your own commercial activities is by having multiple clients. If you have only one client, it becomes easy for others to presume that you share an employer-employee relationship with that client. But be careful when having a single client, because that puts you at risk of being declared as a personal services corporation by the CRA.

Deciding Whether to Become an Employee or a Contractor

 Based on the facts discussed, it looks like being a contractor can be beneficial for you in terms of earnings and taxes, so long as you are prepared. However, remember that being an employee or a contractor is not really one of those decisions that you make when you look for a job. In reality, it is the business or company that decides whether you are a contractor or an employee.

Most of the time, employees are carried on the books, unlike contractors. So as a contractor, it is your responsibility to enshrine your relationship with the company you are working for through a contract. This contract should focus on the first three points of the four-point test and set out the intentions of both parties. Since you are an independent contractor, you have to make sure that such a written agreement is carefully crafted so your status is protected in case the other party subsequently changes his mind and argues that your relationship is not what you think it is.

At the end of the day, it is the business’ responsibility to weigh certain factors to determine whether a worker is an independent contractor or an employee. While other factors may indicate that one is an employee, other factors may indicate that he is an independent contractor. Apparently, there is no magic that stands alone in determining one’s status, but the key to making the right determination is by looking at the entire relationship that the person has with the company he is working for.

In a nutshell, what makes a worker an independent contractor is his being his own boss, although his work should still stay within the definitions of a contract with the party he is working for. Also, he is not eligible for benefits provided by the employer and retains a certain degree of independence and control. On the other hand, a worker is an employee if he treats the business as his stable source of income, is eligible to benefits and pensions, and gives up elements of control to his employer. He should also be working within the time and place specified by the employer.

How to Simplify Business Taxes

If the only purpose of the tax system is to raise the government’s revenue, it could have been simpler. Unfortunately, its goals include ensuring efficiency, fairness and enforceability, influencing social policy and delivering benefits for certain industries, so simplicity in taxes seems out of the question.

While the current tax system is already too complicated, it gets even more complex year after year. Oftentimes, tax simplicity contradicts certain policy goals. While most people think that taxes should be equally conductive, fair, enforceable and simple, it is a fact that even those people who agree on these goals also disagree when it comes to their relative importance. Consequently, policies serve to balance the competing goals and simplicity ends up being least prioritized.

If you own a small business and are unfortunately not a tax expert, you may find it hard to deal with your business taxes. Because of the complexity of the tax system, it is very common for business owners to spend their tax time in panic and stress as they scramble to get their documents together in hopes of meeting deadlines and avoiding penalties.

Business owners often experience tax woes since they are supposed to treat business taxes as a process that needs careful attention throughout the year. The complexity of the tax system makes business tax preparation just as difficult that business owners sometimes feel like preparing for the tax season is an all-year burden that they have to carry.

Business taxes may be a bit complicated, but the good news is that there are ways through which you can simplify them. But before you know how to simplify business tax, it is better to understand first what business taxes are all about.

Business Taxes

 Business taxes have five general types, and the type you pay depends on the form of business that you operate. The give general types of business taxes are:

  • Income Tax. Except partnerships, all types of business are required to file an annual income tax return. The form that you use in filing depends on the organization of your business or your business structure. This type of tax is a pay-as-you-go tax, which means that you pay it as you earn or receive your income. Usually, this is withheld from your pay. Otherwise, you might be required to pay estimated tax.
  •  Estimated Tax. It is by making regular payments of this type of tax during the year that you pay your taxes on income, including your self-employment tax.
  •  Self-Employment Tax. This business tax is primarily for those who work for themselves. Whatever self-employment tax you pay contributes to your social security system coverage, which is responsible for providing you with disability benefits, retirement benefits, survivor benefits and hospital insurance benefits. The law requires you to pay your SE tax if you meet any of the following requirements: (1) your net earnings from being self-employed were $400 or more; (2) you work for a church or any organization controlled by a church which elected an exemption from the FICA taxes.
  •  Employment Tax. You should pay your employment tax if you have employees whose social security and Medicare taxes, as well as federal income tax withholding and federal unemployment (FUTA) tax you are responsible to file.
  •  Excise Tax. You need to pay your excise tax if you do manufacture or sell products, operate different businesses, use various kinds of facilities, products or equipment, or receive payment for certain services. This tax has several tax programs, and one of the major components of these programs is motor fuel.

 Now that you know the different business taxes that you need to pay, and considering how complicated filing and paying them are, it is time to understand how to simplify your business taxes.

 Preparing for the Tax Season

 The key to simplifying your business taxes is to treat them as something that requires your attention throughout the entire tax year. As you begin to see it that way, preparing for tax time won’t be as burdensome for you anymore and it will no longer have to take your time away from your business.

Business taxes are manageable if you know how to prepare them right. Basically, you will need a reliable technology to help you automate your finances. Other things that you need will be—

 Establish better habits for next year and beyond. After completing your taxes for the current year, commit to establish better habits for the following years. You may have promised yourself to do the same last tax year and in the years prior, but this time, make sure that you will stand by your commitment to do better.

 Your business finances need your attention as much as your family finances do. If you are not the type of business owner who keeps track of your business income and expenses, then you are one of those business owners who see tax time as a nightmare.

  •  Track your Business Income and Expenses. To save yourself the trouble, make it a habit to track your income and expenses all the time. That may sound a bit demanding, but it definitely works. To keep track of your finances as they happen, use a spreadsheet or a software program. Reconstructing all your income and expenses for months at once will not only lead to an erratic report but will also leave you drained.

Another advantage of keeping track of your income and expenses in a simple spreadsheet is that you get to see the profit you make and all the numbers you need for tax time.

  • Set Aside Money for Taxes. One of the easiest ways to avoid getting hit with a surprisingly hefty tax bill is to make it a habit to allot money for your business taxes each month. For most businesses, that is equivalent to 30% of your total income. If you set aside this percentage, you will be better off than business owners who don’t set aside anything for tax time.

If you make a conscious decision now to set aside money for your taxes, you don’t only get to avoid considerable penalties but also ease the burden of having to pay a huge sum when the due date for filing taxes comes. That may seem difficult to do at first, but it positively forces you to not procrastinate your taxes until the crazy tax time arrives.

Record everything electronically. Most business owners keep piles of receipts and other important documents in a box, particularly a shoebox. Such a practice is highly inefficient because when the receipts pile up, everything becomes a mess and things become even more stressful for you since you will end up not even knowing what’s in that box. Why don’t you ditch it and start learning how to record everything electronically? That way, you can be sure that your archive is automatically ready when the filing time next year comes.

It is also best to set aside one time to sort out your records. If you plan to do this once a month, a good date would be the time you get your monthly statement for your business checking account. Come up with a checklist that includes your bank account reconciliation and look through all of your transactions to make sure that you don’t commit errors.

Back up your records. Have you ever thought of what may happen to all your data in case a huge disaster hits your place? That is why it is important that you back up all your files and records regularly to a remote location, such as in the cloud. You may also do the backing up on-site, but make sure that you store away all valuable business information from the office. Remember that the law does not find lost records as an excuse when the auditing time comes.

Find a good accountant/ tax advisor. If you think you can’t handle all the paperwork by yourself, you can get an accountant. Accountants are trusted advisors that you can rely on throughout the year. They can help you plan and prepare for the tax season.

If you have just started your business, it is better if you talk to a tax advisor as soon as now. You can explain the basics of your business to your accountant and tax advisor so he can clue you in on the tax deductions you are entitled to. You may not appreciate having a tax advisor by your side straightaway, but when the demands of tax time get more complicated, you will. Since they are savvy about business taxes, they can help you go about every stage of the process.

In the months leading up to tax time, accountants and tax advisors are business owners’ best friends. Ahead of this dreaded season, request from them a tax preparation document to ensure that you have enough time to prepare and that you get all the deductions and breaks you are entitled to.

Use online banking. In most cases, banks allow their clients to download all of their transactions. To help you prepare for the tax season, you can visit the bank every month to mark all your tax-deductible transactions. That way, you can prepare a comprehensive list of all your tax deductible items before the tax season comes.

As you prepare for the tax season, it also helps to use reminders and alerts. You may consider having a specific calendar that’s especially dedicated to your business finances. There, you can set up all your financial reminders for all the payments, transfers and other transactions that you need to perform. This way, you don’t let your financial tasks get lost in the rush of your daily business reminders. It is also advisable that you put alerts on your business checking account so the calendar can alert you when your balance gets too low, or when a new transaction is made.

Automate accounting process. If you own a business, considering an accounting solution is a big help to your tax woes. Finding an accounting solution will help you drive accuracy and efficiency throughout the year and ease your burden during tax time. When you use online accounting for your finances, you don’t only get the latest version of the accounting tool but you also remove the need to invest a large sum of money upfront.

If you own a small business, you can easily pull the transactions you had from your business bank accounts and automatically update them. That way, you can come up with customized financial reports and view your balances more straightforwardly, especially if you use a software that features customizable reports. This is a big time-saver, you’ll see.

Another benefit of automating your accounting process is that you get to plan ahead for your important deadlines. Most accounting software today don’t only keep track of your income and expenses but also have alert features to ensure that you are up-to-date with your business finances and deadlines.

File online. Filing your taxes online is not only faster for you but also ensures that it your filing is less prone to errors. In most cases, tax agencies also require online than manual filing.

When you start having your business financial tracking set in place, you will discover that it actually takes so little time to accomplish your financial review and just a bit of effort to get rid of tax woes that are usually experienced by delinquent business owners. The business tax system is complicated, yes, but there is always something you can do to streamline the process.

If you have just started out your business, it’s normal if your expenses outweigh your income. Setting up a system to track your finances may seem unnecessary at this point, but you shouldn’t make the mistake of waiting until all your financial records have already piled up. Simplifying your business tax is a result of easy habits that you need to learn from the beginning. Try it. When the tax time comes around, you’ll be grateful you’re prepared.

When to Incorporate and When Not to Incorporate

It is true that operating as a corporation has its share of drawbacks in certain situations. For example, as a business owner, you would be responsible for additional record keeping requirements and administrative details. More important, in some cases, operating as a corporation can create an additional tax burden. This is the last thing a business owner needs, especially in the early stages of operation.

You do not have to incorporate to be in business. You can be in business just by being paid for a service or a product. You are then a sole proprietor as well as a self-employed freelancer. But there are certain pros that you and your business can benefit to incorporating.

 Advantages of Incorporating

Founders of startup companies often wait to incorporate a company until they are confident that their concept is viable or fundable.  At some point, however, an entrepreneur will need to formally incorporate a company.

Aside from tax reasons, the most common motivation for incurring the cost of setting up a corporation is the recognition that the shareholder is not legally liable for the actions of the corporation. This is because the corporation has its own separate existence wholly apart from those who run it. However, there are four other reasons why the corporation proves to be an attractive vehicle for carrying on a business.

  • Unlimited life. Unlike proprietorships and partnerships, the life of the corporation is not dependent on the life of a particular individual or individuals. It can continue indefinitely until it accomplishes its objective, merges with another business, or goes bankrupt. Unless stated otherwise, it could go on indefinitely.
  • Transferability of shares. It is always nice to know that the ownership interest you have in a business can be readily sold, transferred, or given away to another family member. The process of divesting yourself of ownership in proprietorships and partnerships can be cumbersome and costly. Property has to be retitled, new deeds drawn, and other administrative steps taken any time the slightest change of ownership occurs. With corporations, all of the individual owners’ rights and privileges are represented by the shares of stock they hold. The key to a quick and efficient transfer of ownership of the business is found on the back of each stock certificate, where there is usually a place indicated for the shareholder to endorse and sign over any shares that are to be sold or otherwise disposed of.
  • Ability to raise investment capital. It is usually much easier to attract new investors into a corporate entity because of limited liability and the easy transferability of shares. Shares of stock can be transferred directly to new investors, or when larger offerings to the public are involved, the services of brokerage firms and stock exchanges are called upon.
  • Limited Liability. The main advantage to incorporating is the limited liability of the incorporated company. Unlike the sole proprietorship, where the business owner assumes all the liability of the company, when a business becomes incorporated, an individual shareholder’s liability is limited to the amount he or she has invested in the company.

Owners of a corporation may only be liable for business losses and obligations up to their investment in the company. As explained on the Entrepreneur website, the shareholder’s personal assets may not be taken to cover liabilities of the corporation. However, shareholders of an incorporated business may be liable for the company’s debts if they sign a personal guarantee on a corporate loan. In addition, shareholders that engage in criminal activities will be individually held responsible for their acts.

If you’re a sole proprietor, your personal assets, such as your house and car can be seized to pay the debts of your business; as a shareholder in a corporation, you can’t be held responsible for the debts of the corporation unless you’ve given a personal guarantee.

On the other hand, a corporation has the same rights as an individual; a corporation can own property, carry on business, incur liabilities and sue or be sued.

Disadvantages of Incorporating

Incorporating a business can seem like a good idea, but the process and requirements of incorporation can actually hinder an organization’s growth and success, especially for smaller start-up companies. Incorporating a business provides some benefits, but the corporation definitely pays the price for these benefits in fees and legal hurdles. The main reasons not to incorporate include a sizeable initial investment, tax disadvantages, increased complexity in bookkeeping and public disclosure mandates.

  • Corporations require annual meetings and require owners and directors to observe certain formalities. Corporations are more expensive to set up than partnerships and sole proprietorships. The process costs money. You can do it on your own, technically, but it’s more advisable to get the help of a lawyer and an accountant. It also requires periodic filings with the state and annual fees. Incorporating later in the life of a business is always an option but a little more expensive, depending on the complexity involved in transferring business assets into the corporation and registering the accompanying tax elections.
  • No Personal Tax Credits and Less Tax Flexibility. Another disadvantage of incorporating is that being incorporated may actually be a tax disadvantage for your business. Corporations are not eligible for personal tax credits. Every dollar a corporation earned is taxed. As a sole proprietor, you may be able to claim tax credits a corporation could not. A corporation doesn’t have the same flexibility in handling business losses as a sole proprietorship or a partnership. As a sole proprietor, if your business experiences operating losses, you could use the loss to reduce other types of personal income in the year the losses occur. In a corporation, however, these losses can only be carried forward or back to reduce the corporation’s income from other years.
  • Ongoing fees. You must file articles of incorporation with the state, plus applicable fees. Many states impose ongoing fees—which are steeper for a corporation than for a sole proprietorship or general partnership.
  • More record keeping. Corporations must follow initial and annual record-keeping requirements—which sole proprietorships, general partnerships and limited liability companies (LLCs) avoid. There is a lot more paperwork involved in maintaining a corporation than a sole proprietorship or partnership. Corporations, for example, must maintain a minute book containing the corporate bylaws and minutes from corporate meetings. Other corporate documents, that must be kept up to date at all times, include the register of directors, the share register and the transfer register.
  • Liability May Not Be as Limited as You Think. The prime advantage of incorporating, limited liability, may be undercut by personal guarantees and/or credit agreements. The corporation’s much vaunted limited liability is irrelevant if no one will give the corporation credit. When a corporation has what lending institutions consider to be insufficient assets to secure debt financing, they often insist on personal guarantees from the business owner(s). So although technically the corporation has limited liability, the owner still ends up being personally liable if the corporation can’t meet its repayment obligations.
  • Added Requirements. Another reason to avoid incorporation is the increased complexity of organizations operating under a corporate shield. Besides the financial and document requirements, corporations are forced to operate with a formal organizational structure of stockholders, a board of directors and officers; these members are required to conduct annual, timed meetings. The last disadvantage of corporations is the amount of information that must be made public. Corporations are publicly traded companies, therefore requiring more business information to be disclosed for the benefit of investors. Besides being required to make accounting records public, the organization must also identify all directors and officers publicly.

 Process of Incorporating

To start the process of incorporating, you can contact your attorney or CPA.  If you wish to do it yourself than contact the secretary of state or the state office that is responsible for registering corporations in your state. Ask for instructions, forms and fee schedules on business incorporation. It is possible to file for incorporation without the help of an attorney by using books and software to guide you along. Your expense will be the cost of these resources, the filing fees, and other costs associated with incorporating in your state.

If you do file for incorporation yourself, you’ll save the expense of using a lawyer, which can cost from $500 to $1,000. The disadvantage of going this route is that the process may take you some time to accomplish. There’s also a chance you could miss some small but important detail in your state’s law. You may also choose to use an incorporation service company to prepare and file the documents with the state.

One of the first steps you must take in the incorporation process is to prepare a certificate or articles of incorporation. Some states will provide you with a printed form for this, which either you or your attorney can complete. The information requested includes the proposed name of the corporation, the purpose of the corporation, the names and addresses of the parties incorporating, and the location of the principal office of the corporation.

You’re not required to incorporate in the state where your business operates; you can choose from any one of the 50 states or the District of Columbia.

Note that simply transacting business via mail order or the Internet typically does not equal transacting business; however, the determination is made on a case-by-case basis. Again, consult your attorney for specifics, as this list is not intended to be comprehensive.

The corporation will also need a set of bylaws that describe in greater detail than the articles how the corporation will run, including the responsibilities of the shareholders, directors and officers; when stockholder meetings will be held; and other details important to running the company. Once your articles of incorporation are accepted, the secretary of state’s office will send you a certificate of incorporation.

 After You’ve Incorporated

Once you’re incorporated, be sure to follow the rules of incorporation. If you don’t, a court can pierce the corporate veil and hold you and the other owners personally liable for the business’s debts.

To make sure your corporation stays on the right side of the law, practice these exercises:

 Get Documents and Records in Order

After incorporating a business, you’ll need to prepare bylaws that describe how your new corporation will operate. A few states also require you to publish a newspaper notice of your incorporation.

You should set up a corporate minute book and a file or binder where you will keep important corporate documents such as your certificate of incorporation, bylaws, shareholder information and resolutions. Some states require you to file an initial report after incorporation and you will generally need to hold shareholder and director meetings at least once a year.

 

  1. Get an Employer Identification Number

An employer identification number, or EIN, is a number that the Internal Revenue Service uses to identify businesses—sort of like the business version of a Social Security number. Most businesses need an EIN, though solo business owners who don’t have employees or pay excise taxes can use their Social Security Number instead.

  1. Open a Business Bank Account

A business bank account will help you keep your business finances separate from your personal finances. This makes record keeping and tax preparation easier and helps preserve your business’s separate identity.

 

For most businesses, the question is not if, but when, to incorporate. There are many pros and cons of incorporating a small business, depending a lot on individual situations. But too many businesses fail to revisit the question of whether to incorporate. As your business matures, and the realities of your legal and tax situations change, asking the question again may bring a different answer. A business with anticipated losses and little legal risk can likely start as a sole proprietorship, but increasing risk and more significant earnings will favour incorporating later on.

Deciding whether or not to incorporate is much more than just understanding the disadvantages of incorporation; the decision also requires knowledge about the advantages and disadvantages of other legal business formation options, such as sole proprietorships, partnerships and limited liability companies.

You should definitely discuss your personal situation with your accountant and lawyer before you decide. He or she will be able to give you a much more exact picture of how incorporation could benefit your business, and help you see whether or not the trouble and expense of incorporation will be worth it to you.

What is Incorporation and How Does It Work?

One of the first decisions you have to make in creating an incorporation is the type of business you want to create. A sole proprietorship? A corporation? A limited liability company? This decision is important because the type of business you create determines the types of applications you will need to submit. You should also research liability implications for personal investments you make into your business, as well as the taxes you will need to pay. It is important to understand each business type and select the one that is best suited for your situation and objectives. Keep in mind that you may need to contact several federal agencies, as well as your state business entity registration office.

The first step in understanding how businesses can be set up comes with knowing that, even though they may all seem similar from the outside, not all businesses are structured identically. Even within the same industry, some owners might opt for one setup while another owner will decide that a different type of arrangement is more suitable. It all depends on the individual needs, preferences, and requirements of the potential business and the business owner. This article will give you a glimpse of how an Incorporation works and how a business owner can use this model to further his or her ventures.

How does Incorporation Work?

A business becomes incorporated when the company’s organizers file incorporation paperwork with the state. For example, corporations in Texas must file a certificate of formation with the Texas Secretary of State’s office, as a condition of its formation. Incorporating a business requires activities, such as selecting individuals to serve as directors, and creating a unique business name. In most cases, a fill-in the blank certificate of formation, also known as articles of incorporation, will be provided by the Secretary of State’s office where the corporation is organized. The fee to file a certificate of formation will vary from state to state.

When a business becomes incorporated, a separate and distinct legal entity is created. An incorporated business acts independently of its business owners. According to the Entrepreneur website, incorporating a business provides the company with most of the legal rights granted to an individual, with the exception of voting privileges. Incorporated businesses must hold shareholder and director meetings, and keep company minutes, as described on the Companies Incorporated website. In addition, corporations must keep accurate banking records that are separate from the personal funds of its owners. Furthermore, an incorporated business must file taxes and annual reports with the state where the company is organized. This new business entity – corporation or limited liability company (LLC) – transforms the way the business is seen through the eyes of the law and often has more credibility with potential customers, vendors, and employees.

When it comes to business taxes, owners of an incorporated business may pay taxes twice on the same corporate dollars, also known as double taxation. This occurs when the company pays business taxes on its earnings. If dividends are issued to shareholders of the corporation, the shareholder pays taxes on those dividends at their individual tax bracket. Dividends issued to shareholders of a corporation aren’t deductible and don’t reduce the corporation’s tax liability. Lastly, for company Stocks, unlike a sole proprietorship or a partnership, an incorporated business has the ability to issue stock to employees and investors. Corporations with unissued shares of stock can sell shares to raise money for the company. Because an incorporated business has limited liability protection, investors may be more likely to invest in a corporation in comparison to a sole proprietorship or partnership. Employee stock incentives may be used to attract talented individuals to work for the corporation.

In any case that the venture hits some financial hurdles, corporations normally file one of two different types of bankruptcy – Chapter 7 or Chapter 11. Alternatively, corporate creditors may force a corporation into bankruptcy. When a corporation enters Chapter 7 bankruptcy, the bankruptcy court appoints a trustee to oversee the liquidation of corporate assets. Assets are then distributed to external creditors according to their priority and the amount that they are owed. Shareholders are the lowest priority unless, for example, the corporation borrowed money from a shareholder. Unlike an individual debtor, the corporation receives no discharge of debt – it simply dissolves and ceases to exist after its assets are liquidated and distributed. On the other hand, when a corporation enters Chapter 11 bankruptcy, corporate representatives negotiate with a creditor’s committee for favorable payment terms, reduced interest rates and, sometimes, a reduction in the principal balance of its debts. The corporation must usually pay its outstanding debts within five years. Both the creditors and the corporation may submit payment plans to the bankruptcy court, but the court must approve it. Once the corporation complies with the settlement, it receives a discharge of any remaining debt.

The Incorporation Doctrine

The incorporation doctrine is a constitutional doctrine through which selected provisions of the Bill of Rights are made applicable to the states through the Due Process clause of the Fourteenth Amendment, the Legal Information Institute explains. This means that state governments are held to the same standards as the Federal Government regarding certain constitutional rights. The Supreme Court could have used the Privileges and Immunities Clause of the Fourteenth Amendment to apply the Bill of Rights to the states. However, in the Slaughter-House Cases 83 US 36, the Supreme Court held that the Privileges and Immunities clause of the Fourteenth Amendment placed no restriction on the police powers of the state and it was intended to apply only to privileges and immunities of citizens of the United States and not the privileges and immunities of citizens of the individual states. This decision effectively put state laws beyond the review of the Supreme Court. To circumvent this, the Supreme Court began a process dubbed as “selective incorporation” by gradually applying selected provisions of the Bill of Rights to the states through the Fourteenth Amendment Due Process clause.

Selective and Offshore Incorporation

To give you a breakdown on what “selective incorporation,” it is a constitutional doctrine that ensures states cannot enact laws that take away the constitutional rights of American citizens that are enshrined in the Bill of Rights. Selective incorporation is not a law but has been established over time through court cases and rulings by the United States Supreme Court. In actuality, selective incorporation is the process that has evolved over the years, through court cases and rulings, used by the United States Supreme Court to ensure that the rights of the people are not violated by state laws or procedures. Moreover, according to Law Teacher, it does not consider all rights in the Bill of Rights fundamental not all rights in the Bill of Rights and some rights outside the Bill of Rights are fundamental. This approach rejects the totality of circumstances to decide whether phases of rights or particular portions of Instead if a right was fundamental, drafters incorporated it into the Fourteenth Amendment through the Due Process Clause and deemed applicable to the states and the federal government. At its heart, selective incorporation is about the ability of the federal government to limit the states’ lawmaking powers.

Meanwhile, Offshore incorporation is a corporation or limited liability company that has been formed outside of your country of residence. One is well advised to choose the country of incorporation wisely. The great thing, however, about having an offshore corporation company that has been established properly is that it will give you, the owner financial confidentiality. If one has an offshore bank account in one’s own name, the name of the account holder is easy to trace. Many people who have an offshore corporation have several companies. Having more than one offshore company allows funds to be transferred between companies that are free from government reporting. There is usually a significant reduction in paperwork because there may be no requirements by the government to report transfers of money between one foreign account and another.

Filing Articles of Incorporation

Starting your own business is a big step, and the legal issues involved can be confusing.  Thinking of a business idea is hard enough, but then there are forms to fill out and technicalities to deal with, especially if you’re structuring your company as a corporation. Here’s what you need to know about one of the first and most important steps of incorporating your business: filing your articles of incorporation.

The articles of incorporation sometimes called a certification of formation or a charter, is a set of documents filed with a government body to legally document the creation of a corporation. This type of document contains general information about the corporation, such as the business’s name and location.

Articles of incorporation can easily be confused with bylaws, which lay out the rules and regulations that govern a corporation and help establish the roles and duties of the company’s directors and officers. Articles of incorporation are also sometimes called a certification of formation or a charter. The articles of incorporation contain general information about a corporation, such as the name and location of the business. Bylaws, on the other hand, contain information about the rules and regulations that govern a corporation. In addition, corporate bylaws help to establish the roles and duties of the company’s directors and officers.

 Forms and Legal Documents

 The first step in the process is structuring a business as a corporation. The specific documents vary by state, but each will include a number of questions about the business and its owners. The forms are easily found online but don’t be alarmed if they are called something other than articles of incorporation.

Despite a state-by-state filing, the forms will all ask pretty much the same questions and will be in a fill-in-the-blank format. The most crucial information that is required will be corporate name, recipient of all legal notices and official mailings, the purpose of the business, the duration of the business, the incorporator, the directors, how many shares of stock can be issued, and how many classes of stock the corporation will be allowed to issue.

Articles of incorporation must be submitted to the secretary or department of state in order to establish a company as a corporate entity. Depending on the state of incorporation, articles of incorporation may be submitted in person to the secretary or department of state’s office, by mail or electronically to the secretary or department of state website. A corporation is not required to file the company’s bylaws with any government agency. Instead, corporations are required to maintain their bylaws at the company’s primary business location. Corporate bylaws are an internal document, establishing operating procedures for a corporation.

Legally, the answer is no. In fact, over 70 percent of U.S. businesses are owned by sole proprietors and operate successfully without incorporating. However, if you need liability protection to protect personal assets if a client sues you, potential tax savings (at a price), or a loan to grow your business in the future, then incorporation might benefit you.

Typically, if you only operate in one state, you should incorporate in that state. If you operate in multiple states, you should determine which state is the friendliest to corporations and incorporate in that state.  File your articles of incorporation in the state where you intend to incorporate – usually with the Secretary of State’s office and for a fee, depending on where you live. Check your state website for more information.

The primary benefit to business incorporation is limited liability. When you own a small business, you will invest a lot of money into not only getting it launched but in keeping it running smoothly as well. As the owner, you are responsible for any debts and losses your business may accumulate along the way. However, when you incorporate, you are typically only held responsible for the amount of money you personally invest. Your personal assets typically cannot be used to satisfy the debts and liabilities of your business.