Tag Archives: accounting blog

Buy-Sell Agreements: Are You Prepared?

Business scenario: Fifteen years ago, I and three others started a business. We had our corporate attorney draft a buy-sell agreement which we all signed.Fast forward to current day. A triggering event occurs (a member quits, is voted out due to lack of performance, retires, becomes disabled, is going through bankruptcy, is having a divorce, etc.), what happens? Our buy-sell agreement was never updated, so what happens is dependent upon what the agreement stated 15 years ago.

In this specific case, there are a number of variables that can drastically affect the outcome of the situation at hand. If there is a shareholder dispute, the process will be fairly lengthy as a result of involving multiple attorneys and the appeals process. Who owns the stock during this timeframe? Does the former shareholder, who feels was voted out of the business unfairly, still get distributions during the lengthy appeals process?

Or, what if a member is going through a divorce, the ex-spouse wants part of the other spouse’s percentage of ownership in the business. Does the buy-sell agreement limit this from happening?

If life insurance policies are in place on each of the owners in case a triggering event occurs. Will the proceeds from the policies be enough to purchase the interest of the departing owner? Does the policy amount cover the total value of the departing member’s interest? If not, what other funding vehicle is going to be to purchase the interest? Also, is the value received by the departing member or member’s spouse “in the ballpark” of what was expected; or is there going to be some ill feelings when it is all said and done between friends (now former friends), family, etc.?

buy-sellagreementSo, let me ask you this, do you have a buy-sell agreement in place? When was it last updated? Does the buy-sell agreement address any of the items mentioned in above? Are the intentions of the ownership group the same as they were when the last buy-sell agreement was signed? Does the buy-sell agreement actually meet the expectations of those signing it?

These are critical questions that must be considered when involved in a buy-sell agreement.  Whatever you spend on a buy-sell, it will be a drop in the bucket compared to what it can save you.

A buy-sell agreement provides the peace of mind knowing that their business. It also:

  • Provides money to create a fair market value exchange
  • Promotes equitable and orderly transfer of wealth, ownership and management
  • May offer tax advantages
  • Guarantees heirs a buyer for assets they may not know how to manage
  • Provides heirs cash to pay estate debt, expenses and taxes

It is far much easier to take the time now to ensure all your “ducks are in a row” while the interests of the parties involved are in alignment. Once a triggering event does occur, the interest of the parties involved generally diverge, and either the buyer or the seller will ultimately be unhappy and unsatisfied. Which end of the spectrum will you be on? Contact our buy-sell agreement specialists today at leininger@wvco.com or call (419) 891-1040 and ask for Ryan Leininger.

By: Ryan Leininger, CPA, CVA

Cash Flow Management

The entrepreneurial spirit that compels people to start their own business does not necessarily translate into them being good business managers and this can lead to a stumbling block for many small business owners.

cashFlowOne of the most troubling aspects of running a small business can be learning how to manage cash flow. Understanding the basics of cash flow can help owners plan for large and small upcoming events in their business.

Cash is what you have at any given time to meet your daily expenses. The cash spent to buy inventory or business equipment is an asset on your balance sheet, but cannot be easily converted to pay monthly expenses. Profit on an income statement does not equate to cash in the bank if you have accounts receivables which require payment. You can’t spend profit. A profit on the income statement does not always indicate financial health unless the company also has a positive cash flow that correlates to those profits.

Many business owners use a cash flow statement to help them understand the movement of cash in their business. A cash flow statement will tell them the sources and uses of their cash.

A typical statement has three areas:

  1. Operating cash flow – is the cash generated from the day-to-day operations of the business. For example, the sale of products, the collection of accounts receivable and payments from vendors.
  2. Investing cash flow –  the cash that is used to purchase equipment.
  3. Financing cash flow – cash from outside normal business operations. For example, money from lenders or shareholders. A new loan or the repayment of a loan creates the cash inflow or outflow.

Good cash flow management requires the business owner to be forward thinking – when and how will cash be needed. How will I acquire the cash needed- thru better accounts receivable collection or from a bank in the form of a loan?

Acquiring the skills necessary to become adept at cash flow management could mean the difference between business success and business failure.

William Vaughan Company has the skill and expertise to help our clients with all aspects of their business management and cash flow is just a small part of overall good business management.

By: Chris Schultz. Accountant

Ohio Municipal Tax Updates

As you may have heard, Governor Kasich recently signed the Municipal Income Tax Reform Bill, which is known as the Amended Substitute House Bill 5 (“HB5”). There is an extensive list of provisions that will take effect on January 1, 2016. Ohio taxpayers have been eager for a bill to emerge that simplifies Ohio’s municipal tax law, and HB5 is a step in the right direction. Here are some of the major changes that you should be aware of:

hb_5_signing

Pass-Through Entity (PTE) Tax: It is important to know that the municipal net profits tax will be imposed at the entity level for pass-through entities (PTE), but PTE owners will generally be taxed on the pass-through income by the municipality in which they reside. HB5 will stay consistent with the previous law set in place for S corporations, meaning tax is imposed at the entity level, and the pass-through income flowing through to resident owners will generally not be taxed by the municipality.

Net Operating Loss Carryforwards (NOL): Starting on January 1, 2017, carryforwards for NOL’s at the municipal level will be consistent across the state. Any loss incurred after the implementation date will have a required 5 year carryforward period, regardless of the municipality. Remember having to keep track of NOL carryforwards separately for each municipality? This is no longer required due to carryforwards now being calculated on a pre-apportionment basis.

Occasional Entrant Revisions: This provision of the municipal tax reform is associated with the amount of days an individual may work in another municipality, away from their primary place of work, before being required to withhold income there. HB5 has increased the amount of days from 12 to 20. Therefore, if an employee is working in another municipality for 20 days or less, the employer will withhold income from where the employee’s primary place of work is located. If the employer expects the employee to work more than 20 days in another municipality, they are required to start withholding from day one. On the other hand, if an employee happens to work over 20 days, which was not originally expected by the employer, the employer must begin withholding income on day 21. For employers who may try to rotate employees to bypass the 20 day rule, provisions are set in place to prevent this.

Does your business collect less than $500,000 of revenue in a given year? This classifies your company as a small business, which means complete exemption from the 20 day rule. Small businesses are only required to withhold income tax from their employees in the municipality of their fixed location, which could be a warehouse, office, etc.

These are just a few of the provisions associated with HB5, which is effective on January 1, 2016. For a deeper look into the provisions and more, click here.

Jason Wenner, Staff Accountant

Can Your Business Save More by Paying More?

A client recently sent me a notification they received from the Ohio Department of Job and Family Services (ODJFS) informing them that they could reduce their unemployment tax rate by making a voluntary additional payment. Usually, paying more taxes in is something employers try to avoid doing, but for certain employers, making this voluntary payment may save them money.

Unemployment application Form with pen, calculator

The unemployment rate that employers pay is largely based on their experience rate – the lower their experience rate, the lower their tax rate. The experience rate is dependent on factors such as how much the employer has paid into its account, how much has been paid out in claims, as well as what the average annual taxable wage amount is. If the employer has paid in enough contributions, their account could reach a certain threshold that could reduce the experience rate. The ODJFS will usually notify the employer whether an additional voluntary contribution would help the employer reach that threshold to reduce its rate.

A basic calculation is included with the ODJFS notification that allows the employer to estimate whether the tax savings is more than what the voluntary payment would be. In the case of my client, it did not benefit them enough to make the voluntary payment, but depending on how many employees your business has, the voluntary payment could end up saving you tax dollars. Please contact your William Vaughan Company representative should you need any further guidance.

2014 Business Year in Review

Busy is good. Most small business owners would rather things were too hectic than too slow. As the year winds down, though, let your staff handle the busy-ness while you look at the business — where you are, what you’ve accomplished in 2014 and where you’re headed in the new year and beyond.

Your bottom line

The quickest way to figure out where you are is to check your bottom line. Are you making money? Are profits better or worse than they were last year at this time? Are you meeting your expectations? If not, why not?

business_outlookYour business plan

Change is inevitable. And businesses have a way of outgrowing their business plans. But if you don’t have a current plan, you don’t have a way of measuring your progress. So if you’ve been “off road” without a plan for a while, it’s time to formalize a plan that reflects past growth and sets new goals for the next several years.

Your competition

The more you know about your competition, the better. Who are they? How are they different? How are they the same? Where do you overlap each other? Understanding their business model will help you prepare strategically for possible changes in the marketplace.

Your secret weapon

Your workforce is your secret weapon, especially if you’re in a competitive market. Dedicated, well-trained employees providing top-notch customer service can help put you out front of even the largest competitor. A rich, competitive benefits package will help you attract — and retain — a high-caliber workforce. Health insurance and retirement plans are highly valued benefits. You can offer a variety of other benefits to suit your employees’ needs and your budget. Ask your financial professional for information.

Your future

Do you have a formal succession plan? Are you grooming someone to take over? A well-trained successor could help in the successful — and profitable — transfer of your business. And you can use life insurance to pre-fund all or part of the sale.

Retirement Plan Fiduciary Responsibilities

Do you manage your company’s retirement plan in your day-to-day activities? Managing a retirement plan such as controlling the plan assets or using discretion in managing the plan makes you the plan fiduciary. According to the IRS, a fiduciary is a person who owes a duty of care and trust to another and must act primarily for the benefit of the other in a particular activity. Fiduciary is not just a title, but the very functions performed for the plan.

Important fiduciary responsibilities include:
– Acting solely in the interest of the participants and their beneficiaries
– Acting exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries, and defraying reasonable expenses of the plan
– Following the plan documents (unless inconsistent with ERISA)
– Diversifying plan investments
– Carrying out your duties as a fiduciary prudently, with care, and diligence

fiduciaryWho sets the standards for fiduciaries of retirement plans?

The Employee Retirement Income Security Act, also known as ERISA, set standards of conduct for those who manage employee benefit plans and its assets. It is important for the fiduciary to follow through with their responsibilities because they act on behalf of the participants in the retirement plan and their beneficiaries. According to the Department of Labor (DOL), the significance of being a fiduciary is acting solely in the interest of plan participants and their beneficiaries, with the exclusive purpose of providing benefits to them.

Carrying out duties prudently is one of a fiduciary’s central responsibilities under ERISA. In other words, a fiduciary should have knowledge and expertise in a variety of functions necessary to operate the plan. It is recommended to consult experts in accounting and investments to assist in carrying out your fiduciary responsibilities the best that you can.

It goes without saying, the responsibility of being a fiduciary should not be taken lightly. It is a big responsibility and often times businesses hire someone to act as their fiduciary to handle the responsibilities set forth above. Even if you hire a financial institution or retirement plan professional to manage your plan, you retain some fiduciary responsibility for the decision to select and keep the service provider. You should document your selection process and monitor the services provided to determine if you need to make a change.

By: Aubrey Forche, Staff Accountant

Real Estate Investment: 1031 Exchange

What is a 1031 exchange (also called a like-kind exchange) and why would you want to do it? If you own investment real estate you may have already engaged in this activity and reaped the benefits, but for others just getting into real estate investment this may be a new topic of conversation.

A 1031 exchange is a swap of one investment asset for another. If done under the rules of 1031 you will in most cases be able to defer any tax due at the time of exchange, which allows your investment to grow tax deferred. You can roll any gain on the swap over into the new investment asset until you actually sell that investment asset for cash at which time you would then recognize any gain.

realestate

There are special rules that apply when depreciable property is exchanged. It can trigger gain known as depreciation recapture that is taxed as ordinary income. In general if you swap one building for another building you can avoid this recapture.

Some general guidelines regarding this provision: It is only for investment and business property, most 1031 exchanges are for real estate. Properties are of like-kind if they are of the same nature or character, this can have a broad interpretation. If you receive cash after the exchange is complete this cash may be taxed as partial sales proceeds and is generally considered capital gain.

This is a general overview and there are many other rules and regulations to complete a successful 1031 exchange transaction for which you would want to consult your accountant.

By: Christine Schultz, Accountant