The HBS Blog offers insight on Delaware corporations and LLCs as well as information about entrepreneurship, start-ups and general business topics.
With the end of the year and the holiday season approaching, many small-business owners may find themselves weighing whether or not to pay their employees a bonus. If your business can afford it, there are a number of benefits to paying deserving employees a little something to show your appreciation for their efforts.
In addition to the subject of employee bonuses, entrepreneurs should also be asking themselves the question, Should I pay myself a bonus? If your firm has enough cash on hand, and enough savings in reserve, to fund a bonus for yourself then you should certainly consider taking one.
If you decide that you can afford to take a bonus, you need to be aware of the tax consequences before determining how much to pay yourself and when to take that distribution (e.g. this year versus next year, all at once versus in several smaller chunks).
Tax issues on bonuses for small-business owners can get pretty complicated, and you should speak with a tax professional about the consequences before paying any bonuses, but there are some basics to be aware of.
If you are the owner of an S corp or a C corp, all bonuses are treated as wages, meaning that you’ll be expected to pay federal, state and medicare taxes, as well as the Social Security tax if you haven’t already received the year’s maximum Social Security wages (currently $106,800 and rising to $110,100 for 2012).
If you are a C corp owner and you’ve already reached the Social Security limit, then a bonus could make sense. If you haven’t reached the limit, or you own an S corp, then a profit distribution instead of a bonus could be more advantageous. If you have a partnership or a limited liability corp, the calculations can be more involved. Talk to your tax advisor to find out which works better for your situation.
You will, of course, also want to analyze the tax consequences of paying yourself a bonus versus retaining profits within the company and having them subject to corporate taxation. When it makes more financial sense to take a bonus, some business owners may be tempted to pay themselves especially large sums in order to lower their corporate tax burden. Beware of this strategy. If the IRS determines that you are paying yourself excessive compensation in order to lower your corporate tax liability, they can disallow the deduction of the bonus as an expense, in addition to charging you penalty fees and interest.
If you are running low on cash at the end of the year, as some businesses do, you might also be tempted to increase the use of a corporate credit card and/or delay paying some bills until next year in order to be able to pay yourself a bonus. In addition to being a potentially unsound business decision, this can also get you into trouble with the IRS who may view this as a sham transaction since the funds to pay yourself were not readily available in liquid form. It is probably best stick to cash on hand when determining the size of your bonus pool.
Whatever legal form you have chosen for your company, make sure to discuss your bonus plans with your tax advisor, and possibly your attorney as well, to ensure that you are maximizing the use of your profits while staying in compliance with all tax laws.
In a previous HBS post we offered up a definition of what constitutes a recession and discussed the possibility that we could be headed for one. While we are not here to make economic predictions, we would like to offer small-business owners five strategies to help cope with the next recession whenever it does arrive.
Focus on Costs
Your bottom line is, of course, driven by your revenues as well as your costs. And while it can be tough to increase your revenues even in the best of times, you do have control over some of your costs, specifically your variable costs. Just as you may be struggling with your business, your suppliers are not immune to the effects of recession either. Because they don’t want to lose you as a customer, now can be a good time to negotiate with suppliers for lower prices.
If your business is operating well below capacity you may have more manpower than you need, and it may be time to think about cutting back some of your employees’ hours. While cutting hours or laying off employees can be very difficult, it is critical to honestly assess your business’s needs in order to survive difficult times.
Preserve Your Cash
The old adage that cash is king is never truer than during a recession. Because banks become reluctant to lend as the economy sours, previously available financing can dry up very quickly, so managing your cash efficiently can make the difference between survival and failure. Make sure to stay on top of your accounts payable, and if you are able to take advantage of credit (without getting over-leveraged) in order to preserve much-needed cash, then by all means do so.
Embrace the Barter System
Contrary to what you might think, the barter system did not disappear with the advent of the market economy, it is alive and well today. Say you really need to update your website in order to make a marketing push (and marketing is something you should try not to skimp on during a recession), but you don’t have it in your budget to pay a web designer. Well, chances are pretty good that there are quite a few underemployed designers around, and if you are persistent you may be able to find a good one who is willing to exchange some of his time for whatever goods or services your business has to offer.
Ramp Up Your Customer Service
While ramping up anything in a recession may seem counterintuitive, customer service is one area in which you can actually have an advantage over your bigger competitors, particularly during turbulent economic times. When large companies struggle with massive layoffs and restructurings, their customer service—which often isn’t a strong point to begin with—can suffer greatly. As the owner of a small business, you have much greater control over your company’s interactions with customers than the CEO of a giant multinational does. And during a recession you may have more idle time to assess and improve those relationships; taking the time to do so will not only help you ride out the storm but should build loyal customers who remain with you during the good times too.
Focus on What You Do Best
When times are tough and business is slow it is important to ask yourself the following, “What is it that my business does best?” Like a lot of entrepreneurs you may have branched out from your initial focus and become involved with a number of different products or business lines. Now is the time to take a hard look at the numbers for each area of your business to see what is working and what isn’t. By refocusing your resources on what you do best (i.e. what makes you the most money) you’ll wind up with a more efficient and profitable company.
While there are no surefire tricks to surviving a recession, following the preceding advice should increase your odds of making it through until things get better; and in the long run, they always do.
If you’ve been paying attention to the (mostly grim) financial news lately then you may have noticed a good deal of chatter about whether or not we are headed for a double-dip recession. And while most of you are probably familiar with the dreaded double-dip when it comes to chips and dip, you may be wondering what exactly constitutes a double-dip with regard to recessions, or, for that matter, who determines whether we are experiencing a recession and how exactly one is defined. So let’s try and answer these questions before moving on to offer some advice on how to cope with a recession, double-dip or otherwise.
In the U.S. the National Bureau of Economic Research (NBER) has a Business Cycle Dating Committee that is tasked with maintaining a chronology of the country’s business cycle and is the body that officially calculates when recessions begin and end. Unfortunately its definition of a recession as “a period between a peak and a trough” in economic activity is somewhat less than instructive.
Perhaps because of the NBER’s nebulous definition, the financial press—as well as most professionals in the field—has come to rely on the more tangible idea that two consecutive quarters of decline in real Gross Domestic Product (GDP) constitutes a recession. (For those of you who decided to give Econ 101 a pass, GDP is the total value of all goods and services produced in a country in a given year.) We’ll rely on this commonly accepted and easily quantifiable definition for our purposes here.
And while the NBER does not define a special category of double-dip recession, practically speaking this refers to a recession that begins shortly after the previous one has ended. In the current case people are concerned that there may be another recession looming, despite the fact that the one that resulted from the global financial crisis just ended in June of 2009, according to the NBER.
So we now know that during a recession the total amount of goods and services being produced is declining. And that we may be headed for another such period even though we only recently emerged from the particularly nasty recession of 2007 through 2009.
So what does this mean for small-business owners? Because the amount of goods that gets produced goes into decline when we experience a recession, recessions are often characterized by periods of high and rising unemployment, as employers are forced to lay off workers when demand for their products sags. As more folks enter the ranks of the unemployed, the demand for goods and services can fall further, as it is tough for the out-of-work to justify buying anything other than the essentials. In this way recessions and unemployment can have a negative self-reinforcing effect that makes things tough not just for the unemployed but for those trying to keep their businesses afloat during these turbulent times. Fortunately there are some strategies that can help you cope, and we’ll explore a few of these in our next post.
Question: “I want to be incorporated through the end of the year. When is it too late to close?”
Answer: Cancel or Dissolve with the state of Delaware before December 31.
Once you’ve determined that filing a formal Cancellation of your LLC or Dissolution of your Corporation is essential to winding up your business, let Harvard Business Services, Inc. ease your mind and assist you with the process. The final closing of the company may seem a bit puzzling to some, but it’s a simple filing with the Delaware Division of Corporations. The last thing you want to do is figure out the costs involved and deal with more paperwork. As a Delaware Registered Agent, our fast and efficient staff will be more than happy to handle the whole process for you in order to get your company formally and legally closed in good standing with both the Registered Agent on file and the State of Delaware.
An important detail when it comes to closing is the fees involved. The State of Delaware requires all taxes due to the State through the effective date of the Cancellation/Dissolution to be paid and all applicable annual franchise tax reports for Corporations to be filed. Therefore, in order to avoid any costs for the 2012 tax year, the Cancellation/Dissolution filing must be submitted to the state of Delaware no later than December 31, 2011. However, since the 31st is a Saturday this year, HBS will require all signed forms to be returned before end of business on December 30th.
So don’t wait until it’s too late.
All you need to do to get started is give us a call to find out the specifics for your company. We are happy to go over the procedures with you. If you are qualified in another state, we can help you with that, as well. Delaware filings are fast and efficient because Harvard can do everything electronically. Originals are not necessary. Therefore, just provide us with an email address or fax number, we’ll get you Certificate of Cancellation or Certificate of Dissolution with related annual reports to sign within 24 hours. Once the completed forms are returned, we will proceed accordingly which is typically that same day. In about two business days you will be provided with the approved date-stamped copy for your records. Your company is then formally closed with the State of Delaware and registered agent on file. The next step is to notify the IRS.
Putting It All Together
In the last three installments of this series, we have endeavored to build a case that our beliefs must be in congruence with our ethics and values in order to reach our full potential as sales people. Beliefs drive behaviors and behaviors drive results. So, if you can’t learn these principles intellectually, how exactly do we put together a program to address these issues effectively? How can we ensure that the change in productive behavior is lasting and consistent?
According to our mantra at Integrity Solutions, Inc., we transform people’s potential through an ethics driven process that aligns knowledge, skills and values. In turn, we help our clients create value for their customers, which brings about customer loyalty. We know from research done at the Harvard Business School that customer loyalty is a key driver of business revenue.*
Before we get into the process, let me state up front two critical requirements for success: First is a business culture that reflects a high degree of ethics and values in the organization’s dealings with customers or clients. Second is an expressed commitment to the process by senior management of the organization. With that said, let’s examine the process.
Adults best learn through “self-discovery” based upon their experience and what they feel is relevant to the task at hand. This concept is practiced and reinforced throughout our initial seminars and follow-up sessions. Rather than by lecture from “the expert”, our programs are facilitated to guide and draw out meaningful experience from the participants based upon the principles and skills presented. By establishing a safe environment to share, this is a very powerful learning tool for behavioral change.
Next, the process must be repeated and reinforced over time. We know from our research, it takes three to four weeks of intentional practice to form a habit. Over the eight weeks of follow-up sessions (typical for most of our programs), bonding with other participants and behavior change starts to take place between the third and fourth week of the program. Here we start to observe real changes in attitudes and actions and we hold them accountable to continue to practice and report back on results.
These efforts must be rewarded. Behavior that gets rewarded gets repeated. Rewards can take the form of simple recognition of success by managers and peers, or they can be instructional, such a book award, or they can be tangible incentives. Generally, increased sales production from the conscientious practice of the principles and skills can be its own reward in increased income.
Because the principles and skills are universal, the programs are self- leveling. That means that whatever level of experience or sophistication of the participant, they learn and practice from that point of entry. The corollary to this is that the programs are customizable to whatever the complexity of the selling cycle, product or service sold. The principles and skills are applicable to all “B” to “B” consultative selling applications.
To make this all a lasting experience of improved performance and production with a high ratio of ROI, we need our managers to coach to the principles and skills covered. When this takes place, the organization has made a quantum leap to the next level.
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