2013 arizona new business kit - clientwhys portal · 2013 arizona new business kit ... conclusion...

2013 ArizonaNew Business Kit

Innovative People–Practical Solutions

Your Guide to Financial, Business Taxand Accounting Considerations of

Starting a New Business

33 N Stone Avenue • Suite 1100 • Tucson, Arizona 85701 • (520) 884-0176 • www.klkcpa.com

2013 Arizona New Business Kit – Your Guide to Financial, Business Tax and Accounting Considerations of Starting a New Business

Keegan, Linscott & Kenon, PC33 N Stone Avenue • Suite 1100 • Tucson, Arizona 85701 • (520) 884-0176 • www.klkcpa.com

TOCTable of Contents

Chapter 1: Selecting a Legal Entity for Your EnterpriseSole Proprietorship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Three Types of Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Business Entity Comparison Charts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Chapter 2: Registering with the Tax AuthoritiesFederal and Arizona Registration Forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Business License. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Incorporation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Chapter 3: Accounting and BookkeepingChart of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Method of Accounting: Cash or Accrual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Accounting Records and Record Keeping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Internal Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Illustrative Chart of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Retention of Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Chapter 4: Payroll TaxesAvailable Publications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Deposit Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Deposit Requirements for Federal Income Taxes Withheld and FICA Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Federal Deposit Requirements for Unemployment Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Reporting Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Federal Payroll Tax Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Arizona Payroll Tax Reporting Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Supplemental Wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Fringe Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Other Tax Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Payroll Tax Rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Retirement Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Independent Contractors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Employee's Request for Social Security Earnings and Benefits Statement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Classification as Employee Versus Independent Contractor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Chapter 5: Selecting a Year-endWhich Month to Choose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23How to Make the Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Changing the Year-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24



Chapter 6: Income TaxesSummary of Federal and Arizona Income Tax Forms for Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25C Corporations: Federal Income Tax Filing Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25C Corporations: Arizona Income Tax Filing Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26All Corporations: Arizona Corporation Commission Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26S Corporations: Federal Income Tax Filing Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26S Corporations: Arizona Income Tax Filing Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27Partnership and Limited Liability Corporations: Federal Income Tax Filing Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27Partnership and Limited Liability Corporations: Arizona Income Tax Filing Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27Proprietorship: Individual Income Tax – Federal Income Tax Filing Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Proprietorship: Individual Income Tax – Arizona Income Tax Filing Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28First Corporate or Partnership Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29Tax Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29State Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Chapter 7: Cash Planning and ForecastingStarting the Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31Cash Collections. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31Cash Disbursements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32Sample Worksheet: Projected Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Chapter 8: Obtaining Credit and Financing for Your BusinessHow Do I Get the Money? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35Development of a Business Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36Financing Alternatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36Debt Financing Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36Equity Financing Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Chapter 9: InsuranceRequired Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Chapter 10: Selecting Professional AdvisorsConclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Apendix A: Keegan, Linscott & Kenon, PC.Carla J. Keegan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43Christopher G. Linscott . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44G. Antonio “Tony” Kenon. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44Bret J. Berry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

This booklet contains general guidelines only. Every individual and business is unique. You should consult with an accountant and/or an attorney to determine business strategies and actions appropriate for your circumstances.

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2013 Arizona New Business Kit – Your Guide to Financial, Business Tax and Accounting Considerations of Starting a New Business – Page 1


Chapter 1Selecting a Legal Entity for Your Enterprise

One of the first major decisions you will have to make as you start your new business is the form of legal entity it will take.To a large degree this decision may be dictated by the way you have organized your operations and whether you intend towork on your own or in conjunction with others.

The form of entity you choose can have a significant impact on the way you are protected under the law and the way youare affected by income tax laws and regulations. There are three basic forms of business organizations. Each has its own ben-efits and disadvantages and is treated differently for legal and tax purposes.

Sole Proprietorship

A sole proprietorship is typically a business owned and operated by one individual, or very often by a husband and wife. Asole proprietorship is not considered to be a legal entity under the law, but rather is an extension of the individual who ownsit. The owner has possession of the business assets and is directly responsible for the debts and other liabilities incurred bythe business. The income or loss of a sole proprietorship is combined with the other earnings of an individual and reportedto IRS on Schedule C of Form 1040, U.S. Individual Income Tax Return.

A sole proprietorship is perhaps the easiest form of business to own and operate because it does not require any specificlegal organization, except of course, the normal requirements such as licenses or permits. A sole proprietorship typicallydoes not have any rules or operating regulations under which it must function.

Partnerships

Partnerships can take two legal forms, general partnerships and limited partnerships.

General Partnership

In a general partnership, two or more individuals join together to run a business enterprise. A partnership must register itsname (DBA "doing business as") with the County Recorder in which the business is located. Each of the individual partnershas ownership of company assets and responsibility for liabilities, as well as authority in running the business. The authori-ty of the partners, and the way in which profits or losses are shared are determined by the partners and documented in apartnership agreement. The responsibility for liabilities can also be modified by agreement among the partners, but part-nership creditors typically have recourse to the personal assets of each of the partners for settlement of partnership debts.General partners are subject to self employment tax on their partnership earnings.

Limited Partnership

A limited partnership is comprised of one or more general partners who are generally personally liable for partnershipdebts, and control the running of the partnership, and one or more limited partners who contribute capital and share in theprofits or losses of the business. The limited partners do not take part in running the business and are not liable for the debtsof the partnership.



Partnerships (continued)

The rights, responsibilities and obligations of both the limited and general partners are typically detailed in a partnershipagreement. It is a very prudent to have a detailed written agreement for any partnership, whether limited or general.

A partnership is a legal entity recognized under the law and as such it has rights and responsibilities in and of itself. A part-nership can sign contracts, obtain trade credit and borrow money. When a partnership is small most creditors require a per-sonal guarantee from the general partners for credit.

A partnership is also required to file income tax returns for both federal and Arizona purposes; Form 1065 U.S. PartnershipReturn of Income and Arizona Form 165, Partnership Income Tax Return. Each of these is due on the 15th dayof the fourth month following the close of the taxable year. A partnership generally does not pay income tax. The items ofincome, deduction, credits etc., from the partnership income tax return are allocated to each partner on Schedule K-1.Each partner combines the Schedule K1 income, losses, and credits with other personal income to determinetheir own tax liability. Therefore, partnership earnings are taxed at the tax rate of the partner.

Corporations

A corporation is a separate legal entity which exists under the authority granted by state law. A corporation has substantial-ly all of the legal rights of an individual and is responsible for its own debts. It must also file income tax returns. Taxation ofcorporate earnings is dependent on the type of corporation, as discussed below. Typically, the owners or shareholders of acorporation are protected from the liabilities of the business. However, when a corporation is small, creditors often requirepersonal guarantees of the principal owners/shareholders before extending credit. The legal protection afforded the own-ers of a corporation can far outweigh the expense of starting and administering a corporation.

A corporation must also adopt and file articles of incorporation and bylaws which govern its rights and obligations to itsshareholders, directors and officers. A corporation must make sure that the corporate name is checked with the ArizonaCorporation Commission (ACC) and is available for use.

Instructions and forms needed for incorporation may be obtained from either of the following:

Arizona Corporation Commission Arizona Corporation Commission400 West Congress, Suite 221 1300 West Washington St., 1st. FloorTucson, Arizona 85701 Phoenix, Arizona 85007(520) 628-6560 Toll Free (Within Arizona): (800) 345-5819

Or online at https://www.azcc.gov/divisions/corporations/filings/forms/index.asp

Corporations must file annual corporation commission reports. The ACC will send registered corporations pro-forma reportswhich must be timely filed to continue to do business in Arizona.

Corporations must file annual income tax returns with the IRS and the Arizona Department of Revenue and possibly otherstates in which it does business. The elections made in a corporation's initial tax returns can have a significant impact onhow the business is taxed in the future.



Three Types of Corporations

C Corporation

A C corporation allows for ease of bringing in additional capital through the sale of equity, or by allowing an individual tosell or transfer their interest in the business. It also provides for business continuity when the original owners choose toretire or sell their interest.

C corporations pay income tax on earnings at the applicable corporate rates.

S Corporation

An S corporation also allows for ease of bringing in additional capital through the sale of equity, or by allowing individualsto sell or transfer their interest in the business. It also provides for business continuity when the original owners choose toretire or sell their interest.

An S corporation does not pay income tax. Income, losses, and credits from S corporations are reported to the IRS on its cor-porate income tax return, and to its shareholders on Form 1120S, and Schedule K1. Each shareholder combines the ScheduleK1 income, deductions and credits with other personal income to determine their own tax liability. Therefore S corporationearnings are taxed at the tax rate of the shareholder.

S corporations have other organizational restrictions: only individuals, estates and certain trusts may be shareholders, limit-ed to 100 shareholders, limited to only one class of stock, and restrictions on shareholder agreements exist.

In order to elect S Corporation Status Form 2553 it must be filed with the IRS. Even if a husband and wife own the stock joint-ly, they both must sign the Form 2553.

Limited Liability Company

A Limited Liability Company (LLC) is a business structure allowed by state statute.

LLC’s are popular because similar to a corporation, owners have limited personal liability for the debts and actions of the LLC.Other features of LLC’s are more like partnership, providing management flexibility and the benefit of pass-through taxation.

Owners of an LLC are called members. Members may include individuals, corporations, other LLC’s and foreign entities.There is no maximum number of members. Most states, Arizona included, also permit “single member” LLC’s, those havingonly one owner. A husband and wife may qualify for a single member LLC.

For federal income tax purposes the LLC’s may elect to be classified as partnerships, corporations or disregarded entities(single member LLC’s) by filing Form 8832 with the IRS. Electing to be recognized as a partnership or disregarded entity allowsfor only one level of taxation. If Form 8832 is not filed with the IRS, a domestic LLC is classified by default as a partnershipif there are two or more members or as a disregarded entity if there is only one member.

Should you decide to incorporate your business venture, you should seek the advice of competent legal counsel and busi-ness-oriented accountants who can guide you through the entity selection process.

Following are charts which allow easy comparison of various legal and tax attributes of sole proprietorships, partnerships,limited liability companies, S corporations, and regular C corporations.



LIMITED PARTNERSHIPGENERAL PARTNERSHIPSOLE PROPRIETORSHIP

Business Entity Comparison Chart: Which Structure is Right for You?

Formation

Duration of existence

Restrictions on number of owners

Liability

Operational requirements

Management

Taxation

Pass through income/loss

Double taxation

Deductibility ofbusiness losses

Tax level when business is sold

Cost of creation

Raising capital

Transferability of interest

Who generally finds this the best way to

do business?

No State filing required.

Dissolved if entity ceases doing businessor upon death of the sole proprietor.

Only one sole proprietor.

Sole proprietor has unlimited liability.

Relatively few legal requirements.

Sole proprietor has full control of management and operations.

Not a taxable entity. Sole proprietor pays all taxes.

Yes

No

Owners may use losses to deduct against other income on individual taxreturns (subject to passive loss rules that apply to all businesses).

Personal tax level of owner.

None

Often difficult unless individual con-tributes funds.

No

Owner who wants legal and managerial autonomy and minimal organizational red tape.

Agreement between two or more parties.No State filing required.

Dissolves upon death or withdrawals of apartner, unless safeguards are specified ina partnership agreement.

Minimum two general partners.

Partners have unlimited liability.

Relatively few legal requirements.

Typically each partner has an equal voice,unless otherwise arranged.

Not a taxable entity. Each partner pays taxon his/her share of income and can deductlosses against other sources of income.

Yes

No

Partners may use losses to deduct otherincome on individual tax returns if “at risk”for loss or debt and subject to active-passive loss rules.

Personal tax level of individual generalpartners.

None

Contributions can be made from partnersand more partners can be added.

Not without legal involvement due to personal liability.

Joint owners who are not concerned withpersonal liability for business debts.

State filing required.

Perpetual.

Minimum one general partner and onelimited partner.

At least one general partner has partial or unlimited liability.

Some formal requirements, but less formal than corporations.

Limited partners are excluded from management unless they serve on the board of directors.

Files taxes as separate entity, must meetcertain criteria to avoid being taxed as acorporation.

Yes

No

Same as general partnership, but limitedpartners may only deduct “nonrecoursedebts” (for which general partners are not specifically liable).

Personal tax level of individual generaland limited partners.

State filing fee required.

Contributions can be made from partnersand more partners can be added.

Yes, pending approval of other limitedpartners and the general partners.

Joint owners who want partnership tax treatment and some non-managinginvestors; general partners must bewilling to assume personal liability forbusiness debts.



LIMITED LIABILITY COMPANY (LLC)S CORPORATIONC CORPORATION


Perpetual.

Arizona allows one-person corporations, althoughsome states require two individuals.

Shareholders are typically not responsible for thedebts of the corporation.

Board of directors, annual meetings and annualreporting required.

Managed by the directors, who are elected by the shareholders.

Taxed at the entity level. If dividends are distributed to shareholders, dividends are also taxed at the individual level.

No

Yes, if income is distributed to shareholders in the form of dividends.

Corporation may deduct business losses (share-holders may not deduct losses).

Two levels: shareholders and corporation may be taxed on sale of business.


Shares of stock are sold to raise capital.

Shares of stock are easily transferred.

Owners who want limited liability and abilityto split income between themselves and a

separately taxed business.


Perpetual.

Same as C Corp., but no more than 100 shareholderspermitted.

Shareholders are typically not responsible for thedebts of the corporation.

Board of directors, annual meetings and annualreporting required.

Managed by the directors, who are elected by theshareholders.

No tax at the entity level. Income/loss is passedthrough to the shareholders.

Yes

No, unless the S Corporation was a C Corporation pre-viously and had accumulated C Corporation earnings.

Shareholders may deduct share of corporate losses onindividual tax returns.

Normally taxed at personal tax levels of individualshareholders, but corporate level sometimes due ifS corporation was formerly a C corporation.


Shares of stock are sold to raise capital.

Yes, but must observe IRS regulations on who canown stock.

Owners who want limited liability and individual taxrates to apply to business income; must be willing tomeet initial and ongoing S corporation requirements.


Dependent on the requirements imposed by thestate of formation.

One member allowed in all states.

Members are not typically liable for the debts of the LLC.

Some formal requirements but less formal than corporations.

Members have an operating agreement that outlines management.

If properly structured there is no tax at the entitylevel for federal and Arizona purposes. Some statestax the entity based on value or income. Income/loss is passed through to its members.

Yes

No

Follows sole proprietorship or partnership rulesdepending on tax status of LLC.

Follows sole proprietorship or partnership rulesdepending on tax status of LLC.


Possible to sell interests, though subject to operating agreement restrictions.

Possible to sell interests, though subject tooperating agreement restrictions.

Generally, owners who want limited liability andpass-through taxation; particularly beneficial forsmaller, privately held businesses.



Chapter 2Registering With The Tax Authorities

Federal and Arizona Registration Forms

A significant task for the new business owner is assuring that the business is properly complying with the extensive tax andinformation filing requirements imposed by various governmental agencies. Stiff penalties are commonly assessed if therequired forms and returns are not properly prepared and timely filed. There are several forms required to be filed when thebusiness is started. While this chapter is not intended to be an all inclusive list of the filing requirements, it summarizes someof the more prominent requirements common to most businesses.

Many industries have specific filing requirements which are not part of this text, but which, nevertheless, must not be over-looked. Professionals with experience in your industry should be consulted to assure that any such filings are properly han-dled.

Both the Internal Revenue Service and the State of Arizona require that you obtain identification numbers.

A new business that is either a corporation or a partnership should file both the Form SS4 and JT-1/UC001. Any business, including sole proprietorships that anticipate hiring employees should also file both forms.

There is no deadline for filing Form SS-4. However, to avoid substantial confusion file your Form SS-4 early. If an income taxform is filed without a Federal Employer Identification Number (FEIN), the Internal Revenue Service will assign one. It is notuncommon for the Internal Revenue Service to assign more than one FEIN to a business, which can result in notices for delin-quent income and/or payroll tax returns that have been filed using a second FEIN.

Most filings with the Internal Revenue Service come under the headings of income and payroll taxes. Payroll tax require-ments are detailed in Chapter Four. Income tax filing requirements and tax planning are discussed in Chapter Six.

Form needed (number & title).

Where to file.

When to file.

Additional information.

Form SS-4, Application for EmployerIdentification Number (FEIN).

Internal Revenue Service CenterATTN: EIN OperationCincinnatti, OH 45999 (online at www.irs.gov)

Four weeks before you need it, or see SS-4instructions for using fax.

If ownership of a corporation is obtained by acquiringits stock, use the corporation’s existing FEIN.

C-001, Joint Tax Application.

Arizona Department of RevenueP.O. Box 29032Phoenix, AZ 85038-9032 (online at: aztaxes.gov)

Within 10 days of the start of business.

Application is also used to register with the Arizona Department ofEconomic Security for unemployment insurance, withholding tax, use tax,and wholesale tobacco.

AGENCY INTERNAL REVENUE SERVICE ARIZONA DEPARTMENT OF REVENUE



Business License

To operate a business you must obtain a business license from the city or county or both. Applications can typically beobtained at the city hall or county offices where your business is located. At the time of filing the application a fee must bepaid. The license is usually issued immediately and must be posted in plain sight at your place of business. The license, withthe related fee, must be renewed annually.

You should take care to determine whether you will need special permits from the health department, police department,planning commission, or other government agencies, depending on the type of business you plan to operate.

Incorporation

A corporation must adopt and file articles of incorporation and bylaws and appoint a statutory agent. A corporation mustmake sure that the corporate name is checked with the ACC and is available for use. Articles of incorporation must be pub-lished in a newspaper of general circulation in the county of the business location. Instructions and forms needed for incor-poration may be obtained from either of the following:

Arizona Corporation Commission Arizona Corporation Commission400 West Congress, Second Floor 1300 West Washington St., 1st. FloorTucson, Arizona 85701 Phoenix, Arizona 85007(520) 628-6560 Toll Free (Within Arizona): (800) 345-5819



Most operators of a new and growing business have a flair for the environment in which the business operates. They maybe a great salesperson, an outstanding mechanic, carpenter, lawyer, or inventor. Unfortunately most people don't like tokeep the books. As an owner of a business you must remember that your company's books and financial statements repre-sent a score sheet which tells how you are progressing, as well as an early warning system which lets you know when andwhy the business may be going awry. Financial statements and the underlying records will provide the basis for many deci-sions made by outsiders such as banks, landlords, potential investors, and trade creditors as well as taxing authorities andother governmental agencies. The necessity for good, well-organized financial records cannot be over emphasized. One ofthe greatest mistakes made by owners of small businesses is not keeping good financial records, which can lead to improp-er or poor business decisions based on inadequate information.

Quality financial information does not necessarily translate into complicated bookkeeping or accounting systems. Far toooften owners of businesses become overwhelmed by their accounting system to the point where it is of no use to them. Anaccounting or bookkeeping system is like any tool used in your business; it needs to be sophisticated enough to provide theinformation you need to run your business and simple enough for you to run it (or supervise the bookkeeper). Questionsyou should ask in developing an accounting and financial reporting system are:

• Who will be the users of the financial information?

• What questions do I need answered to manage the business?

• What questions should be answered for government or regulatory taxing authorities?

As your business grows, you should work closely with your accountant to ensure that your accounting system is providingyou with useful and appropriate information.

Chart of Accounts

The basic road map into any accounting system is the chart of accounts. It is this chart which helps categorize financial infor-mation in a useful and systemic manner so the data will be easily retrievable, and usable once retrieved. This tool, like therest of the accounting system, needs to be dynamic and should grow as the size and needs of your business change.

To help establish a good working chart of accounts you need to answer some questions, in conjunction with your account-ant, as to how your business will operate and what is important to you. Some of these considerations might be:

• Will your business have inventory to account for? If so, will it be purchased in final form or will there be production costs?

• Are fixed assets a significant portion of your business?

• Will you sell only one product or service or will there be several types of business?

Chapter 3Accounting and Bookkeeping



Chart of Accounts (continued)

• Will you have accounts receivable from customers which you will have to track?

• Are you going to sell in only one location or will you do business in several states?

• Are the products you sell subject to sales tax?

• Do you need to track costs by department?

• What type of government controls or regulatory reporting are you subject to?

Each one of these questions can have several answers and will probably generate more questions. Each answer will have animpact on how the chart of accounts is structured.

It may seem that developing a chart of accounts is not particularly high on your list of things to do as you start a new busi-ness. The amount of time and money a well-organized accounting system may save you can be significant, especially as theneed to generate information for various purposes increases. This is particularly important when the company is attempt-ing to obtain financing or credit. Most banks or investors will request to see your books. An example of a basic chart ofaccounts follows this section.

Method of Accounting: Cash or Accrual

One of the decisions to be made as you start a business is whether to keep your records on a cash or accrual basis of account-ing. The cash basis of accounting has the advantage of simplicity and almost everyone understands it. Under the cash basisof accounting you record sales when you receive the money and account for expenses when you pay the bills. The increasein the money in "the cigar box" at the end of the month is how much you made.

Unfortunately, as we all know, the business world is not always so easy. Sales are made to customers and you sometimesmust extend credit. Your business will incur liabilities which are due even though you may not have received the invoice orhave the cash available to pay them.

Most users of financial statements such as bankers and investors are accustomed to accrual basis statements and expect tosee them. Once you become familiar with them, they provide a much better measuring device for your business operationsthan cash basis statements. Whether you use the cash or accrual basis, it is possible to keep books for income tax purposeson a different basis than for financial statements. It may be more advantageous (less tax) for you to do so. Your accountantcan advise you on the advantages and feasibility of doing this in your particular situation.

Accounting Records and Record Keeping

Another question which the owner of a business must answer is "Who will keep the books of the business?" Will you do ityourself, will the receptionist or a secretary double as a part-time bookkeeper, will you have a bookkeeper that comes inperiodically, or will the volume of activity be such that a full-time bookkeeper will be required?



Accounting Records and Record Keeping (continued)

Very often the owners of a business decide to keep the books themselves and underestimate the commitment they havemade to other phases of the operation and the time required to maintain a good set of financial records and book ofaccounts. As a consequence, the record keeping is often low priority and must be caught up later. This approach, thoughrarely planned, can require a substantial expenditure of time and money. While it is important for the owners of a businessto maintain control and stay involved in the financial operations of the enterprise, this can be achieved by maintaining closecontrol over the check signing function and frequently scrutinizing certain records. Your company's accountant can helpdevelop a good program of record keeping duties for you, your employees and any outside bookkeepers or accountantsyou may engage.

Internal Control

What is internal control? It is the system of checks and balances within a business enterprise which helps to ensure thatthe company's assets are properly safeguarded and that the financial information produced by the company is accurateand reliable. When you are operating as a "one person shop" or at least handling all of the company's financial transac-tions, maintaining good internal accounting control is relatively straightforward. However, when your company grows tothe size where you must delegate some of the functions it will be more difficult to ensure all transactions are beingaccounted for properly.

No matter the size of your business, you should always be able to answer "yes" to the following questions:

• When my company provides goods or services to our customers, am I sure that the sale is recorded and the revenueis recorded in accounts receivable or the cash is collected?

• When cash is expended by my company, am I sure we received goods or services?

The method used to ensure that these two questions can be answered affirmatively will vary widely from business to busi-ness. Solid internal control procedures are essential stepping stones to maintaining good control in your business. The solu-tion in your particular instance may be as simple as numbering the sales tickets and being sure all tickets are accounted foror reviewing all invoices and time cards before signing company checks. These are fundamentals in a well-run business.

As the company grows you will need to consider concepts such as segregation of duties, as well as employee fidelity bondsor controlled access storerooms. No matter what the size of your enterprise, you should consider controlling your businessand safeguarding hard earned assets as a priority from the outset.



Current Assets:1110 Cash1120 Temporary Investments1130 Accounts Receivable1139 Allowance for Uncollectibles1140 Notes Receivable1154 Interest Receivable1170 Inventory1190 Prepaid Rent1191 Prepaid Insurance

Property, Plant and Equipment:1200 Land1210 Buildings1220 Computer Equipment1229 Accumulated Depreciation - Computer Equipment1250 Office Equipment & Furnishings1259 Accumulated Depreciation - Office Equipment & Furnishings

Intangible Assets:1310 Patents1320 Goodwill1330 Organizational Cost

Current Liabilities:2130 Accounts Payable2154 Interest Payable2155 Salaries Payable2160 Income Tax Payable2170 Sales Tax Payable2180 Withholding and FICA Tax Payable2181 Federal Unemployment Tax Payable2182 State Unemployment Tax Payable2195 Advances from Customers2196 Rent Received in Advance

Long Term Liabilities:2410 Mortgage Payable2420 Note Payable

Stockholder's Equity:3510 Capital Stock3511 Additional PaidIn Capital3610 Dividends3650 Retained Earnings

Sales and Related Accounts:4010 Sales4020 Sales Returns & Allowances4030 Sales Discounts

Cost of Sales:5170 Purchases5178 Purchase Returns and Allowances5179 Purchase Discounts5200 Freight

Operating Expenses:6001 Owner's Salary6002 Other Salaries & Wages6010 Payroll Taxes and Benefits6110 Rent6120 Utilities6210 Advertising & Promotion6220 Office Supplies6230 Postage6240 Telephone6310 Professional Fees6320 Insurance6410 Repairs & Maintenance6510 Travel6520 Meals & Entertainment

Other Revenue:7010 Rent of Land7054 Interest Income

Other Expenses:7154 Interest Expense

Income Tax:8160 Income Tax

Illustrative Chart of AccountsRetention of Records

The length of time records should be kept depends on what doc-ument it is and the circumstances that gave rise to the document.For example, tax returns and any government reports affectingtax liability should be kept permanently. Most backup records,such as receipts documenting income or deductions on the taxreturns, only need to be kept for seven years.

Generally, the IRS has three years from the date you file yourincome tax return to propose any adjustment to your tax liability.However, a six-year statute applies if IRS can prove there was anomission of at least 25% of income. Therefore, use the six-yearperiod instead of the three-year period, and add a year to be safe.The state of Arizona has one additional year to audit, therefore,we recommend maintaining tax documents for at least sevenyears.

Settled accident claims ...........................................................7 years

Audit reports of CPAs ..............................................................permanent

Bank statements and reconciliations ......................................7 years

Cancelled checks for standard transactions.............................7 years

Cancelled checks for key payments (taxes,

permanent property purchases, special contracts) .............7 years from property disposition

Contracts and leases in effect..................................................7 years from contract termination

Corporate minute books for directors & stockholders..............permanent

Correspondence:

Accounting ...................................................................7 years

Credit & collection ........................................................7 years

General .........................................................................3 years

Personnel......................................................................7 years after termination

Capital stock and bond records ...............................................7 years from property disposition

Deeds, mortgages and bills of sale .........................................permanent

Employee personnel records (after termination).....................3 years

Employment applications .......................................................3 years

General and private ledgers ....................................................7 years

Insurance policies (expired) ....................................................3 years

Invoices from vendors .............................................................7 years

Property records......................................................................7 years from property disposition

Tax returns, worksheets and related documents.....................7 years

Time books .............................................................................7 years

Trademark registrations ..........................................................permanent

RECORDS TO KEEP SUGGESTED RETENTION PERIOD



Whether you operate as a sole proprietor, a partnership or a corporation, if you are going to have employees you will haveto contend with payroll taxes. The brief summary which follows will give you some guidance in the rules and regulations ofthe various taxing authorities.

Available Publications

Circular E, Publication 15, Employer's Tax Guide, covers the federal payroll tax reporting and deposit requirements. Thisdetailed and informative publication can be obtained through the local office of the Internal Revenue Service or by calling:

IRS Forms and Publications Toll Free Number: 1-800-829-3676Hint: The best times to call are 8:00-9:30 am and 3:00-4:30 pmThe publication may also be found on the IRS website: www.irs.gov

Deposit Requirements

Federal Deposit Requirements for federal income taxes withheld and FICA taxes (employer and employee portion):

If you are just starting out in business, you are considered a monthly depositor for the first calendar year. After that,IRS will notify you each November whether you are a monthly or semiweekly depositor for the coming calendaryear. The rules apply to social security and Medicare tax and federal income tax withheld on wages, tips, and sickpay. If, as an employer you accumulate less than a $2500 tax liability during the quarter, no payroll tax deposits arerequired, and this liability may be paid with the tax return for the quarter. Otherwise you must follow either themonthly or semimonthly schedule shown:

Deposit Requirements for Federal Income Taxes Withheld and FICA Taxes (Employer and Employee Portion):

Chapter 4Payroll Taxes

When to deposit

What to deposit

Where to deposit

Form needed

By Wednesday and by Friday following the periodsshown below.

On Wednesdays, deposit taxes withheld or due onwages paid the prior Wednesday, Thursday, and/orFriday.On Fridays, deposit taxes withheld or due on wagespaid the prior Saturday, Sunday, Monday, and/orTuesday.

Electronically with EFTPS..

None - deposit MUST be done electronically.

By the 15th day of the following month.

Federal income tax withheld and FICA taxes (employerand employee portions) withheld or due on total wagespaid in a month.

Electronically with EFTPS..

None - deposit MUST be done electronically.

DEPOSIT SCHEDULE SEMIWEEKLY MONTHLY

New businesses use this for the first year of operations



Deposit Requirements (continued)

Generally, an Arizona payroll tax deposit should be made whenever a federal payroll tax deposit is required. (Arizona unem-ployment tax payments are due at the time the UC018 Unemployment Tax and Wage Report is filed.)

.

.

.

.

Federal Deposit Requirements for Unemployment Taxes:

When to deposit

What to deposit

Where to deposit

Form needed

By the last day of the month following the close of each calendar quarter.

Multiply by .008, the portion of the first $7,000 of each employee's annual wages that you paid during the quarter. If the resultantliability for the quarter is over $100, make a deposit; if $100 or less, there is no requirement to deposit it currently, you merely addit to your liability for the following quarter.

Electronically with EFTPS.

None - deposit is made online.



Reporting Requirements

Federal Payroll Tax Reporting Requirements

*Mailing addresses vary by state and/or region. These addresses are for Arizona businesses. If your business is located inanother state, look in the Form instructions for correct mailing addresses.

WHEN TO FILE ADDITIONAL INFORMATIONWHAT AND WHERE TO FILE *FORM NUMBER AND TITLE

The last day of the monthfollowing the end of eachcalendar quarter.

By January 31. If all tax isdeposited when due, youhave until February 10.

To be completed by eachemployee when they startwork.

Due to SSA by March 1. Mustbe furnished to employee by Transmitted with Form W-3 and allFebruary 1. W-2s for the year.

Due to SSA by March 1.

Due by March 1. Must befurnished to employee byFebruary 1.

March 1, or March 31 if filedelectronically. Must be fur-nished to vendor byFebruary 1.

941 Employer's QuarterlyFederal Tax Return.

940 Employer's Annual FederalUnemployment Tax Return .

W-4 Employee's WithholdingAllowance Certificate .

W-2 Wage and Tax Statement.

W-3 Transmittal of Income andTax Statements.

1099-R

1099-Misc.

Without payment:Department of the TreasuryInternal Revenue Service CenterOgden, UT 84201-0005

With payment:Internal Revenue ServiceP.O. Box 37941Hartford, CT 06176-7941

Without payment:Department of the TreasuryInternal Revenue Service CenterOgden, UT 84201-0046

With payment:Internal Revenue ServiceP.O. Box 37940Hartford, CT 06176-7940

Retained by employer.

Copy A filed with Social SecurityAdministration; copies B, C, 1 and 2 toemployee.Copy D for employer records.

Use one W-3 to transmit all W-2 Copy A’sto SSA.

Copy A to Department of the TreasuryInternal Revenue Service CenterAustin, TX 73301(Use Form 1096 to transmit.)

Form 1099Department of the TreasuryInternal Revenue Service CenterAustin, TX 73301

Employers are no longer required to routinely submit Forms W-4 to the IRS.

Must be prepared for each employee.

Distributions from pensions, annuities, retirement, profit-sharingplans, IRA’s, etc.

For each person you paid $10 or morein royalties, $600 or more in rents,services, income payments, prizes andawards, gross proceeds to an attorney– see instructions for Rules &Thresholds amounts. Form 1099-Misc.www.irs.gov.



*Mailing addresses vary by state and/or region. These addresses are for Arizona businesses. If your business is located inanother state, look in the Form instructions for correct mailing addresses.

WHEN TO FILE ADDITIONAL INFORMATIONWHAT AND WHERE TO FILE *FORM NUMBER AND TITLE


Due by February 28.


A-I-QRT Arizona QuarterlyReport of Income Tax Withheld.

A-1R Arizona WithholdingReconciliation Return.

UC-018 Unemployment Taxand Wage Report .

Arizona Department Of RevenueP.O. Box 29009Phoenix, AZ 85038-9009Online at www.az.taxes.gov

Arizona Department of RevenueP.O. Box 29009Phoenix, AZ 85038-9009

Arizona Department of EconomicSecurity (DES)P.O. Box 52027Phoenix, AZ 85072-2027

For assistance call:Phoenix (602) 255-2060Toll-free in Arizona:1-800-843-7196

Used to transmit all W2’s to the state.

For assistance call:Phoenix (602) 771-6601

Reporting Requirements (continued)

Arizona Payroll Tax Reporting Requirements

Supplemental Wages

If supplemental wages such as bonuses, commissions, overtime pay are included in the same payment with regular wages,tax to be withheld is determined as if the total of the supplemental and regular wages were a single payment for the regu-lar payroll period.

If supplemental wages are not paid in the same payment as the regular wages the employer may:

1. Withhold at a flat rate of 28% for federal; there is no flat rate provision for Arizona, or

2. Combine the supplemental wage with the last regular wage, determine the tax on the total wage and subtract theamounts already withheld on the regular wage payment.

Fringe Benefits

A fringe benefit is a form of pay for the performance of services such as the use of a company vehicle. The IRS categorizesthree types of fringe benefits:

1. Performance of services.

2. Provider of benefit.

3. Recipient of benefit.

Any fringe benefit you provide is taxable and must be included in the recipient’s pay unless the law specifically excludes it.



Other Tax Requirements

Whenever a wage payment is made, the employer must provide the employee with a statement of the gross wages and spe-cific deductions (if any). Use Form W-4 submitted by the employee and the tax tables provided in Circular E, Employer’s TaxGuide to determine the correct income tax to withhold. If the employee fails to submit a W-4 Form, the employer must with-hold at the rate applicable to a single person who has no withholding exemptions.

When making a reimbursement or payment of moving expenses to or for an employee, the employer must complete andfurnish the employee with a Form 4782 for each move.

The employer must also furnish a Form W2 to each employee showing remuneration and withheld taxes for each calendaryear. Flat rate expense account allowance, disability insurance paid by the employer, and non-qualified moving expensereimbursements are among the items to be included as other compensation on Form W2. Upon request, Form W2 must befurnished to a terminated employee within 30 days after the request or the final wage payment whichever is later. All otherW2 Forms should be given to the employees by January 31, of the following year.

Compliance with the payroll tax requirements is quite cumbersome and complicated. Once a business employs more thana few people, we recommend that a qualified accounting firm or payroll service be used. It has been our general experiencethat the cost of the service is far outweighed by the personnel and management time required to operate the payroll sys-tem in house.

Payroll Tax Rates

The following charts contain tax rates and the taxable wage basis for employers and employees. The limits and maximumcontributions given are per employee.

TOTAL

1.45%

1.45%

no limit

no limit

7.65%

7.65%

6.0%

5.1%

0.90%

$7,000.00

$63.00

MEDICARE

6.20%

6.20%

$113,700

no limit

SOCIAL SECURITY

Tax Rate for Employer

Tax Rate for Employee

On Wages Not to Exceed – 2013

Maximum Tax w/h 2013

Federal Unemployment Tax. FUTA (employer only)

Less Credit for AZ Unemployment, if Timely Paid

Net Federal Tax Rate

FUTA Wage Maximum

FUTA Maximum Employer Contribution (per employee)

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NOTE: Beginning in 2013 there is a .9% Medicare surcharge on earned income in excess of $200,000 single or $250,000 married filing jointly.

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Key Advantage

Employer Eligibility

Employer’s Role

Contributors to the Plan

Maximum Annual Contribution(per participant)

See www.irs.gov/epfor annual updates

Contributor’s options

Minimum employee coveragerequirements

Withdrawals, loans andpayments

Vesting

Page 18 – 2013 Arizona New Business Kit – Your Guide to Financial, Business Tax and Accounting Considerations of Starting a New Business


Retirement Plans

You may choose to offer your employees retirement benefits. The following charts contain plans available and the detailsthat can help you decide which one to use.

IRA Based Plans

SEPPAYROLL DEDUCTION IRA

Easy to set up and maintain.

Any employer with one or more employees.

Arrange for employees to make payroll deduction contribu-tions for employees to IRA. No annual filing requirement foremployer.

Employee contributions remitted through payroll deduction.

$5,500 for 2013 Additional contributions can be made by par-ticipants age 50 or over up to $1,000 in 2013.

Employee can decide how much to contribute at any time.

There is no requirement. Can be made available to anyemployee.

Withdrawals permitted anytime subject to federal incometaxes; early withdrawals subject to an additional tax (specialrules apply to Roth IRAs).

Contributions are immediately 100% vested. Vesting for com-pany matches varies based on the employer’s plan.

Easy to set up and maintain.


May use IRS Form 5305-SEP to set up the plan. No annual fil-ing requirement for employer.

Employer contributions only.

Up to 25% of compensation but no more than $51,000 for2013.

Employer can decide whether to make contributions year-to-year.

Must be offered to all employees who are at least 21 years ofage, employed by the employer for 3 of the last 5 years andhad compensation of $550 (for 2013).

Withdrawals permitted anytime subject to federal incometaxes, early withdrawals subject to an additional tax.

Contributions are immediately 100% vested.



S SAFE HARBOR 401(k)SIMPLE IRA PLAN

Salary reduction plan with little administrative paperwork.

Any employer with 100 or fewer employees that does not currently maintainanother retirement plan.

May use IRS Forms 5304-SIMPLE or 5305-SIMPLE to set up the plan. No annualfiling requirement for employer. Bank or financial institution handles most ofthe paperwork.

Employee salary reduction contributions and employer contributions.

Employee: $12,000 in 2013. Additional contributions can be made by partici-pants age 50 or over up to $2,500 in 2013.

Employer: Either match employee contributions 100% of first 4.1% of compensa-tion (can be reduced to as low as 1% in any 2 out of 5 yrs.); or contribute 2% ofeach eligible employee’s compensation.

Employee can decide how much to contribute. Employer must make matchingcontributions or contribute 2% of each employee’s compensation.

Must be offered to all employees who have earned income of at least $5,000 inany prior 2 years, and are reasonably expected to earn at least $5,000 in thecurrent year.

Withdrawals permitted anytime subject to federal income taxes, early with-drawals subject to an additional tax.

Employee salary reduction contributions and employer contributions are imme-diately 100% vested.

Permits high level of salary deferrals by employees without annual discrimina-tion testing.


No model form to establish this plan. Advice from a financial institution oremployee benefit advisor may be necessary. A minimum amount of employercontributions is required. Annual filing of Form 5500 is required.

Employee salary reduction contributions and employer contributions.

Employee: $17,500 in 2013. Additional contributions can be made by partici-pants age 50 or over up to $5,500 in 2013.

Employer/Employee Combined: Up to the lesser of 100% of compensation or$51,000 for 2013. Employer can deduct amounts that do not exceed 25% ofaggregate compensation for all participants.

Employee can decide how much to contribute pursuant to a salary reductionagreement. The employer must make either specified matching contributions ora 3% contribution to all participants.

Generally, must be offered to all employees at least 21 years of age who workedat least 1,000 hours in a previous year.

Withdrawals permitted after a specified event occurs (e.g., retirement, plan ter-mination, etc.) subject to federal income taxes. Plan may permit loans and hard-ship withdrawals; early withdrawals subject to an additional tax.

Employee salary reduction contributions and most employer contributions areimmediately 100% vested. Some employer contributions may vest over timeaccording to plan terms.



Key Advantage

Employer Eligibility

Employer’s Role

Contributors to the Plan

Maximum Annual Contribution(per participant)

See www.irs.gov/epfor annual updates

Contributor’s options

Minimum employee coveragerequirements

Withdrawals, loans andpayments

Vesting

Retirement Plans (continued)

Defined Contribution Plans

401(k)AUTOMATIC ENROLLMENT SAFE HARBOR 401(k)

Permits high level of salary deferrals by employees withoutannual discrimination testing (after 2007).


No model form to establish this plan. Advice from a financialinstitution or employee benefit advisor may be necessary. Aminimum amount of employer contributions is required.Annual filing of Form 5500 is required.

Employee salary reduction contributions and maybe employ-er contributions.

Employee: See annual update for 2013 dollar limit. Additionalcontributions can be made by participants age 50 or over.

Employer/Employee Combined: Up to the lesser of 100% ofcompensation or the dollar limit for 2013 (see annualupdate). Employer can deduct amounts that do not exceed25% of aggregate compensation for all participants.

Employees, unless they opt otherwise, 4.1% salary reductioncontributions, with automatic annual increases for 3 years.The employer must make either specified matchingcontributions or a 4.1% contribution to all participants.

General, must include all employees who have not alreadyopted out and who are at least 21 years of age who worked atleast 1,000 hours in a previous year.

Withdrawals permitted after a specified event occurs (e.g.,retirement, plan termination, etc.) subject to federal incometaxes. Plan may permit loans and hardship withdrawals; earlywithdrawals subject to an additional tax.

Employee salary reduction contributions vest immediatelyand most employer contributions must be 100% vested after2 years of service. Some employer contributions may vestover longer period according to plan terms.

Permits high level of salary deferrals by employees.


No model form to establish this plan. Advice from a financialinstitution or employee benefit advisor may be necessary.Annual filing of Form 5500 is required. Requires annual non-

discrimination testing to ensure plan does not discriminate infavor of highly compensated employees.

Annual employer contribution is discretionary.

Employee: $17,500 in 2013. Additional contributions can bemade by participants age 50 or over up to $5,500 in 2013.

Employer/Employee Combined: Up to the lesser of 100% of compensation or $51,000 for 2013. Employer can deductamounts that do not exceed 25% of aggregate compensation for all participants.

Employee can decide how much to contribute pursuant to asalary reduction agreement. The employer can make additionalcontributions, including matching contributions as set by planterms.

Generally, must be offered to all employees at least 21 years ofage who worked at least 1,000 hours in a previous year.

Withdrawals permitted after a specified event occurs (e.g., retirement, plan termination, etc.) subject to federal incometaxes. Plan may permit loans and hardship withdrawals; earlywithdrawals subject to an additional tax.

Employee salary reduction contributions are immediately 100%vested. Employer contributions may vest over time according toplan terms.



DEFINED BENEFITPROFIT SHARING (See info. for Defined Contribution Plan)

Permits employer to make large contributions for employees.


No model form to establish this plan. Advice from a financial institution or employee benefit advisor may be necessary. Annual filing of Form 5500 is required.

Annual employer contribution is discretionary.

Up to the lesser of 100% of compensation or $51,000 for 2013. Employer candeduct amounts that do not exceed 25% of aggregate compensation for all participants.

Employer makes contribution as set by plan terms. Employee contributions, ifallowed, as set by plan terms.

Generally, must be offered to all employees at least 21 years of age who worked atleast 1,000 hours in a previous year.

Withdrawals permitted after a specified event occurs (e.g., retirement, plan termination, etc.) subject to federal income taxes. Plan may permit loans and hardship withdrawals; early withdrawals subject to an additional tax.

May vest over time according to plan terms.

Provides a fixed, pre-established benefit for employees.


No model form to establish this plan. Advice from a financial institution oremployee benefit advisor would be necessary. Annual filing of Form 5500 isrequired. An actuary must determine annual contributions.

Primarily funded by employer.

Annually determined contribution.

Employer generally required to make contribution as set by plan terms.

Generally, must be offered to all employees at least 21 years of age who workedat least 1,000 hours in a previous year.

Payment of benefits after a specified event occurs (e.g. retirement, plan termination, etc.). Plan may permit loans; early withdrawals subject to an additional tax.

May vest over time according to plan terms.



Independent Contractors

If you had people work for you who were not considered employees you should file Form 1099-MISC if payments madeto them in the course of your trade or business exceed $600 in a calendar year, and the payee is not a corporation. Form1099MISC, should be supplied to the payee by January 31, and filed with IRS by February 28, of the following year.

In order to file the 1099-MISC you must obtain the correct taxpayer identification number. To have accurate information,have your independent contractors fill out a Form W-9 to keep on file.

Below has the list of factors to be considered when making the determination of whether a worker should be classified asan employee or as an independent contractor.

Employee’s Request for Social Security Earnings and Benefits Statement

In order to help employees (or yourself ) verify past earnings covered by Social Security, as well as estimated future bene-fits, use the Form SSA7004SM, Request for Earnings and Benefit Estimate Statement.

Classification as Employee Versus Independent Contractor

An employer must generally withhold payroll taxes on wages paid to an employee. An employer does not generally have towithhold any taxes on payments to independent contractors. The IRS has developed some common-law rules to determinewhether an individual is an employee or an independent contractor. Facts that provide evidence of the degree of controland independence fall into three categories: behavior control, financial control and type of relationship of the parties.

The IRS has a 20-factor control test to help determine whether a worker is an employee or an independent contractor. Thedegree of importance of each factor varies depending on the occupation and the context in which the services are ren-dered. The 20 factors are:

• Instructions to worker

• Training

• Integration into business operations

• Requirement that services be rendered personally

• Hiring, supervising, and paying assistants

• Continuity of the relationship

• Setting the hours of work

• Requirement of full-time work

• Working on employer premises

• Setting the order or sequence of work

• Requiring oral or written reports

• Paying worker by the hour, week, or month

• Payment of worker’s business and/or traveling expenses

• Significant investment by worker

• Realization of profit or loss by worker

• Working for more than one business at a time

• Availability of worker’s services to the general public

• Firms’ right to discharge worker

• Worker’s right to terminate relationship

• Furnishing tools and materials



Chapter 5Selecting a Year-end

If the new business is a sole proprietorship, a partnership, a limited liability corporation, or an S corporation, the companywill usually be required to use a calendar year-end. However, if the business is incorporated, the corporation is often allowedto select a fiscal year-end using a month-end other than December.

Which Month to Choose

The selection of a year-end involves several considerations. The most important factor is the ease by which data is accumu-lated. For this purpose, most companies prefer to use a quarter-end as the last day of the fiscal year (e.g. March 31, June 30,September 30, or December 31). Many companies not using a quarter-end date find that it complicates several governmentfilings and can be confusing to shareholders and others when disclosing quarterly data.

A second consideration involves the nature and seasonal fluctuations of the business. As a general rule, the year-end caus-es a disruption to the normal course of business, especially if a physical inventory is required. It is usually better to have thisdisruption occur during the offseason. Also, since the periods just before and just after year-end often involve an addition-al time commitment by the key officers, a year-end that does not conflict with normal vacation schedules is preferable. Forthis reason, a calendar year-end is often not selected.

There are also tax reasons to select a year-end other than December 31. If the company has, for example, a June 30 year-end, it is possible for the corporation to pay bonuses in June and obtain a tax deduction. The employee then has six monthsto decide whether to pay tax currently on the income or attempt to shelter it.

Proper planning in selecting a year-end can also defer the payment of taxes at the corporate level. Suppose the companyincorporated in July and operated at break-even through the next April, but expected May and June to be big incomemonths. By selecting a March or April year-end, the company can delay for ten months the payment of taxes on the May andJune income. Since cash is often scarce for a startup company, this tax deferral can provide a significant benefit.

How to Make the Election

The election of a year-end is made on the first tax return of the corporation. Even though the corporate bylaws disclose thefiscal year and the request for Federal Identification Number (Form SS4) asks for the year-end, a final election is not madeuntil the tax return is filed. There is not a separate form for making the election, the corporation merely states the fiscal yearon page one of Form 1120. There are two important requirements for making the election. First, it must be made on atimely filed (including extensions) return. If the first return is not timely filed the year-end of the corporation is, by default,December 31. Secondly, the first year can not be longer than 12 months. For example, if a company is incorporated onJune 25, and wants to select a June year-end, it must file a return for the five day period, June 25 through June 30.Otherwise, the first return would be for twelve months and five days which is not allowed.



Changing the Year-end

Once a year-end is selected, it may be changed under certain conditions without the prior approval of the Internal RevenueService. If the conditions are not met, it can only be changed if permission is obtained from the Internal Revenue Service. Inconsidering a request for change of year-end, the Internal Revenue Service will look closely at the business or economic rea-sons for the change. The absence of a tax avoidance motive is generally a requirement.

Certain corporate events will require a change of year-end. For example, if the company's stock is acquired by another cor-poration, the acquired corporation will be required to use the same year-end as the parent company. Also, recent tax lawchanges mandate that S corporations and many personal service corporations use a December 31 year-end.



Chapter 6Income Taxes

Eventually you will have to deal with income taxes. The income tax laws are extensive and can be confusing for an individ-ual starting a business. This chapter does not cover all the tax ramifications of a new business; however it provides someguidance on complying with the laws. A qualified CPA or tax attorney should be consulted when you are dealing withincome taxes. Income taxes have a direct and potentially significant impact on the cash flow of your business.

Summary of Federal and Arizona Income Tax Forms for Businesses

C CorporationsFederal Income Tax Filing Requirements

C Corporation

S Corporation

Limited LiabilityCompany other than

single member LLC

Partnership

Sole Proprietorship

Federal Form 1120Arizona Form 120

Federal Form 1120SArizona Form 120S

Federal Form 1065Arizona Form 165Included in income of owner.

Federal Form 1065Arizona Form 165

Federal Form 1040,Federal Schedule CFederal Schedule FFederal Schedule SEArizona Form 140

Corporate tax rates apply.

Generally not a taxable entity. It is treated as a conduitthrough which taxable income is passed to the sharehold-ers for inclusion on their respective tax returns.

Taxed as a partnership.Tax in same manner as owner.

Not a taxable entity. It is treated as a conduit throughwhich taxable income is passed to the partners for inclusion on their respective tax returns.

Considered a component of the individual’s personal tax situation.

REQUIRED ANNUAL TAX RETURN ADDITIONAL INFORMATIONTYPE OF ENTITY

Form to file

Where to file

When to file

Additional Information

Form 1120, U.S. Corporation Income Tax Return.

Department of the TreasuryInternal Revenue Service CenterOgden, UT 84201-0012

On or before the 15th day of the third month following the close of the tax year.

An automatic 6-month extension of time to file is available by filing Form 7004.

Taxes are due in full by the original due date ofthe return. A return must be filed even if no taxis due.

Form 8109, Federal Tax Deposit Coupons or EFTPS.

Deposit electronically with EFTPS or Form 8109.

For calendar or fiscal year corporations the payments are due bythe 15th day of the 4th, 6th, 9th, and 12th month of the tax year.

Form 8109 is computer-generated and mailed automatically to allcorporations with a federal identification number.

If the corporation’s estimated tax is expected to be $500 or more,estimated tax payments are required.

ANNUAL INCOME TAX RETURN ESTIMATED TAX PAYMENTS



C CorporationsArizona Income Tax Filing Requirements

All CorporationsArizona Corporation Commission Requirements

S CorporationsFederal Income Tax Filing Requirements

Form to file

Where to file*

When to file

Form 1120S U.S. Income Tax Return for an S Corporation.


On or before the 15th day of the third month following theclose of the tax year.

An automatic 6-month extension of time to file is availableby filing Form 7004.

Form 8109, Federal Tax Deposit Coupons (required in limited situations) or electronically with EFTPS.

Deposit with an authorized financial institution.

For calendar or fiscal year corporations, the payments are due by the 15th day of the 4th, 6th, 9th, and 12th month of the tax year.


* Mailing addresses by state/region/revenue. These addresses are for Arizona businesses. If your business is located inanother state, look in form instructions for correct mailing address.

Where to file

When to file

Filing fee

Arizona Corporation Commission400 West Congress Street, Suite 221Tucson, AZ 85701Or online at www.cc.state.az.us

Due date assigned by Corporation Commission. Proforma mailed to taxpayer must be used. 60-day extension may berequested only for tax exempt organization.

$45 for a profit corporation; $10 tax exempt organization.


Form to file

Where to file

When to file

Corporate minimum tax

Form 120, Arizona Corporation Income Tax Return.



Federal extension automatically extends Arizona return ifat least 90% of the tax liability has been paid, otherwisefile Form 120EXT.

$50.

120ES, Arizona Corporation Estimated Tax Payment.


For calendar or fiscal year corporations the payments aredue by the 15th day of the 4th, 6th, 9th, and 12th monthof the tax year.




S CorporationsArizona Income Tax Filing Requirements

Partnership and Limited Liability CorporationsFederal Income Tax Filing Requirements

Partnership and Limited Liability CorporationsArizona Income Tax Filing Requirements

Form to file

Where to file

When to file

Form 165, Arizona Partnership Income Tax Return.


On or before the 15th day of the fourth month followingthe close of the tax year.

Federal extension automatically extends Arizona, or fileForm 120EXT.

None

N/A

N/A



Form to file

Where to file*

When to file

Form 1065, U.S. Partnership Return of Income.


On or before the 15th day of the fourth month followingthe close of the tax year.

An automatic 5-month extension of time to file is availableby filing Form 7004.

None

N/A

N/A


Form to file

Where to file

When to file

Form 120S, Arizona S Corporation Tax Return.



Federal extension automatically extends Arizona return ifat least 90% of the tax liability has been paid; otherwisefile Form 120EXT.

Form 120ES


For calendar or fiscal year corporations, the payments aredue by the 15th day of the 4th, 6th, 9th, and 12th monthof the tax year.


Note: S Corporations must file the Annual Report and Certification of Disclosure with the Arizona Corporation Commission,the same as all other corporations.



Proprietorship Individual Income TaxFederal Income Tax Filing Requirements

Proprietorship Individual Income TaxArizona Income Tax Filing Requirements

Form to file

Where to file

When to file

Form 140, Arizona Resident Personal Income Tax Return.

Without payment:Arizona Department of RevenueP.O. Box 52138Phoenix, AZ 85072-2138

With payment:Arizona Department of RevenueP.O. Box 52016Phoenix, AZ 85072-2016

On or before April 15th.Federal extension automatically extends Arizona, or fileArizona Form 204 by April 15, if payment is due.

Form 140ES Estimated Tax For Individuals.


Due on or before the 15th day of April, June, Septemberand January.

Required if Arizona gross income is reasonably expected to exceed $75,000 for singles (head of household), marriedfiling separately, or $150,000 married filing jointly for thetaxable year, or was greater than $75,000 in the precedingtaxable year.



Form to file

Where to file*

When to file

Form 1040, U.S. Individual Income Tax Return, plusSchedule C and SE.

Without payment:Internal Revenue Service CenterFresno, CA 93888-0002

With payment:Internal Revenue Service CenterP.O. Box 7704 San Francisco, CA 94120-7704

On or before April 15th.A 6-month extension is available by filing Form 4868 (4months if “out of country”), Application for AutomaticExtension of Time to File U.S. Individual IncomeTax Return.

If you are a US Citizen or resident and your tax home is in aforeign country and you expect to qualify for the foreignearned income exclusion and/or foreign housing exclusionor deduction, you should file your application for a 6-month extension using Form 2350.

Form 1040-ES Estimated Tax For Individuals.

Internal Revenue ServiceP.O. Box 510000San Francisco, CA 94151-5100

Due on or before the 15th day of April, June, Septemberand January.




First Corporate or Partnership Return

The first tax return a corporation files is very important. As part of that return elections are made which will dictate the waythe business is taxed for many years to come. Some of the more significant elections that may need consideration are out-lined below:

Election to capitalize and amortize costs incurred to organize the business. These can be legal, accounting or sim-ilar fees paid to commence operations. Such costs are not normally considered expenses of the corporation andare not deductible unless this election is made.

Election to accrue vacation pay earned but not taken by employees at the end of the tax year. Without this elec-tion, vacation pay is not deductible until the year taken.

The elections discussed above are only a few of those that may need to be considered in an initial return. A qualified taxpractitioner can help plan how best to utilize elections.

Tax Planning

Proper tax planning is essential in order to make the most of the income tax laws. You will probably need to develop a rela-tionship with a qualified professional who has experience with the taxation of your type of business. Tax planning is not aonetime shot right before the return is due. Tax planning is a year-round endeavor requiring communication on both sidesyou and your CPA. Proper planning ensures that there are no surprises when the return is filed.

State Taxes

If your company will be doing business in more than one state, it is essential that you familiarize yourself with the tax laws,as well as the registration and filing requirements of those states. Each state has its own rules and regulations; if you are innoncompliance, you may be barred from doing business in that state.

Conclusion

Income tax laws are quite complicated. The amount you may save by attempting to tackle your own taxes, particularly asthey relate to a business, can be greatly overshadowed by the expense you may incur if you make a mistake. This axiom takeson greater significance when the return is for a corporation, especially the first return. However, a far greater considerationthan potential mistakes is missing opportunities which may be available to you and your business.



Chapter 7Cash Planning and Forecasting

CASH IS KING! The life blood of any business is its ability to collect cash and pay bills as well as pay its employees, particu-larly its owners. Far too often small businesses are profitable, but they do not have enough operating capital to meet theircurrent needs. Consequently, they may be forced to sell out to a stronger competitor, sell a portion of the company toinvestors at an undesirable price or close the doors and put the company out of business. None of these alternatives are typ-ically what the owners intended when starting the business.

The ability to forecast cash resources and uses is an art and is by no means a well-defined science. None of us have a crystalball and any cash forecast which is prepared by the management of a company or an outside consultant can be no morethan a guess as to when the customers will pay and when your business will pay its obligations. Hopefully, the more effortthat is put into cash forecasting the better will be the educated guess and the more accurate the resultant picture of thefuture operations of your business.

Starting the Analysis

One of the most significant factors to be considered in your cash flow forecast is the volume of sales which will be generat-ed in the next several months and for the rest of the period for which you intend to forecast. Your sales forecast must be asfine tuned as possible. It is typically unrealistic to assume that there is a million dollar market for your product in your areaand you will be able to capture a specified percent of it. A sales forecast needs to be based upon specific facts. These mightinclude your sales history or the history of similar businesses you have owned or operated or the competition. In your areaof industry, what has been the experience of similar operations?

Some of the questions which should be addressed would include what other factors can be controlled such as adding newproduct lines, deleting unprofitable operations, adding a new salesperson, or terminating one that is not producing toquota? In preparing a forecast, you must also take into consideration items such as the seasonality of your business, the rel-ative state of the economy and the period over which you will forecast.

Obviously your ability to forecast sales for the next month is better than it is for three to five years from now. The amount ofdetail which must be included in the cash forecast is really a matter of preference. It can be based on per-unit sales extend-ed out by the sales price of each type of unit or an average sales volume per day, week or month of your type of business inits current environment.

Cash Collections

Once you have determined a reasonable level of sales and you are comfortable with the forecast you have made, you mustaddress questions such as: what percentage of sales are received in cash, and what portion are credit sales for which youwill have to carry accounts receivable? For those that are receivable based, how soon is the cash collected? Do you have towait for customers to pay or do third parties such as Visa or MasterCard take the customers account and convert it to cashwith a discount?



Cash Collections (continued)

If you are relying on customer payments for collection of receivables, you must determine what portion of the receivableswill be collected in 30 days, 60 days, 90 days and thereafter, and what portion, if any, may never be collected. To assume that100% of your sales will ultimately be converted to cash is probably unrealistic especially considering the current economicenvironment and the tight cash situations that may face some of your customers.

Other sources of cash may be available in addition to sales. Do you expect to bring in a partner or other investors, or can youborrow money from a bank? When will you receive the cash and how much will you get? Part of your cash flow analysis maybe to determine how much investment money or loans will be required to operate your business.

Once you are comfortable with the cash receipt side of your business, and the timing of the collections of funds from yoursales and other sources, it is necessary to consider the expenses and other cash needs of your business operation.

Cash Disbursements

Certainly if your business entails sales of inventory you will have to purchase the merchandise from others or purchase thecomponent parts and pay employees to assemble it. This may require a significant outlay of cash before the first dollar ofsales is generated and received. You should consider how often and in what amount your employees must be paid andwhen their payroll taxes must be deposited.

Additionally, you need to know the credit trade terms your vendors are willing to advance to you. Do you have to pay forinventory items on a C.O.D. basis or can you pay for them 30 days or 45 days after receipt? What expenses must be paid toallow you to convert purchased merchandise to salable inventory? If your production requires utilities to run machines orsupplies that are required such as dispensable chemicals or packing materials that must be purchased prior to the sale ofthe inventory you should factor the timing of payment. In addition to the cost of manufacturing, you should considerwhether your productive capacity will allow you to generate enough inventory to support the level of sales which you arepredicting. If the volume of sales you forecast is above and beyond your ability to produce today, what changes in your oper-ating environment must be made to meet the production levels. Will you need additional employees, if so, how much willthey cost?

Do you have to acquire additional machinery for your shop operations? What is the cost of the machinery and when will youhave to pay for it?

Once you have determined the cost of operating your production or service facilities, you need to consider what otherexpenses you must pay to keep the doors of your business open. You typically will have to pay rent for your office or man-ufacturing facility. You must consider how much the monthly payment is and when it has to be paid. Ask yourself if therewill be other cash requirements such as a deposit on first and last months' rent. If you are opening a new business, you mustconsider what your cash requirements are to make your facility ready for your specific needs and purposes. Will you have tobuy or rent furniture? Will you need to make tenant improvements or pay deposits for utilities and other services?

You also need to consider many of the overhead items and costs to open a new business that will hopefully be one timeexpenses. This may be attorney's fees for drafting partnership agreements or incorporating your business. The cost to obtainbusiness licenses, authorization from the taxing authorities, setting up an accounting system, stationary costs, costs of signsor logos.



Cash Disbursements (continued)

It may seem like the list of costs and expenses to be incurred is endless. It may even discourage you in moving forward withyour business endeavor. However, it is imperative to make the list as detailed as possible to ensure that you have sufficientfunds to make your operation ready for business prior to running out of cash. The more detailed the list and the more suffi-cient information you can provide, the less chance there is of unpleasant surprises as you move down the course to open-ing your business.

In addition to determining the amount and volume of expenses and cash outlays you will have to make, it is critical to deter-mine the timing of such payments. As we have discussed in other chapters, there may be a variety of financing alternativeswhich are available to you. Most of the startup cost which you incur can be delayed or deferred until you can generate thecash from your operation to help pay them. This needs to be carefully analyzed and factored into your cash flow analysis.However, a good rule of thumb is to assume that you are going to have to pay your expenses sooner than you think and thatyou will collect your cash slower than you anticipate. If you work with this attitude, any surprises should be favorable ones.

Cash flow projections can be very slow, time-consuming, and tedious to undertake. It is often very tempting to hire some-one else to prepare the projections for you. There are a variety of individuals who can help you do this, but the critical fac-tor is that they only help. You, as the owner and operator of the business, are the only one truly qualified to develop yourcash flow projections. You know what it takes to open and operate your business. Certainly a trained professional can offerguidance and ask pointed questions to be sure you are considering all of the necessary and sometimes hidden costs of oper-ating a business. However, the more effort you put into developing the cash flow projections the more accurate they willtend to be. This exercise may also help you to pinpoint areas of potential cash savings which you had not otherwise consid-ered.

We have included a worksheet following this chapter which may assist you in developing a cash flow analysis.

Bear in mind however, this worksheet does not include all the items that should be considered in preparing your cash flowanalysis but should help raise many of the questions which you need to ask yourself before deciding how much cash will berequired to establish and operate your business and what period of time must elapse before you can expect to pay back thelender or return profits to your investors.

Cash Inflows

Cash from sales

Cash from owners

Cash from loans

Cash from other investors

Total Cash Inflow

Cash Outflows

Opening inventory

Capital equipment

Property

Renovations

Marketing & promotion

Deposits

Cash required to open

Cost of goods sold

Salaries

Payroll taxes and benefits

Rent

Advertising & promotion

Utilities & telephone

Professional fees

Insurance

Miscellaneous

Total operation expenses

Interest payment

Principal payment

Total loan payments

Total Cash Outflow

Net Cash Flow

Cumulative Cash Flow

Page 34 – 2013 Arizona New Business Kit – Your Guide to Financial, Business Tax and Accounting Considerations of Starting a New Business


4TH QUARTER3RD QUARTER2ND QUARTERPROJECTED STATEMENT OF CASH FLOWS:(FOR ONE YEAR PERIOD)

Sample Worksheet

1ST QUARTERPRE-OPENING



Chapter 8Obtaining Credit and Financing for Your Business

If you are not independently wealthy, and perhaps even if you are, eventually you will probably need to obtain some out-side capital for your business. In some instances, you may need to obtain capital for the initial expenses prior to openingyour business or for instance, the funds you require may be for expansion or working capital during the off season.

Generally, business financing can take two forms, debt or equity. Debt, of course, means borrowing money. The loans maycome from family, friends, banks, other financial institutions or professional investors. Equity relates to selling an ownershipinterest in your business. Such a sale can take many forms such as the admitting of a partner or, if you are in a corporation,issuing of additional common stock, options or warrants to investors. It is typically a prudent idea to consult with youraccountant and attorney as there are many significant tax and legal ramifications to such a step.

How Do I Get The Money?

Irrespective of the type of financing you need and are able to obtain for your business, the process of obtaining it is some-what similar. There are several questions that must be answered during the course of raising money for your business. Theability to answer these questions is critical to your success in obtaining financing as well as the overall success of the busi-ness. Remember, in raising capital you have to sell the ability of your business to potential investors in much the same wayas you sell your product to your customers.

• How much cash do I need?

To answer this question you will have to do some serious cash planning, which will require estimates of future sales, therelated costs, and how quickly you must pay your vendors. You will also have to factor into your planning some assumptionsabout when you will generate enough cash to pay the money back. However, if you raise cash through equity you probablydo not need to pay it back but your investors will want to know how the value of the business will grow and how they willbenefit through dividends or selling their shares.

• What will you do with the money?

One of the most important questions you will have to answer for a potential investor is how the money will be spent. Willyou use it for equipment or to hire additional employees or perhaps for research and development for a new improvedproduct? Again, part of the answer on how you spend the money is how it will benefit the company.

• What experience do you have in running your business?

One of the primary reasons for business failure is lack of experience and management. You will need to convince yourinvestors that you have the knowledge, experience and ability to manage your business and their money at the level atwhich you expect to operate.

• What is the climate for your type of business and your geographic location?



How Do I Get The Money? (continued)

Few investors will want to put money into your business if you have not done sufficient homework to determine that youhave a reasonable chance of success. If your business is based on existing economic or legal conditions which are subjectto change in the near future, your risk is substantially increased. Even if your business has great potential, if the local econ-omy is sluggish to the point that it cannot support your venture, you need to be aware of this before moving ahead.

Development of a Business Plan

The homework you have done in determining if your prospective business is viable is typically documented in a businessplan. The business plan outlines your type of business, the key executives of the business, your potential markets, your com-petitors, and your projections for cash needs and profitability. The development of a plan takes time to prepare. It should beprofessionally presented to your potential financing sources as it is your initial marketing material for your venture. Workingwith an experienced accounting firm can often facilitate the creation of this plan.

Once you have developed the business plan, you can begin looking for financing. One of the first steps is to determinewhether to raise funds through debt or equity. There are positive and negative aspects to each type of capital. The cost toyour company of each type of funding is different as is the way in which they are treated for income tax purposes. The inter-est on borrowed money is deductible by a business for income tax purposes, which reduces the effective cost to your com-pany. Dividends which you might pay on the same investment in stock would typically not be tax deductible by your com-pany. In selling stock there usually is no firm commitment by your company to pay the money back but your stockholderwill want and generally will have a legal right to have a voice in the management of your company. When you have madethe decision as to the type of financing you think is appropriate to fit your desires and needs it is probably a good idea toconsult with your accountant as to alternative types of debt or equity financing available.

Financing Alternatives

Whether you determine that debt or equity financing is the best choice for your company, there are a number of alternativetypes of financing available. Depending upon the nature of your business the financing may be a combination of debt andequity and may be tailored to fit the specific needs of your company.

In the summary we will only mention a few of the more conventional methods for a young company to obtain capital, thoughthe possibilities are many. A good business-oriented accountant can discuss these and other alternatives in greater detail.

Debt Financing Sources

• Banks. The first source of funds which typically comes to mind when borrowing money is a bank. Banks are in thebusiness of loaning money. Banks typically lend to small businesses on a secured basis using equipment, inventoryor accounts receivable. The more liquid and readily marketable assets you have to offer as security, the more accept-able they are likely to be to a banker. Loans from a bank may take several forms such as:

1. A line of credit which renews annually and allows you to borrow up to a predetermined maximum as you need it,and pay it back as funds from sales and receivables are collected.

2. A short term demand note which is payable in full on a specified date.

3. A term loan for the purchase of a specific asset such as a computer or a machine.



Debt Financing Sources (continued)

As your relationship with your banker develops and your business becomes established, you may consider a long-term (3 to5 years) loan which will be payable in monthly installments.

• Lease Financing. In today's business environment it is quite common to acquire equipment through lease agree-ments. Leasing packages come in a variety of types through many sources. Leasing companies typically will accepta somewhat higher degree of credit risk because they are looking to the value of the equipment for collateral if yourbusiness cannot make the agreed upon payments. For this reason, leasing companies generally prefer to financenew equipment of a general purpose nature which can be resold if necessary. Leases often run for a period of threeto five years and because of the risk that leasing companies are willing to take, they are somewhat more expensivethan commercial bank loans.

• Trade Credit. A very important source of financing for your company may be from the vendors and suppliers withwhom you do business. Many suppliers will originally ask for cash on delivery or in some instances they want pay-ment before starting on your order, depending on the nature of your purchase. Most suppliers will quickly establishtrade credit with you once you have gained their confidence by continuing to do business with them and paying asrequested. Establishing good relationships with trade creditors is essential because it allows you to use the goodsand services in your operations and sell your product to your customers, in some instances before you pay for them.The trade credit you build today will be relied upon by other vendors as you attempt to establish yourself with othervendors in the future. Trade credit terms will vary depending on the type of purchase you make, the industry you arebuying from and the industry you are in.

Equity Financing Sources

Equity financing usually means selling a portion of your business. This can be accomplished in a number of ways includingthe sales of common or preferred stock or stock warrants. Equity sales are usually carefully tailored to meet the needs ofboth the company and the investor.

• Venture Capital Companies. A venture capital company or fund is typically a company that is in the business of tak-ing risks. A venture capital fund is often backed by a group of individual or corporate investors. The investors areoften represented by a management group which evaluates potential investments and manages the existing invest-ment portfolio.

The price of venture capital financing is usually very high when compared to borrowing money from a bank, but itmust be remembered that venture capitalists are dealing with much higher risk situations than commercial bankswill finance. This cost of venture capital is measured in terms of the portion of your company you must sell to obtainthe level of financing you require. A venture capital firm sometimes requires a 300 to 500 percentage return on itsinvestment over a four to five-year investment period. While this may seem like an enormously high return, a ven-ture capitalist is in the risk business and the return on a good investment must help offset those companies that donot meet their projections or fail altogether. To determine the price of such financing, a venture capitalist will startwith the amount of financing you require and calculate what he must receive at the time his investment will be soldto allow him to achieve the rate of return he deems necessary.



Equity Financing Sources (continued)

• Based upon the operating projections you provide, discounted based on his experience, he will estimate what yourcompany might be worth at the time his investment will be liquidated. This might be at the point of a public offer-ing or a sale to a corporate investor. The last step for a venture capital company in determining pricing is to calculatewhat percentage of the company he must own to realize the return he desires. At this point, the "horse trading" gen-erally begins. As a general rule you will want to retain as much of the ownership of the company as you can. The ven-ture capitalist wants enough ownership to achieve his investment goals and have some control over how his moneyis spent. This will often be achieved by voting power and representation on the Board of Directors. At the same timea venture capitalist wants to be sure there is sufficient reward in the company for you and your management teamto be motivated and achieve the projections in your business plan.

• A venture capital company is often managed by an individual or group of individuals with a strong background inbusiness and management. They can often provide depth of experience and management assistance in areas whereyour management team may be weak. A venture capital group can very often provide contacts and valuable intro-ductions in your industry.

Remember a venture capital investor becomes a member of your team.

• Corporations. A corporation, in a similar line of business, or related business may be interested in an investment inyour business venture. A corporation may view an investment in your business as a way to enhance its share of themarket, or perhaps capture resources it needs, while also increasing its opportunities for profit. Such a corporationwill want to participate in the management activities of your firm to some degree and will expect representation onthe Board of Directors. The business expertise, marketing channels, and customer base of such a company can be avaluable asset to your business. An existing corporation, active in a similar line of business can often react to oppor-tunity much quicker than a venture capital firm. Corporate investors can be flexible in the type of investment struc-ture allowing you to negotiate for favorable financial and tax treatment.

• Private Individuals. Very often, individuals who are successful in their own right and have accumulated substantialwealth may be looked to for investment in your business venture. Such individuals may believe that the success ofyour business may enhance theirs as well as help increase their personal wealth. These individuals, like a venture cap-ital company, very often want to participate in the management activities of your firm and help guide your progressthrough representation on the Board of Directors. The business insight and contacts of these individuals can oftenbe a valuable asset of your business. An individual investor can often react to opportunity much quicker than a ven-ture capital firm and typically has only his own interests to serve as opposed to a financial backer or group of limit-ed partners.

Individual investors can be more flexible in the type of investment structure they can deal with, and often have per-sonal, financial and tax motivations to consider.



Chapter 9Insurance

Business insurance, like many types of expenditures, is one of those items which business owners typically do not like to pay.You must remember that sufficient insurance can be as critical to the success of your business as a good product or service.Without proper insurance you could lose all of the money, time, and effort you put into your company. The types andamounts of coverage you purchase must be evaluated on a cost-benefit basis like any other commodity you purchase. Youraccountant and insurance agent can help you review the amount of coverage you need for various purposes. Usually, youwill want to insure against risks which could have significant detrimental impact on your business. This normally wouldinclude such items as fire, storm damage, theft, general and product liability, as well as disability, and business interruptioninsurance. Depending on the nature and size of your business it can be a good idea to self-insure for all or a portion of cer-tain losses. Self insurance can be accomplished by not buying coverage for incidental risks or increasing the deductibles onpolicies which you do buy. Often, raising the deductible can have a very favorable impact on policy premiums. The admin-istrative cost to the insurance company to process small claims is quite high; consequently the rates typically go down sub-stantially if they are relieved of this expense by insuring for losses in excess of a sizable deductible amount. An insurancebroker can provide you with comparative costs for various types of coverage with varying degrees of deductible amounts.

Required Policies

Very little insurance coverage is mandatory. The only coverage typically required by law is workman's compensation cover-ing injuries to employees while on the job. An insurance agent can explain the required coverage, the rating systems, andhelp you purchase a policy.

You must also be aware that the terms of your building, office lease or mortgage may require you to carry certain kinds ofinsurance coverage in specified minimum amounts. If you have leased equipment or have borrowed money from a bank orother lenders, there will usually be insurance requirements in the agreements relating to these transactions. There are manyother types of policies which you may wish to consider. The specific coverage provided by each and the related costs can beexplained in depth by a qualified insurance broker.

Types of insurance coverage which you might consider for your business are:

• Business Interruption. This coverage, as the name implies, covers lost revenues your business would generate if therewas a forced shut down beyond your control. While this is obviously valuable insurance, the policy premium mustbe carefully considered relative to the potential profits your business might lose during a short shutdown of opera-tions.

• Employee Fidelity Bond. This type of insurance typically covers the risk of loss from theft by employees. If your busi-ness deals in large amounts of cash, negotiable securities, or similar types of assets, you may be well-advised to con-sider this coverage. Certain industries are required to carry this insurance by regulatory authorities.

• Umbrella Coverage. This type of insurance covers losses above and beyond the limits of other policies which youcarry. Umbrella policies usually pertain to liability of various sorts and are usually valuable if your business or youhave a net worth which requires protection in the event of a catastrophic loss.



Required Policies (continued)

• Disability Coverage. This type of insurance provides a benefit should you become disabled and unable to work.Policy premiums vary with the benefit provided and the waiting period required between the start of the disabilityand the commencement of benefit payments.

Insurance is like any other product you purchase. Before purchasing you should consult with more than one broker as toyour needs for protection. You should discuss insurance needs with acquaintances in the same or similar business as yours.Before buying coverage you should check the reputation of the company that is underwriting the policy. Companies arerated by the A.M. Best Company and such ratings are available through your insurance broker.



Chapter 10Selecting Professional Advisors

Starting your own business obviously involves a multitude of decisions; decisions which may seem overwhelming withoutthe right players on your team. In order to succeed you need to equip yourself with every tool at your disposal.

One of the most cost effective tools you can utilize is the expertise of a specialist. The right accountant and attorney caneliminate a host of problems and potentially costly errors you might make as you build the financial foundation of your suc-cessful business.

As any coach can tell you, having a first-rate quarterback (you) won't guarantee a winning team without a first-rate line ofdefense. The right accountant and attorney are your best defense. Their expertise can help save you money, which in turncan increase profits.

When enlisting the expertise of an accountant and attorney you want a specialist suited to meet your specific needs. Youwant a specialist who will listen to you. More importantly, you need someone you can and will listen to as they devise strate-gies to help you succeed.

At Keegan, Linscott & Kenon, PC we can help you avoid the common pitfalls that many new small business owners makewhen starting their new venture. We are a full-service CPA firm that offers affordable service to new business owners,whether it is from QuickBooks help, audit and review services, or tax services.

Keegan, Linscott & Kenon, PC was formed 15 years ago upon principles of quality and innovation. From this solid founda-tion, we’ve become successful through the success of our clients. In these times of economic uncertainties, you need a finan-cial partner at your side to help you achieve your long-term goals.

You want to succeed and you can. By taking the time to make key decisions and enlisting the right players on your teamyou will succeed!

We wish you success and welcome you to the wonderful world of free enterprise.

Conclusion

You now have a handy reference guide to starting a business. With it you should be able to successfully handle many of theproblems encountered in starting and running a business. Always remember to seek professional advice in areas which youare not sure. The benefits will far outweigh the cost.

Good luck!

Keegan, Linscott & Kenon, PC



Appendix AKeegan, Linscott & Kenon, PC

Keegan, Linscott & Kenon, PC is a full service accounting firm in Tucson, Arizona. The four directors Carla Keegan,Christopher Linscott, Tony Kenon and Bret Berry are CPAs, who together bring over 100 years of business experience.

The firm philosophy is clearcut and easy to understand:

• prompt client service;

• continuous, ready access to knowledgeable decisionmakers; and

• effective control of client fees.

Due to the extensive training and experience of our directors and staff, our firm has the capability to provide all necessarybookkeeping, auditing, tax, and consulting services. The depth and quality of our services in each of these areas inunmatched by our competitors.

Keegan, Linscott & Kenon, PC is a part of the McGladrey Alliance. The McGladrey Alliance includes RSM McGladrey andMcGladrey & Pullen, LLP and network offices that together represent the fifth largest public accounting firm in the world.We effectively operate as the Tucson office of RSM McGladrey, and therefore have access to national training resourcesand national industry experts. Our affiliation with RSM McGladrey ensures our clients that we will provide them with highquality service at cost effective rates. They receive the timely service and responsiveness that can only be provided by a localaccounting firm with the resources of a large international accounting firm.

The individual expertise which our directors and staff bring to you is as follows:

Carla J. Keegan

Carla is a Certified Public Accountant with over 30 years of experience in public accounting. As the Director of Taxation, shespecializes in tax planning and compliance for partnerships, corporations, individuals and trusts. Carla is also a CertifiedFraud Examiner, a Certified Insolvency and Restructuring Advisor, and Certified in Financial Forensics.

Carla practiced with Coopers & Lybrand for almost 12 years, leaving her position as Tucson office Tax Practice Leader, tocofound Keegan, Linscott & Kenon, PC in 1994. Carla has assisted numerous entrepreneurs in starting-up and restructuringtheir businesses. She has an extensive background in planning real estate partnership transactions; including syndication,forecasts and projections, tax return preparation and planning, bankruptcy court reporting, and reorganizations. Carlaserves individuals, trusts, S corporations, limited liability companies, C corporations and not-for-profits in all phases of taxplanning and compliance, including startup, reorganization, and negotiations with the Internal Revenue Service.

Carla holds a B.A. and M.B.A. with an emphasis in accounting and a specialization in tax from the University of Arizona. Shehas been an adjunct professor of taxation at the University of Arizona and has taught various national, local and AICPAcourses in all areas of taxation. She is a member of the tax section of the AICPA and ASCPA. She has served on several Boardsof Directors including the Tucson Community Food Bank, the Junior League of Tucson, Inc., and Alpha Omicron Pi AlumniGroup. She is currently actively involved with Angel Charity for Children, Inc., and D-M 50.

2013


Christopher G. Linscott

Chris is a Certi�ed Public Accountant, as well as a Certi�ed Fraud Examiner, and Certi�ed Insolvency and RestructuringAdvisor. He is Director of litigation and bankruptcy support services at Keegan, Linscott & Kenon, PC.

Chris's experience includes more than 30 years in public accounting, �rst with KPMG Peat Marwick, and then as Director oflitigation and bankruptcy support services and audit manager with Coopers & Lybrand in Tucson. Chris provides expertiseto companies and attorneys involved with commercial litigation, bankruptcy, receivership and other matters related to the�nancial well-being of the companies. Chris has also served as Chief Financial O�cer of a startup company, taking respon-sibility for all aspects of �nancial reporting, budgeting, cash management, fundraising, and recruiting.

Chris holds a B.A. in psychology from Amherst College and an M.S. in accounting from New York University. He is a memberof the AICPA, the ASCPA and the National Association of Certi�ed Fraud Examiners.

G. Antonio “Tony” Kenon

Tony is a Certi�ed Public Accountant and a Chartered Global Management Accountant with over 25 years of experience inpublic accounting. Tony is KLK’s founding audit director and specializes in auditing and consulting services.

Tony began his professional career with Coopers & Lybrand in Tucson. As audit manager in the o�ce, Tony worked onemerging business clients that required audits and extensive bookkeeping and business consulting services. He has ledaudit and consulting engagements in the �elds of health care, nonpro�t agencies, human services, and hotel services,among other �elds. Tony has consulted extensively on health care projects dealing with managed care contract negotiation,including capitation and fee schedule rate setting for individual and group medical practices and clinics, as well as for non-pro�t and government agencies.

Tony received a B.S. in Accounting and Finance from the University of Arizona and is a member of both the AICPA and theASCPA. He serves on the Saguaro Audit Committee of the United Way, has served on the Board of Directors for the ArizonaCouncil For Economic Conversion, and is involved with the Hispanic Chamber of Commerce. Tony is a frequent lecturer too

Bret J. B

B LK. B ed c

B ed in ra-ti ce re ess m nd da

Bam

utside groups on accounting and consulting topics and is �uent in Spanish.

erry

ret is a Certi�ed Public Accountant, a Chartered Global Management Accountant and is a Director of audit services at Kret has over 15 years of accounting experience and specializes in providing assurance and advisory services to a diversi�lient base.

ret began his professional career in 1997 with Ernst & Young, LLP in their Bu�alo, New York o�ce. At E&Y, Bret was involv all phases of �nancial statement and compliance audits where his client base included mid-size public and private corpo

ons. At KLK, Bret’s focus is on helping clients achieve their business objectives. He specializes in SOX404 complianadiness, internal control fraud infrastructure reviews, audit committee formation, strategic business planning and businodel evaluation and design. His speci�c industry knowledge includes metals and mining, manufacturing, aerospace a

Arizona New Business Kit – Your Guide to Financial, Business Tax and Accounting Considerations of Starting a New Business

efense, construction and engineering, technology, retail, professional services, development stage entities, home builders nd developers, nonpro�t organizations, private operating foundations and health care.

ret received a B.S. in Accounting and Finance from the State University of New York at Bu�alo and is a member of the AICPA nd the ASCPA. He serves as Treasurer on the Board of Directors for the Community Food Bank of Southern Arizona and is a ember of the Northern Pima County Chamber of Commerce.

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– 2013 Arizona New Business Kit – Your Guide to Financial, Business Tax and Accounting Considerations of Starting a New Business


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