Author Archives: c05572520

Check Withholding Now To Avoid Tax Surprises Later

With the year more than halfway over, the Internal Revenue Service urges taxpayers who haven’t yet done a “Paycheck Checkup” to take a few minutes to see if they are having the right amount of tax withholding following major changes in the tax law.

A summertime check on tax withholding is critical for millions of taxpayers who haven’t reviewed their tax situation. Recent reports note that many taxpayers could see their refund amounts change when they file their 2018 taxes in early 2019.

The Tax Cuts and Jobs Act, passed in December 2017, made significant changes, which will affect 2018 tax returns that people file in 2019. These changes make checking withholding amounts even more important. These tax law changes include:

  • Increased standard deduction
  • Eliminated personal exemptions
  • Increased Child Tax Credit
  • Limited or discontinued certain deductions
  • Changed the tax rates and brackets

Checking and adjusting withholding now can prevent an unexpected tax bill and penalties next year at tax time. It can also help taxpayers avoid a large refund if they’d prefer to have their money in their paychecks throughout the year.

You can use the free IRS Withholding Calculator to check your withholding now.

Special Alert: Taxpayers who should check their withholding include those who:

  • Are a two-income family.
  • Have two or more jobs at the same time or only work part of the year.
  • Claim credits like the Child Tax Credit.
  • Have dependents age 17 or older.
  • Itemized deductions in 2017.
  • Have high income or a complex tax return.
  • Had a large tax refund or tax bill for 2017.

How Businesses in California Can Acquire and Keep a Positive Cash Flow – July 17, 2018

As the saying goes, “cash is king!”  Cash flow is the lifeblood of any business organization. Small-business owners are often so concerned with other matters that they fail to pay proper attention to managing their cash resources properly.

More businesses go out of business for this above all other reasons. The hard reality is this – When you’re out of cash, you’re out of business. The fortunate thing is that proper cash management, like many other skills, can be learned.

Once understood and implemented, you will wonder how you got along without using “cash management” as an integral tool in managing your small business.  This chapter will show you how.

What is Cash Flow?

Cash flow is the movement of money in and out of your business over a period of time; these movements are called inflow and outflow. Inflows for your business primarily come about from the sales of goods, collections of your receivables, borrowed money, investment income from interest, and finally, sale of assets.

Outflows for your business are measured by the checks you write and the cash you disburse to pay expenses. Some examples of cash outflow are payroll, operating costs such as utilities, rent and telephone, purchasing inventory, and any loan repayments.

A positive cash flow results if the cash inflows are greater than the cash outflows. A negative cash flow results when the opposite takes place; cash outflows exceed cash inflows.

Cash Flow Verses Profit

Although cash is critical, people think in profits instead of cash. We all do. When you imagine a new business, you think of what it would cost to make the product, what you could sell it for, and what the profits per unit might be. We are trained to think of business as sales minus costs and expenses, which are profits. Unfortunately, we don’t spend the profits in a business. We spend cash.

Profitable companies go broke because they had all their money tied up in assets and couldn’t pay their expenses. Working capital is critical to business health. Unfortunately, we don’t see the cash implications as clearly as we should, which is one of the best reasons for proper cash planning. We have to manage cash, as well as profits.

Cash flow and profit are two concepts that are very different from each other and very often misunderstood by many small-business owners. The two major differences between cash flow and profit come about due to:

  1. Difference in timing when transactions are recorded. Profits are the excess of revenues over expenses. Revenues are recorded in the books when your customers buy from you, with cash or on credit. Even though you haven’t received the cash, the sale shows up on your income statement and is part of your profits (assuming you are on the accrual basis). As part of your management review, if you were to look only at your income statement for that period of time, you’d think all was well because your books are showing a healthy profit. Your cash flow statement, however, shows a very different picture. This difference between when a sale is made and the cash is received can have serious financial consequences on your business if not understood and reviewed regularly.
  2. Type of transactions that are used when computing each one. The second important difference between cash flow and profit is the type of transactions included in each. Cash flow considerations include items such as funds borrowed, equipment sold, and loan repayments. These items don’t figure into profits and don’t show up on your income statement. But such items do have a significant impact on your cash flows. Likewise, there are other items such as depreciation which are not considered when computing cash flow but do play an important role when computing profit.

Practicing Proper Cash Management

Proper cash management can contribute much to the success of your small business. Cash makes business owners’ dreams come true! Managing your cash well means making the best, most productive use of what you have.   It involves knowing the following: 1) what your cash needs are; 2) when, during the year, you generally need cash; 3) the best sources for meeting additional cash needs.

Proper cash management also means you must be prepared to meet needs when they occur. The quality of relationship you maintain with bankers and creditors will go a long way towards determining your supply of cash.  Equipped with the necessary financial statement tools in hand (the cash flow statement, the cash projection and the variance report), you are ready to maximize the cash in your business.

What happens when your cash needs outpace your cash available?  The answer is clear – it is difficult, if not impossible, to plan for the future!  Even some of the best-managed companies may find themselves vulnerable to cash shortages.  Adding employees or inventory too rapidly is one way in which this can occur.

These ideas can provide relief and positively influence your cash flow:

  1. Bill promptly: Prepare invoices immediately after you have delivered your goods or services to each customer. Once the invoice has been prepared, be sure it is sent immediately to the customer.
  2. Payment in advance: A number of businesses require payment in advance for some part of the sales price, and often encourage up-front payment with a substantial discount. This leads directly to cash in the bank.
  3. Collect on your accounts receivable: If you do nothing else, make certain that your credit-and-collection system is operating at peak efficiency.
  4. Trim your Inventory: Inventory describes the extra merchandise or supplies your business keeps on hand to meet the demands of customers. Keeping too much product on hand can tie up a great deal of cash. Too many business owners buy inventory based on hopes and dreams instead of what they can realistically sell. Keep your inventory as low as possible.
  5. Accounts payable: Accounts payable represent amounts you owe to your suppliers that are payable sometime within the near future. In this case, “near” probably means between 30 and 90 days. To maximize the flow of your cash, you should speed up collection of your receivables, but slow the payment of your bills.
  6. Minimize Expenses: The absolute best way to improve your cash flow, and in particular to improve your accounts payable, is to minimize your business’ operational expenses and ensure you make the most efficient use of every dollar you spend.

Cash is king.  Simply put, “no cash equals no business.” It is the gas that keeps your business going.  As the owner, you must know how much cash comes in and how much goes out on a regular basis. Companies go out of business for cash flow problems over profitability.

Even otherwise-healthy companies can go under for lack of cash. It can kill a company if it sneaks up by surprise, but can be easily managed when there is a plan for it. Tracking the amount of cash you have is a vital function that you can never lose a handle on.

For more on this topic, please check out my book “Secrets of Small Business Success in the San Francisco Bay Area“.

How to Keep Records that Help You Control Your Business in California – June 26, 2018

Keeping accurate and clear business financial records can, for many business owners, be the most difficult, and frankly the most stressful, part of running a business.

Simply understanding these records is often challenging. And yet maintaining a set of clear and understandable financial records is perhaps the single most important factor that separates successful businesses from those that fail.

Good decision-making requires it. And you, the business owner, must take responsibility for obtaining this knowledge.

Use the basic principles of sound financial management on a daily basis – you can leave the more complicated accounting work to professionals, but don’t underestimate your need to know!

Maintaining good financial records is a must. For all of the things you will want to achieve in building your business – saving on taxes, obtaining financing, selling your business, monitoring your business’ progress – a solid bookkeeping system is essential.

Why You Need Good Records

Develop good habits from the beginning. Although you’d much rather spend your time selling your product or service, take some time to learn about financial records. Accurate and timely financial information is a must. Here are some of the reasons why you need a good financial record-keeping system:

  • To monitor the success of your business
  • To get the information you need to make decisions
  • To obtain bank financing
  • To obtain other sources of capital
  • To budget your money
  • To prepare your income tax return
  • To ensure compliance with federal and state payroll tax rules
  • To properly submit sales taxes
  • To distribute profits

Record Keeping Tips

For many small businesses the most common bookkeeping errors are also the easiest to fix. Use these six tips to help keep your business on sound financial footing.

  1. Use the right accounting system
  2. Maintain daily records
  3. Handle and review checks carefully
  4. Get a bank statement with a month-end cutoff
  5. Leave an audit trail
  6. Use a computer

There are five basic records that are required for any small business record-keeping system:

  • Sales records
  • Cash receipts
  • Cash disbursements
  • Accounts receivable
  • Accounts payable

Other important records include Payroll. This is perhaps the most complex function when it comes to accounting.  There are myriad state and federal forms that must be completed, and highly specific payroll laws that must be followed.

Most businesses have several types of insurance and, for each policy, you should keep detailed information about what is covered and the effective dates.

In addition, keep an accurate list of business equipment.  The list should describe the equipment and provide serial numbers, date of purchase and original cost.

Finally, keep records of your transportation expenses – those are the ordinary and necessary business expenses of getting from one place to another in the course of your business.

Record Keeping Requirements

There are four basic requirements your record keeping system must fulfill:

  1. It must be simple to use and easy to understand. The information will be kept current if the system is “user-friendly.”
  2. Your record-keeping system should be both relevant and accurate. It should be specific to your business in order to minimize time recording information, and recording only what is needed and necessary. “Accurate” means it should be free of errors, thus conforming to the standards you have for your record-keeping system.
  3. Your system should ensure that records are kept current. The information will only be effective if records are done in a timely fashion.
  4. Your record-keeping system should be consistent. The same standards and principles should be followed throughout the system, and at all times.

Knowledge of finances and financial record keeping is essential to business success.  Good decisions are only made with the benefit of quality information.  No matter how skilled you are at creating, manufacturing, selling or marketing your product, any profit you might earn will quickly dissipate if you do not know how to track it, save it, spend or invest it.

For more on this topic, please check out my book “Secrets of Small Business Success in the San Francisco Bay Area“.

Small Business Financing: How and Where to Get the Money You Need – June 6, 2018

Every day thousands of businesses are forced to close their doors. The most common reason given for the high failure rate of small businesses is a lack of adequate capital.

Whether you’re starting a business or expanding one, sufficient ready capital is essential.

But it is not enough to simply have sufficient financing; knowledge and planning are required to manage it well. These qualities ensure that entrepreneurs avoid common mistakes like securing the wrong type of financing, miscalculating the amount required, or underestimating the cost of borrowing money.

There are three typical financing arrangements for any business:

  • Self-funding: you put up your own money
  • Debt financing: you borrow money
  • Equity financing: you share ownership with a partner or shareholder in return for money


Self-funding is often the more popular option for small-business owners. Without substantial physical assets in the business, banks will often be hesitant to offer a direct business loan. Even if you can get a business loan, a lender often wants you to personally guarantee it.

Many business owners also don’t want to get involved in the intricacies of equity financing. This leads to most small-business owners choosing the option of self-funding.

There are five ways to raise funds for your small business without obtaining a business loan.

  • Personal savings
  • Home equity loans
  • Life insurance
  • Retirement plans
  • Credit cards

Debt Financing

Businesses may use debt financing to operate over a period of time.  Funds secured through debt financing must be repaid over a predetermined period of time, usually with interest.  Short-term (less than one year) and long-term (more than one year) options are available.

Debt financing does not require any change in ownership structure, one advantage of this method.  Further, interest paid is deductible as a legitimate business expense.  Sources of debt financing include banks, trust companies and credit unions, for example. Other sources include family and friends, suppliers and equipment manufacturers, third-party leasing companies, government agencies and other financing organizations.

Types of debt financing include demand loans, lines of credit, term loans, and leasing and supplier credit. Remember to shop around and compare terms, costs and flexibility.

Equity Financing

Equity means ownership. Equity financing describes an exchange of money for a share of business ownership. This form of financing allows you to obtain funds without incurring debt.

Equity financing is good if you don’t want an obligation to repay a lender. The major disadvantage to equity financing is the dilution of your ownership interests and the possible loss of control that may accompany a sharing of ownership with additional investors.

The most basic hurdle to equity financing is finding investors who are willing to buy into your business, especially if you are a new business. No matter how sure you are that your business will succeed, others will not always share your conviction.

Different types of equity funding include:

  • Venture Capital (VC)
  • Small Business Investment Corps. (SBIC)
  • Informal Investors/Business Angels
  • Initial Public Offerings


When it comes to financing, you essentially have three options – put up your own money, borrow it from a bank, or secure it through a business partner.  While any or all may work, one thing is certain – your business must be properly financed or it will not succeed.  While doing your business planning, spend the time necessary to determine your financing needs and sources.

Remember to keep yourself connected to others who may be able to impart the wisdom of their experience unto you.  Other business owners, friends, and associates are resource options; remember, too, the Small Business Administration provides helpful information and resources to all small-business owners.  Use them.

Finally, work hard to avoid common mistakes associated with financing your business.  Ask yourself the right questions, and spend time evaluating and reevaluating your needs on a regular basis.  Understanding the intricacies of financing will go a long way towards securing the financial future of your business.

For more on this topic, please check out my book “Secrets of Small Business Success in the San Francisco Bay Area“.

HSA Limit Adjustments – June 5, 2018

Following are the Health Savings Account (HSA) Limits for 2018

Maximum Contribution
Individual Only: $3,450
Family Coverage: $6,900

HDHP Minimum Deductibles
Individual Only: $1,350
Family Coverage: $2,700

HDHP Maximum Out-of-Pocket Amounts
Individual Only: $6,650
Family Coverage: $13,300

Catch-up Contribution (age 55 or older)
Individual Only: $1,000
Source: Rev. Proc. 2018-27

*This latest procedure update was provided by the IRS in response to a previous reduction in the maximum contribution amount for individuals, Rev. Proc. 2018-18.

Three Ways to Grow Your Business in California – May 15, 2018

Regardless of what your product or service is, there are only three ways to grow your business, i.e., increase revenues and improve profitability. That’s it. All paths to growth are a variation on one of these themes.

Once you have grasped this idea, your marketing will become more focused, more organized and more powerful. The three ways to grow your business are:

  1. Increase the number of customers
  2. Increase the average size of the sale per customer
  3. Increase the frequency of purchase

Let’s look at each one in more detail:

1) Increase the number of customers

There’s no denying that customers are very important to any business. It is imperative that you keep a steady stream of customers coming in to your establishment, or taking advantage of your service.  They’re out there; you just have to find them.  Once you identify them as prospects (leads), you must help them believe in the uniqueness of your product or service.  When they believe, then you’ll have a customer.  Here are some ideas on how to turn leads into customers:

  1. Increase the number of referrals: Getting new customers through referrals is one of the most cost-effective methods there is for growing a business.
  2. Establish joint ventures: Find companies similar to yours that have already spent considerable time, effort and money establishing and building relationships with their customers.
  3. Select marketing media that can deliver your message to your target market in a cost-effective way.
  4. Increase your conversion: Increase the conversion ratio of prospects into paying customers.
  5. Reduce customer loss: Reduce customer defections – don’t let existing customers slip away to do business with the competition.

2) Increase the average size of the sale per customer

Once you have got the customer in the door or in your database, you want them to spend more money, if it is in their best interest to do so. You can do this by raising prices, up-selling, packaging items/services as attractive solutions or expanding your product line.

Always keep in mind that it can cost a fortune to acquire a new customer. However, once you have the customer, you must maximize your sales to them over the life of your business relationship. Here’s how you can do it:

  1. Raise your prices: Customers are often willing to pay much higher prices than you expect for something. Try raising prices in small increments.
  2. Up-sell and cross-sell: Don’t be afraid to sell a customer more than what she wants, if you believe she can benefit more from the next level product.
  3. Package different products or services together: Different people want different things, but everyone loves a “package” deal.

3) Increase the frequency of purchase

The third way to grow your business is to increase the frequency of purchase. A prior purchase (and being satisfied with that purchase) is more likely to bring a customer back. Reselling someone is far less expensive than selling to someone new. And with trust comes more purchasing.

Optimal profits can be earned when you create a structured program that welcomes these folks to purchase more products and services from you.

So keep your customers coming back to you again and again. Here are a few ways you can do that:

  1. Thank you cards/letters: Everyone likes to receive thank you cards or letters. Frequent communication with your customers also creates expectations that they will hear from you. This can be used to your advantage as well.
  2. Make new offers: They may not buy every time you promote something, but they will continually “keep you in mind.” Staying in touch with your customers has proven to be an effective way to retain them.
  3. Customer clubs/loyalty programs: Rewarding customers for frequent purchases is a fast, easy and low cost way to retain customer loyalty.
  4. “By invitation only” events: Any opportunity you can create for your customers to feel more “connected” to your business will pay dividends down the road.
  5. Reactivate old customers: Inevitably some customers are going to stop doing business with you. Some may get busy with work or the kids’ sports. They may become ill for a few months. Or they may just forget about you. Herein lies a gold-mine of opportunity.

Becoming an astute marketer is a process that will take time and money to master. Learning and implementing this one skill will ensure a steady flow of new customers to your door – a very necessary ingredient for a healthy cash flow and continued prosperity of your business.

For more on this topic, please check out my book “Secrets of Small Business Success in the San Francisco Bay Area“.

Secrets of Growing Your Business Sensibly and Profitably in California – April 24, 2018

It appears that many small businesses believe in the age-old adage that says, “Build a better mouse trap, and the world will beat a path to your door.”

In the real world, this little piece of wisdom does not hold true.

Unless you have invented a totally unique product or service uncommon in the marketplace, it is very likely there are tens or even hundreds of businesses out there that are similar to yours.

Each day, the average American is bombarded by an average of 100 television commercials, 30 radio spots, 194 newspaper ads, and up to 10 direct mail solicitations.  This doesn’t even include telemarketers!

Competition for your customers’ money is fierce.  If you want to win the battle for their hearts and money, you must first prove that you understand them, and then you must find the right vehicle to “connect” with them.

Let’s talk about the fundamentals of marketing. It is getting the right message to the right people via the right media. Marketing means: “market first, message second, and media third” – in that order!  I often refer to them as the 3 Ms. Let’s look at each.


Not every product appeals to everyone.  That’s why marketing is so vital; it is the process by which potential customers are identified and “targeted.”

Your target market is one that has high probability of purchasing your products or services and which you have selected for focused marketing activities. Unfortunately, most small-business owners get to their best prospects randomly – by throwing out their message to everybody and letting the right people find it.

This is like getting a message to your uncle in Manhattan by dropping 100,000 copies of your letter out of an airplane as you fly over New York. I refer to this as “blind archery.” Imagine launching 100 arrows while blindfolded.  You might hit a target or two, but think of what else you’ll hit along the way!

And arrows are one thing. A limited supply of dollars is another. If you market wisely, you’ll hit the target, and you won’t waste money.


Your message is the words that crystallize or articulate the “uniqueness” of your business.

Why is your business unique?  What sets it apart?  What is that “something special” you can offer that no one else does?  How you answer these questions matters very much to how attractive your business will be to potential customers.

This can be identified as a “unique selling proposition,” or USP.  The USP is the heart of your business, and as such it should be the heart of your marketing.  All in all, your USP is the most powerful marketing tool you have.

The USP for Federal Express is “When it absolutely, positively has to be there.” They based it on a promise of delivery reliability.

Domino’s based their slogan on the fact that most pizza eaters don’t care how much stuff is on their pizza, but that it is hot, fresh, and delivered quickly. Their slogan goes as “Fresh, hot pizza in 30 minutes or less.”

Once you have defined your target market and your message, you are ready to move to the third M in Marketing, “Media.”


Your marketing medium is the communication vehicle you use to deliver your marketing message. It’s important to choose a marketing medium that gives you the highest return on your marketing dollar. This means you want to choose the medium that delivers your marketing message to your targeted prospects at the least possible cost.

What I have seen most small-business owners do is market their product or service through one marketing medium only. So the florist will place a Yellow-Page ad and do nothing else to promote her business.

The auto mechanic will place an ad in the newspapers and not explore all the other marketing media available. The small-business owner must instead test several marketing media and use them in their arsenal of marketing media.

The fact is effective marketing is more an art than a science.  Don’t believe for a second that many of these techniques are obvious to everyone – they’re not. Only a few know and understand them. As one of those few, you’ll not only learn how to make your small business stay alive and thrive, but you’ll learn to dominate your marketplace.

For more on this topic, please check out my book “Secrets of Small Business Success in the San Francisco Bay Area“.

Choosing the Right Legal Structure for your Business in California – April 3, 2018

When you start or run a business, it’s vital to choose the right type of legal entity and structure.

It’s equally important to keep that structure under review as the right solution may change as time goes on.

No one entity is perfect for every business venture; there are a number of different factors that would favor the selection of one entity over another.

Choosing the right business structure can save you money and the pain of many headaches! There are several different legal structures under which you can choose to operate: sole proprietorship, partnership, limited liability company (LLC), S-corporation, C-corporation and non-profit corporation.

Each has advantages and disadvantages. Here I have given you an overview of the pros and cons of each. However remember this only highlights some of the key points. Make sure you get good advice before choosing the best option for you.

Option #1: Sole Proprietorship

A sole proprietorship is generally the simplest, most-common, least-regulated form of business and does not require any formal action to set up.

If you don’t incorporate and don’t have a partner, the law will automatically classify you as a sole proprietorship. To establish a sole proprietorship, all you have to do is obtain whatever licenses and permits are needed in your local area to begin operations.

One of the big attractions of this approach is the ease and speed of formation. You usually need to spend only a few minutes with your city or county clerk to obtain a business license or trade name certificate. Since no formal set up is required, reduced expenses come from not requiring legal help and additional registration fees with your state regulatory agency.

For income tax purposes, the government treats you and your sole proprietorship as one. An added tax saving comes about from not having to pay federal and state unemployment taxes on your profits.

One major disadvantage of the sole proprietorship is that you have unlimited personal liability in your business. This means that you are responsible for the full amount of business debts.

Option #2: Partnerships (technically known as the “general partnership”)

With the exception that a partnership has two or more owners, it is similar to a sole proprietorship in many ways. Creating a partnership can be very simple, since the law does not require any formal written documents or other formalities for most partnerships.

As a practical matter, however, it is a much sounder business practice for partners in a business to have a written partnership agreement that, at a minimum, spells out their agreement on such basic issues as how much will each partner contribute and how profits and losses will be divided among the partners.

Although the legal formalities to set up a partnership are greater than a sole proprietor, they are less when compared to the creation of a corporation. For income tax purposes, the profits or losses allocated (Schedule K-1) to you from a partnership are treated as ordinary income or losses.

However, a major risk inherent in a partnership agreement is that each partner can be held responsible for the debts, taxes, and other claims against the partnership. In addition, most state partnership laws provide that when one of the partners dies, quits, or declares bankruptcy, the partnership is then dissolved, jeopardizing the continuity of the business.

Another point o bear in mind is that a partnership is an understanding between partners. Much like a marriage, this understanding is nurtured by trust. Unfortunately, many partnerships end in a break-up.

Option #3: C-Corporations

An entity formed and operated as a corporation assumes a separate legal and tax life distinct from its shareholders. The label “C-corporation” merely refers to a regular, state-formed corporation. Corporations exist only because state statutory laws allow them to be created.

A corporation issues shares of its stock as evidence of ownership to the person or persons who contribute the money or business assets, which the corporation then uses to conduct its business. Thus, the stockholders (also known as shareholders) are the owners of the corporation, and they are entitled to any dividends the corporation pays.

Perhaps the biggest reason why many small-business owners incorporate their business is to limit their liability to the amount invested in the business – although there are certain exceptions to this.

Various lenders, including banks, venture capitalists, and others, are generally much more willing to make loans to a corporation that has been operating successfully than to a sole proprietorship or a partnership.

One of the big disadvantages of corporations is the corporate formalities required. A corporation can be created only by compliance with General Corporation Law of the state of incorporation. Getting this paperwork done takes time, effort and money.

Another potential disadvantage of a corporation is “double taxation.” The corporation pays tax once based on its corporate profits and a second time as ordinary income when profits are distributed to you as the shareholder. When your corporation loses money, such losses remain within the corporation and no immediate benefit is derived from the potential offset against earned income.

Option #4: S-Corporation

Many business owners hesitate to the double taxation rules imposed on C-corporations. Setting up your business as an S-corporation alleviates this “double taxation” rule.

An S-corporation begins its existence as a C-corporation upon filing the articles of incorporation with the secretary of state. After the C-corporation has been formed, it may elect “S-corporation status” by submitting the appropriate form to the Internal Revenue Service (in some cases a state filing is required as well).

Once a corporation makes the Subchapter S-election to be an S-corporation, profits and losses are passed through the corporation and are reported on the individual tax returns of the respective shareholders of the S-corporation.

To qualify, your business must meet the specific requirements set forth by the IRS.

There are several advantages of an S-corporation. For example, it receives limited liability protection accorded to corporations while avoiding the double-tax feature of taxation of your corporate profits. It also permits benefit of offsetting business losses incurred by the corporation against your income.

In an S-corporation, only earnings actually paid out to an owner as compensation for services are subject to payroll taxes. Any money distributed to the shareholder as a dividend is not subject to payroll taxes… and not subject to self-employment tax.

However, there are certain disadvantages of S-corporations. These include the corporate formalities: An S-corporation follows the same state formalities as a C-corporation and must also make a special tax election under the Internal Revenue Code.

S-corporations also offer less generous loss deductions compared to LLCs. Some states require all S-corporations to pay a minimum corporate tax regardless if the business reports a loss.

Option #5: Limited Liability Company (LLC)

An LLC is a business entity consisting of one or more “persons” (meaning an individual, general partnership, association, trust, estate or corporations) conducting business for any lawful purpose.

This form of business entity is a hybrid between a partnership and a corporation in that it combines the “pass-through” treatment of a partnership with the favorable limited liability accorded to corporate shareholders.

While an LLC has many of the same characteristics as an S-corporation or a limited partnership, it is, in many cases, more flexible.

With a few narrow exceptions, LLC members are not subject to the debts and obligations of the LLC and thus enjoy the same “limited liability” of a corporation. Should members of an LLC desire additional tax savings, it can elect to change its tax status to that of a regular corporation.

Disadvantages of an LLC include transferability of ownership. No one can become a member of an LLC (either by transfer of an existing membership or the issuance of a new one) without the consent of members having a majority in interest (excluding the person acquiring the membership interest) unless the articles of organization provide otherwise.

Other disadvantages include that an LLC does not have a reliable continuity of existence. The articles of organization must specify the date on which the LLC’s existence will terminate. Filing to form an LLC can be also extremely complicated, and the paperwork needs to be completed meticulously.

Option #6 Nonprofit Corporations

A nonprofit organization is a group organized for purposes other than generating profit and in which no part of the organization’s income is distributed to its members, directors, or officers.

Nonprofit organizations include churches, public schools, public charities, public clinics and hospitals, political organizations, legal aid societies, volunteer services organizations, labor unions, professional associations, research institutes, museums, and some governmental agencies.


It is reasonably well-accepted and understood that selecting the most appropriate entity is extremely important when you first get into business. The fact not clearly understood by most small-business owners is its significance when you are already in business.

For existing businesses, it is important to know that one type of entity selection may be more advantageous in one year but not in another, due to a shift in circumstances. I recommend that your accountant review the appropriateness of your entity at least once annually. An accountant well-versed in this area will provide excellent insight into which entity is right for you.

For more on this topic, please check out my book “Secrets of Small Business Success in the San Francisco Bay Area“.

Tips on Writing Business Plans that Get Results in California – March 13, 2018

If you were traveling from New York to Alaska, and you had never been to Alaska, you would most likely consult a map for direction and guidance. If you didn’t, you could drive in circles for hours, if not days.

And if you didn’t ask anyone for directions, then you probably would not get there at all.

Unfortunately, many small-business owners attempt to do the same thing when they start their business. They start and continue to operate with no such map.

The end result is usually failure. With a business plan as your road map, your journey is not only much simpler, but your confidence is much higher.

A business plan is a written description of your business’ future. It’s a written document that explains and analyzes your business, and gives detailed projections about its future.

In short, it describes what you plan to do and how you plan to do it. A business plan covers all significant areas of the business including business strategy, marketing analysis, financial analysis and operations.

The Problem with Business Plans

The problem is that most business plans, once written, sit on a shelf and collect dust.

The first reason for that is that most business plans are written because the business owner thinks of it as an exercise that “must be done.” When the task at hand to prepare a business plan is approached in this way, it lacks the passion, energy and vibrancy that a good business plan should have.

The second problem is that most business plans are static. There is usually no room for change. Revisiting your plan, however, gives you the opportunity to step back, examine and organize your thinking about the business, and makes sure you’re charting a successful course for the future.

Writing a business plan is a lot of work. So why take the time to write one?  Because good planning leads to good success.  Almost without exception, business owners who write a plan are pleased they have one.  Those without a plan wish they had written one.

Here are some of the specific and immediate benefits you will derive from writing a business plan.

  • Helps You Obtain Money
  • Improves Your Odds of Success
  • Keeps You On Track

Outline of a Complete Business Plan

A business plan customarily has a number of major elements or sections. Each of these elements serves a particular purpose in the overall presentation of your plan.

There are three main parts to a business plan:

  • The first is the business concept: Here you discuss your business “industry,” your business structure, and your products or services.
  • The second is the marketplace section: Here you define and analyze the potential buyers of your product or service. You also describe and analyze your competitors.
  • The final section is the financial section: This includes your financial reports, e.g., the profit and loss statement, balance sheet, cash flow projections, and ratio analysis.

These three parts further break down into several key components.

Executive Summary 

This is arguably the most important single part of your document. It provides a high-level overview of the entire plan that emphasizes the factors that you believe will lead to success.  In essence, it is the business plan in miniature.

Someone who has finished reading your executive summary should be able to say, “So, that’s what these people are about.”

Market Research/Analysis

This presents an analysis of the market conditions that the business faces, sets forth the marketing strategy that the business will follow, and provides a detailed schedule of marketing activities to support sales.

Market research looks at the total industry, however it is defined. Analyze the data for both the total market and your specific customers. Your target market represents your potential customers, who may be defined by age, sex, race, affluence, education, physical characteristics, location, etc.

Quantify your target market. Is it growing? By how much? What are the spending habits of your targeted customers? Who is your competition and how aggressive is it?

Operations, Management and Fulfillment

This is where you detail how operational and management issues will be resolved, including contingency planning. Operations incorporate the physical plant, its capacity and ability to grow, and your needs in terms of contract and equipment purchases (or leases).

How adaptable is the plant for updating its process? Is the industry rapidly changing and improving quality? What is the minimum you can manufacture (or sell) to avoid losing money? What salaries are necessary to operate the business?

Financial Projections

This is another extremely important section. Your projections (and historical financial information, if you have it) demonstrate how the business can be expected to do financially if the business plan’s assumptions are sound.


This is the place to present supporting documents, statistical analysis, product marketing materials, resumes of key employees, etc.

Using Your Business Plan and Keeping It Current

The mark of a good plan is its “usability.”  Words on a page mean nothing, unless you can put those words into actions.  A good plan dictates action.  It is a guide for operating your business, especially in its initial stages.

In Conclusion

Every business needs a plan, just as every destination needs a way to reach it.  Business planning, although not flashy or necessarily exciting, is essential to the development and organization of a successful business.  Without a plan, there is no way to reach your goal!

For more on this topic, please check out my book “Secrets of Small Business Success in the San Francisco Bay Area“.

3 Key Ways to Start Your Own Business in California — February 20, 2018

If you are looking to start a new business, there are three main ways you can do so.

You can start a new business, purchase an existing business, or invest in a franchise operation.

There are good reasons for each choice and each carries its own advantages and risks.

Option #1: Start a New Business

This option permits you the most freedom and the satisfaction of knowing you did it all yourself.

Some opportunities which might prompt this choice are: a new invention, a spin-off of an existing product or service, turning a hobby into a business, awareness of a customer ready to buy your product, unfulfilled market need, expansion of a part-time activity or simply chance.

Advantages of starting a new business:

  • For true entrepreneurs, the real goal and major appeal is in the creation of something new, not necessarily in the management aspect, so starting a new business is appealing.
  • The high investment costs associated with buying an existing business or obtaining a franchise can be avoided.
  • You are in control. As the owner, you call the shots. You run the business you want to. No franchisors to listen to.

Disadvantages of starting a new business:

  • You need a good idea, potential customers, and knowledge of marketing, finance and management to succeed.
  • There is a high failure rate. (The Small Business Administration reports that 75% fail in a year and 25% of first-year survivors fail in the second year.)
  • Most new businesses are privately financed with the owner’s money and often are undercapitalized.
  • There is a lack of formalized structure, which is good for some and bad for others. You’ll have to learn to adjust to a need for greater personal drive and motivation to get going and stay active in business.
  • It is not unusual for a new business owner to work at least 60 hours, and possibly as many as 80 hours in a week, seven days a week, for the first year or so, which can create stress for yourself and your family.

Option #2: Buy an Existing Business

By buying an existing business you can avoid lead-time required to launch the business, understand expected income and expenses, acquire an existing customer base, and take hold of an established image.

Most successful acquisitions are accomplished by knowledgeable, adequately financed business people. When acquiring a company, it’s important to understand the numerous tax and financial maneuverings available for acquiring and financially restructuring an existing company.

Evidence clearly shows that your chances of success are best when you buy an existing business or franchise resale. With any new business you have two challenges: developing the product or service, and then seeing what, if anything, people are willing to pay you for it.

In spite of a company’s past performance, an existing business or franchise will, at the very least, have a track record from which you will be able to make certain decisions.

Even if the company was not profitable in the past, your strengths may lend themselves perfectly to turning it into a viable venture. Additionally, you have the ability to evaluate what the company did in the past that resulted in the current status of the operation.

Advantages of buying an existing business:

  • The business is “up and running” already.
  • It is likely to have an existing customer, employee and supplier base.
  • There is a tried and tested business formula to emulate, or some sort of a baseline to improve on.
  • The previous owners are likely to lend support and goodwill.
  • There is generally more chance of success than starting a similar business from scratch.
  • Obtaining outside financing may be easier because of an existing track record.

Disadvantages of buying an existing business:

  • A large investment is often required.
  • The loss of an owner or manager may lead to disruption for the operation.
  • Business transfer costs, i.e., solicitors, surveys, accountants etc.
  • A large amount of time and travel required to research the opportunities available.
  • You may inherit inept employees or employees who are loyal to the previous owner and not to you.
  • The present location may be limiting. You may be locked into the existing policies and practices of the business, at least for the foreseeable future.

Option #3: Purchase a Franchise Business

This option allows you to “purchase” a known trademark for delivery of products or services under an established system. You will usually pay a franchise fee, ongoing royalties, and the costs of getting into the franchise.

While it can be comforting to have ongoing support services, collective buying and advertising power and market research, not every franchise is guaranteed to be successful. Many small, less-expensive franchises are under-funded, lack a good training program, and fail to provide the necessary support.

Many of the large, well-known franchises are too costly for many beginning entrepreneurs. This can be an attractive starting point but be sure to check out the franchise thoroughly.

Advantages of owning a franchise

  • A ready business package that may include setup, training, operations, and marketing programs.
  • Public recognition of franchise logo and product achieved through uniform standards in color, design, taste, clothing, etc. This includes quality control measures imposed and enforced by the parent company.
  • Lower costs through collective purchasing powers for suppliers because of the economies of scale.
  • Ongoing financial relationship that may include assistance and training in budgeting and financial management for your business.
  • Finely tuned operating system where the bugs have been worked out at someone else’s expense.
  • Training and guidance, often in the form of an ongoing program for employees and/or managers.
  • Financial assistance, such as startup financing packages. Nearly one-third of parent companies offer startup financing to qualified potential franchisees.

Disadvantages of owning a franchise

  • The high investment cost (franchise fee, royalties, advertising, etc.) may prevent you from looking at several franchise opportunities.
  • Royalty fees appear to be never-ending, often as high as 4% to 6%, and tied to gross revenues (not profits). Royalty fees are a variable operating cost and often become a cash drain on small businesses.
  • Lack of control: someone else tells you how to run your business.
  • Borrowing money can be difficult (not all franchisors offer financing packages). Banks that have had bad experiences with franchises may be less willing to participate in a franchising arrangement.
  • The franchisor’s ability to terminate the franchise agreement may be somewhat arbitrary.
  • The franchisor often reserves the right to place new and more restrictive financial commitments on the franchisee at the franchisor’s discretion.


Being a successful entrepreneur, a successful business owner, takes more than a great idea.  It takes personal desire, fortitude and stamina!  Success also requires you to be thorough in your research, and honest in your decisions.

Knowing yourself, understanding where your talents are (and where they are not!), testing your ideas, and finally using available resources wisely are all key components of creating a successful business.

For more on this topic, please check out my book “Secrets of Small Business Success in the San Francisco Bay Area“.