Exit Planning: An Introduction

Chances are, as a business owner, you have heard of exit planning. But have you ever sat down and considered it in all its glory? Exit planning is a crucial step to any business, no matter what stage. In fact, the earlier you consider it, the more time you have to create an effective exit strategy that will ensure your business stays successful even after you are no longer in the driver’s seat.

Did you know that exit planning and succession planning often get confused? While the two sound similar and have some common themes, they are actually different.

  • Succession Planning – Focuses on identifying successors within a business and preparing them to replace the existing business leaders; Focuses on transfer of leadership from one generation to the next
  • Exit Planning – Analyzes all of the factors that impact a business owner, including current and future planning; Identifies strategies and steps that are most likely to allow the business owner to reach their goals

In this next series of blogs, we will be discussing a framework for exit planning and what you, as a business owner, need to know to keep your business running smoothly after you exit.

The steps we’ll be discussing are based on BEI’s Seven Step Exit Planning Process. They include:

  • Identifying Owner’s Objectives & Goals. This step will focus on identifying primary planning objectives, such as desired business departure date, who you want to leave the business to and more.
  • Quantifying Business and Personal Financial Resources. In this step, we will talk about valuation and cash flow. This will include asking yourself how much you know about the worth of your business, and how much it is expected to bring in future cash flows.
  • Business Value Enhancement. In order to make the business more appealing to your ownership interest, you must know how to increase value.
  • Ownership Transfer to Third Parties. To make sure that a smart transfer is made to a third party, this step will ensure you know how to sell to a third party in a way that will maximize your cash while minimizing your tax liability.
  • Ownership Transfer to Insiders. If you are considering transferring the business to someone on the inside, such as family, this step will be of high importance to you. This step can also help you decide whether an inside or third party transfer is right for you.
  • Continuity Planning. This step will help you ensure you have all the necessary precautions taken to be sure your business continues on if you don’t.
  • Personal Wealth and Estate Planning. It is imperative to have a plan in place to provide for you and your family post-business sale. This step will help make sure you are on the right track for financial security.

Prepare to join us over the course of these next seven blogs to learn a framework on successful exit planning and how it can benefit you and your business now, as well as in the future.


The HR Side of Succession Planning

Earlier, we brought you a blog about the importance of getting started early with succession planning. In case you don’t remember …

Succession planning is the process of identifying and developing people inside your organization to fill key leadership and ownership positions. It’s also commonly known as transition planning, as you’re looking at how you’ll transition the business to the next leader(s).

Now that you realize how important it is to get started early, the next step is figuring out how you are going to undertake this process of implementing a succession plan.

The Human Resources (HR) department is a great (and often overlooked) tool in succession planning. Not only are these professionals in the business of keeping employees satisfied, but they also know how to work with employees (and potential employees) to find out what talents, traits and characteristics they have, which can be crucial in implementing a succession plan. A survey by the Corporate Leadership Council, an HR organization, showed that of the 276 companies surveyed, only 20% of HR executives were satisfied with the succession process. This leaves a large area for HR professionals to jump in and take over the succession planning process.

According to the Society for Human Resource Management, the preparation process for keeping talent in the pipeline is generally a 12 to 36 month process. What does that mean for you? You need a good plan and strategies in place to ensure your business is always in good hands, and you need these strategies in place ASAP.

From an HR standpoint, there are a number of ideas to focus on in order to find the best candidates to have lined up in your succession plan. This starts with the search: should you look inside or outside of your business? There are advantages and disadvantages to each that can help you decide where to look.

Let’s start with taking a look inside your business…

  • Advantages
    • Already have an established fit with the company and are familiar with how things operate
    • Have already been invested in by the company
    • Can be monitored on performance and can be “groomed” to fit the position
    • Can start planning process sooner with these people, as they are already a part of the company
  • Disadvantages
    • May have experience in your company, but may not be the correct experience
    • May have been hired because of skills, but these skills may not be a good fit for the new position
    • Takes time and money to implement a plan within
    • The plan could fall through if they end up leaving the job

And now outside of your business…

  • Advantages
    • Brings in a fresh perspective
    • Ready to learn new skills and can be adaptable
    • The company can search from a larger pool to find an exact match
  • Disadvantages
    • Don’t know the company as well and may not be an immediate team fit
    • Could potentially lengthen the already time consuming succession planning process
    • This person may be able to do a job, but can they do the job?
    • If the wrong person is brought in, it can lead to a complicated, expensive mess

After weighing the pros and cons of each pool of candidates, you need to know how to implement a successful succession plan (say that three times fast!). There are some components of an excellent succession plan that deserve some thought and attention.

  • Motivation – You want to provide your employees with incentives to encourage motivation. Herzberg’s Theory of Motivation states that meeting personal growth, achievement and recognition of needs promotes motivation. Focus on these factors, and watch your employees become more motivated.
  • Participation – Commitment and support from everyone involved in succession planning will have a positive influence on the program. It also allows for more inclusion, which can help create a positive learning experience.
  • Alignment – Making sure the succession plan matches up with the business objectives. This will help with a smooth transfer of skills for the position needed to be filled.
  • Variety – People learn in different ways. Offering different techniques for training can assist in finding the best possible method for succession planning that will be beneficial to all candidates.
  • KPIs – Having Key Performance Indicators in place will help you measure how far along the candidates are in their succession training, and can also help you decide who is learning and adapting quickest, which may indicate their readiness to be a successor.

Although these components can help to implement a successful succession plan, there are, of course, some obstacles you should be aware of.

  • Resistance to Change – Change is often something that can be hard to handle. In an organization planning to find a successor, tensions could arise if people are not exactly in favor of implementing a succession plan, especially if it involved bringing in someone new. Start small with the changes, involve everyone and work to build a cohesive team and strategy.
  • Lack of Support – If outspoken anti-succession employees get the floor to speak, it can be hard to sell the idea of succession planning. In this case, locate the source of skepticism and address it with relevant facts to gain this support back.
  • Lack of Time – Let’s be honest, you knew we would mention this one again. Without giving yourself enough time to develop a succession plan, the time may come when a successor is needed, and the pool of candidates to take this spot is empty. Always prepare yourself for any possible “what ifs” and make sure you have ample time to address them.

If you’re ready to get started, but need some help getting going, we are here.

5 Tips on How to Be a Great Boss

We’ve brought you tips about how you can keep your employees, shared some advice on teamwork and helped you decide if it’s a good move to hire a friend or not. But what are the qualities of a boss that employees are looking for?

Throughout our professional careers, we’ve been exposed to all sorts of people in the workplace, each bringing their own unique personalities to the organization. Some of these people have been positive influences in our lives, while some have left a not so good memory.

Bosses are no exception. Let’s face it: there’s a good chance you’ve worked for some great bosses, as well as some who have made you want to leave your job.

In order to help you be the best boss you can be, we’ve provided our top five tips on how to be an excellent boss.

The boss works on improving his or her employees.  

We’ve mentioned it before that, without your employees, your business would be struggling for success. Of course it is great to focus on goals and achievements, but if you aren’t taking care of your employees, it will be hard to reach these goals. Your employees can only achieve what they are capable of achieving, so investing in them can help them be more capable of achieving more.

So, how does a boss work on improving employees? Some of the most popular options are through training and mentoring, and providing opportunities employees need and deserve. Providing these for your employees lets them know they are valued and brings meaningful strategies for employees to measure progress, improvement and achievement.

Although it’s good to spend some time on reaching goals, it’s even better to spend more time developing the skills and qualities of your employees; achieving goals will be a natural outcome.

The boss doesn’t put problems on the back burner.   

It’s hard to deny that every business has problems that occur. Sometimes problems come up that are strange in nature, or just downright difficult to deal with. How a boss handles these problems tells a tale of what kind of boss he or she is.

Problems that don’t get handled or addressed often times can end up crushing a team’s drive and success. They’re also a huge distraction to team members because the members often dwell on them, rather than focusing on their work.

When a boss ignores a problem, the employees tend to lose respect for their boss, and without respect from employees, it is very difficult to lead. To avoid all these downfalls, a good boss will address problems as they come up, rather than putting them off. No problem, no matter how big or small, will go away on its own. Go after every problem head on, and continue to be a good boss to your employees.

The boss helps everyone in the organization.

Almost every business has employees that are struggling. Whether it be personal life or work problems, these employees are hurting and it can have a negative impact on their performance.

As the boss, you have a choice to make in this type of situation. You could terminate them from the position so you don’t have to risk your business being hurt from their poor performance. The other option however, is what makes a boss stand out.

A good boss, rather than removing this employee, will put effort into trying to rescue that person instead. Be confident, helpful, reassuring and promise to be there with them through their struggles. You hired these great employees, and when they don’t produce how you expected, it can be very disheartening. A struggling employee has tons of potential and an upside, and helping them get there can be a rewarding experience for both people.

The boss isn’t selfish.  

When employees excel, your business also excels. What makes a good boss is how he or she attributes this success. In a business, success comes from everyone involved in a team. This includes top management (the boss) down to the employees.

Although you are a part of the success, it is important to remember your employees need and deserve the recognition too.

Consistently showing your employees how important they are and not taking credit for the team success will show you are a great and successful boss.

The boss stays humble.   

To your employees, especially newcomers, you are seen as famous. You’re the boss, you’re in charge and you guide your employees to success. So, when an employee wants to chat with you about something even seemingly small, it’s possible he or she just wants to spend time with you.

You’re presented with a choice. You can ignore the employees and move on with your day, or you can take this moment as an opportunity. It could be a chance to motivate and inspire this person. It is important to remember that the higher you rise, the greater the impact you can make on someone’s life. It also means you have more responsibility to make that impact on someone’s life.

Remember that you were once in that lower position and what that was like for you. Remember where you came from, and take time to be a great boss to your employees.


Kickstarter and Its Tax Implications

Need funding to get your idea off the ground? Turning your idea into a Kickstarter project just might be the ticket to getting the funding you need. Just don’t forget about the tax implications of using a fundraising platform such as Kickstarter.

Income Tax

Generally speaking, the funds received through a fundraising platform are reportable as revenue for income tax purposes. That makes sense, right? You’re getting money and most money is taxable.

Sales + Use Tax

If you’re thinking about offering a gift for a contribution (maybe it is the product you are trying to fund), you might create a sales or use tax obligation.

Can’t remember what the difference between sales and use tax is? Click here to find out.

While sales tax typically applies to the sale of goods or select services, use tax typically applies to gifts. So if you’re offering a gift, you may need to pay use tax to the appropriate state. The use tax is generally calculated based on the cost to produce the product, not the retail price.

What’s with typically and generally? Remember, your responsibility to remit sales and use tax depends on whether or not you have created nexus. Doesn’t ring a bell? Click here to find out more.

Let’s take a look at an example. Suppose you live in North Dakota and are doing a Kickstarter project for a new granola bar. Individuals contributing $50 to your project will receive five granola bars, because you’re nice like that. You will be selling the granola bars for $4/bar (retail), however, they cost you $2 to produce. When you gift the granola bars (meaning you take them out of your inventory at $2/bar), you are on the hook to pay use tax to the State of North Dakota in the amount of $2 times the applicable use tax rate.

What if the individual contributing is in Iowa? North Dakota tax still applies.

The Bottom Line

Taxes aren’t easy. If you are thinking about starting a Kickstarter project (or another similar fundraising platform), consider speaking to your tax professionals before you start your project. And remember, you might need both an income tax expert and state and local tax (SALT) expert in your corner. If you don’t have them, we’ve got them and they love this stuff.



Updates to ACA & Why Your Business Should Care

Guest Blog by Shannon Breuer, Partner at Eide Bailly

In the midst of all the other things you have to worry about when you’re running a small business, you may not be thinking about health care. However, with the reporting requirements of the Affordable Care Act (ACA) and the coverage rules, you should be.

The ACA has created a great deal of complexity for businesses, especially if you have 50 or more full-time equivalent employees and/or offer a self-insured health plan. Remember, the determination of whether or not you are an Applicable Large Employer is based on a defined calculation and must include all members of your group…meaning all related companies may need to be included in the count.

Full-time employee: An employee who works 130 hours a month. If you use a 12-month lookback measurement, you need to base your fulltime employees on 1,560 hours (or more) per year.

The ACA calls for large employers to provide affordable, minimum essential coverage, and not complying could lead to penalties. The coverage must be considered affordable for the lowest cost self-only premium. Also, you must offer coverage for dependents, even though there is no affordability requirement. There are some good planning ideas that can come from evaluating your compliance with the ACA so we encourage you to consider doing so.

Even though your business may be small, the ACA is still important to be aware of, especially as you grow.

Here are a few updates you should be keeping in mind:

  • Critical ACA Compliance Test

This rule states that large employers must offer coverage to at least 95 percent of their full-time employees and their dependents. Not doing so will result in penalties, specifically the IRC §4980H(a) penalty, which is the penalty for having no insurance.

Wondering what we mean by penalties? Well the Applicable Large Employer penalty for those who fail to offer group coverage is now up to $2,160 times the number of fulltime employees in excess of 30 employees. If you fail the affordability and/or minimum value test, the penalty increases to $3,240 per employee, but only for those for whom the tests were not met.

  • Employment Status Change

If you have an employee who goes from full time to part time, you may need to continue their coverage following their date of change. Depending on which measurement period method you use, the employee may need to be part time for three full months before they are considered part time under the ACA. Also, these individuals have to have been offered coverage that met minimum value when they were initially hired.

Additionally, someone moving from part time status to full time status may or may not be required to be offered insurance depending on the measurement period selected and the nature of their job requirements.

  • Transitional Relief Gone

The transitional relief for employers with 50-99 employees has expired and now all employers with 50 or more full-time equivalent employees have to be in compliance with the ACA.

  • Signed Waivers

Just because you offer it, doesn’t mean your employees have to use it. However, it is still important employers collect signed waivers from full-time employees that declined coverage. It’s in your best interest to have documentation of signed offer letters for both accepted and declined coverage so there’s a clear paper trail.

So how do you track this?

On forms 1094 and 1095. The deadline for completing and submitting these forms to participants is January 31, 2017. The 1094 and 1095 Forms are due to the Internal Revenue Service by March 31, 2017 if electronically filed or if mailed, by February 28, 2017. If these deadlines are not met, businesses face penalties of at least $250 per employee.

And while it might seem easy, it’s really not. So if you need assistance, we can help.

A version of this post first appeared on EideBailly.com.

What Tax Forms Do I Use?

It’s no surprise that running a business is no easy task. You have to worry about compliance, human resources and of course, that pesky accounting piece too. Another factor that adds to the confusion of running a business is tax filings. Common struggles with tax filings include knowing how to file them, when to file and what forms to use. Fear not: we are here to save the day!

Whether you’re an S-Corp, C-Corp, Partnership or Sole Proprietorship, we’ve got you covered. Not sure which you are? Look here. We’re breaking down what type of forms you need and what they cover.

If you’re an S-Corp…

As an S-Corp, there are five forms you need to focus on.

  1. Form 2553 — Election by a Small Business Corporation – This is the required form to elect to be treated as an S-corporation for income tax purposes. Without filing this form, your business will be considered a C-corporation, partnership, or sole proprietorship for income tax purposes. Generally, it must be filed within 2 1/2 months after the effective date of the S-election or anytime during the preceding year leading up to the effective date. There are provisions for late S-corp election in certain instances.
  2. Form 1120S — US Income Tax Return for an S Corporation – This form includes information on the corporation’s profits and losses, deductions and credits. This is the S-corp’s annual income tax return. It is due on the 15th day of the third month.
  3. Form 7004 — Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns – If you need more time to file income tax, information and other returns, you can file this form for a six-month extension. The due date varies depending on the last day of the corporation’s tax year.
  4. Form 1120W — Estimated Tax for Corporations – Although this form will not apply in most cases, quarterly estimated tax payments must be paid in order to avoid penalties if the total of the taxes on built-in gains, excess net passive income tax and the investment credit recapture tax are more than $500.
  5. Schedule K1– Shareholder’s Share of Income, Deductions, Credits, Etc. – This form is part of the annual income tax filing (Forms 1120s) and will tell each individual shareholder what their portion of the S-corp’s income, deductions and credits of the tax payment is. This activity will be reported on the shareholder’s personal income tax return.

If you’re a C-Corp…

There are four important forms you need to be aware of.

  1. Form 1120 — US Corporation Income Tax Return – This is the annual income tax return filed with the IRS. The corporation’s taxable income will be subjected to the appropriate corporate rates. Any dividends paid to shareholders will also be taxed at the individual level.
  2. Form 7004 — Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns – This form allows for a six-month extension if more time is needed to file income tax. The due date will vary based on the last day of the corporation’s tax year.
  3. Form 1120W — Estimated Tax for Corporations – A C-Corp must make quarterly estimated tax payments if it expects tax for the year to be estimated at $500 or more. If payments are not made by their due date, the C-Corp can face an underpayment penalty.
  4. Form 1099 – DIV-Dividends and Distributions — This form is required to be issued to shareholders for dividends and other distributions on stock of $10 or more.

If you’re a Partnership…

If you are a partnership, the following three forms require your attention.

  1. Form 1065 — US Return of Partnership Income – This form reports income, gains, losses, deductions and credits from the partnership’s operations.
  2. Form 7004 — Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns – Form 7004 will give your business a five month extension to get your returns and paperwork in order. To qualify, this form must be filed by the original due date of Form 1065.
  3. Schedule K1 — Partner’s Share of Income, Deductions, Credits, Etc. – This form serves to tell each partner what their individual portion of the taxable income or loss is. It also states any credits and any other pass-through income and deductions.

If you’re a Sole Proprietorship…

More than likely, you can easily recognize if this is your business. A Sole Proprietorship is owned by a sole proprietor (hence the name) alone.

A Sole Proprietorship utilizes the following four forms.

  1. Form 1040 — US Individual Income Tax Return– One of the most common forms, it is used to report an individuals’ income, gains/losses, deductions and credits. It must be filed by the 15th day of the fourth month.
  2. Schedule C — Profit or Loss from Business (Sole Proprietorship) – This form is to be filed alongside the 1040. It reports the taxable income/loss from the sole proprietorship.
  3. Form 1040ES — Estimated Tax for Individuals – If you expect to owe at least $1000 in tax for the year, after subtracting your withholding and refundable credits, quarterly payments are required in order to avoid underpayment penalties. For more information on estimating tax amounts, check out this blog.
  4. Form 8832 — Entity Classification Election –This form is required to change the entity status of your business. For example, LLCs are not considered corporations by default. (They are classified as partnerships or sole proprietorships for income tax purposes by default.). However, by filing this form, LLCs can choose to be taxed as corporations.

If you have employees…

Having employees working for you is great, but you need to acknowledge these five forms to stay compliant.

  1. Form 940 — Employer’s Annual Federal Unemployment (FUTA) Tax – This is your annual payroll report which will also detail your business’s unemployment taxes. This form is due January 31st.
  2. Form 941– Employer’s Federal Quarterly Tax Return — This form is due quarterly, and reports info on employee withholding and wages.
  3. Form W3 — Transmittal of Wage and Tax Statements — Filed with the Social Security Administration, this form is the transmittal of wage and tax statements. It is due by February 28th.
  4. Form 943 — Employer’s Annual Federal Tax Return for Agricultural Employees – Due quarterly, this form must be filed if there are any agricultural employees within a company.
  5. W2 — Wage and Tax Statement – A form you are probably familiar with, this form must be given to employees at the end of the tax year to report their wages and tax payments made on their behalf. More information can be found here.

Miscellaneous filings

1099s – There is a series of information returns, referred to as 1099s, that all business are required to file to report various types of activity. Examples are 1099-INT to report interest, 1099-DIV to report dividends, 1099-MISC to report rent, non-employee compensation, and various other types of income. The list is goes on and on!

Various state filings — In addition to the common federal forms previously referenced, most states (and some cities) have their own reporting requirements. Common examples are state unemployment, workers’ compensation, sales & use tax, personal property tax, state payroll filings, and state income or franchise tax filings.

Tax season won’t be upon us for a while, but it is never too early to start thinking of what you may need to do to make sure your business is up to date. Sound like a lot to keep track of? We can help!