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ACCOUNTING

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ACCOUNTING SYSTEMS

BUSINESS START-UPS

The Entities

Sole Proprietorships

Partnerships

Corporations

Limited Partnerships

Limited Liability Companies

Registering The Business

Banking

Employees & Contractors

Business Plans

BUYING BUSINESS INSURANCE

INTERNET PRESENCE

INTERNET RESOURCES

RETIREMENT PLAN HIGHLIGHTS


BUSINESS START-UPS

Starting a new business or buying an existing one is an odyssey that begins with a concept, continues through implementation until finally the end of the journey: retirement. The passage is fraught with many shoals that must be avoided. This guide is geared to help you safely begin that voyage and to not only eat well, but sleep well, too.

Although the information primarily focuses on New Jersey, most states have similar requirements. Those with Internet access can visit their state's website for detailed requirements and downloadable forms. Alternatively, you can check the blue pages in the phone book for the appropriate agencies or consult an accountant. Those who have Internet access, should visit New Jersey . . . open for business at www.state.nj.us/njbiz/s_index.html. Although the focus is on New Jersey, there is a large amount of useful information about starting a new business. Those who opt for a New Jersey corporation or an LLC can check this site to see if the desired name has already been taken. That service is free.

THE ENTITIES

The kind of entity that will own and operate the business and its assets should be determined in the early planning stages. The advantages and disadvantages of the three principal kinds of operating entities must be considered: sole proprietorships (mama or papa), partnerships (mama, papa, and maybe some others), corporations (all of the above and possibly more) and the newest, the limited liability company (arguably the pick of the litter). See the appendix for entity comparison charts.

SOLE PROPRIETORSHIPS

As the name implies, this is a single-owner, unincorporated entity. For legal, tax and accounting considerations it is the simplest among the five options. The most significant drawback, if legal disputes arise-and eventually they will-is that the owner's personal assets are also in jeopardy. For sole proprietors, this is often mitigated by additional liability insurance.

PARTNERSHIPS

A partnership involves two or more individuals, corporations, or individuals and corporations who agree orally or, preferably, in writing to form a business or joint venture. The legal exposure is similar to a sole proprietorship because the personal assets of the partners are at risk. There is, however, a more significant disadvantage: The partners are liable for partnership debts jointly and severally-and severally is the kicker. The worst-case example is for one partner to run up debts, then leave town with all the partnership's liquid assets. The remaining partners are liable for the debts, and one partner may end up having to pay all the debts.

Before entering into a partnership, we cannot urge you strongly enough to have an attorney prepare a written partnership agreement. Just as marriages sometimes end bitterly, so do partnerships. Think of it as a business prenuptial agreement. It is far better to arrange for the termination of a partnership when everyone is amiable, rather than after disputes arise.

CORPORATIONS

More complicated than a partnership, corporations offer more-but not absolute-protection for the shareholder's(s') personal assets. Generally creditors are limited to only the corporate assets with some notable exceptions. One example where the corporate veil can be pierced is unpaid federal and state tax liabilities. Gross negligence, if proven in personal injury lawsuits, is another.

For income tax purposes there are several kinds of corporations, two of which are the most popular: Sub-chapter C and Sub-chapter S. C corporations are taxed on their net profits at progressive (regressive?) rates. What remains after taxes is available to the shareholders as a taxable dividend. That, folks, is double taxation. For that reason we usually advise clients to title all real estate in their names and rent it to the corporation to avoid double taxation on the gain when the property is sold. This holds true for S corporations, too—just in case. Depending on whether the political winds are blowing from the right or left, you never know what Congress will do to the Internal Revenue Code in the future.

Sub-chapter S corporations generally do not pay income taxes. Their net profits or losses are passed through to the shareholders. Shareholders report their share of earnings on Form 1040 whether or not they take the money out of the corporation. The same is true for losses, which reduces other income. While Sub-S appears to be the better corporate choice, that's not always the case. First, some control over timing of corporate and personal income is lost. With some exceptions, Sub-S corporations must use the calendar year. Another disadvantage is health benefits. While the S corporation may pay them, it is denied a deduction for the expense. Most states now provide for a Sub-S election for state corporation taxes.

LIMITED PARTNERSHIPS

The least known and least popular option is a limited partnership formed to pass income and loss to the partners while providing limited liability to the limited partners. Simply put, there are two classes of partners: general and limited. The general partner, usually a corporation, is not only responsible for its share of partnership liabilities, it also may be sued for any corporate assets as well. Limited partners, however, are only liable to the extent of partnership assets. Their personal assets are protected. Needless to say, the corporation is generally a shell with no assets other than its partnership interest. Among the five entities, this is the least attractive. For the small business, it is not practical. In a word it's much too complicated.

LIMITED LIABILITY COMPANIES

YES. Finally. The new kid on the block, this hybrid entity is similar to sole proprietorships and partnerships, but offers limited liability to the owner or members like a corporation. When we wrote this in 1992, not all states recognized this kind of entity. Historically in the United States, Wyoming was the first state to enact LLC legislation in 1977 followed by Florida in 1982. Back in the bad old days, an LLC was risky. No one knew whether IRS would tax an LLC as a corporation or as a partnership. Because the concept behind forming an LLC—to enjoy partnership tax status without the personal legal liabilities—seemed too good to be true. Few business people chose to avail themselves of this new entity without clarification from IRS. Accordingly, other states were unwilling to enact LLC legislation.

The stalemate ended in 1988 when IRS ruled on the tax treatment of Wyoming LLCs. Much to the surprise of accountants and tax lawyers, IRS agreed that an LLC formed under Wyoming law was eligible for partnership tax status. The fat was in the fire, and the rubber hit the pavement. The rest of the states were off and running. Shortly all states and the District of Columbia passed enabling legislation. The next significant development occurred in 1997 when IRS threw out old and complicated business tax entity classification regulations and agreed that LLCs should be taxed as partnerships (or sole proprietorships if they have only one owner) without jumping through a number of technical hoops.

Further, IRS provided for an LLC to elect corporate tax treatment if it so desires. A one-member LLC's income or loss is reported on Form 1040, Schedule C for federal taxes. New Jersey income and loss is reported on NJ-1065, Partnership Return, from which it is passed through to the member's NJ-1040. Two or more member LLCs file Form 1065, Partnership Return of Income unless the have elected to be treated as an association taxable as a corporation, in which case the LLC files Form 1120 with Internal Revenue Service. In New Jersey income or loss is reported on either NJ-1065 or CBT-100-P, as the case may be.

As mentioned above, the need for a partnership to have a written agreement, LLCs also need a written agreement. Some states, in fact, require a written operating agreement. There are two kinds: Operating Agreement for Member-Managed Limited Liability Company and Limited Liability Company Management Operating Agreement. The difference, briefly, is that the former is managed by the members; the latter is managed by a paid manager who may or may not be one of the members. Member managed is by far the more common. Not all states permit one-person LLCs. Only recently New Jersey improved its statues to permit one-person LLCs.

A bit more complicated than a sole proprietorship and similar to a partnership, LLCs definitely should be considered. For a small business, it's the best thing since homemade bread. Actually, for small businesses, limited liability companies will make sole proprietorships, partnerships and corporations obsolete before the end of this decade.

SUMMARY

From the five brief synopses, it should be evident that choosing the form of doing business should not be taken casually. The legal and tax ramifications are substantial. We strongly urge seeking advice from an attorney and an accountant. Your attorney may not want you to form an LLC for two reasons: LLCs are not as reliable as corporations for interstate commerce, or he simply may not be up to date on the current state statues and Internal Revenue Rulings on LLCs. Those planning to become involved in interstate commerce, may want to be wary, for now, of an LLC. Other than that, there is no good reason to use an obsolete operating entity. If your attorney cannot give you a solid reason not to go with an LLC, consider changing lawyers. The same holds true for accountants, too. You should not have to suffer with an inappropriate business entity because of a business advisor not being current.

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REGISTERING THE BUSINESS

FEDERAL

When a new business is formed it must register with Internal Revenue Service to obtain an EIN (employer identification number). This is accomplished by filling out form SS-4, which can be obtained from the nearest IRS office, downloaded from the Internet or from an accountant. If a number is needed quickly to open a checking account, it can be handled over the telephone. Fill out the form and sign it. Call the appropriate telephone number found on the back of the form.

An LLC, which wants to be treated as an association taxable as a corporation and a single-member LLC will also have to file form 8832, Entity Classification Election. On form SS-4 the single-member LLC should select Sole Proprietor for type of entity. A multiple-member LLC should select Partnership unless it has filed form 8832 and elected to be treated as an association taxable as a corporation. In that case, Other Corporation should be selected and write LLC in the space provided. Other LLCs that have not filed form 8832 should select Partnership.

IRS personnel will ask questions in the order in which they appear on the form. When the call is completed, an EIN will be assigned. Write the number and the date on the top of the form. Make a copy of the form, sign it and mail or fax the original to the address on he back of the form within the next 24 hours. Telephone numbers may change without notice. Call 800-829-1040 to verify the number. Presently the IRS address and telephone number for New Jersey is Attn: Entity Control, Holtsville, NY 00501, 516-447-4955.

STATE AND LOCAL

This will focus on New Jersey because we are well acquainted with New Jersey's requirements. For a brochure, Starting a Business in New Jersey, call 609-292-6400 or 800-323-4400 for touch-tone phones. With a few exceptions other states follow similar procedures. Information can be obtained by calling the applicable state tax office. In New Jersey there used to be two principal authorities with which to register: Division of Taxation and the Department of Labor. Since 1999 Taxation and Labor have been consolidated on the Business Registration form.

The Division of Taxation handles most of the state's taxes: Sales and Use, Gross Income Tax, Corporation Business Tax (read that income tax) to name a few. Call 609-292-1730 to get form NJ-REG, Business Registration. You can also get information on getting the form by fax from the same number. Beware, it's one of those menu-driven telephone systems: "Press 1 for an ulcer, press 2 for a migraine, press 3 for agita, press 9 for an operator. Please hold, all our lines are busy." It's better to get the federal EIN first because the state registration requests it and uses it as the basis for your state number. Trust us, life will be much simpler if you don't start out with a temporary state number.

Unemployment and Disability Insurance (tax) is administered by the Department of Labor. Although in New Jersey the disability insurance is paid along with the unemployment tax, not all states, such as New York, are the same. In some it is purchased from an insurance broker or agent. And don't confuse disability insurance with workers compensation insurance. The former covers illnesses that are not job related; workers comp covers on-the-job injuries. Check with county and municipal governments for any registration or licenses that may be required for your kind of business.

Finally, though not a tax, if the business has employees or if it is incorporated get the above-mentioned workers' compensation insurance. That's not an option, it's the law. Noncompliance carries very high penalties: up to $1,000 when noncompliance exceeds 20 days and up to $1,000 levied for each period of ten days thereafter. Before you hire the first employee, or if you are incorporated, have a binder on a workers comp policy in effect.

BANKING

When it comes to banking, unless you're going to need some mighty financing, bigger is not necessarily better. Indeed, it is usually just the opposite. Few people have not seen their bank change names-sometimes twice in a one-year period-and get bigger. And so do their customers' bank charges. Generally, small, local savings and loans can offer all the services a small business needs. And they do so for much lower fees. Trust us. No one is going to be impressed with how large your bank is.

We know; we learned the hard way. Four-years ago our bank was the same one we had used twenty-five years ago. During that period it went from a local bank to three takeovers, each larger than the previous. They finally ticked us off when they told us we had to wait five days for a large certified check to clear. We went bank shopping and settled on a small savings and loan. Our bank charges dropped from about $350 per year to $100, and the cost of printing checks dropped, too. Think small.

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EMPLOYEES & CONTRACTORS

HIRING REQUIREMENTS

Before hiring anyone have the employee fill out form W-4, which indicates the employee's filing status, the number of exemptions being claimed, and the name and address. This is necessary to determine the correct federal and state withholding and prepare year-end W-2s. To obtain copies of W-4 call IRS at 800-829-1040 or visit their website at www.irs.ustreas.gov. Insist upon seeing the employee's Social Security card before adding him or her to the payroll. You MUST get the correct social security number or face penalties. The rule should be simple: no card, no job. The employee can go to a social security office to get a duplicate. They will give the employee a letter to prove the duplicate has been ordered. Until the employee presents the card or the letter, don't hire him or her.

No less important is form I-9. This is the government's attempt to prevent illegal aliens from working in the United States. Forms and a handbook can be obtained from Immigration and Naturalization Service, telephone 201-645-4400. Check to see if the number has changed. New Jersey introduced another form (yes, yet another form) in 1998, the New Hire Reporting Form that must be submitted within twenty days of an employee's first day on the job. The principal purpose of the form is to locate deadbeat dads and moms. Secondarily, it helps to identify and locate welfare recipients and people on unemployment who are working and not reporting their earnings to the proper agency. To get forms, call 1-800-NJ-HIRES or visit their website: www.nj-newhire.com.

EMPLOYEE POLICY

One of the latest threats to businesses are employee lawsuits. The rise in what was once considered frivolous legal actions is alarming. Now that all the lawyers have returned from Florida, they are looking for work. And the actions are not limited to the nefariously popular sexual-harassment complaints. The only defense a business has is a written employee policy that all new hires must read and sign that they have read and understand it. Then follow the policy without deviation or exception.

The easiest way to develop and write a manual is to purchase an employee manual software package. There are at least three available from the Internet: Bizmanuals.Com, http://www.bizmanuals.com/emplhand.htm, $149; Policies Now, http://www.jobsemployment.org/software/policiesnow.htm, $119 and Employee Manuals Made E-Z at http://www.e-zlegalforms.com/, $30. After the first draft is completed, it should be reviewed by an attorney who is familiar with labor law. After his go ahead, revise and print the plan. But as mentioned above, the policy must be strictly adhered to without exception.

INDEPENDENT CONTRACTORS

If a person provides a service to your customers they are NOT independent contractors, and anyone who treats his or her employees as contractors and issues 1099s has opened a Pandora's box of woes. What happens when the so called contractor gets injured on the job and isn't covered by workers comp? A lawyer and his client will be the proud new owners of your business-your house, your car and your first born. Meanwhile, the good folks who collect payroll taxes for the federal and state government move in and do their thing.

So what are independent contractors? Painters, carpenters and other craftsmen and other service providers that hold themselves out to the public as self-employed contractors that work for multiple people and businesses. They own their own tools, and they set their own working hours. The easiest way to explain the difference between an employee and a contractor is by analogy. We're accountants. We do books, we do taxes, and we do websites. If we hire someone to work in our office to prepare tax returns or do bookkeeping, that person is a common law employee. If we hire someone to fix our computers, that person is an independent contractor. Why? Because we do taxes and books and websites in the ordinary course of business; we don't fix computers-and, for that matter, we really don't want to.

If you're still not convinced, fill out IRS Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Withholding Taxes, and let IRS determine if the person who will be working for you is a contractor or a common law employee. Then wait for the auditor to arrive a year or two later. Actually, you don't have to mail the form to IRS to figure it out. If you answer the questions candidly, you will be able to determine the status. Even if you do meet most the requirements for federal purposes there's still another hoop to jump through: the state. For federal purposes, an employee is defined by common law; in New Jersey and most states the determination is made by statutory law and is engraved in stone.

You may talk to others who have been involved in the kind of business you're starting or buying who have treated their employees as contractors for years and have gotten away with it. Possibly. Upon further questioning, it may be discovered that their business has never been subject to a payroll-tax audit by either the state or the feds. Getting away with something does not make it legal-even by Clintonesque standards. It only means not getting caught-yet. Should you treat employees as independent contractors, and the state selects you for audit, you better have a mighty strong compelling legal authority to support you position.

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BUSINESS PLAN

We purposely put the section last; it really should be in the beginning. It's not because, from experience, we know that ninety percent, if not more, of new business startups will not prepare a business plan. That may explain Dun & Bradstreet's disheartening statistics: eighty percent of the business startups fail within five years.

While a business plan will not guarantee that a business will succeed, it might prevent some from going under the auctioneer's gavel. Space does not permit all the contents that make up a business plan. At a minimum, the plan should indicate, realistically, the potential gross and net income on a monthly basis for the first year and quarterly for the next four years. It also should present the cash flows in the same manner for the five-year period. Cash flows indicates from where the cash will come: venture capital, net profits, loans and sale of assets, and where it will go: operating expenses, capital acquisitions, dividends and debt reduction.

Software is available to help develop a plan: http://www.jian.com/. BizPlanBuilder Interactive is reported to be the leading seller; cost is about $90. Another is Palo Alto's Business PlanPro, http://www.paloalto.com/, which also sells for $90. Another Internet source for business plan software is from the Small Business Administration: http://www.sba.gov/hotlist/bplan.html.

A business plan will require a lot of time and effort. The plan is only as good as the accuracy of the data entered: junk in, Chapter 11 out. Not to begin with a business plan is like a long sea voyage without a chart, compass and sextant-and radar and a GPS, too. Although people have crossed the Atlantic without the above, more have foundered. It's the same with a business as noted in the above D & B statistic. So with everything to gain and little to lose, why don't more entrepreneurs prepare a business plan? Simple. Too much heavy lifting.

The worst-and possibly the best-answer from a business plan may be NO.


This part really should be in the beginning. It's not because, from experience, I know the that 90 percent , if not more of the new business start-ups will not prepare a business plan. That may account for Dun & Bradstreet's statistics: eighty percent of the new businesses fail within five years.

Space does not permit all the contents of the plan. At a minimum, the plan should indicate, realistically the potential gross and net income over a three-to five-year period. Equally important is cash flow, which is not the same as net profits. Cash flow indicates from where the cash will come: net profits, loans and sale of assets, and where it will go: operating expenses, capital acquisitions, and debt reduction.

Software is available to help develop a plan. BizPlanBuilder Interactive (they finally found out how to separate at least one word) is reported to be the leading seller; cost is about $90. Seven software companies that write business plan software can be found at this site. If the URL doesn't work, try the backdoor. Type "business plan" in their search engine. A business plan will require a lot of time and effort. The plan is only as good as the accuracy of the data entered: junk in, Chapter 11 out.

Not to begin with a business plan is like a long sea voyage without a chart, compass and sextant - and radar and loran, too. Although people have crossed the Atlantic without the above, more have foundered. It's the same with a business as noted above in the D & B statistic.

The worst - and possibly the best - answer from a business plan may be NO.

Vehicles

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Living Quarters

 

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Travel & Entertainment

 

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Use Tax

 

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ACCOUNTING SYSTEMS

Practically speaking, you have three options: hand write-up, computer spreadsheets or computer accounting software. And do yourself and your accountant a favor. Do not buy one of those brown Dome bookkeeping systems unless your business will be cutting a half-dozen lawns. Since hand write-up is the most popular, and in many cases the most practical, we will address that first. There are two kinds and both are based on multi-column spreadsheets: columnar pads and one-write. Typically there are three sections to spreadsheet accounting: cash receipts, cash disbursements and payroll sheets.

The cash receipts book is where the date, source and amount of each deposit are entered. The deposit is then allocated across other columns such as income, sales tax, deposits, loans, etc. Cash disbursements, characteristically, have columns for date, payee, check number and the amount of the check. To the right of the check-amount column there are several other columns where the amount of the check is classified by expense. The best and most accurate hand write-up spreadsheets is a one-write system such as Safeguard Business Systems. When you write a check, all the relevant data is entered directly onto the spreadsheet, which is under the check. Simply extend the amount of the check to its expense category. Payroll sheets can be purchased at any stationary store, but are an integral part of the Safeguard system..

It goes without saying that to do the write-up on a computer you need a computer. For practical purposes you are limited to two choices: IBM compatible with a Windows OS (operating system) or MAC, and if you're into Linux, you certainly don't need advice from us about 'puters or OSs. Both Windows and MAC have distinct advantages and disadvantages. The amount of software written for MAC is more limited than what is available for the Windows OS, although most of the programs you really need are also available in MAC versions. When using Windows, however, you need a helmet, roll bar and an air bag. Unlike the MAC OS, Windows is crash retentive.

We've been using Windows since 1997 when fewer and fewer programs were being written for DOS. Computer spreadsheets are essentially the same as hand write-ups. The columns are setup in either Excel or Lotus. The big advantage is instant totaling. Data entry, however, is reversed. The source of the receipt or the kind of expense is entered first with a totaling column for the amount of the deposit or the amount of the check. Column totals should be provided at the end of each month, from which they are posted to the general ledger. If you don't use a general ledger, the monthly totals are added together to arrive at year-to-date totals.

Regardless of whether you do your spreadsheets by hand or on a computer the total monthly deposits and check disbursements should be reconciled with your bank account. That is your internal control for accuracy. If the cash per bank does not agree with the cash per books, there's an error in either the cash receipts or cash disbursements books.

QuickBooks Pro and Peachtree Complete Accounting are the two most popular accounting software packages written for Windows and Mac. If you have a decent background in accounting, this may be the best solution for your bookkeeping requirements. While we have not worked with Peachtree for Windows-yet-we are mightily acquainted with QuickBooks Pro and strongly suspect that Peachtree is quite similar.

We have been bean counters since 1968. Starting in 1986 we have learned, if not mastered, many software programs, all self taught: Word, WordPerfect, Excel, Lotus 123, several tax preparation programs, FrontPage, Dreamweaver, Homesite, Family Tree Maker, BizPlan Builder and Peachtree Accounting for DOS to name just a few. We can assure you that the learning curve for QuickBooks Pro is a nightmare of epic proportions. QuickBooks Pro comes with a cast of thousands. All the above-mentioned programs paled by comparison. Windows-based accounting software programs, to put it delicately, employ the Bernoulli theorem.

For clients who we do data entry and financials for on our computers from their write-ups or check stubs, we use Peachtree for DOS Version 10. The Windows version is not cost effective for us. The learning curve notwithstanding, it takes three times as long for data entry in the Windows-based program as it does in Peachtree Accounting for DOS. We do, however, have one client in QuickBooks Pro: our son's LLC. The only reason for that is because we don't want to forget what we have so painfully learned in case we're ever called upon to help a client get into QuickBooks Pro.. When it comes to computer programs, the old axiom was never truer: If you don't use it, you lose it.

For the mentally gifted, we have provided URLs for QuickBooks Pro and Peachtree Complete Accounting in the Internet Resources section. You can download a free 30-day trial version from their websites. This will help you to determine what you're up against before you purchase-or decide not to purchase-the program. Accounting software may not work for you if you have a regular heartbeat, are five-pounds overweight, five-pounds underweight, not pregnant, breathing or have stopped breathing. Ask your accountant if an accounting software program is right for you.

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INSURANCE

Shop, shop, shop, but don't shop till you drop-unless you have adequate medical coverage. This can be tough, especially if you try to compare two or more proposals that are different.

The first step is to devise an idea of what the business's needs and exposure are. For the most small businesses there are four basic kinds of insurance to be addressed: general liability, workers compensation, automobile, and property. Estimate as accurately as possible what the annual sales will be. Calculate the square feet of the building(s). Calculate what the annual gross payroll of each of employee will be and what their duties are. List the year, make and model of any business vehicles and the name and driver's license number of all employees who will be driving the vehicles.

With this information, request quotes from at least three insurance brokers or agents. Explain that you want a proposal based on the exact information you provided, plus an umbrella policy. If one of the agents wants to change the information for more or less coverage, do not accept it. You want to compare cumquats to cumquats, not cumquats to avocados. Later, after a final decision has been made, is the time to fine tune the insurance package with the agent or broker that has been selected.

Be sure to seek a quote from at least one insurance broker. The difference between an agent and an insurance broker is the agent generally deals with one company, while a broker deals with several. Often, though not always, the insurance will be less expensive through a broker. Different insurance companies sometimes specialize in specific industries. The broker should know which company to approach for the best deal, unlike agents who may be limited to only one. Don't hesitate, however, to ask for quotes from an agent, too. It may turn out to be the lowest.

In addition to the price, it is important to learn the name of the insurance companies that have been selected by a broker. Not all insurance companies are the same. Check each company's rating in Best's Insurance Reports, which can be found in most county libraries. Also go to http://www.ambest.com/, the A M Best web site.

Another precaution: don't allow an agent or broker to base the workers compensation on less than a realistic appraisal of what the payroll will be. It may save money in the beginning, but when the payroll is audited, the unpaid amount will be due, plus premiums for the following year will go up. It may seem like an attractive way of interest-free financing, but it's not a good idea. When negotiating, discuss the terms of how the coverage will be paid. In many instances, it can be financed for nine to eleven months. Remember: the interest rate is negotiable, too.

Finally, remind the broker that the relationship is an affair, not a marriage. He or she should monitor your insurance needs while keeping cost always in mind. Every three or four years, start insurance shopping four months before your policies end. With that in mind, try to arrange for the policies to have identical anniversary dates. For existing businesses, use your current policies as the basis for shopping.

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RETIREMENT PLAN HIGHLIGHTS

What follows are the basis advantages and disadvantages of retirement plans for the small business. Space does not permit us going into the all nuances and rules of the different kinds of plans. Their are five basic options to consider: an IRA, an SEP, a SIMPLE IRA Plan, a 401-K and a Keogh. Although the Keogh is the oldest, the 401-K, arguably, is the best known among the five. That's the plan that's been driving the economy and Wall Street for most of the past decade. But unless you anticipate having at least twenty-five employees participating forget the 401-K. At a minimum the maintenance cost will be at least $2,500 per year. For most small businesses, that's a real bummer.

The Keogh also requires a bit more maintenance than most businesses need to get into. The next best-known plan is either an IRA or a Roth IRA. Each has limitations, one of which is that a business entity cannot participate, nor is a federal tax deduction for the business available. That leaves the SEP (Simplified Employee Pension plan) and the SIMPLE IRA Plan as the most viable choices for small businesses. In both plans the employer sets up separate IRAs for each participating employee. If you choose an SEP only the business can make contributions to the employees IRA. Since 1997 there is no longer a provision for the employee to contribute through a salary reduction. Employees who must be included are those who have reached age 21, have worked for you at least three of the last five years and have received at least $450 in compensation from you (for 2000). You can use less restrictive, but not more restrictive eligibility requirements. Your contribution on behalf of your employees is usually based on a percentage of their compensation. That percentage cannot exceed 15%, and the total amount cannot exceed $30,000 per year for each employee. You do not have to make contributions every year. You may not, however, discriminate in favor of highly compensated employees. The contribution must be deposited into the employees' IRA by the due date of your tax return.

Unlike the SEP, the SIMPLE IRA Plan provides for your employees to participate through a salary reduction. Employees who have received at least $5,000 in compensation during any two years preceding the current calendar year and are reasonably expected to earn at least $5,000 during the current calendar year are eligible to participate. Again, you may not discriminate in favor of highly compensated employees. You can use less restrictive, but not more restrictive requirements. The employee's salary-reduction contribution is usually expressed as a percentage of the employee's compensation, but cannot exceed $6,000 per year (for 2000).

The employer has two choices for how they contribute: match the employees' contributions dollar per dollar up to one to three percent of compensation or non-elective contributions up to two percent of compensation. If you choose a percentage for matching contributions of less than three percent you must notify the employees, and you cannot choose a percentage lower than three percent for more than two of the last five years ending with the year for which the choice is made. If you choose the non-elective two-percent option you must make a contribution whether or not an employee chooses to make salary reduction contribution.

You must deposit the employee salary-reduction contributions within 30 days after the end of the month in which the amount would have otherwise been paid to the employee in a paycheck. Your matching contribution must be paid into the employees' IRAs by the due date of your tax return. The employees' salary reduction contributions are not subject to federal withholding, and the reduced salary is reported on the W-2s in the "Wages, tips and other compensation box. It is, however, subject to FICA and FUTA taxes. Your contribution is not subject to any of the above taxes. If your tax year is a calendar year, you deduct your contributions on your tax return for that year to which they were applied. If your plan is for the calendar year 2000, and your fiscal year ends June 30, 2001, you take the deduction on your tax return for June 2001.

Needless to say, pension plans are a complicated part of the Internal Revenue Code. You need advice from an accountant, and you will need a stock broker, a banker or an insurance broker to setup the plan. Our preference is usually The SIMPLE IRA Plan with matching contributions. We don't like the non-elective-contributions option because you have to make contributions for employees who choose not to participate. God-that's you- helps those who help themselves. If an otherwise eligible employee chooses not to participate, you can exclude him or her from the plan and lower your cost of doing business.

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WEBSITES

If asked about an internet when we originally wrote this in 1992, we would have thought it was a piece of commercial fishing gear. Oh how the times have changed-and are still achangin'. We can think of few businesses that would not benefit from having a website. What has to be decided is what you want the site to do and how much you want to spend. Like all advertising, the website should produce more income that it costs-unless, of course, you have a .com business with a negative P/E ratio.

While you don't have to have a domain name, we think it's worth the effort and expense, $35 per year. Your site could be as simple as one page describing your business, what you offer and how to contact you, to an interactive site with multiple pages. You may want forms on your site to gather information and feedback from your visitors. Generally, the bigger the website, the more it costs to design and maintain.

Next you will need a hosting service. Most folks, in the beginning, use their Internet Service Provider. We started that way in 1997 with the now defunct Jersey Cape, but as our site expanded from one to fifty-plus pages and beyond the five megabytes limitation, we moved it to Tripod, which provides 20 MBs of space for free. We use a forwarding service for our domain name, www.scottmcgonigle.com, to get around the longer Tripod URL http://members.tripod/scott_mcgonigle. Although free forwarding services are available, we feel the $20 annual fee is worth the forwarding service we use. Never have put much stock in free lunches.

You can pay a website designer, or if you understand basic composition, you can design your own homepage. There are a number of WYSIWYG (what you see is what you get) website design editors to help you: Microsoft's FrontPage2000, $130; Macromedia's Dreamweaver, $280 and Allaire's HomeSite 4.5 $95 (which is bundled free with Dreamweaver) are three with which we are best acquainted. All prices are for the full version, not updates. We tried some other-and cheaper-programs and found them wanting-wanting to be dumped from our hard drives.

Better yet, learn HTML (hypertext markup language) before buying website design software. That's how we started and have never regretted it. Sometimes the above programs gets obstinate, and there's nothing like tweaking the HTML by hand. Although there are a number of books to get you started, we recommend the latest version of Laura Lemay's teach yourself Web Publishing HTML in a week. Cost is about $30. We avoided the Dummies books on web publishing because experience has taught us that the Dummies series seldom goes far enough or into enough detail, and we end up buying the thicker books anyway.

After a year of designing and maintaining our website manually, we decided to save some time and use a WYSIWYG editor. Unless you switch modes, you don't see the HTML in a WSIWYG editor, only an approximation of what the finished page will look like. And just as we've never regretted learning HTML first, we haven't regretted the time savings from using an editor, either. We purchased FrontPage first, but after six months found it-like most Microsoft products-much too proprietorial. It's not that the program doesn't accommodate Netscape Navigator and Java, it does. But it gets along with Netscape and Sun Microsystems like George W and Al Gore during the Battle of the Pregnant Chads. FrontPage, in a word or two, tolerates Netscape and Sun. What FrontPage really needs, to be PC, is sensitivity training, conflict resolution and, most of all, diversity acceptance.

We learned, through research on the Internet, that the combination of Dreamweaver and Homesite is the preference of most professional website designers. Dreamweaver is a WYSIWYG editor, while Homesite is an HTML text editor-sort of Notepad with an attitude-a positive one. While working in Dreamweaver, you can easily switch to Homesite, tweak the HTML, then switch back to Dreamweaver. If you decide to purchase Dreamweaver, consider buying the studio version ($420), which includes Fireworks ($290), a vector-based graphics program, which integrates with Dreamweaver. That's a savings of $150 over buying the two programs separately.

The best argument for designing and maintaining your business website yourself is that, if needed, you can update it daily. Secondly, although the best software is a bit pricey, you'll probably save money in the long run, especially on monthly maintenance and updates. And as mentioned above, you don't need expensive software to design a web page. It can be created in a simple ASCII text editor like Windows's Notepad or Mac's Simple Text that comes with the OS. We designed our website, which uses frames, tables, graphics, animation and optional background music, in Notepad long before we began using a WYSIWYG editor. So can you.

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INTERNET RESOURCES

We have verified the below URLs as of 2 February 2001. But, as you know, the Internet can be a capricious chameleon. Websites come and websites go and websites change. So if a link turns out to be a bummer, we apologize for the inconvenience. We also suggest surfing the net for websites that relate to the kind of business you plan to start or buy.

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DISCLAIMER

The firm and the partners are not engaged by this text in the rendering of legal, tax, accounting or similar professional services. While the tax, accounting, and legal issues discussed in the material have been reviewed with sources believed to be reliable, concepts discussed can be affected by changes in the law or in the interpretation of such laws since this text was updated. For that reason, the accuracy and completeness of this information and our opinions based thereon cannot be guaranteed. In addition, state or local tax laws and procedural rules may have a material impact on the general discussion. As a result, the strategies suggested may not be suitable for every individual. Before taking any action, all references and suggestions should be checked and updated accordingly.

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that neither the firm nor the partners are engaged in rendering tax, accounting, legal, or other professional services by its distribution. If tax, accounting, legal, or other expert advice is required, the services of a competent professional should be sought.

From a Declaration of Principles jointly adopted by a committee of the American Bar Association and a Committee of Publishers and Association.

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Provided by W. Scott McGonigle & Co.
W. Scott McGonigle & Co. 1998
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Last updated 10 January 1998