Tag: Small Business

Mario Armstrong: Cloud Computing, SaaS, Social Media Are Tools for All Small Businesses to Consider

Earlier this week we got the chance to speak with Mario Armstrong, on-air tech contributor for NPR’s Morning Edition and tech contributor to CNN. We discussed several technology issues, including SaaS and social media, for small businesses to consider to mark National Small Business Week.

There you have it! Cloud solutions, SaaS, social media. They’re all important tools for small business owners. You can spend your weekend boning up.

Doing Penance for John Edwards’ Sins: Provision Could Hit “Skilled” S Corp Owners

Long before John Edwards became known as a well-coiffed skirt-chasing weasel, he was a well-coiffed successful trial lawyer. He was successful enough to afford good tax advice, so he conducted his law practice in an S corporation.

Back in the old days, professional practices were conducted as sole proprietorships or general partnerships, reportable as self-employment income, subject to the 15.3% self-employment tax up to the FICA base (currently $106,800), and to the 2.9% Medicare portion of the tax to infinity.


When state laws allowed professionals to incorporate, attorneys and accountants quickly noticed that income on S corporation K-1s is not subject to self-employment tax. This makes S corporations a popular way to run a professional practice. The professionals take a “reasonable” salary out of the business (subject to employer and employee FICA and Medicare tax) – enough to not raise IRS eyebrows – and take the rest out as S corporation distributions with no employment tax.

John Edwards did well by this. His law practice generated millions dollars of K-1 earnings in excess of his salary, saving him hundreds of thousands of dollars in payroll and self-employment tax.

Now that he has been reduced to a wealthy target of mockery, Congress is ready to crack down on the John Edwards S corporation tax shelter. The annual “extenders” bill has a provision – almost as absurd as Edwards love life – that will hit professional S corporation K-1 income with self-employment tax. The SE tax will apply when the “principal asset” of the S corporation is the “reputation and skill” of three or fewer professionals – defined for this purpose as “services in the fields of health, law, lobbying, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, investment advice or management, or brokerage services.”

Congress doesn’t muss its hair worrying about how taxpayers in multi-owner S corporations are supposed to figure out whether its “principal asset” is the “reputation and skill” of three or fewer owners. However it works, this provision is too late to hurt John Edwards — his reputation isn’t much of an asset anymore.

Joe Kristan is a shareholder of Roth & Company, P.C. in Des Moines, Iowa, author of the Tax Update Blog and Going Concern contributor. You can see all of his posts for GC here.

Small Businesses Lead on Long-term Job Growth

This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

If you harbored any doubts about the importance of small businesses to job growth, then you should consider the results of new research looking at payroll data over the past ten years. The clear conclusion is that the lion’s share of employment growth over the long term has happened at establishments employing fewer than 50 people.

But the implications for our current economic situation are disturbing.


The research, from Case Western Reserve’s Scott Shane, looked at data collected from Automated Data Processing’s monthly employment numbers from 2000 to 2010. The numbers are broken down into three categories: establishments with 1-49, 50-499, and more than 499 employees. By establishment, ADP means “a single physical location where business transactions take place and for which payroll and employment records are kept.”

According to Shane’s analysis, the most job loss has occurred at the bigger establishments. For example, in March 2010, the biggest folks employed 84.3 percent of the people who worked for them in December 2000. As for establishments with 50 to 499 workers, they employed 93.6 percent of those who worked for them over that same time period.

But, for the smallest establishments, the story is startlingly different. They now employ 103.5 percent of the people they employed in December 2000.

Then, there’s a study from the Ewing Marion Kauffman Foundation I wrote about recently. It showed that high-growth companies that are three -to- five years old account for about 10 percent of new jobs in any given year, although they make up less than one percent of all businesses.

But, if small establishments and so-called gazelle firms are so important to job growth, then the latest data from the National Federation of Independent Business, reported on by my colleague Stephen Taub, is especially sobering. The findings showed continued decreases in hiring and flat growth in capital expenditures.

It all has urgent implications for government policy. Given the importance of fast-growing young firms, in particular, to employment creation, the wisest policies would be those that support these promising, three-to-five year old businesses. Something has to be done to get our engine of employment creation back on track.

Small Business Still Not Showing Signs of Life

This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

Don’t look for small businesses to lead the economic recovery.

The monthly reading from the National Federation of Independent Business Index of Small Business Optimism clearly shows little optimism among small business.


Sure, nine of the 10 components that comprise the index rose from the prior month.

However, some of the critical factors that would indicate whether small business owners plan to invest in their firms did not show encouraging results. The NFIB’s job measures barely moved and capital expenditure plans were flat.

More specifically, according to the survey average employment per firm was negative in April. What’s more, since July 2008 employment per firm has fallen steadily each quarter, logging the largest reductions in the survey’s 35-year history.

If small business is key to job growth – as some pundits think – then this does not bode well for our economy.

And the jobs small businesses create are not exactly great ones. They are more likely to come without benefits and less time off for vacation.

Meanwhile, the Index does not suggest that small businesses will be investing heavily in non-personnel. It noted that plans to make capital expenditures over the next few months were unchanged from the prior month and its reading is only slightly above the 35-year record low.

Yikes!

The survey also noted that small business owners continued to liquidate inventories and weak sales trends gave little reason to order new stock. In fact, more owners plan to reduce stocks than plan new orders, according to the NFIB.

Meanwhile, regular borrowers continued to report difficulties in arranging credit. “Historically weak plans to make capital expenditures, to add to inventory and expand operations also make it clear that many borrowers are simply on the sidelines, waiting for a good reason to make capital outlays and order inventory that requires businesses to take out the usual loans used to support these activities,” the report notes.

Obviously, small businesses are not going to turn this economy around any time soon.

Small Businesses Need Accounting Help + Accountants Want Opportunities = This Should Be Easy

With all the uncertainty out there, more and more small businesses are cropping up. As anyone who has started their own business knows, there are plenty of decisions to be made, including your accounting method. While that answer may come easy, at some point small business owners have to ask themselves honestly A) Do I know squat about accounting? B) If no, do I hire someone full time or do I contract the work out as needed?


First, if you’re not versed in accounting and taxes are you really going to take the time to learn everything you need to know at the behest of growing and refining your business? Have you seen the tax code? You want to take advantage of everything you can, right? Best to call an expert.

Secondly, if you do decide to get some help, are you willing to pay for someone to keep the books, file tax forms, manage the payroll, etc. etc. full time? Are you going to pay them a salary, benefits, supplement their daycare, give them vacation? If you’ve got the resources to bring someone on, that’s great, start interviewing people. But what if you’re still in the early stages? Finding a CPA firm that can provide those crucial services for you can save a lot of headaches.

On the other hand, if you are already an accountant, maybe this growth in small businesses is your opportunity to get a little entrepreneurial yourself. CPA firms are the most profitable small businesses out there and somebody has to help those business owners keep their debits, credits and tax forms straight; it might as well be you.

It Was a Dark and Stormy Night…or: Cloud Computing and SaaS Briefly Explained

Figuring out how to sum up Cloud Computing and Software as a service (SaaS) in the space of ~800 words would absolutely require the biggest, puffiest, most cumulus metaphor that ever precipitated understanding over the dry, barren plains of ignorance EVER! Something like….

king Business Applications By Storm, or
– Burning off the Fog Around Cloud Computing, or
– Cloud Computing goes from Light Showers to Torrential Downpour, or even
– Quit Jiiiivin’ Me Turkey, You Got to SaaS it! (a Turkey is a bad person)

Why?

Because this thing is growing like a Class 5 Hurricane sucking up warm air over the Gulf of Mexico in mid-September, and you’re in the eye of the storm baby!


Enough! I can’t… I just can’t brew up another hackneyed metaphor!

All joking aside, Cloud Computing and SaaS are now “required reading” if you’re even remotely involved with technology (i.e. you use a computer). I can help you understand this stuff better, but first some disclosure:

I work for a SaaS company. My paycheck depends upon acceptance of this technology.

If you can accept this embedded bias, I’ll try to suppress any overt advocacy while providing a synopsis of this space over the course of the next few weeks. Call it Saas 101.

So, what is it?

We’ll get into this in more detail soon because there’s more to it, but very simply:

Software as a Service – A software application that you access online without having to download anything to your computer.

Cloud Computing – Provides computing power and data storage on an “as needed” basis much the same way as a public utility provides electricity.

Why should you care?

At the very least, you should care because you are already using this stuff for personal web activities (e.g. Facebook – think privacy, Twitter, LinkedIn, Gmail, etc). And I’ll bet you dollars to donuts that the next software sourcing project your company undertakes will include Cloud and Saas representation.

This is a bet I’ll win because even the big, established players in the software world like IBM, Oracle, SAP, and Microsoft are running to try and get in front of this thing on the business side.

You want to know about this.

Where did it come from?

How did Software as a Service and Cloud Computing as we know it come about?

Well, what’s in a word?

Again, there’s more to it, but without rekindling the internecine nerd-fighting I think tracing the roots of this movement back to Marc Benioff, the founder, Chairman & CEO of Salesforce.com is not unreasonable for our purposes. He was arguably the most vocal advocate for looking at software delivery in a new way back before this stuff HAD a name. Salesforce.com launched as an unknown start-up back in 1999 and is now one of the leading CRM (Customer Relationship Management) products Cloud or otherwise and is traded on NYSE with a market cap of over $10 Billion.

Along with another early entrant, Netsuite, these guys let the genie out of the bottle. Interestingly, both companies have deep, deep roots back into Oracle Corp., Oracle, a company that, according to Oracle, “would change the face of business computing forever.” I don’t dispute the claim though. And I would take it one further saying, the apple doesn’t fall far from the tree.

The Rain Fell in Torrents…

The creation of Salesforce and Netsuite were both extremely capital intensive. In order to host their customers (i.e. users of the software), tens of millions of dollars were required to build the data center infrastructure. You’re not required to buy servers and hardware, so where do you think all your data is residing? In a cloud? We haven’t advanced that far.

But we have advanced.

Today companies building Cloud apps don’t tend to build their own data centers, at least not right off the hop. Another important innovation in Cloud comes from companies like Amazon. Apart from books, Amazon has a whole other line of business providing computer infrastructure on a rental basis. It’s like a power grid for computing.

This changes the business model for companies who build software in the same way these Cloud app companies are changing things for you.

Suddenly, your IT goes from being a Fixed Cost to a Variable Cost.

More next week.

Enjoy!

Geoff Devereux as been active in Vancouver’s technology start-up community for the past 5 years. He regularly attends and contributes to the growing entrepreneurial ecosystem in the city through the Vancouver Enterprise Forum, guest blogging on Techvibes.com, and as a mentor with ISS of BC. Prior to getting lured into tech start-ups, Geoff worked in various fields including a 5 year stint in a tax accounting firm. He is currently working in a marketing/social media role with Indicee, a Saas Business Intelligence company, bringing B.I. to mere mortals.

Don’t Get That Excited About the Growth in SBA Loans

This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

It’s time to dial down all the fuss about SBA loans.

First, there are the reports about increases in SBA loan dollar volume, thanks to the stimulus bill. For example, according to the SBA, over a period of about a year, average weekly loan dollar volumes increased more than 90 percent in the two most popular programs, 7(a) and 504, from the average before the passage of the stimulus bill. 7(a) loans can be used for such purposes as working capital and the purchase of equipment, while 504 provides long-term, fixed-rate financing for buying real estate and other fixed assets used for expansion or modernization.


But, a recent analysis by Scott Shane, professor of entrepreneurial studies at Case Western Reserve, shows this conclusion should be taken with a big pitcher of salt. According to Shane, the level of growth is only impressive when compared to the previous year’s poor results. That is, in 2009, the volume was about $180,000,000. So, the approximately $300,000,000 for the first 27 weeks of the 2010 fiscal year represents a big jump. But compared to, say, 2006 and 2007, it’s about the same.

Then, there’s the more important matter of just how many small businesses get SBA loans in the first place. The answer is: Not many. Take the 7(a) program, which comprises 90 percent of SBA loans. According to Shane, last year, less than one percent of small businesses with employees received one of these babies. If you look at non-employer businesses, which comprise the majority of all small companies, their share was between one tenth and one twentieth of one percent–about 50,000 small businesses out of 29.6 million.

Of course, 2009 was a lousy year. But, the data still suggests that all the attention being given to the SBA-loan program may not be warranted. That, in turn, has some pretty serious implications for government policy. Those businesses that got SBA loans undoubtedly were helped, possibly increasing their sales and, perhaps, their hiring. But, to reach more companies, the programs just aren’t enough. Another approach is needed to help the vast majority of businesses that don’t use these loans at all.

Deciding Between the Cash and Accrual Methods of Accounting

While the IFRS v. U.S. GAAP rages (or stalls) a far simpler (yet no less important) decision with regard to accounting methods is considered by many small businesses every year.

The cash versus accrual decision is one that all businesses have to make but small businesses have to make and depending on an entrepreneur’s familiarity with the issue, this could be a very simple decision or a “HELP!” moment.
, a quick refresher:

Cash – You get cash; you record the transaction. You pay cash, you record the transaction. Simple.

Accrual – This is what your copy of Kieso, Weygandt, & Warfield harped on in college. Accounts receivable, accounts payable, deferrals, revenue is recorded when earned; expenses are recorded when incurred, the matching principle, you know the drill.

Before we get to the pros, let’s consider a simple example. If you and some friends want to pool your money together and buy a piece of commercial property, it doesn’t make a lot of sense to go the accrual route. Your tenants pay rent, you record revenue. You pay for supplies to make improvements, you record the expense. In general, don’t make something complicated that is inherently easy.

However, depending on the entity structure of your business, you may be disqualified from using the cash method. Generally, C Corporations, partnership with one C Corp partner, and tax shelters are not allowed to use the cash method. So if any of these apply, hello accrual.

Enough with the elementary crap though, amiright? Thought so. To get some additional insight, we called on a couple of partners who have no problem sharing their opinions: Scott Heintzelman of McKonly & Asbury in Camp Hill, PA and our own Joe Kristan of Roth & Company, P.C. in Des Moines, IA.

Since Scott is effectively the visitors, he’ll get first at bat. He told us that he encourages clients to adopt accrual right away for three reasons:

1) Fewer surprises. I just met with a prospect and the number 1 frustration they had about [their] prior accountant was that CPA encouraged [c]ash but things fell wrong that next year and they got killed with a tax liability.

2) It helps to prevents “games” being played with year end cash receipts and cash disbursements.

3) It helps the company to think like a “grown up” business. Too often a small business thinks and acts small (cash basis is thinking little) when I encourage them to think bigger.

So, according to Scott, if you’re thinking about getting into business you should think BIG, thus, accrual is the way to go.

Is it that simple? Well, maybe but Joe has some other considerations including – what else – taxes, “For tax, cash is normally preferred because of the ability to control taxable income at year-end. Farmers are notorious for stocking up on feed at year-end to manage taxable income, but being able to manage income by paying off A/P at year end is useful for anybody.”

Of course, the more complex your business gets, the cash method is less available:

Where it becomes a disadvantage is in mixed structures or large entities. If you have related entities doing business with one another, accrual is nice because you eliminate a lot of Sec. 267 related party problems. You don’t have to worry about paying a related party for A/P by year-end to get the deduction because they have to accrue the income.

For a simple structure without a lot of related entities, you will want to do your tax returns on a cash basis. As the structure gets more complicated, accrual method becomes more attractive, and likely mandatory under Sec. 448 or in medium to large entities with inventories.

But for anyone that has to produce GAAP financial statements Joe concedes, “I have no idea why anybody would be cash basis. You can’t be GAAP on a cash basis, and lenders don’t like that.”

The lesson? Like everything in this world, it depends. Do you have a complex entity structure with several related parties engaging in business? Accrual might be better. If you want to be the next Google (or even a fraction of Google), then you might as well be on accrual. If your bank requires GAAP financials to get a loan, you’ll be on accrual.

But on the other hand, if you’ve got no use for GAAP and a simple business not looking to get crazy, the cash method may be the way to go. If you’re still nervous about checking one box or the other, don’t worry, nothing is written in stone. Just consult your business or tax advisor and they’ll help you figure this out. Anyone got more advice? Feel free to chime in.

PwC Report: Venture Capital Activity in New York Jumps While Silicon Valley Sees a Slide

This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

Silicon Valley is still central headquarters for venture capital activity in the US. But it looks like the New York City area is trying to play catch up.

A new report shows an increase in the region both in the amount of startup funding and the number of deals for two consecutive quarters, while activity in Silicon Valley dropped.


The report, from PricewaterhouseCoopers and the National Venture Capital Association, found that financing for companies in and around the Big Apple increased to $566 million in the first quarter. That was an 18.9 percent rise from the previous quarter, also a 34 percent year-over-year increase. A total of 75 firms received money in the first quarter, up 13.6 percent.

In Silicon Valley the story was very different. Investment dollars and numbers still won out over New York, of course. But the trend was down. Total funding of $1.5 billion in the first quarter represented a 21.4 percent drop from the fourth quarter 2009, while the number of deals fell 24.6 percent over the same period.

Overall share of VC money also rose in New York and fell in Silicon Valley. In New York, it reached 12 percent, up from 9.2 percent in the fourth quarter 2009, compared to 32.3 percent for Silicon Valley, down from 37.5 percent.

This New York- area investment growth reflects recent efforts by venture capitalists and the New York City government to rev up funding.

A few examples:

Last spring, New York law firm Lowenstein Sandler started First Growth Venture Network, which provides mentoring for newbie CEOs from venture capital firms, angels and more-seasoned executives.

Last fall, they announced the first 15 CEO mentees. Late last year, seven successful entrepreneurs launched the Founder Collective to make $50,000 to $1 million investments in very early-stage ventures in New York, as well as the Boston area.

In early 2009, NYC Seed, a partnership of venture capital, non-profits and universities, made its first investments in several seed-stage ventures.

Last week, I wrote about trends in angel investing and noted that such financing provides more money for startups than venture capital. Still, although VCs invest in a small percentage of all new companies, they do support enterprises with potential to become real powerhouses. So, the New York area economy clearly benefits both in the short and long-term from this financing activity.

Although it’s doubtful these firms will ever match the contribution in tax dollars and jobs provided by Wall Street.