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Success Is Your Business

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Emotional Intelligence in the Workplace
Are You Collecting the Data You Need to Run Your Business?
Five Reasons To Pay Attention To CRM Software
Warning Signs of a Company in Trouble
Working Capital Analysis

Success Is Your Business

I am going away from talking about traditional cash flow analysis this week. I was recently at a meeting with Larry Tyler of Metro Bank here is Houston. Larry was the guest speaker talking about how proper cash flow management can make a business successful. He then discussed how  business owners need to look beyond the financial numbers and look in the mirror to find out how their personal beliefs can affect the cash flow of their companies. Furthermore, Larry pointed out the reason business owners need to look in the mirror is that their personal values are going to make their businesses successful.

Success Philosophies

Larry was kind enough to put together that a business owner understand and believe some of the following points and philosophies that make success is your business a reality.

  1. Everybody in is a salesperson.
  2. Are you a salesperson in business, or are you a business owner making sales?
  3. You will not reach your potential as a sales professional until you answer the question, and answer it correctly! The Law of the Shareholder demands that you do.
  4. The Law of the Shareholder says that the most successful salespeople buy stock in themselves, they adopt a “CEO mindset” where they see themselves as a business owner making sales with a compelling vision to help people and they begin to stop thinking of themselves as an employee.
  5. The life of us lives in the life within the limits of our own thinking.

A Contract in Thinking

                           A Contrast in Thinking

Salesperson ThinkingCEO Thinking

Pays only for what can be reimbursed   Invest money to make money

Calls on anybody   Calls on the right body

Reacts to interruptions    Makes sure interruptions don’t occur

Keeps safe clients   Terminates unprofitable relationships
Is busy and action oriented   Is productive and results focused 
Thinks quantity is more important   Knows quality creates more quantity

Puts profits before people   Puts people before profits 

Puts revenue before reputation             Puts reputation before revenue

Builds business ahead of capacity   Builds capacity ahead of business 

Prioritizes schedules                      Schedules priorities

Is short-term oriented                     Is long-term oriented

Relies on quick turnaround                 Relies on clients’ trust

Succeeds by accident                       Succeeds by design


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S Corporation vs C Corporation

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S Corporation
C Corporation
Limited Liability Company (LLC)

S Corporation vs C Corporation

Although these two entities are very similar, there has always been a debate between an S corporation vs C corporation. The S corporation vs C corporation debate has been ongoing for a while. The following are some major differences that exist which may help an entity choose the proper class of corporation.

Double Taxation

In a C corporation, the entity is forced to pay Federal Income Taxes at the entity level and again at the individual level when it distributes dividends to its shareholders. This double taxation is a huge disadvantage to the C corporation. It acts as a flow through entity much like a partnership. Each individual is only taxed on their earnings from the s corp at the individual level on schedule E of the IRS form 1040.

# of Shareholders

An S corporation can only have 100 shareholders total. This is good if it is a smaller company. However, for larger companies, this is simply not possible because of the amount of cash flow needed to finance a larger corporation. Consider all family members within the S corporation as only one shareholder. This means that there is a way in which there could be more than 100 shareholders. It also means that S corporation holders can increase their interest in the business without losing the status of an S corp.

Forms of Stock

C corps can issue several different forms of stock to obtain financing for its operations. In comparison, an S corporation can only have one class of stock. The C corporation’s advantage is that it has the ability to issue preferred shares or other classes depending on its needs.

Type of Company

You can form S corps only after you set a company as a C corp or a Limited Liability Company (LLC). This is a disadvantage for entities that would like the S corporation status (i.e. partnerships because of the similarities between the two).

Note: This is by no means all of the S corporation and C corporation differences. However, our list includes some of the main ones that influence a company to go one way or another.

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s corporation vs c corporation

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s corporation vs c corporation

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S Corporation

An S corporation (S-Corp), also called a subchapter S corporation, is a type of business organization that is structured like a corporation but taxed like a partnership. Find the applicable law in Chapter 1, Subchapter S, of the Internal Revenue Code. S-corps do not have to pay corporate income taxes. Instead, include the company’s profits and losses in the tax filings of the individual shareholders. To qualify as an S-corp, a company must be a domestic entity. The company must also have no more than 100 shareholders. The company must meet other specific requirements.

Advantages and Disadvantages of a S Corporation (S-Corp)

The primary advantage of the S-corp is the tax benefit. S-corps do not have to pay corporate income taxes. Also, it offers owners limited liability protection with the S-corp status. On the other hand, establishing an S-corp can involve significant legal and accounting costs. And S-corps are only allowed to issue one type of stock (typically common stock), which can limit the entity’s ability to raise capital.

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S corporation, S-Corp
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S corporation, S-Corp

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General Partnership
Limited Partnership
Sole Proprietorship

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Retained Earnings

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Accounting Income vs Economic Income
Realized and Unrealized Gains and Losses
Operating Income
Overhead Definition

Retained Earnings

Retained earnings (RE) refers to the portion of a company’s net income that is reinvested in the company. It is also the amount of profit left over after the company pays dividends to its stockholders.

Record RE in the owners’ equity section of the balance sheet. The account is cumulative. So, add profits and subtract losses from the account each accounting period. The RE account links the income statement and the balance sheet. If the account is negative, then it is either accumulated deficit, accumulated losses, or retained losses.

Calculating Retained Earnings

To calculate retained earnings, start with the value of the RE account from the previous period. Then add net income for the period and subtract dividends paid. In conclusion, the result is the new value of this account.

New RE = Prior RE + Net IncomeDividends 

If you want to add more value to your organization, then click here to download the Know Your Economics Worksheet.

retained earnings

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NPV vs Payback Method

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Payback Period Method
Bailout Payback Method
Rule of 72

NPV vs Payback Method

NPV (Net Present Value) is calculated in terms of currency while Payback method refers to the period of time required for the return on an investment to repay the total initial investment. Payback, NPV and many other measurements form a number of solutions to evaluate project value.

Payback method, vs NPV method, has limitations for its use because it does not properly account for the time value of money, inflation, risk, financing or other important considerations. While NPV method considers time value and it gives a direct measure of the dollar benefit on a present value basis of the project to the firm’s shareholders. NPV is the best single measure of profitability.

Payback vs NPV ignores any benefits that occur after the payback period. It also does not measure total incomes. An implicit assumption in the use of payback period is that returns to the investment continue after payback period. Payback method does not specify any required comparison to other investments or investment decision making. It indicates the maximum acceptable period for the investment. While NPV measures the total dollar value of project benefits. NPV, payback period fully considered, is the better way to compare with different investment projects. If you’re looking to sell your company in the near future, download the free Top 10 Destroyers of Value whitepaper to learn how to maximize your value.

NPV vs Payback method

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NPV vs Payback method

For additional information on NPV, please read Net Present Value Method.

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Keep Your Corporate Veil Closed

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Ten In-House Secrets for Reducing Your Company’s Legal Costs
Secrets of Successful Out of Court Debt Restructures
Tips on How to Manage your Lawyer
Relationship With Your Lender
Debtor in Possession
Corporate Veil

How to Keep Your Corporate Veil Closed

The State of Texas has long prided itself in being a very corporate friendly state. Laws were created that made it extremely difficult to pierce the corporate veil and impose corporate liabilities upon its individual shareholders, officers, directors, parent companies and subsidiaries. However, in recent years, this protection has started to recede through an emerging legal theory called the “single business enterprise.” This doctrine creates a path for litigants to go beyond the company directly liable for its damages and reach other companies formerly protected.

This article focuses briefly upon the history of the corporate veil in Texas, the current status of the law under the “single business enterprise” theory, and finally on some tips to keep your companies separate to avoid joint liability. Before we go into how to keep your corporate veil closed, let’s get the background of the corporate veil.

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The Corporate Veil

The corporate veil has long existed in Texas. However, in 1986, in the landmark case of Castleberry v. Branscum, the Texas Supreme Court set out various methods available to pierce the corporate veil and hold individuals liable for the acts of their corporations. Among those mechanisms was the theory of alter ego. “Alter ego applies when there is such unity between corporation and individual that the separateness of the corporation has ceased and holding only the corporation liable would result in injustice.”

Castleberry v. Branscum

The legislature was quick to react to the very unpopular holding in Castleberry. In 1989, they passed several amendments to Texas Business Corporation Act that limited Castleberry to tort claims. It also provided that for contract claims the corporate fiction will not be disregarded unless there is a showing of actual fraud.

In 1996, the legislature extended that coverage to all contractual obligations of the corporation and any matters relating to or arising from the obligation. If a particular claim against a corporation falls within a contractual cause of action, then the veil may not be pierced absent a showing of actual fraud. The commentary following the 1996 amendments suggests that the actual fraud requirement should be applied, by analogy, to tort claims. This is especially true for those those arising from contractual obligations. Under Section 2.21 of the Texas Business Corporation Act, the person attempting to pierce the corporate veil must show the following:

(1) actual fraud (which has six independent elements);

(2) in relation to the specific transaction; and

(3) primarily for the direct personal benefit of the shareholder.

The Comments to this section note that this language “reflects public policy that the corporate fiction should be recognized absent compelling circumstances to the contrary.”

The strength of the protection afforded by § 2.21 was long recognized by Texas Courts. Under the Act, a plaintiff seeking to pierce the corporate veil must prove actual fraud which involves dishonesty of purpose or intent to deceive.

Importance of the Corporate Veil

The corporate veil is extremely important in keeping the debts and liabilities of one company inside that company. It is a shield that protects not only the officers, directors, and shareholders of a company, but also other commonly owned and operated companies. The shield protects parent companies for the acts of its subsidiaries, and vice versa. It is the insurance that most business owners rely upon in continuing to make business decisions and take risk. Without this protection, most individuals and small businesses cannot afford the risk of doing business and its associated potential liabilities.

The Single Business Enterprise

“The ‘single business enterprise’ theory involves corporations that ‘integrate their resources to achieve a common business purpose…’ In determining whether two corporations were not maintained as separate entities, the court will consider the following factors: (1) common employees; (2) common offices; (3) centralized accounting; (4) payment of wages by one corporation to another corporation’s employees; (5) common business name; (6) services rendered by the employees of one corporation on behalf of another corporation; (7) undocumented transfers of fund between corporations; and (8) unclear allocation of profits and losses between corporations.” Superior Derrick Servs. v. Anderson, 831 S.W.2d 868, 874 (Tex. App. – Houston (14th Dist.) 1992, writ denied).

Conspicuously missing from this list of elements is a showing of any kind of fraud.

Single Business Enterprise Theory

First, it is important to note that the Texas Supreme Court has yet to adopt the single business enterprise theory as a mechanism of applying the liability of one company to that of another. However, the intermediate courts of appeals in Texas have not only adopted it, but are actively using it to spread liability between companies. And while the Texas Supreme Court, even as recently as 2007 in PHC-Minden, L.P. v. Kimberly-Clark Corp., noted that it has yet to formally adopt this theory, by not issuing an express holding renouncing or rejecting the theory, it remains alive and kicking at the trial courts and appellate levels of litigation (where most litigation occurs).

Example 1

Consider the following example: Company X buys and sells goods for consumption inside the United States. Over the years, it develops an international market; however, because of the increased risk in dealing with a variety of international issues, the owners of Company X create a new company, Company X International to handle the international aspect of the business. Both companies are run from the same location, and while most of their employees are separate, they do share the same in house accounting, human resources, and legal departments. Those employees are all paid by Company X. There is no accounting of Company X International reimbursing for those expenses. And while the two companies have separate bank accounts and separate books of account, they can freely transfer money between the two companies to cover a variety of costs.

This example is not unlike how many businesses run their subsidiaries or sister corporations. It happens every day at every level of business. However, Company X and Company X International meet every element of a single business enterprise. If anything were to happen to Company X International, exposing it to losses, the original Company X is just a liable.

Example 2

Consider a bigger example: a large oil, telecommunications, or computer company. While there may be one large parent (imagine Exxon Mobile, AT&T, or the like), there are hundreds of subsidiaries. But, there are common owners, common names, shared employees, shared expenses, and an unclear allocation of profits between the many companies. They created these subsidiaries to protect the larger parent. This also protects other related companies from devastation should any of the others go under. Under the current status of Texas law, those protections no longer exist.

Avoiding Common Liability

The answer to this seems somewhat obvious: keep everything separate. Probably the most important area for separateness is in the financial arena. Document all transfers between the companies. Don’t be afraid to have inter-company contracts (i.e. lease agreements, notes, and contribution agreements). Allocate expenses (including salaries) between the companies so that each pays its share. Have policies in place and in practice keeping everything about the businesses separate. Consider having separate boards of directors and offices if that is practical. The problem is that this is not always convenient or practical for many commonly owned companies. Therefore, remember, the more you separate, the better off you are.

There are no promises in litigation. There is also nothing anyone can do to ensure that they won’t be sued. However, there are things you can do to help make sure you win you case. The more prepared you are for these kinds of issues, the more protection you have.

Keep your corporate veil closed

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Choose a CPA or Auditor

Choose a CPA or Auditor

Do you choose a CPA or auditor? Any company whose stock is sold to the public is subject to the reporting requirements of the Securities & Exchange Commission, which include having its financial statements audited by an independent certified public accountant. Whereas companies, whose stock is not sold to the public, are not subject to such reporting requirements. But many such companies have an annual audit of their financial statements performed because one of the following may require it:

Owners may require one to satisfy themselves that the data provided by the company’s financial staff is “materially correct.”

It should be understood that an audit does not guarantee that the financial statements are 100 percent “correct” but rather that they are “materially correct and not misleading.” Also, the audit is not intended to detect fraud.

Selecting an Auditor or CPA

Selecting an auditor (CPA) is an important task for a company, as the CPA can be a valuable resource for information, and such relationships generally last for years. But privately-owned companies rarely use the 4 largest international (Big 4) certified public accounting firms; particularly if the company revenues are under $100 million. This is because the fees commanded by these firms who perform most of the audits of the world’s publicly owned companies would be too expensive.

Factors to Consider When You Choose a CPA or Auditor

Consider the following factors when choosing from the remaining firms:

  • The nature of the company’s operations – multi-national, multi-state, or multi-location within a state
  • Company plans for expansion, potential future debt placements, and IPOs
  • Experience of the CPA in company’s industry, particularly that of the local office staff’s experience
  • Size of CPA and its impact on ability of CPA to meet company reporting requirements, such as timetables and contractual deadlines
  • Compatibility of CPA staff with company culture
  • CPA’s reputation within the local business community, particularly the company’s bankers, trade creditors, or other debt holders
  • References from existing and former clients
  • Potential for year-to-year stability of staff assigned to your account
  • Tax experience in company’s industry
  • Composition of CPA’s staff assigned to account
  • Distribution of CPA’s businessaudits, write-up, tax
  • Willingness of CPA to utilize company staff to minimize annual audit and tax return preparation fees
  • Audit fee charged

Keep in mind that Bigger does not necessarily mean BETTER SERVICE for your company.

Determine which CPA or auditor are the right fit for your company using our 5 Guiding Principles For Recruiting a Star-Quality Team.

choose a cpa or auditor

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choose a cpa or auditor

See Also:

How to Control Audit Fees
How to Hire a CFO Controller
American Institute of Certified Public Accountants – AICPA
How to Control Annual Audit Fees
Certified Public Accountant (CPA)

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