Wednesday, July 27, 2011

Small Business Introduction(2) - The Single Member LLC

Last time I talked about the Sole Proprietor business entity and some of its advantages and disadvantages. In this installment, I discuss the Single Member Limited Liability Company (SMLLC). The SMLLC is a relatively new business entity, but it is very popular. Here are some of its characteristics.

Single Member LLC
SMLLCs have popped up across the country very quickly. They are easy to form, flexible, and have easy tax reporting requirements. SMLLCs are neither a corporation nor a partnership; they are unique. SMLLC must be registered at the State level. In Texas, they are registered with the Secretary of State, in the forms section.  The form is about 6 pages long, but half the pages are instructions or descriptions. LLCs have members; obviously the SMLLC just has one member.  After the form is completed, it can be faxed to the SoS along with a $300 filing fee payment.

Liability      
As the name implies, your liability is limited to your investment. In other words, you can only lose as much as you invest in the company. So, if you invest $10,000 in your SMLLC, the max that you can lose is your $10,000 investment. But you have to be very careful with how you conduct your business. You must keep the SMLLC separate from your personal finances. If you don’t and you get sued, the person suing you may try to pierce the veil. That is, they may argue that there is really no distinction between your SMLLC and you personally.  If they are successful, your personal assets are at risk. So, conducting your business as a separate entity is important.

Income Tax Reporting
The income tax return for a SMLLC is prepared the same way as it is for a Sole Proprietor. You would prepare IRS Form 1040, and report business income and expenses on Schedule C. If you actually work for someone and your wages are reported on Form W-2, and you also run a business and either get issued or do not get issued a 1099-MISC, you report all of your income on the same tax return. You do not create two tax returns, just one that contains both your W-2 wages and your SMLLC income.

Additional Taxes
If you are an employee, Social Security taxes are withheld through the FICA system. Under this system, half of the Social Security taxes are paid by your employer, and the other half is paid by you. However, if you have income from self-employment, you are going to have to pay the entire Social Security tax on this income. This is in addition to income tax, and usually comes as a surprise to new self-employed individuals. Additionally, you may be required to make estimated tax payments throughout the year.

Franchise Tax
In Texas, LLCs are subject to a franchise tax, collected by the Comptroller of Public Accounts.  Although most companies will be taxed at the 1.0% rate, the no tax due limit is less than or equal to $1 million of total revenue for tax reports originally due on or after January 1, 2010 and before January 1, 2012.

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor

Tuesday, July 19, 2011

Small Business Introduction(1) - The Sole Proprietor

I’m writing this series of articles because I’ve talked to and prepared tax returns for several people who don’t realize that the IRS considers them a business. Also, there are many people who intentionally create a business, but do not think about what type of business entity they are creating. I’m hoping to shed some light on the tax consequences as well as liability implications as they relate to the business entity.

Sole Proprietorship
The first and probably the most common business entity is the Sole Proprietorship. This entity doesn’t require any filing with the state and that’s probably the reason why it’s the most common. So, if you go into business on your own, like a plumber, electrician, website designer, etc. and don’t register your business as some other entity with your state, then you’re probably a Sole Proprietor. What many people don’t know is that even contractors are self-employed business owners. For example, if your “employer” issues a 1099-MISC to you after the tax year, the IRS treats you as self-employed with respect to the income you received on the 1099-MISC. Usually Box 7 of the form will have the amount that you were paid for the tax year. If you also receive a W-2 from another employer, you are both an employee and self-employed. What does it mean to be a Sole Proprietor?

Liability
There is no separation between your business assets and your personal assets. If you get sued for something that you do in your business, all of your assets, business and personal, are at risk. The same is true if you get sued on your personal side, your business assets are at risk too. As you can see, this can be a very risky business entity.

Income Tax Reporting
You would prepare IRS Form 1040, and report business income and expenses on Schedule C. If you actually work for someone and your wages are reported on Form W-2, and you also run a business and either get issued or do not get issued a 1099-MISC, you report all of your income on the same tax return. You do not create two tax returns, just one that contains both your W-2 wages and your business income.

Additional Taxes
If you are an employee, Social Security taxes are withheld through the FICA system. Under this system, half of the Social Security taxes are paid by your employer, and the other half is paid by you. However, if you have income from self-employment, you are going to have to pay the entire Social Security tax on this income. This is in addition to income tax, and usually comes as a surprise to new self-employed individuals. Additionally, you may be required to make estimated tax payments throughout the year.

Reporting Requirements
The filing requirements for W-2 income (employee wages) and self-employment income are different. For W-2 income, the threshold is the filing status standard deduction plus the personal exemption(s). For example, if your filing status is Single, the 2011 standard deduction is $5800 and the personal exemption is $3700. So if you make less than $9500($5800 + $3700), you do not have to file an income tax return. However, if you have net self-employment income of $400 or more, you must file.

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor

Monday, July 11, 2011

National Do Not Call Registry – Stop Wasting Cell Phone Minutes

If you are receiving telemarking calls on your land line or cell phone you can have them stopped. All you need to do is register your phone number(s) at the US government’s website, Don’t Bother Me. After registration, they’ll send you a confirmation email. By the way, registration doesn’t expire so if you registered before, you don’t need to register again. You can also check to see if your phone number is already registered at the same website.

A really interesting website is www.usa.gov.   You can find just about everything related to the US at this site. This is how I ran across the do not call website. Under the Get Services tab, there’s a Seized Property Sales link. If you happen to live in one of the cities where the auctions take place, you’re in luck. Most items look new, like they “just fell off the truck”.

Under the jewelry section, you’ll see things like pinky rings, silver shark cufflinks, pendants inlaid with every gem known to man, and many more strange items.  And watches galore.

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor

Wednesday, July 6, 2011

FDIC – NCUA -- SIPC – US Treasury – Who’s Got Your Back? Part 2

Last time I discussed the FDIC & NCUA. These are the agencies that you will have to deal with in order to get your money from a failed bank or credit union. If you have a broker, you broker is probably covered by the Securities Investor Protection Corporation, aka SIPC.  If they aren’t, you may want to look for another broker.

Here is a portion of the SIPC’s mission statement, “When a brokerage firm is closed due to bankruptcy or other financial difficulties and customer assets are missing, SIPC steps in as quickly as possible and, within certain limits, works to return customers' cash, stock and other securities, and other customer property”.  The SIPC covers cash and securities, like stocks and bonds. But, there are many investments that are not covered. Among investments not covered are commodity futures contracts (unless defined as customer property under the Securities Investor Protection Act) and currency, as well as investment contracts (such as limited partnerships) and fixed annuity contracts that are not registered with the U.S. Securities and Exchange Commission under the Securities Act of 1933.

The SIPC is not like the FDIC or NCUA; it does not guarantee that it will recover all of your lost assets. If a firm fails, and sufficient funds are not available in the firm's customer accounts to satisfy claims within these limits, the reserve funds of SIPC are used to supplement the distribution, up to a ceiling of $500,000 per customer, including a maximum of $250,000 for cash claims. Additional funds may be available to satisfy the remainder of customer claims after the cost of liquidating the brokerage firm is taken into account. Additionally, losses due to investment fraud are not covered by the SIPC.

The SIPC recommends that you keep all transaction records and at least your monthly brokerage statement in case there are discrepancies between your books and the broker’s books. More information is available at the SIPC website.

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas

contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor Representative

Tuesday, July 5, 2011

FDIC – NCUA -- SIPC – US Treasury – Who’s Got Your Back?

With bank failures, crooked funds managers and brokers, and warnings of the US government not being able to pay its bills, you might be wondering if your money is really safe. Well, that’s a good question. If the US Government cannot pay its bill, we have a huge problem. And by “we”, I mean everyone in the world. Investing or loaning money to the US government has historically been considered to be risk-free. However, if you’ve been listening to the news lately, you’ve heard about the national debt and the growing concern about being unable to repay it.  For this discussion I’m going to assume that Uncle Sam can still pay the bills.

FDIC
If you deposit your money in an FDIC insured bank and the bank fails, you’ll probably be working with the FDIC to recover your deposits. The FDIC claims “Since the FDIC was established in 1933, no depositor has ever lost a single penny of FDIC-insured funds”.  The key words are FDIC-insured funds.   You may not be able to recover all of your money. First off, there is an upper limit of $250,000 per account. So, if you have more than that in one bank, you may not be able to collect the excess funds. Also, there are restrictions on the accounts that are covered. For example, covered accounts are Savings, Checking, CDs, and Money Markets.  Many banks offer investment products like mutual funds, annuities, life insurance policies and stocks and bonds; these are not FDIC insured. 

Remember, the value of all of your accounts is insured up to $250,000. So, if you have $200,000 in a CD, and $100,000 in a savings account, you can only recover $250,000 instead of $300,000.

You may be able to have more than $250,000 insured in a single bank. The FDIC says “The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.” The “account ownership category” part opens up some additional coverage.  Here’s how it works. You can have both an individual account and a joint account. In each account, you’ll have the $250,000 of coverage. So your total coverage is $500,000. In fact, you can also have an IRA account that will be covered up to $250,000.

The FDIC has an excellent tool that can help you determine your coverage. For more information, visit their website at FDIC Calculator

NCUA
If you belong to a Credit Union, your deposits are insured by NCUA (National Credit Union Administration) instead of the FDIC.  Like the FDIC covered accounts, NCUA covered accounts are backed by the full faith and credit of the US Government.  As I went through the NCUA website insurance discussion, I could not see any difference between FDIC vs. NCUA.  In fact, they also have a calculator to help you determine your coverage, see NCUA Tool. The interface looks suspiciously like the FDIC tool. As far as I can tell, you can read my FDIC section, replace bank with credit union and replace FDIC with NCUA.
Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor