Everything your startup needs to know about accounting

IDEAinstitute 2015 ENTREPRENEUR SEASON

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Startup Compass: Navigating Accounting for

Your Venture

Presented by Kushner LaGraize, LLC

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What you don’t know, you don’t know

Wendy Dew, CPA John Wyatte Foard, CPA Susan Kliebert, CPA

Presentation Objectives 1. To provide a basic overview of different aspects to starting a new business.

2. To learn the basic of various legal entities that a new business may become

3. To understand the basics of financial statements

4. To briefly discuss various options new business have in obtaining debt

financing

5. To review the basics of sales tax liability

6. To discuss some of the various tax incentives available to businesses

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Using a “new business checklist” • Many aspects of starting a new business ▫ Assembling a business plan ▫ Getting the work space ▫ Determining where the financing will come from Debt Equity

▫ Establishing the legal business entity ▫ Setting yourself up with federal and state government Taxes (income, payroll, sales) Maybe necessary to establish vendor relationships

▫ Accounting software – get your books started before it’s too late! ▫ Insurance – are you covered?

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Various checklists available!

• SBA.gov (http://www.sba.gov/content/follow-these-steps-starting-business)

• Guide to Doing Business in New Orleans (http://www.nola.gov/nola/media/One-Stop-Shop/Revenue/OED-Guide-to-Doing-Business.pdf)

• CPAs / business advisors / various NFPs 9

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Make sure to look at the edition version! 6/14

Choosing your business structure • Sole Proprietorship

• Partnership

• C Corporation

• S Corporation

• Limited Liability Company (LLC)

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Sole Proprietor - Advantages • Most basic & usually the simplest form of

business organization • Owner has full control of management and

operations • Fewer administrative burdens • Owner holds title to property • All taxation to owner

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Sole Proprietor - Disadvantages

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• Limited source of capital • Unlimited liability for owner ▫ No legal separation between owner and business ▫ Owners are personally liable for debts &

obligations of the business • No continuity past proprietor • All net income is subject to self-employment

(SE) tax (social security 12.4% & Medicare 2.9%) • Burden of complete control

Partnership - Advantages

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• More sources of capital and more management resources

• Less administrative burdens than corporations • Pass-through taxation; special allocations

allowed • Limited partners have limited liability • Limited partners have no SE tax

Partnership - Disadvantages

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• Each general partner is personally liable ▫ Includes business debts and decisions made by

other partners • General partner’s net income is subject to SE tax • Complexity of partnership tax rules • Transfer of interests is more difficult than stock • Disagreement between partners

C Corporation - Advantages

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• Owners have limited liability ▫ Shareholders’ personal assets are protected

• Corporations have perpetual life • Ease of transferability of stock • More management resources • Can raise capital with stock sales • Attractive to potential employees ▫ Competitive benefits & stock options

C Corporation - Disadvantages

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• Earnings subject to double-taxation (dividends) • Administrative burdens • Somewhat difficult to form and to dissolve • Borrowing often requires shareholder

guarantees

S Corporations - Advantages

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• Pass-through taxation avoids double taxation • Owners have limited liability similar to C Corps • Individual tax rates may be lower than the

applicable corporate rate • Distributions from the S Corporation are exempt

from payroll taxes (assuming shareholder/employee paid “reasonable compensation”)

S Corporations - Disadvantages

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• Number of shareholders is limited to 100 • Corporations and partnerships cannot be

shareholders • Possible for individual tax rates on the pass-

through income to be higher than applicable corporate rates

• Shareholders must directly invest to have basis to claim losses

• May have similar C Corp administrative burdens

Limited Liability Company (LLC) - Advantages

• All members have limited liability • No limit on number or types of members • May elect to be treated as S Corporation,

partnership or C Corporation • Members may participate in management • Very few corporate formalities

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Limited Liability Company (LLC)- Disadvantages

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• May have a limited life • LLC laws vary from state to state • Members who have management authority, who

have debt responsibility or who materially participate may be exposed to SE tax

Getting set up with the government • Federal tax identification numbers –

(http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Apply-for-an-Employer-Identification-Number-(EIN)-Online) ▫ Occupational Licenses & Zoning ▫ Sales Taxes – MORE LATER! State

(http://www.revenue.louisiana.gov/sections/business/intro.aspx)

Parish ▫ Other business licenses and

permits 22

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Basic Financial Statements Balance Sheet

Income Statement

Statement of Cash Flows

Statement of Changes in Stockholder’s Equity

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Balance Sheet

Snapshot of a company’s assets, liabilities, and owner’s equity at a certain date. Illustrates the financial health of the company.

Typical characteristics: Balancing Order of listing Valuing of items

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Typical Balance Sheet Accounts

Cash Marketable Securities Accounts Receivable Inventory Prepaid Expenses Fixed Assets, less accumulated depreciation Intangible Assets, less accumulated amortization Other Assets Accounts Payable Accrued Expenses Debt Owner’s Equity

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See sample Balance Sheet in packet.

Income Statement Revenues less expenses for a period of time (e.g. month,

quarter, year). Allows user to assess profitability (or loss) for a period of

time.

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Components of an Income Statement

Revenues

Expenses

Net Income (Loss)

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See sample Income Statement in packet.

Users of Financial Statements

Management – information used in making decisions about operations, financing needs, etc. Lenders – used in long and short lending decisions Vendors – used in credit applications Investors – long-term investments/capital Government regulations, tax authorities ▫ Federal Regulators (SEC, FINRA, SBA, etc.) ▫ Internal Revenue Service, Louisiana Department

of Revenue ▫ Income taxes, sales taxes, etc.

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Financing options through debt

• Family & friends • Banks – local & national • Not for profit organizations • Peer-to-peer lending (e.g. Prosper, Lending

Club)

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SBA loan search tool • http://www.sba.gov/loans-and-grants

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Sales taxes • When you start a new business or purchase an ongoing

business, you need to register with the LA Department of Revenue for a revenue account number. If you are classified as a dealer, you are required to apply for a sales tax certificate. ▫ Online http://www.rev.state.la.us/Businesses/BusinessRegistration Takes 3 business days 10/24/14 registration is moving to Louisiana Taxpayer Access

Point (LaTAP) ▫ Mail in form http://revenue.louisiana.gov/TaxForms/16019(5_08)F.pdf

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NEXUS • “Physical presence” in a State or Parish.

• Need to determine whether you have Nexus in a

specific Parish. ▫ Then you need to register in that Parish as well.

• Amazon cases nationwide ▫ courts ruling on behalf of states

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Non-taxable transactions • Non-taxable transactions – not all inclusive ▫ Out of jurisdiction sales ▫ Sale for resale ▫ Purchase for lease ▫ Occasional sales ▫ Custom computer software ▫ First use offshore ▫ Exemptions manufacturing equipment medical devices drugs prescribed by physician or dentist

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Taxable Transactions • Taxable transactions ▫ Leasing tangible personal property ▫ Sale of tangible personal property (TPP) ▫ Services Furnishing of sleeping rooms Laundry, cleaning, pressing & dyeing services Cold storage Repairs to TPP Fabrication

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Use tax • Necessary to accrue if you purchased item tax

exempt and then used in your business. • Include in sales tax return.

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Filing sales tax returns

• Due on or before 20th day of the following month (starting immediately)

• Must file even if $0 revenue (penalties could result)

• Pay online LaTAP or traditional paper filing

• Quarterly filing – can request after 6 returns filed with average of less than $500 per month

• Important to save records – burden is on agent

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Sales Tax Audits • Audits ▫ Statute of limitations Later of 1 year after date the tax was paid or 3 years from

the 31st day of December in which the taxes become due assuming a tax return is filed

▫ You will receive an audit notice Start file Maintain audit communication log Designate single person to be auditors contact Treat auditor cordially & expect same treatment Request audit work papers Review for errors such as duplicity, math errors

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Louisiana Tax Incentives

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• The Louisiana Economic Development Corporation manages several programs for business development ▫ Website: www.opportunitylouisiana.com

• Expanding? Relocating? Starting Up? Louisiana’s tax credits and incentive programs can give your company a competitive edge

Louisiana Tax Incentives

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• Digital Interactive Media and Software Development Incentive

• Research and Development Tax Credit • Enterprise Zone • Quality Jobs Program • Restoration Tax Abatement

Digital Interactive Media and Software Development Incentive

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• Refundable tax credit that helps traditional and

digital companies of all sizes • Provides a 35% tax credit on payroll for eligible

labor expenses (project managers, programmers) • Offers a 25% tax credit for qualified production

expenses made in Louisiana • No cap and no minimum requirement

Digital Interactive Media and Software Development Incentive

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• Open to all LA digital interactive media and software development projects (that are not regulated under LA Gaming Control Laws)

• Does not apply to software developed for institutional, private or internal purposes

• Qualifying development products include: ▫ Digital media and games, web-based and mobile

applications, consumer software, entertainment software, and business and enterprise software

Research & Development Tax Credit

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• Encourages existing businesses with operating facilities in LA to establish or continue research and development activities within the state

• Provides up to a 40% refundable tax credit (based on size of company) on qualified research expenditures incurred in LA

• No cap and no minimum requirement

Enterprise Zone Credit

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• A jobs incentive program that provides LA income and franchise tax credits to a new or existing business located in LA creating permanent net new full-time jobs, and hiring at least 50% of those net new jobs from one of four targeted groups

• The benefit provides a one-time $2,500 job tax credit for each net new job created

• Can also provide a 4% rebate of sales taxes paid on qualifying expenditures

Enterprise Zone Credit

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• Must create a minimum of 5 permanent net new full-time jobs within 24 months of project start date

• 50% of the net new jobs created must be people hired from these targeted groups: ▫ Residency – someone living in an EZ within the state ▫ Receiving an approved form of public assistance ▫ Lacking basis skills (performing below a 9th grade

proficiency in reading, writing or math) ▫ Unemployable by traditional standards

Quality Jobs Program

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• Provides a cash rebate to companies that create well-paid jobs and promote economic development

• Rebate consists of 5% or 6% of annual gross payroll for new, direct jobs for up to 10 years

• Could also provide a 4% sales tax rebate on capital expenditures

• Hiring requirements similar to that of the Enterprise Zone Program

Restoration Tax Abatement

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• Provides a 5-year abatement of property taxes on the renovations and improvements of existing commercial structures and owner-occupied residences

• Open to all LA businesses with existing structures to be expanded, restored, improved, or developed in qualifying locations (i.e. downtown development districts, historic districts)

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Questions?

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3330 W. Esplanade Ave. Suite 100

Metairie, LA 70002

(504) 838-9991

www.kl-cpa.com

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trust your crazy ideas.

we do.