The first thing to know about subsidiary companies is that they can offer tax advantages. In this rocky business environment where financial strain has forced more than a few small businesses to permanently close their doors, any positive tax news should be greeted with open arms.
But before we get into those details, let’s back up and look at what defines these companies. A subsidiary is a company that belongs to a separate company that controls more than half of the subsidiary’s stock. The company holding the controlling interest is known as the parent company (aka the holding company).
Basically, if more than half of your company’s equity is controlled by a separate company, you are likely a subsidiary. In this arrangement, the parent company plays a key role. They help elect the board of directors for the subsidiary and can exert influence on multiple aspects of the business operations.
“Subsidiaries are common in some industries, particularly real estate,” explains a report from The Balance Small Business. “A company that owns real estate and has several properties with apartments for rent may form an overall holding company, with each property as a subsidiary. The rationale for doing this is to protect the assets of the various properties from each other's liabilities. For example, if Company A owns Companies B, C, and D (each a property) and Company D is sued, the other companies can not be held liable for the actions of Company D.”
Now let’s look at some of the tax implications for subsidiaries. Because a subsidiary is a separate legal entity, it must often do all the things that a normal business would. This includes maintaining financial records, recording all liabilities and assets, filing tax returns, and paying income taxes. This level of independence is noteworthy because it opens the door for financial benefits for the parent company. For example, if a parent company in Canada owns a subsidiary based in Germany, the subsidiary might pay taxes on its profits according to the laws of Germany rather than lumping its financials together with the parent company and paying in Canada. This dynamic can often provide tax benefits for the parent company.
Similar tax savings might also be available at the state level. For example, let’s say a parent company in California wanted to use a new trademark. If the trademark taxes were particularly high in the Golden State, the company might create a subsidiary in Wyoming in order to take advantage of that state’s more favorable tax rates.
This is not to say that the financials of subsidiaries and their parent companies are completely separate. There are times when a parent company will consolidate things in order to save money.
“However, many public companies file consolidated financial statements, including the balance sheet and income statement, showing the parent and all subsidiaries combined,” says The Balance Small Business. “And if a parent company owns 80% or more of shares and voting rights for its subsidiaries, it can submit a consolidated income tax return that can take advantage of offsetting the profits of one subsidiary with losses from another. Each subsidiary must consent to being included in this consolidated tax return by filing IRS Form 1122.4.”
While this type of consolidation can be a shrewd approach for a parent company to offset losses among its subsidiaries, special rules apply. Tax returns and financial statements from multiple subsidiaries can only be merged when the parent company owns 80% or more of each of the companies in question. And the parent company would need to notify the IRS in advance of the plan to consolidate tax returns.
As you can imagine, it’s complex and burdensome to manage the accounting for multiple companies. Add in the tax element and things get even more difficult. For this reason, the owners of parent companies and subsidiaries should always invest in the services of a reliable and trusted accountant. Additionally, they should consult with attorneys in order to understand and adhere to all relevant laws.
It’s understandable that some business owners might balk at the idea of paying for accounting and legal help. After all, the price tag is never cheap for quality advice. But it’s a wise investment that will help them maximize the unique financial benefits of their business structure. Failing to do this would be like owning a high-performance sports car but never learning how to shift into its 2 fastest gears.
Subsidiary corporations also need to ensure that their day-to-day bookkeeping is consistent and accurate. It’s a best practice to use bookkeeping software that can automate recurring tasks and help to ensure tax compliance. This proactive approach to your finances will save you time, hassles, and money.
The information provided in this post does not, and is not intended to, constitute tax advice; instead, all information, content, and materials available in this post are for general informational purposes only. Readers of this post should contact their tax professional to obtain advice with respect to any particular tax matter.
A diverse workforce speaks volumes about your company’s values and your desire to create an inclusive workforce. Recruiting people of color (POC) is one way to show that your organization is committed to embracing the best talent from multiple ethnicities.
So how can companies recruit diverse employees in general—and POC in particular? Below, we offer 7 helpful tips to get you started.
1. Recognize the benefits of diversity.
Some companies may decide to recruit POC because they feel pressure to be politically correct. However, it’s also advantageous to your company. Research reveals that diverse companies are more creative and profitable than homogenous organizations. In fact, astudy by McKinsey found a direct connection between racial and ethnic diversity among senior leaders and financial performance in the US.
“Recognizing that having a diverse team of different genders, races, ages, religions, ethnicities, sexual orientations, and education is a massive advantage is the first step of integrating diversity into a business structure,” says Ashwin Sokke, cofounder ofWOW Skin Science, a vegan beauty brand.
2. Actively seek diversity.
If your standard recruitment efforts aren’t producing POC applicants, you may be fishing in the wrong pond. Expanding your efforts to such sources as historically black colleges (HBCUs) can provide a plethora of candidates. Another tip is to reconsider what you’re looking for in job applicants. “It is extremely important that each new employee matches the company’s core values but also offers a completely new set of unique skills, perspectives, and experiences,” Sokke says.
“The beginning stages of developing a system of hiring that is heavily focused on diversity and inclusivity is the most challenging part of the process,” he says. Blind-hire practices, which include removing identifying characteristics from the job application (race, age, gender, etc.), can ensure that unconscious biases do not play a role in hiring decisions.
3. Promote POC
Another way to recruit POC is to show them that your company will reward their hard work. “The most effective way to attract and recruit more people of color is to have people of color in leadership positions at your company,” advises Nerissa Zhang, CEO ofThe Bright App. She points to 3 reasons why she says it’s the most important factor if you’re trying to diversify your company.
“It shows prospective POC talent that they’re less likely to face bias during the hiring process and afterward,” Zhang says. “Also, it shows them that they are more likely to truly have the opportunity for advancement at your company.” In addition, Zhang says promoting POC shows applicants that they’ll have a greater chance of finding mentors for professional development.
Her views are shared byDr. Ti’eshia Moore, a CliftonStrengths coach and researcher who focuses on organizational learning and culture. “Specifically, top-tier applicants are looking to see if diversity is a true organizational commitment or simply an organizational statement,” she says. “They are interested in things such as the presence of key leaders and decision-makers of color and opportunities for advancement and mentorship.”
4. Include POC in recruitment efforts.
In any scenario, nothing beats a real-world example, and this is also true when recruiting POC. “One of the critical ways that companies can recruit people of color is by utilizing people of color from the team in the recruiting efforts,” says Moore.
“Now, more than ever, they are looking for real feedback and experiences from members of the actual team,” she says. “If you want to recruit people of color, show them that the environment is making an intentional effort to foster or increase the quantity and quality of applicants of color.”
5. Create a culture that embraces diversity.
One way to show applicants that you’re making an intentional effort is by creating the right type of company culture thatsupports POC employees. “Applicants of colors are used to working in environments where they are the minority, but now more than ever, a diverse workforce is a key factor in employee satisfaction,” Moore explains. “This is important as we investigate the difference between recruitment and retention.”
In addition to diverse work teams and leadership, Moore says POC are also looking for action-oriented organizational commitments to diversity. “And while organizations may still be recruiting people of color, future statistics may reveal a higher turnover when a company’s culture doesn’t match its rhetoric.”
6. Provide diversity training.
Creating the right type of environment may require diversity training for your employees. “Moving from the design stages to implementation can cause resistance within the organization,” Sokke says. “Offering diversity training that demonstrates to employees how to adopt diversity through inclusion efforts and team exercises is crucial to developing a culture of diversity.”
7. Make your intentions known.
The last tip for recruiting people of color is to make sure that everyone knows this is one of your priorities. “Promoting the implemented culture of diversity initiatives on social media, career pages, and print content will attract those diverse candidates,” Sokke says.
“Inflation” is one of those economic terms Americans hear about from childhood onwards—but if quizzed on its exact definition, many might have a hard time coming up with the correct answer.
Most often, we probably think of inflation as the reason why goods cost more and wages are higher today than in the past. For example, you could buy a glass of beer for a nickel in the late 1800s, and the federal minimum wage in 1980 was just $3.10 per hour.
But to understand how inflation works and how it can impact your small business, it’s critical to look at the concept from several angles. Wages, supply, demand, and monetary supply all play a role in inflation.
“Inflation can be defined as the overall general upward price movement of goods and services in an economy,” according to theDepartment of Labor.
This upward trend is generally caused by 1 of 2 reasons: cost and demand.
Cost-push inflation is caused by the rising cost of producing goods and services. If the cost of labor, land, or raw materials go up, businesses will usually increase prices to maintain their profit margins.
Natural disasters provide an extreme example of cost-push inflation. If production facilities are severely damaged, prices go up because production becomes more expensive.
On the other hand, demand-pull inflation is caused by an increase in demand. If demand exceeds production, inflation will likely occur because prices will rise.
While it’s not wise to overgeneralize economic trends, demand-pull inflation is sometimes thought of as “good” because it typically happens in an expanding economy with low unemployment.
When the national money supply, which includes cash as well as credit and loans, is overextended, a type of demand-pull inflation occurs. If there is too much money being produced for not enough goods, the price of goods will increase. This situation also lowers the value of the overproduced currency in comparison with other global currencies, causing import costs to rise and, in turn, causing overall prices to increase.
Overproduction of the money supply, in some cases, can lead to the extreme devaluing of currency. Famously, hyperinflation occurred in Germany following World War I and in Venezuela during the 2010s.
Because small businesses areless financially stable by their very nature, inflation has an outsized impact on smaller companies. Increasing your prices by just a few dollars can make you far less competitive. As a small business, your profit margins are likely very tight anyway.
Unfortunately, when it comes to macroeconomic forces like inflation, there is not much you can really do except for plan. When doing yourlong-term financial forecasting, you should think about both demand-pull and cost-push scenarios.
If your cost of production rises year after year or demand starts to overwhelm your supply,how much can you raise prices and still stay competitive?
Let’s not beat around the bush. Today’s small business environment makes it incredibly difficult for female entrepreneurs to build successful startups. No matter how much talent or hustle they have, the game is stacked against them. Already, 90% of startups fail, and you can imagine that percentage is even higher for female-founded businesses struggling to find venture capitalist funding and small business loans.
The struggle is real. And it’s also unjustified, especially considering women-led businesses have greater profit potential than businesses with mostly men in the driver’s seat. Because of this, we want to give every woman entrepreneur the resources she needs to level the playing field.
Unfortunately, women-only business loans don’t exist. However, a few lenders and loan programs prioritize supporting female small business owners. On top of that, women-only mentorship programs, business grants, and other resources are available to give women the support they need to build successful companies.
To help female small business owners reach the top of their game, we’ve compiled the best-of-the-best resources available.
Accelerators for female founders.
Accelerators offer startups invaluable mentorship, networks, seed money, and more, but they’re notoriously difficult for female founders to join. That’s where women-only accelerators can help.
Female Founders Alliance (FFA), a relatively new network of female startup founders, has built a free five-week accelerator for women, by women. This program goes beyond finding female entrepreneurs—it also caters to their specific needs. Many competitive accelerators require founders to relocate for three to six months, a feat often impossible for women, who are more often caregivers. FFA’s Ready, Set, Raise, program consists of remote workshops followed by a one-week immersion in Seattle, designed intentionally so women don’t have to uproot their families.
FFA is not the only one giving women a chance to start businesses. There are a number of other women-only accelerators to consider:
SheStarts offers a three-month program in Australia for women in tech industries.
MergeLane helps startups with at least one female founder connect with mentors and investors.
Aviatra Accelerators (formerly Bad Girl Ventures, Inc.) trains and mentors female entrepreneurs in Ohio.
These are just a few examples of the many accelerators available specifically for female entrepreneurs. It's important to do research and find the one that best fits your business.
And women-only accelerators aren’t your only option. A few of the most successful seed-stage investors happen to be accelerators who have a proven track record of supporting women-led businesses. The following are leading the pack:
Mentorship can be a game-changer for entrepreneurs, especially for women who may not have as many role models or connections in their industry. Luckily, there are numerous mentorship programs and networks specifically designed to support and connect female founders.
SCORE provides free business mentoring services to all entrepreneurs, but also has a dedicated Women’s Entrepreneurship Program with specialized resources for women.
Springboard Enterprises offers a variety of programs and events for women-led businesses, including mentorship networks.
Astia provides mentoring and access to investors for female entrepreneurs in high-growth industries.
The Boss Network offers online resources and networking opportunities for professional women of color.
EY Entrepreneurial Winning Women provides education, resources, and networking opportunities for high-potential women entrepreneurs.
The Next Women hosts events and offers mentorship and resources for female entrepreneurs in Europe.
The Vinetta Project supports women-led businesses through mentorship, pitch competitions, and funding opportunities.
WBENC certifies women-owned businesses and provides resources and networking opportunities.
Venture capital for women-owned businesses.
It takes money to start a business, and it unfortunately often takes more effort for women to secure that money. If you look at the $130 billion paid out in venture capital in 2018, businesses owned by women only accessed 2.2% of the pie.
Despite the bad press and dismal statistics, there are VCs committed to supporting women on the road to success.
Here are some notable examples:
Fika Ventures: Eva Ho and TX Zhuo lead this California-based seed fund. If your business involves automation, data, or AI technology, they’ll be particularly interested in chatting with you.
Urban Innovation Fund: As the name implies, this firm offers seed capital to entrepreneurs who will improve cities with their ideas. Sector examples include housing, education, transportation, and recreation.
SoGal Ventures: Led by Elizabeth Galbut and Pocket Sun, SoGal Ventures has an international presence and often invests in innovative technologies that solve problems.
500 Startups: If your business is in the retail, fashion, or beauty industries, you should consider 500 Startups. This global VC firm is dedicated to investing in businesses led by women and other historically marginalized individuals.
Glasswing Ventures: Aside from having an absolutely gorgeous name, Rudina Seseri’s firm is always on the lookout for startups with great AI solutions.
Halogen Ventures: This early-stage VC fund invests in consumer technologies that push the limits of what’s possible. They’re known for giving ample support and development resources to the businesses they fund.
Small business loans and grants for women.
Securing a small business loan or grant can be a game-changer for women entrepreneurs, providing vital funding to help their businesses grow and thrive. This section will explore some of the loan programs and grants available to women.
SBA loans.
The Small Business Administration (SBA) offers several types of loans designed to assist businesses with various needs. SBA loans are provided by lenders like banks and credit unions, and they are guaranteed by the SBA. This means if a business defaults on the loan, the SBA will cover the majority of the lender's loss. SBA loans are available for most business purposes, such as to purchase equipment, inventory, or real estate, to acquire a business, or to provide working capital. These loans are known for their lower down payments, flexible overhead requirements, and no collateral needed for some loans.
Business line of credit.
A business line of credit is one of the most flexible forms of financing. With this type of financing, you have access to a certain amount of money (the credit limit) that you can draw from as needed. You only pay interest on the funds you use, and once you repay the funds, they become available again. This is great when you need cash for emergencies or unexpected expenses.
Small business grants for femal entrepreneurs.
Small business grants can be an even better resource for women business owners. Essentially, a grant is free money that you don’t pay back, ever (unlike a small business loan or credit card). So, you’d guess these grants would be extremely competitive—and you’d be right! But each small business grant is unique and has its own set of requirements, so you never know when you’ll be the most qualified candidate.
Although there are a ton of available grants, a few focus specifically on women. These grants are definitely worth looking into:
Amber Grant awards $4,000 each month to a woman-owned business
IdeaCafe Grant has a $1,000 grant for startups and young businesses
GrantsforWomen.org provides a comprehensive list of grants available to women entrepreneurs.
FedEx Small Business Grant awards grants and other resources to small businesses with a compelling story and potential for growth.
The Halstead Grant offers a $7,500 grant and other opportunities to jewelry designers.
Educational programs for women.
Knowledge is power, and there are plenty of programs educating women to become the most powerful entrepreneurs in the world. These are just a couple of the incredible resources available for female entrepreneurs.
Women’s Business Centers
Beyond loans, the SBA has a few different programs to help female small business owners learn to run a business, secure financing, and create valuable networks. The SBA’s Office of Women’s Business Ownership (OWBO) manages a network of Women’s Business Centers (WBCs) across the entire U.S. There are more than 100 of these centers giving women entrepreneurs a fighting chance by providing management training, technical assistance, certification courses, consulting, and much more.
NAWBO Institute
The National Association of Women Business Owners (NAWBO) is the unified voice of more than 10 million women-owned businesses in the U.S. With the NAWBO Institute, women get access to online virtual courses to learn best practices, network, and ultimately get ahead of the curve. The best part is that you can learn at your own pace and focus your attention on growing your business while studying on the side.
Despite the vast challenges female entrepreneurs face, the rate of women-owned startups has been growing close to double that of their male counterparts in recent years. Although these incredible resources don’t completely erase core obstacles, they take a big step in alleviating the hurdles female small business owners face along their entrepreneurial journeys.
Why would anyone want to lock their small business down into a business structure? Just the term “structure” might be enough to give some entrepreneurs the heebie-jeebies. After all, modern folks value flexibility. It’s why so many of us own personal vehicles instead of relying on public transportation, why we prefer to book hotel rooms with free cancellations, and why we don’t purchase lifetime subscriptions to streaming services like Netflix or Hulu. We enjoy the freedom afforded by a variety of choices and want to be able to reverse course on decisions whenever the need arises.
This love for flexibility extends to our professional lives. While workers in prior generations often chose a career and stuck with the same company for decades before ultimately claiming their pensions, many Americans now experiment with various options and avoid being tied down to 1 company. This approach often means freelancing for your entire career or taking a meandering journey through the entrepreneurial jungle.
The benefits of a malleable career include fewer constraints on your creativity, pursuits, and accomplishments. If you can dream it, you very well might be able to do it.
“In my case, when I worked as a writer in my full-time job, I was only writing about my beat—articles and features,” explains entrepreneurial guru Mukti Masih. “When I started freelancing, I learned blogging, which was quite different from in-depth articles that I was used to. Thereafter, I co-founded a video production company with my brother so I got the exposure to script and screenplay writing. I have also written scripts for audiobooks, website content, copies for ad films and TVCs, product descriptions for e-commerce websites, white papers, and e-books. I am quite sure, a few jobs down the line wouldn’t give me the freedom to write all these kinds of things.”
At the same time, there’s something to be said for structure in the business world. And there are compelling reasons to set your small business up as an entity. Here are some benefits to consider:
Tax savings
Growth opportunities
Financing qualifications
Personal liability protection
It’s also worth noting that when you set up your business as an entity, you don’t completely surrender your flexibility card—you may actually have the opportunity to change structures if necessary.
Setting the stage for your business structure decision.
Some business decisions bring limited consequences. For example, let’s say you decide to put most of your marketing budget toward a Facebook campaign. After running your ads on Facebook for a few weeks, you might decide that you’d get a better response on Instagram. No big deal: you simply discontinue the Facebook campaign and then start advertising on Instagram. The cost is minimal, and there are no long-term complications.
It’s a different story when it comes to your business structure, however. While there might be the possibility of switching your structure down the road, you certainly won’t be able to hop from one to another like you would in the social media advertising example given above.
“Of all the decisions you make when starting a business, probably the most important one relating to taxes is the type of legal structure you select for your company,” explains a business report from Entrepreneur. “Not only will this decision have an impact on how much you pay in taxes, but it will affect the amount of paperwork your business is required to do, the personal liability you face, and your ability to raise money.”
You might be wondering which structure is ideal for small business owners—and there’s no boilerplate answer. Your best match will depend on a wide range of factors, including your business model, your industry, your growth goals, and your patience for procedural red tape.
These details, and many more, are best distilled through a business plan. This document outlines why you’ve started your business, how you’ll structure it, how you’ll run it, and where you want it to go.
If you’ve already assembled these details, putting a business plan together is merely a process of assembling your research and goals into a centralized place. For those who have yet to begin, you’ll want to start with some crucial questions. Here are some examples:
What do I want to accomplish with my business?
What problems does my business solve for customers?
What is my mission statement?
What are the financial projections?
What are the financial needs?
What makes my business different from the competition?
What did my competitor analysis reveal?
What did my industry analysis reveal?
What did my marketing analysis reveal?
Each question you answer will provide the information needed to build your plan. The process takes time, so don’t expect to cobble together a plan over a single weekend. As you can see from the questions above, conducting the competitor analysis and other research required could easily take several weeks. Put the time in so that you can get the best results out.
“Research and analyze your product, your market, and your objective expertise,” explains the Houston Chronicle. “Consider spending twice as much time researching, evaluating, and thinking as you spend actually writing the business plan. To write the perfect plan, you must know your company, your product, your competition, and the market intimately.”
Completing your business plan is a major accomplishment. It will guide all your subsequent business decisions, such as how to structure your business. Additionally, it’ll serve as a representation of your vision and abilities as you seek financing (more on this later).
Choosing the best structure for you.
Armed with the information from your business plan, you can choose a structure that aligns with your goals and maximizes your financial strategies. The 6 main options chosen by small business owners are general partnership, limited partnership, sole proprietorship, corporation, S corporation, or a limited liability company (LLC). Each has unique strengths and limitations, so let’s take a look at the highlights:
1. Partnership
Also known as a general partnership, this structure is a great option if you’re going to share ownership with other individuals. Each of the partners in these entities has an equal stake, helping to run the operations and sharing the burden of financial liability. If problems arise and the business incurs debts and losses, the partners would all be on the hook from a personal perspective. This means that assets such as homes, vehicles, real estate, and inventory could be in jeopardy.
One of the biggest reasons small business owners choose partnerships: it simplifies your tax situation and can save you money. With this structure, you can take advantage of “pass-through” laws that mean your business doesn’t have to pay taxes on profits and losses. Instead, those profits and losses pass through to the personal taxes of each partner.
Another benefit: partnerships are simple to form, and there aren’t too many costs associated with the process.
2. Limited partnership
This structure shares a lot of common DNA with partnerships, as they’re both fairly easy to set up and the costs are modest. Additionally, limited partnerships also qualify for “pass-through” laws, making tax season more enjoyable—you can simply account for your business’s profits and losses on your personal taxes and potentially save a lot of money in the process.
The chief difference is that limited partnerships allow for a hierarchy among the partners. Rather than everyone sharing in the profits, having a voice in decisions, and sharing liability for losses, some of the partners can serve in an investor role, where they don’t take on personal liability for the business.
The clear advantage here: partners can take on a role that aligns with their priorities, whether that’s a full-fledged seat at the table that brings higher risks and rewards or a safer position that comes from the “limited” role.
3. Sole proprietorship
For those who like independence and flexibility, a sole proprietorship is the next best thing to freelancing. This type of entity is convenient to set up and is one of the most inexpensive options available—no wonder it’s the most popular business entity in America.
As the name implies, sole proprietorships are intended for business with 1 owner. If you have partners involved, you’ll have plenty of other viable options, such as a partnership, limited partnership, corporation, S corporation, or limited liability company (LLC). Given the independent nature of a sole proprietorship, there are no business agreements to wrangle or outside approvals to seek.
The risks and rewards of a sole proprietorship are high-stakes. All profits come directly to you, but if things go south for your business, you alone will be liable for debts and losses. Personal assets could be at stake in these situations, including if you’re sued.
The tax arrangement for sole proprietorships is similar to partnerships, as the profits and losses pass through to your personal taxes. In the eyes of the government, you and your business are a single entity. The good news: sole proprietorships have low tax rates.
4. Corporation
While sole proprietorships create a structure where you and your business are a single entity, corporations essentially put a rock wall between you. This legal separation offers liability protection if your business struggles, preserving personal assets. Your house, ranch, Winnebago, or boat will be safe from anyone seeking compensation.
Of course, it takes a lot more effort and paperwork to create a separate entity. Corporations can be complex, and the setup costs are substantially higher than many of the other options on this list.
Another potential drawback of corporations: you might be required to pay business taxes twice (as if tax season wasn’t already difficult enough). The first payment would be state and federal corporate income tax. If any business earnings were given to shareholders in the form of dividends, you would then need to pay personal taxes for those payments.
5. S corporation
Perhaps you find the sophisticated nature of corporations intimidating. Much like how limited partnerships are a more user-friendly version of partnerships, there’s an option called an S corporation that provides more flexibility than a corporation.
S corporations offer a similar degree of personal liability protection, which is obviously a major benefit. If your business incurs debts or losses, you’ll be considered a separate entity and won’t need to worry about anyone coming after your personal assets.
Where S corporations differ: you can add more shareholders than in a corporation. This makes it easier to attract investors. Also, you won’t need to deal with the same complications when tax season rolls around. Your business’s profits and losses will pass through to your personal tax return, which is always the easiest method.
While S corporations are more streamlined than corporations in many ways, they still bring their fair share of challenges. You will be required to hold meetings for your directors and shareholders and keep detailed minutes from each of these meetings. Your shareholders must also be allowed to vote on key business decisions.
6. Limited liability company (LLC).
While sole proprietorships are the most popular business structure in America, LLCs might be the most beloved. This structure merges some of the best perks from corporations and partnerships into 1 entrepreneur-focused entity.
An LLC advertises its liability protection right in the name. This is a big deal for small business owners who have no interest in a structure that doesn’t shield them on a personal level from business debts and losses.
Another big benefit of LLCs: your business earnings and losses are handled on your personal tax returns. This pass-through arrangement is simple to handle, but it also means that you will owe self-employment tax. Be sure to plan on self-employment tax as the year progresses, so that you won’t be caught by surprise when you receive your tax bill.
You can have an unlimited number of shareholders in an LLC. And unlike a corporation or S corporation, you won’t need to deal with all the red tape associated with shareholder meetings and distributing meeting minutes.
As you can see, there are plenty of nuances to consider with each of these business structures. Your unique situation might immediately rule out some of the options, but you should consult with a tax professional to identify the structure that will best serve your needs and set you up for future success.
This is also a prime time to meet with your mentor and get an insider’s take on the situation. An experienced mentor can alert you to red flags and offer tips for streamlining the setup process.
Business structures and financing.
As mentioned earlier, a substantial benefit of structuring your business is that you can boost your credibility and qualify for financing. Considering the fact that financing is an essential source of capital for most of America’s small businesses, this element of the decision shouldn’t be ignored.
Your business’s financial needs will vary wildly based on your industry. If you have a consulting business, you might be able to operate out of your home and only have moderate costs associated with your operations. On the other end of the spectrum, you might have a restaurant or construction business that would typically require a business location, utilities, equipment, supplies, insurance, licenses, permits, and other various expenses.
Based on the intel in your business plan, you can home in on the amount of money your business needs and the timeline to acquire it. You can then work with your mentor to identify the best financing option for your needs. Popular examples include:
You should also research other sources of capital. Many entrepreneurs prefer microloans because they’re easier to acquire, though the dollar amounts are typically much smaller. Some of the most reliable microloan providers are Kiva, Opportunity Fund, and Accion.
Another possible option is a business grant. This is one of the most challenging of all funding sources to qualify for, but the fact that the money is free certainly helps to justify the effort required to pursue them. Look for federal grant opportunities at Grants.gov, then check out some private sector options from the Halstead Grant, Amber Grant, Idea Café Grant, and National Association for the Self-Employed (NASE).
Whether you’re applying for a business term loan or scoring a grant from the federal government, your business structure will be an important part of your resume. The fact that you’ve set up your business as an entity shows how serious you are about its performance. It doesn’t matter whether it’s an LLC or S corporation or sole proprietorship—the point is that you’ve followed the necessary steps to legitimize your business in the eyes of the government and/or private lenders. And that seal of approval can really boost your odds of getting approved for financing and ultimately reaching the goals you outlined in your business plan.
Financial statements are meant to provide insight into your business and help you to make informed, strategic decisions. With the data you collect and report, you can identify a host of problems, ranging from wasted spending to underperforming investments.
However, a financial statement is only as good as the insight you can glean from it. If you aren’t sure how to read the reports, don’t update them regularly, or don’t take action on them, they won’t be valuable.
If you’re new to financial reporting or have a hard time knowing what to look for, consider these 5 red flags in your financial statements.
1. A High Debt-to-Income Ratio
Business and personal accounting have 1 thing in common: you always want to make more than you spend. If your debt-to-equity ratio is on the rise, then you’re spending more than you’re bringing in—and unless you’re scaling and reinvesting in your business, that’s a major red flag.
Set a goal for a standard debt-to-income monthly ratio, with ranges for healthy high and low levels. This process will help you to sound an alarm if your ratio begins to rise—that way, you can intervene before your spending gets out of hand.
To rebalance your debt-to-income ratio, look for unexplained or unnecessary expenses. You can also acknowledge that some expenses are 1-time issues (like an unexpected plumbing repair cost at your business) that will return your ratio to normal in the following month.
2. Lower Profit Margins
High sales totals don’t always indicate a successful business. A more reliable metric to look at is your profit margin. The profit margin is a metric that describes the amount of money (or percentage of profit) that a business makes from its sales.
For example, let’s say you offer 2 products that both cost $20. If Product A costs $5 to make and Product B costs $15 to make, then Product A is significantly more profitable to your business. So even though these products are priced the same, their costs are different—which means they have different profitability (profit margin).
You can’t always control what your customers buy. However, you can create a diverse product offering and prioritize marketing your higher-margin items while continuing to focus on optimizing your company-wide profit margin.
3. Excess Inventory
Inventory that you haven’t been able to sell is called dead stock. This term refers to items that get stuck on store shelves or in warehouses before they can get moved to the store or shipped to customers.
Excess inventory means lower profits. First, you have to pay for warehouse space for the inventory that isn’t selling. Next, your shelves become full of unwanted items, which limits your ability to bring in new, highly desirable products.
Even if you do sell your dead stock, you’re more likely to take a loss. Think about a collection of unfashionable sweaters that’s discounted 75% by May or the Christmas decorations that immediately go on clearance after December 25. At some point, you just want to get rid of the inventory and move on.
If you consistently have problems moving your inventory, you may need to reconsider how much of a given item you buy or change your buying patterns to acquire more desirable items.
4. A Large Account Receivables
When you send an invoice to a customer, it goes into your accounts receivables until those outstanding funds are collected. This is money you’ll have in the future but can’t use now.
Watch to see if your accounts receivables build up—if they do, it could create cash flow problems in the future. Not only do you need to worry about customers not paying their bills (or taking too long to reconcile them), you also need to make sure you have enough operating cash to sustain your own liabilities and expenses.
Like your debt-to-income ratio, set ranges for a healthy accounts receivable amount so you can intervene before the unpaid invoices become a problem.
5. A Large Number of ‘Other’ Expenses
Within your financial records, you should keep most of your expenses categorized. You’ll likely have categories for materials, utilities, labor, marketing, and other costs. Unfortunately, not all of your business costs fall into these exact categories.
Keep an eye out for a rise in “other” expenses that might fly under the radar but build up if you’re not careful. This is particularly relevant if your “other” expenses are large and contribute significantly to your debt-to-income ratio.
You should look for ways to categorize these items and set budget items to avoid overspending.
Many of the financial metrics above can change depending on the statement, time frame, or other variables you might use. If you notice any of the above red flags in your financial statement, it doesn’t mean the sky is falling—these are signals that should give you pause and lead you to investigate further, but they’re not completely damning.
For example, during the pandemic, you may have extended your net payment terms with clients. This flexibility with your customers could lead to an increase in accounts receivable—but within the context of the global pandemic, you can understand that it’s not indicative of a poorly run business.
The key to reading financial statements is to identify patterns and problems. If you can’t answer why these changes are happening, you need to take a closer look at your business.
For better organization and financial planning, look into getting a software system that can help with bookkeeping. The Lendio app can help you organize expenses, sort invoices, and make accounting a breeze.
The sprawling and tech-fueled California economy performed a grand experiment with its freelance and gig workforce in 2020—but now they’re overhauling that experiment in a big do-over.
The state enacted the landmark independent contractor law AB 5 on January 1 this year, requiring that many companies hire freelancers and independent contractors as employees with benefits. But freelancers trying to work under AB 5 found that the well-intended law created unexpected nightmares for millions of self-employed Californians it was intended to protect, with many freelancers being laid off.
A new “clean up” bill (AB 2257) removes many of those limitations and exempts several industries from freelance employment requirements, as the San Francisco Chronicle explains. Certain industries are no longer required to give full-time benefits to independent contractors, and there are now carve-outs for specialized lines of work, including translators, florists, event planners, and other independent contractors whose bread-and-butter is one-time or occasional jobs.
Notably, writers and photographers were only allowed to submit 35 or fewer pieces to one publication per year under AB 5. That limit caused many of them to lose significant income, but they’re now exempt under this new bill.
The original AB 5 law was intended to force companies like Uber and Lyft to offer their gig workers employment benefits. That requirement of them is technically still in place, but California is suing those companies to get them to comply. Meanwhile, the tech companies are pushing a November ballot measure to get themselves exempted from this employment law too. (DoorDash, Lyft, and Uber have poured nearly $200 million into that campaign, making it the most expensive ballot measure in California history.)
The full text of AB 2257 describes which industries are exempt from the employment benefits requirement, but it’s not the easiest bill to understand. It’s based on a 2018 California Supreme Court case that determined one can only be classified as an independent contractor if they meet 3 specific criteria.
How California Defines ‘Independent Contractor’
That 2018 decision is the backbone of both AB 5 and the new AB 2257, and it says that one cannot be an independent contractor unless each of these 3 benchmarks applies to the work they do for a certain company:
The worker is free from the hiring company’s control and can work when or where they choose
The work they perform is not the hiring company’s main area of business
The worker conducts their own independent business and is free to do the same work for other companies
But AB 5 still mandated paid sick leave, workers’ comp, and unemployment insurance that many companies found impractical to provide to occasional freelancers. Thanks to AB 2257, freelancers in the following fields no longer have the burden of those requirements—but a few of these industries have exceptions where contractors still must be classified as employees.
Which Professions Are Exempt From AB 5
Certain specialists like dentists and lawyers were always exempt from AB 5. But the new version broadens that exemption to independent contractors in these fields:
But some of these exempt fields have specific exceptions, where certain types of workplaces are still required to hire these specialists as employees.
The AB 2257 Videographer Exception
Videographers are exempt from the employment requirement under AB 2257 but only in certain circumstances. Specifically, videographers for TV stations and motion picture studios are still expected to be hired with benefits. But writers and photographers now worry that the videographer exception could ensnare them too, as more video requirements become part of their job duties in the digital media era.
The AB 2257 Musician Exception
Musicians and songwriters are also now exempt under AB 2257. But the new law stipulates that musicians must still be hired as employees if they play for symphonic orchestras or organizations that regularly put on shows in front of big audiences, like Broadway-style theaters.
And musicians take their role in the gig economy seriously. After all, they came up with the word “gig.”
Gig Economy Regulation Sentiment Is Growing
Regardless of what happens with Lyft and Uber’s big-money November state ballot measure, a national movement toward gig economy regulation may be growing. Democratic presidential nominee Joe Biden has spoken in favor of AB 5, as has his vice-presidential candidate Kamala Harris. If they win the 2020 presidential election, expect a Biden administration to promote some form of freelance employment regulation.
The passage of this fix-it bill indicates that California considers contract employment law to be a work in progress, and the state is likely to alter it again if legal challenges are successful. The state is trying to figure out how to regulate potential exploitation of app-based drivers while still allowing freelance specialists to flourish under non-traditional employment. The weak COVID-19 job market is likely to draw more Californians to the freelance market, but lawmakers think it's time for the gig economy to face the music.
AnSBA loan is intended to help a small business get up and running. This can be a risky endeavor, so the federal government provides them to help entrepreneurs who might not be able to get a loan under normal circumstances. It’s a powerful kickstarter for our economy.
The SBA doesn’t make any of the loans itself but makes it all possible by guaranteeing the loans made by other lending institutions. What usually happens in the case of a default is the lending bank will contact you and explain the details of the default and how to remedy it.
What Happens If You Default on Your SBA Loan?
In situations where you are unable (or unwilling) to make payments, the lender will begin the collection process as laid out in the SBA loan agreement. This may include the sale of assets you used to collateralize the debt, like business assets. For larger loans, maybe even your home and other properties. If you continue to fail to make payments, the lender can close the business and also foreclose on your property.
If it reaches a point where the lender has used all options for recovery, they’ll make a claim to the SBA. At this point, the SBA guarantee kicks in and the federal government will repay the lion’s share of the loan on your behalf.
With the lender paid, you would now be dealing with the SBA. You’d get a notice from the SBA, explaining that you need to pay the remaining balance or present an “offer in compromise.” An offer in compromise is a situation where the SBA will review your financial situation and perhaps accept less than is actually required. The key in these situations is for you to present a settlement amount that is substantial, but also sustainable given your finances. The SBA obviously has no interest in payment plans that you wouldn’t be able to meet.
If the SBA accepts your offer, then everyone will be happy as long as the repayments are made. In cases where the SBA rejects the offer, you usually have an opportunity to recalibrate and submit again. Other times, the SBA will simply send the account to the Treasury Department. At that point, the Treasury Department has a full range of collection options (like garnishing wages and taking tax returns).
You might still have the option to settle when the loan is with the Treasury Department, but it’s a tedious process. So it’s always better to find solutions at the beginning of the process, when the loan is still with the original lender. Think about it this way: would you rather deal with a nice woman at a bank named Mary, or a government agent who eats entrepreneurs for breakfast?
It’s important to remember that even if trouble arises, there’s life after default. Once you’ve settled the debt, you can move forward and focus on restoring your financial health. To make sure it’s truly in the rear-view mirror, you will need to make sure that you’ve resolved all the issues related to the defaulted loan. This is particularly true for SBA liens or judgments that might go unnoticed at the time, but could cause issues later.
Social media can be a game-changer for small businesses—if you know how to use it. This guide covers everything from choosing the right platforms to creating engaging content and growing your audience. With actionable tips and proven strategies, you’ll learn how to turn likes and follows into real business results.
Email marketing is one of the most powerful tools for small businesses—when done right. This guide covers everything from building your email list to crafting engaging campaigns that drive results. With actionable tips and step-by-step guidance, you’ll learn how to connect with your audience, boost sales, and grow your business through email.
Digital marketing doesn’t have to be overwhelming. This guide simplifies the essentials, from building an online presence to leveraging social media, email, and SEO. Packed with practical tips and step-by-step strategies, it’s designed to help small businesses succeed in the digital world without a big budget or a full marketing team.
Let’s face it. There’s a lot of bad marketing advice out there. Or great advice that’s far too in-depth for a small business owner who isn’t looking to start a full-time career in marketing. We created this guide to cut through the clutter and provide you with principles, direction and the applicable step-by-step how-tos to get the job done.
Your brand is more than just a logo—it’s the heart of your business. This guide walks you through the essentials of small business branding, from defining your identity and crafting your message to building a strong, lasting impression. With clear steps and actionable advice, you’ll create a brand that resonates with customers and sets your business apart.
Hiring for small businesses doesn’t have to be complicated. Your business can achieve success when you understand relevant legal requirements and find the right job candidates for your open positions. This comprehensive guide covers everything from finding the right employees to hire to employee training and development.
Your best customers are your biggest growth opportunity. This guide breaks down customer marketing strategies tailored for small businesses, helping you turn happy customers into loyal advocates. From building relationships to leveraging referrals, discover actionable steps to maximize lifetime value and drive sustainable growth.
From selecting the right franchise opportunity to navigating the financial aspects, this step-by-step resource equips aspiring entrepreneurs with the knowledge and strategies needed to thrive in the world of franchising.
Have a business idea but not sure where to start? Our comprehensive guide to starting a business has everything you need to know. From legal requirements to market research, we’ve got you covered.
Running and growing a business is no easy feat. Our guide to running a business has everything you need to know to keep things running smoothly. From managing employees to marketing your business, we’ve got you covered.
Take your business to the next level with our Accounting Guide. Master the language of numbers, understand financial statements, and make informed decisions based on accurate financial data. Discover the power of sound financial management.
Master the art of cash flow management with our comprehensive guide. Learn strategies to optimize your cash flow, forecast revenue and expenses, and keep your business financially stable. Take control of your finances and achieve long-term success.
Streamline your billing process with our Invoicing Guide. Learn how to create professional invoices, manage client payments, and maintain a healthy cash flow for your business. Get paid faster and efficiently track your revenue.
A great marketing strategy is the foundation of small business success. This guide takes you step-by-step through defining your goals, identifying your audience, and choosing the right channels. With practical tips and clear direction, you’ll build a tailored strategy that drives growth and delivers measurable results.
Navigate the complex world of taxes with our Tax Preparation Guide. From understanding tax obligations to maximizing deductions and filing quarterly taxes, we’ll help you stay compliant and minimize your tax burden. Unlock the secrets of tax success for your business.
Stay on top of your business finances with our Bookkeeping Guide. Learn the art of tracking income and expenses, maintaining financial records, and keeping your books in order. Unlock financial success with our expert tips.
Need help securing funding for your business? Our business loans guide simplifies the financing process, explains key terms, and walks you through your loan options.
