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    Archive for February, 2014

    Posted by Bernie Dietz
    Categories: Virginia limited liability companies

    An Operating Agreement is the name we give a legal contract for a limited liability company.  That contract covers all of the details about your LLC, including who the owners are, what percentage of the LLC they each own, how the LLC will be managed on a day-to-day basis, and how new Members will be added and current Members allowed to leave.  These details are very important, even if you are the only owner of your Virginia LLC.

    For example, how will you prove that you own your LLC so you can open a bank account?  Your name as owner is not in the Articles of Organization filed with the State Corporation Commission.  And how will you show that you respected the separate legal nature of the LLC if you get into trouble and a creditor is trying to pierce through the veil of limited liability protection?  And will the default laws of Virginia for LLC’s be sufficient for how you want to make decisions for your LLC?  Without an Operating Agreement, the Virginia Limited Liability Company Act will control the things that happen to your LLC.

    So yes, it’s important (and useful) to have an Operating Agreement even if you’re the only owner.  It can be short and simple and doesn’t need to include confusing legalese.

    Posted: February 18th, 2014 at 11:42 am | | Email Post |
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    Posted by Bernie Dietz
    Categories: FAQ

    When you’re operating your business there’s almost a limitless amount of different numbers, ratios, percentages, and measurements available to you (assuming you keep good books and records, which you should of course).  Gross revenue, net revenue, total costs, percentage annual growth, total number of customers, etc. etc. etc.  But at the end of the day, for all businesses, sooner or later, there is only one number that really matters: profit.

    I define profit as simply the amount of money that remains for the owners after all of the expenses of the business have been paid.  If you don’t have a positive number for your profit then it doesn’t really matter what your gross revenue is (you can bring in a million dollars a day but if it costs you two million dollars a day to do so, you won’t be in business long) or what your customer growth rate is (a fast growth rate when you lose money on each customer is just accelerating towards bankruptcy), or anything else.  The fact is that if you can’t generate a profit before you run out of your available capital then you only have two options: (1) raise more capital, either through investments or loans, or (2) shut it down.  So while certain metrics and number trends may be exciting, don’t forget to keep your eye on the one number that matters. And make sure you’re always taking steps to improve it.  It’s what will allow you to stay in business and thrive.

    Posted: February 13th, 2014 at 4:43 pm | | Email Post |
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    Posted by Bernie Dietz
    Categories: FAQ

    Nope. No. Definitely not.  You should not use your social security as the tax ID number for your single owner LLC in Virginia.  Yes, I know, the IRS allows you to do that.  They do not require a single owner LLC to obtain a separate Employer Identification Number (EIN)   and they will allow you to just use your social security number.  But it’s a bad idea.

    It’s a bad idea because of the risk of identity theft.  As you grow your business, your tax ID number for your LLC will have to be shared with many different people and companies; vendors, customers, suppliers, and the list goes on.  You do not want to have your social security number floating out there everywhere.  So get an EIN from the IRS for your LLC.  It’s free and available online.  And then use that as your tax ID number and keep your social security number private.

    Posted: February 6th, 2014 at 2:31 pm | | Email Post |
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    Posted by Bernie Dietz
    Categories: FAQ

    When you hire someone to help you with your business, they are classified as either an “employee” or an “independent contractor” for tax purposes.  Knowing which classification applies is important to you because it lets you know what taxes to withhold, if any, and what tax forms to file.

    From your perspective as the hiring company, the main difference between the two is that you are not responsible for payroll taxes for independent contractors while you are (and must pay the other half of social security and Medicare) for employees.  So looking at it strictly from a financial perspective, you save money when you have independent contractors rather than employees.  Unfortunately, the decision regarding which classification you choose is not solely up to you.  The IRS has the ultimate say and can “reclassify” your workers if they disagree with your assessment (and, of course, can assess penalties if they decide your independent contractors are actually employees).

    The IRS looks at three things when they evaluate whether a worker should be classified as an employee or an independent contractor:

    1. Behavioral Control.  This relates to whether your company has the right to control how the work to be done is actually done.
    2. Financial Control.  This relates to whether your company has the right to control the financial and business aspects of the worker’s job.
    3. Type of Relationship.  This relates to how you and your worker perceive your relationship.

    Basically, the more control you have over your worker – telling them where to be, when to be there, and what and how to do their job – the more likely they will be considered an employee.  Independent contractors are, not surprisingly, independent and can choose when they work, where they work, and how they get the work done.  They also frequently have more than one source of income (i.e. you’re not the only one they work for), use their own tools and equipment to get the job done, and operate under an entity rather than individually as a sole proprietorship.  If you plan on working with someone as an independent contractor then it is very important (and can help you if the IRS looks into your situation) to have a written independent contractor agreement.

    The IRS web site has more information on the analysis of the independent contractor versus employee issue and offers tips to help you decide.  When bringing on someone new to help with your business, it’s important to look closely at the factors so that you choose correctly.


    Posted: February 5th, 2014 at 5:34 pm | | Email Post |
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