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Archive for January, 2012

The recession may have finished as a matter of technical accounting, but the general economic conditions for business remain very difficult. Whether you are a start-up or continue as a small business owner, there’s a temptation to cut the business overheads to the bone. This can be a false economy. Let’s start with a little law. If you are trading as an individual or a partnership, you are personally liable on all the contracts you make and for any losses arising due to your negligence (or criminal activity). Although there are slight variations in the law from state-to-state, the general rule about an LLC is that you are personally liable in tort and for any crimes you may commit, but there’s a shield to prevent you from incurring liability in contract. The general rule for a full corporation is you avoid personal liability under both contract and tort, although you can still be sued if members of the company believe you have breached your fiduciary duties as a director or senior officer. The other piece of law you need to know is that either you or the company will be held vicariously liable for whatever an employee does during the course of the employment. So if an employee is driving a vehicle owned by the business or driving his or her own vehicle on company business, either you or the company will be liable if the employee drives negligently and causes loss to a third party.

Many people believe it will be enough to rely on a Business Owners Policy (BOP). Indeed, many insurers and their agents sell these policies as a one-stop insurance solution. Sadly, this is a dangerous assumption. In particular, many BOPs limit or exclude losses caused when vehicles are damaged or damage third parties or their property. This is something you should discuss with your insurance advisor. For example, although the business owner may find some third party losses covered when he or she is driving, vicarious liability is almost always excluded. This means you could find yourself personally liable for both the medical expenses of anyone injured and all the consequential losses arising from the accident. Worse, if you or an employee was driving a vehicle owned by the business, BOPs decline cover for repair or replacement if the vehicle if damaged. The same applies if the vehicle is stolen or vandalized. You will only be able to recover these losses if you have a commercial auto insurance policy in place. It gets worse because, even if the employee is driving his or her own vehicle, it’s at your risk. Similarly, BOPs usually exclude cover if you rent a vehicle for your own or an employee’s use.

To protect yourself or the general financial health of your company, you either need to go through the BOP and agree endorsements with the insurer to cover all the obvious areas of risk, or you should buy a full commercial car insurance policy covering third party, comprehensive and hired vehicle losses. It’s a false economy to rely on a BOP when even a small claim may be the difference between continuing in business and bankruptcy. Buying cheap car insurance should not be an option in these difficult economic times.

Globalization can be defined as the process of increasing connectivity and uniting the worlds markets and businesses. Globalization has emerged the last couple decades as the internet has emerged, making it easier for people to travel, communicate, and do business internationally. When economies become more connected to other economies, they have increased opportunity but also increased competition. With Globalization evolving, more and more pro globalization and anti globalization lobbies have arisen. The pro globalization party argues that globalization brings about much increased opportunities for almost everyone, where the anti-globalization parties argue that certain groups of people who are deprived in terms of resources are not currently capable of functioning within the increased competitive pressure.

The Problem we face is that Globalization links the world’s major companies together and makes it more of a universal world. This may dramatically impact the majority of populations around the world because of the fact that many of these major companies find loopholes in the system and can hire accountants and lawyers and scheme their way around paying enormous amounts of tax whereas the average person is deprived of fair tax laws and the burden is placed on them to make up for the chunk of loss tax money. Multinational companies are well placed to exploit tax havens and hide true profits thereby avoiding tax. Through offshore tax havens and fraud, and through transfer pricing, billions of dollars go untaxed. Estimates range from $50 billion to $200 billion of revenue losses worldwide. These corporations use transfer pricing to make up for missing tax money by saying the revenues were utilized in selling a good or service to another company or subsidiary. It’s kind of compared to money laundering where criminals open business to say they make revenue through a good or service but in turn they are operating an illegal business but can tell the IRS they have made profit from something legal.

Many people wonder why taxation is so important. For rich countries like the United States, one main reason is that the less tax paid to the government means more for individuals, who are best placed to contribute to the economy. For poor countries it means they can determine their own route out of poverty. It’s also the way they can begin to free themselves from dependence on handouts and the punitive conditions attached to aid. Faced with the pressures of Globalization and the threat that companies will relocate unless given lower taxes, governments have responded by engaging in tax competition to attract and retain investment capital. In the US there is little evidence that state and local tax cuts when paid for by reducing public services stimulate economic activity or create jobs. Yet there is evidence that increases in taxes, when used to expand the quantity and quality of public services, can promote economic development and employment growth.

Globalization is thought to reduce the ability of governments to collect taxes. If labor and capital can move between jurisdictions, then attempts to tax these factors will lead to a vanishing taxpayer as factors flee from high to low tax regions. Most economists support globalization because it raises the incomes of peoples worldwide through a one world economy and a competitive business market from the richest to the poorest countries. In other words it creates a one world economy where not just four or five countries rein supreme it creates more balance to try and help the poorer countries prosper. Globalization has been happening for decades. The US government has already surrendered massive amounts of power political and economic power to global organizations such as the United Nations and the World Bank. Our economy has been emerging into a one world economy. If you look inside the United States many of our products sold in our stores are made from the other side of the world. Some people see globalization as sending millions of our jobs overseas and it is destroying the standard of living of America’s middle class. In the new global system, multinational corporations can shop for labor almost anywhere they want. So why should they give American workers good wages and good benefits when they can legally pay large numbers of workers on the other side of the globe slave labor wages and get away with it? For blue collar American workers, globalization has turned out to be a very, very bad deal as you can see with Detroit, Pittsburgh and many other manufacturing cities across the United States. Now since they must compete with slave labor in other countries, the labor of these blue collar workers has become greatly devalued. This is having a devastating impact on manufacturing in the United States.

Much of the jobs and industries that have been outsourced have gone to nations such as China. So what is the impact of Globalization on taxation and America? As capital and labor become more mobile and internationally dependent, international tax competition increases. With more jobs being shipped overseas and more and more Americans out of work and taxes increasing, it seems like our country has shifted their focus towards a Wal-mart state of mind. Sustainability is the plan for the our country and as far as tax competition it should bring more companies to poorer nations and leave Americans with fast food chains, Universal Health care and Wal-Mart. Globalization makes it harder for countries to tax at high rates because people and capital will flow out. As labor and capital become more mobile, international tax competition increases. With tax competition individuals and businesses gain the freedom to take advantage of low tax rates abroad. On the other side, Globalization could mean more trading and therefore more jobs created because more and different resources will be available to Americans. This could in turn open all types of new markets for Americans, which would create a new era of jobs for many unemployed Americans. Only the future will tell what the impact of globalization means to tax rates and American business. Until then, it seems sustainability may be the key to reviving a down-spiraling economy.

We all use auto insurance to secure our vehicle no matter whether we want it or no. Auto insurance is mandatory and there’s no way going around this fact unless you’re bold enough to go against the law and risk driving without insurance. There are many things that will affect the cost of your insurance most of the factors dealing with the car and its characteristics, while some of the factors can also use your personal data to determine how good of a driver you are. Yes, by knowing your place of residence, age, sex, marital status and education the insurance company can tell how it is likely for you to have a traffic accident. They all have enormous bodies of statistical data on their hands and they know what they’re saying. However, some factors may seem odd and even bizarre to be used for determining your auto insurance rates and credit rating is definitely one of them.

If it comes as a surprise to you, yes, insurance companies use the customer’s credit rating when calculating their rates. Not all of them, but a large part definitely do. And they don’t have to tell you about it. If you’re furious and think that they are breaching your privacy the law is definitely on their side since state legislation allows the insurance companies to use such data without disclosing it to third parties. So, instead of raging about the fact let’s look into the logic of it. Why would the insurance company want to use your credit rating to determine auto insurance costs, how’s this connected? There is a connection and you wouldn’t see it coming unless you’ve had such an enormous pool of information as a typical insurance company.

It was observed that the number of claims filed by the customer is statistically linked to his or her credit score. The better is the rating the less likely it is for this particular customer to end up in an accident and file an insurance claim. And respectively, the lower is the score the more likely it is for the driver to require coverage. So the insurance companies decided to use this relation when calculating their rates because they will use just any piece of information in order to determine their risks and manage them through auto insurance rates. It seems that if a person is responsible in what concerns their finances they are also responsible and cautious on the road. At least this explanation seems to sound logic just to explain the relation between auto insurance claim risks and credit scores.

Now, what if your credit rating is not as good as it could be? Your auto insurance rates will be higher than the average and that’s definitely not what you want these days. The most logic solution would be finding an insurance company that doesn’t use credit rating when determining their rates. They are less than those that do, but they are still around to make a presence. Another solution, more demanding yet more effective, would be improving your credit rating. Hire a financial consultant to review your credit report and determine the strategy for improving your score. This solution will have more benefits than just auto insurance cost optimization, since it will be much easier and cheaper for you to take loans and credits with a better credit score.

A partnership, for the purposes of general law, is a relationship that exists between persons carrying on business in common with a view to profit. The income tax purposes, however, the definition of partnership not only encompasses a partnership in that sense, but also an association of persons in receipt of income jointly, share farmers. Plus, the joint owners of property who share income from the property, whether as joint council tenants in common common will be partners for tax purposes, even though they may not be partners under the general law. partnerships are generally created under state laws which apply in each of the states of Australia. These pieces of legislation outlining the basic registration requirements of partnerships and some of the basic rules about the way partnership members relate to each other.

A syndicate that may have come into existence only limited period purpose may be a partnership income tax purposes. However, a limited period joint-venture between two entities for the construction of residential buildings which were divided equally between the venturers after construction, was not a partnership either a general law or income tax purposes. The relationship between trustees is not one of partnership, although trustees are legally competent to form a partnership. Companies are specifically excluded from the definition of partnership tax purposes. An association of persons not carrying on business with a view to profit would not be a partnership tax purposes but would be taxed as a company. The general provisions of the taxation of partnerships owing corporate limited partnerships are in section 90 to 94 of the income tax assessment legislation.

Taxation of an LLC in Va is a common question for those starting an Virginia limited liability company. The good news is that if you know the rules and meet certain timing requirements, you can choose how your Virginia LLC will be taxed for income tax purpose.

TAX CHOICE #1: PASS THROUGH TAXATION

The first tax choice for an LLC in Va is to be taxed as a pass through entity. This means that the legal entity itself does not pay any income tax on its profits and gains. Instead the profits are passed through to the owners of the Virginia limited liability company and paid by the owners on their individual tax returns.

The process depends on whether the business is owned by a single member or by more than one member. With a single member LLC, the legal entity is disregarded for all tax purposes and the single owner reports the income on its return as if the business were a sole proprietorship. This is for taxes only. A single member LLC in Va still gets all the benefit of a limited liability company for all other purposes such as gaining limited liability protection.

For a multi-member business, the partnership tax rules of the Internal Revenue Code apply. Same end result where the owners pay the tax but there are some additional steps. The business must prepare an information return to file with the IRS and then send each member a tax form which is known as a K-1 which evidences his/her share of business profits and losses.

If you want this tax structure, this is the default tax structure which means there are no elections you or your LLC in Va need to make.

TAX CHOICE #2: C CORPORATION TAXATION

The second tax choice is to be taxed a C corporation under the Internal Revenue Code. C corporation taxation means double taxation which is why most small businesses who are limited liability companies do not opt for this choice. Double taxation means the entity itself pays a tax on its profits and then if the profits are distributed to its owners, the owners pay another tax on the same profits.

Nonetheless, an LLC in Va might find it advantageous to elect C corporation taxation. The C corporation tax rates may be lower than the personal rates of the owners. Also C corporation taxation can give a business some extra tax breaks when it comes to certain employee benefits.

It is always recommended you seek the advice of your business accountant if you are contemplating C corporation taxation.

TAX CHOICE #3: S CORPORATION TAXATION

The IRS even allows for an LLC in Va to be taxed as an S corporation if the business meets all the requirements to qualify for S corporation tax treatment.

S corporation taxation is very similar to pass through taxation (Choice #1) in that it is a single layer of taxation . There are different forms to file with the IRS. However, S corporation can be much more complicated because there is a laundry list of rules and restrictions the Virginia limited liability company must meet and maintain throughout its existence.

Many opt against this because if for some reason, they inadvertently fail to meet a requirement, they could lose the tax status and potentially significant liabilities can be created.

However, there is one possible advantage of S corporation taxation over pass through partnership or disregarded entity taxation and that is that an LLC in Va that has S corporation tax treatment may be able to pay less in self employment taxes. Talk to you accountant if this is something of interest as the rules can get complex.

SUMMARY

An LLC in Va has the most tax choices over any other legal entity or business structure. While this was not always the case, the IRS provided for this in 1997. Since 1997, the Virginia limited liability company has become the most popular choice for small business owners.

There are three major functional areas in accounting, which need to be considered in modern day accounting for any business. The three are financial, cost and management accounting.

The first area, namely financial accounting, is primarily useful for ascertaining the results of the business on a periodical basis; for example, one year. This will help to determine the future course of action in the long term. In economical terms, financial accounting treats money as a factor of production.

Cost and management accounting are tools to enable management to take decisions on a day-to-day basis. Cost and management accounting are not useful for their own sake. These two functions assist management in the conduct of the business along with other key factors involved in running of the business. Key factors could be demand, supply, competition, availability of raw material, logistics etc.

The second area, namely cost accounting, seeks to ascertain the value of direct costs and indirect costs involved in production . From this value, management can make an informed decision regarding the improvement of production performance. In economic terms, cost accounting is a measure of economic performance. This information gives management a clear indication of economic performance of the production resources of the business.

Costing also helps the sales manager in setting prices. But since costing is a measure of economic performance, it cannot be considered as an absolutely accurate basis for setting prices. This is because selling prices are more of an economic decision. It would not be amiss to mention here that prices depend basically on market factors. Prices depend more on demand, supply and competition and less on costs. For example, high demand coupled with lack of competition would mean that business could charge higher prices for its products, well above the costs.

The third area, namely management accounting, is closely interrelated with costing accounting. Although it has evolved from cost accounting, management accounting has a broader role to play in management decisions. It measures economic performance of the business enterprise as a whole, vis-a-vis the economic environment in which the business operates. This function of accounting seeks to combine the financial and cost information in a broader aspect.

Finally, management accounting is instrumental in assisting and advising management in making important business decisions. It makes management aware of the economic implications and consequences of their decisions. In economic terms, it implies a close study of money as an economic resource, while simultaneously treating it as a measure of economic performance. This enables management to measure it as an economic factor of production, e.g. the rate of return on capital employed.

It is thus seen that accounting has a distinct role to play in three different areas, which are equally vital. With the advent of computerised accounting, it has become very easy for management to monitor the accounting information on the tips of its fingers. Financial accounting programs enable financial statements and various cost and MIS statements to be produced almost instantly at push of a button. Now, only the laborious part of accounting is data entry. Financial managers must ensure that meaningful data is input into the system to produce meaningful information. Proper categorisation must be done and keying errors avoided at all costs, ensuring providing accurate financial information to management.