St. Louis Business Formation
Is your business formed properly?
Well! This question has come up several times when I am dealing with my clients, especially during tax season.
After formalizing your business, registering it with the Secretary of State, etc., most small business owners start working “in” their businesses. They are always busy with the many things that need to get done in the business. One of the most important things that we St. Louis business owners all focus on is creating “Sales”, then trying to collect the payments, right? Why?So that all personal and business expenses will be taken care of.
Maintain a Good Cash Flow
To maintain a good cash flow, the payables/receivables timing has to be right, meaning that the payments need to be collected magically somehow, or at least just right before the day your bank accounts will be automatically withdrawn! As long as you can juggle these balls, the chance that you will need to dip into your saving or retirement account will be minimum.
What if you don’t have those cushions that you can fall back on? Searching for a loan would be the next step to get the needed cash. With today’s stricter banking regulations, it is increasingly difficult to get a bank loan approved.
Traditionally, there are two main factors that banks are seriously looking for; Are there enough assets to secure the loan? – Yes, it’s called ” Collateral ” – and, Is there sufficient cash flow to cover how the loan will or could be paid back?
A business entity with the right formation is not only helping save money in taxes, but it also helps lower its risk from being audited by the IRS. According to statistics reported by the IRS for 2014, S-Corps or partnerships including LLC Partnerships filing 1065 forms, regardless of income or other factors, had only 0.4% chance of being audited, versus 2.4% for Sole Proprietor or Schedule C filers with gross receipts between $100K and $200K.
This doesn’t mean that all sole proprietors should change their entity or filing status right away. There are several great benefits of declaring your business as a Sole Proprietorship. However, when the right time comes, don’t opt-out or overlook the opportunity to convert your business to the proper entity. That being said, no one thing triggers red flags; all of us are always at risk of getting picked for an arbitrary audit. The best action is to retain all receipts, tax related documents, vehicle records and work with a trusted accountant and a tax professional.