Warranties: What you need to know

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A brief history

The Uniform Commercial Code or UCC was first published in 1952. It is one of a number of uniform acts that have been promulgated to harmonize the law of sales and other commercial transactions in all 50 states within the United States of America. It is in fact adopted by all the states except the state of Louisiana.

The Uniform Commercial Code deals with the following subjects under consecutively numbered Articles:

Article 1: General Provisions Definitions, rules of interpretation

Article 2: Sales of goods

Article 2A: Leases of goods

Article 3: Negotiable Instruments Promissory notes and drafts (commercial paper)

Article 4: Bank Deposits Banks and banking, check collection process

Article 4A: Funds Transfers of money between banks

Article 5: Letters of Credit Transactions involving letters of credit

Article 6: Bulk Transfers and Bulk Sales Auctions and liquidation of assets

Article 7: Warehouse Receipts, Bills of Lading and Other Documents of Title Storage and bailment of goods

Article 8: Investment Securities and financial assets

Article 9: Secured Transactions secured by security interests

About warranties

This post about warranties therefore falls under the Article 2 of the UCC because just like sales, warranties are considered contracts. A warranty is a contract which guarantees that a product will work for a specific purpose for a specific period of time.

There are 5 different types warranties:

1) Implied Warranty of merchantability
The UCC defines a merchant as one who deals with goods of a particular kind and represents himself as having special knowledge, skills or expertise pertaining to those goods.
As the name implies, this type of warranty can only be provided by a merchant. It basically says that the goods being sold to the buyer are going to pass through the market place without objection. What does that mean you may ask. Well, it means that the goods are not necessarily the best or the worst in terms of quality or workmanship, but that the goods are going to satisfy their ordinary intended or qualitative purposes. Apart from durable goods, food and beverage sold for consumption at or away from the establishment also fall under this warranty. The only way a merchant can disclaim the warranty of merchantability would be by specifically declaring that the product is sold ‘As Is’, making it explicitly clear that the buyer assumes all liabilities should any harm occur from the consumption of the goods.

2) Implied warranty of fitness (for a particular use or purpose)
This type of warranty can be provided by either a merchant or a non-merchant. This warranty states that not only are the goods qualitatively fine, but that the goods are going to satisfy the buyer’s special or particular need for this particular product. In order to prove a breach of this warranty, the buyer would need to demonstrate that he or she told the seller of their particular need of this particular product and the seller represented that the goods will satisfy their needs, and they need to prove that they relied upon the representation.
An example: Let’s say Stuart has a boat and went to a Ford show-room looking for a vehicle that is powerful enough to tow the said boat. The sales rep showed him a Ford Focus and told him that it would be powerful enough to tow a boat. Stuart relied upon the sales rep’s recommendation and bought the little car only to have it breakdown, unable to tow the boat. Stuart can now go to the courts and sue Ford for damages.

3) Warranty of encumbrances
As complicated as it may sound, it simply says that the goods being sold to the buyer are going to be free of any legal encumbrance (judgments/leans).
An example: Our friend Stuart goes out and invents a new fabric cutting machine. He patents it and is now legally covered for 21 years by the patent law. Stuart’s competitor, Devlon, finds out about the invention and decides to copy it any way. A customer, Richard, comes into Devlon’s showroom and buys the machine from Devlon. Stuart, upon finding out that Richard is using his machine can now bar Richard from using the machine due to the patent violation. Richard on the other hand is protected by the warranty of encumbrances is able to turn around and sue Devlon for damages.

4) Express warranty
This is an easy one to explain. Express warranty is an affirmation of fact pertaining to the product. In most cases it will appear in many forms of the media including but not limited to newspaper ads, TV ads, Radio ads, Catalogues, or actual model/prototype on display at trade shows or retail store windows. It implies that the goods being sold to the buyer are going to conform to the description in the ad, brochure or catalog based upon the model or prototype displayed. If they do not, there is a breach of warranty and the buyer may sue the party responsible for the advertisement.

5) Warranty of title
It is implied that the goods being sold to the buyer are going to be transferred validly and proper legal title is being transferred to the buyer. As a general rule, the Warranty of title cannot be waived. An example of an exception would the Mercedes Benz impounded and sold by the cops at auctions. In such a case, if someone comes along and can provide documentation that the vehicle belongs to them, they would have legal grounds to claim it back.

We will look further into other types of contracts in our next post. Questions, comments and feedback are always welcomed.

Ethics and Leadership. Part 2

This post is part of a series. to read the previous post click here.

Ethical Culture in the Workplace

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Most organizations have an either all-in or all-out approach when it comes to ethics. They either care about the employee’s well-being or they completely ignore it and concentrate solely on the profits and the bottom-line. Most companies that adopt the latter approach to ethics usually have reports of employees witnessing misconduct in the workplace, be it time-theft or more serious white-collar crimes.

Essentially there are 4 types of business/corporate ethical cultures:

1) Apathetic: Minimal concern for people or performance

2) Caring: High concern for people; minimal concern for performance

3) Exacting: Minimal concern for people; high concern for performance

4) Integrative: High concern for people and performance

To enforce/establish these types of cultures, companies use either a compliance-based or value-based approach.

Compliance-based cultures use a more legalistic approach to ethics. In reality, this kind of culture revolves around risk management rather than ethics and lack  a long-term focus or integrity. Employees are usually subject to quarterly or yearly compliance quizzes and checklists. Their impacts are usually very short-lived without proper reinforcement.

Value-based cultures on the other hand rely on mission-statements that define the firm and stakeholders’ relationships. They focus on values rather than law and feel less legalistic to the employees. To instill value-based cultures, buy-in from the top executive management and all levels of management is critical.

Adopting the right kind of culture for your business can have very profound impact on your organization’s success. It brings a whole new level of commitment from employees who will be ready and willing to invest in the company. Employees will be more likely to make personal sacrifices for the company. The correlation is almost 1:1. The more a company is dedicated to ethics and shows concerns including a safe work environment, competitive salaries & benefit packages, the greater the employee’s dedication will be.

It is therefore no surprise that companies that are perceived by their employees as being more honest and ethical are usually more profitable. This is because an ethical climate in an organization provides a platform for increased efficiency, productivity, profitability, and customer satisfaction. All keys to a successful and profitable venture.

To implement an ethical culture in a work place can be rather challenging, depending upon the industry one is in. This is because studies support the fact that ethics are learned while interacting with others. As such, if you are in an industry that is known for unethical behaviors, it is very much more likely for a culture of deceit and corruption to persist within such an industry. Still, it is also a fact that superiors in a company have a strong influence over their subordinates and most employees will go along with the superior’s moral judgments in order to showcase their loyalty. The task of changing a corporate culture, especially when it comes to ethics, is therefore a full-time job that has to be taken seriously by upper management. As shown in the chart below, different industries are trusted at varying levels by their stakeholders.

TrustPercent

As it may be observed, in this post 2008 recession era, banks have taken a real beating when it comes to trust. In the past 2 years, the problem has not been rectified either as can be seen in the chart below. Trust in financial services sector has remained stagnant from 2013 to 2014.

2013Trust

What remains to be seen is how perturbed the financial industry will be by these findings. Will the major players in the financial industry be making any radical re-branding moves in 2015 and what opportunities will they present to the consumers. Your thoughts, comments and questions are always welcomed.

Ethics and Leadership. Part 1

Ethical Leadership is a big deal

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With the openness and transparency brought about by the internet age, ethics is suddenly top priority for businesses. With increased consumer awareness and knowledge, companies small and large have had to make meaningful adjustments to their ethic codes or face the consequences. At the very least, companies have had to come out and make a statement (when possible) and showcase what they are doing for the betterment of the community at large. Think of Monsanto, BP, Exxon Mobil, SeaWorld, and energy companies involved in fracking for example. Just a decade or two ago there wouldn’t have been so much awareness, so quickly, of what these companies are doing to the global environment. In today’s age, however, these companies must address ethic issues head-on.

Moreover, there are documentary makers and journalists out there whose sole purpose in life is to find fault with companies that may be involved in unethical behaviors. CNN’s Blackfish and #IvoryTower documentaries are recent examples of these but there are many others including documentaries on Monsanto and various other chemical companies such as Food Inc., etc that highlight these social and ethical problems.

What is at stake is now much larger than ever before. While the saying that “a sucker is born every minute” still holds true in most cases and most large corporations with questionable ethic codes have not gone out of business purely because of ethical issues alone, it is also a fact that consumers today are much more aware and smarter than at any other time in history. The recent documentary Blackfish, for example, has sent SeaWorld reeling and attendance at its parks have fallen 5 percent according to CBS. The documentary has mobilized animal rights activists and strained SeaWorld’s corporate partnerships. Virgin America, Alaska Air and Southwest Airlines have pared back sales and marketing deals with the theme park.

What all this translates to is that if you are an unethical business, not only will you lose customers, but you will also lose your partners. And if you don’t turn things around soon enough, you could be forced into a position where you’d need to make drastic changes to your business model. The top priority has to be revisiting of the corporate ethics.

For a change in corporate ethics, however, a strong, ethical leadership team is needed. The following are some habits of strong ethical leaders:

1) Ethical leaders have strong personal character. They do not bend to the organizational pressures or powers that be.

2) Ethical leaders have a passion to do what is right.

3) Ethical leaders are proactive. Being reactive is the thing of the past and is, in financial terms, a loss proposition. Ethical business leaders strive to be proactive and lead, rather than deal with problems as they arise.

4) Ethical leaders consider stakeholders’ interests. This is a very important concept to understand. They do not only consider stakeholders who are directly involved in the financial sense, i.e. investors, but rather stake holders in all aspects of the business including customers, vendors, and the communities that the business does business in.

5) Ethical leaders are transparent and actively involved in organizational decision-making. Pulling strings behind the scenes certainly was not a model of ethics in the 1950’s and neither is it now. An ethical leader leads by example and communicates his or her ideas to the entire organization.

6) Ethical leaders are competent managers who take a holistic view of the firm’s ethical culture. This is to say that an ethical leader has to take responsibility for the entire company’s performance, not just any one or two specific departments that maybe operating ethically while the others do not.

For most companies, it is with the intensity of ethical issues, individual factors, and business & organizational opportunities, that result in business ethics evaluations and decisions. An organization’s ethical culture is shaped by effective leadership. Top level support is required for ethical behavior to exist and persist within the walls of an organization. An ethical corporate culture in turn becomes a significant factor in ethical decision-making for the company. If a firm’s culture encourages, rewards, or does not monitor unethical behavior, employees will most likely act unethically.

Development of Ethical Culture within an organization

Regardless of the size of your organization, the following are two ways by which an ethical culture may be introduced and instilled within the employees. Luckily, it is not rocket science.

1) Formalize the Ethics code. This has to come from upper management. Send out memos, write down employee code of conducts, employee manuals, supplement forms and even create formal swearing-in ceremonies if necessary.

2) Encourage ethics via activities. These are informal methods that are used to convey management’s desire to create an ethical work environment. This could be through promotions, dress code, or extracurricular activities. The goal here is to subtly encourage ethical behaviors and get the buy-in from the employees.

A balanced combination of both methods and buy-in from the executive management is absolutely crucial in setting the tone.

In our next post here, we will explore the types of ethical cultures and their examples, as well as the correlation of culture and business performance.

Thoughts on starting a new business. Part 4

This article is part of a series. To read the previous article please click here. To read this series from the beginning please click here.

To Corp or Not To Corp… That is no longer the Question

articles-of-incorporation

Incorporating a business is a big deal. Your corporation is your baby in more ways than one. A corporation is recognized by law as a separate entity, it has its own tax identification number or EIN just like you have a social security number. As it grows and generates more and more income, so will be the associated expenses including salaries, benefits, and lest we forget; taxes. It also needs a bit of TLC every quarter with the remittances of appropriate corporate and employment taxes, unemployment insurance forms, and any other appropriate deductions and withholdings depending on your type of business.

In this post we will take a closer look at the different types of businesses entities and understand what they are all about. The following is taken from sba.gov:

1) Sole-Proprietorship: This is where you are the company. There is essentially no separate legal entity formed. You have no separate taxes to file, no termination forms to fill if you ever wish to stop doing business. It’s just you and the lemonade stand. The downside of this type of business is that it is incredibly difficult to raise money and because there isn’t a separate entity to take the blame should any losses occur, the sole-proprietor is liable for any and all damages incurred.

2) Limited Liability Company or LLC: An LLC is essentially a partnership. Unlike shareholders in a corporation, LLCs are not taxed as a separate business entity but the members enjoy limited amount of liabilities just like a corporation would. All profits and losses are “passed through” the business to each member of the LLC to be reported on the personal federal tax returns. The other nice thing about LLCs is that you can apply for an S-Corporation status for your LLC and enjoy the tax benefits associated with it.  Filing taxes is a once-a-year affair on April 15: a single-member LLC files a 1040 and Schedule C like a sole proprietor; partners in an LLC file a 1065 partnership tax return like owners in a traditional partnership. Moreover, LLCs are not required to have formal meetings and keep minutes.

There are also fewer restrictions on profit-sharing within an LLC as members distribute profits as they see fit. Members might contribute different proportions of capital and sweat-equity. Consequently, it’s up to them to decide who has earned what percentage of the profits or losses.

But LLCs are not the perfect entity for all businesses. First, an LLC has a limited life: when a member dies or undergoes bankruptcy the LLC is dissolved. Typically, you would determine in advance the length of the LLC’s duration when you file it with your state. If your plans include taking your company public or issuing shares to your employees, essentially prolonging its life, then you would need to convert to a corporate business structure.

Second, the owner of an LLC is considered to be self-employed and must pay the 15.3% self-employment tax contributions towards Medicare and social security. As such, the entire net income of the LLC is subject to this tax. It costs money to have some operational ease!

The IRS also limits the ‘characteristics’ of your company. An LLC may only have two of the four characteristics that define corporations:

1) Limited liability to the extent of assets

2) Continuity of life

3) Centralization of management

4) Free transferability of ownership interests.

Therefore, if you wish to have more than two of these characteristics, you’ll need to convert to a corporate business structure.

3) Cooperative: A cooperative is a business or organization owned by and operated for the benefit of those using its services. Profits and earnings generated by the cooperative are distributed among the members, also known as user-owners.

Typically, an elected board of directors and officers run the cooperative while regular members have voting power to control the direction of the cooperative. Members can become part of the cooperative by purchasing shares, though the amount of shares they hold does not affect the weight of their vote.

Cooperatives are common in the healthcare, retail, agriculture, art and restaurant industries.

Forming a cooperative is different from forming any other business entity. To start up, a group of potential members must agree on a common need and a strategy on how to meet that need. An organizing committee then conducts exploratory meetings, surveys, and cost and feasibility analyses before every member agrees with the business plan. Not all cooperatives are incorporated, though many choose to do so. If you decide to incorporate your cooperative, you must complete the following steps:
•File Articles of Incorporation. The articles of incorporation legitimizes your cooperative and includes information like the name of the cooperative, business location, purpose, duration of existence, and names of the incorporators, and capital structure. Once the charter members (also known as the incorporators) file with your state business entity registration office and the articles are approved, you should create bylaws for your cooperative.
•Create Bylaws. While the law does not require bylaws, they do need to comply with state law and are essential to the success of your cooperative. Bylaws list membership requirements, duties, responsibilities and other operational procedures that allow your cooperative to run smoothly. According to most state laws, the majority of your members must adopt articles of incorporation and bylaws. Consult an attorney to verify that your bylaws comply with state laws.
•Create a Membership Application. To recruit members and legally verify that they are part of the cooperative, you must create and issue a membership application. Membership applications include names, signatures from the board of directors and member rights and benefits.
•Conduct a Charter Member Meeting and Elect Directors. During this meeting, charter members discuss and amend the proposed bylaws. By the end of the meeting, all of the charter members should vote to adopt the bylaws. If the board of directors were not named in the articles of incorporation, you must designate them during the charter meeting.
•Obtain Licenses and Permits. You must obtain relevant business licenses and permits. Regulations vary by industry, state and locality. Use our Licensing & Permits tool to find a list of federal, state and local permits, licenses and registrations you’ll need to run a business.
•Hiring Employees. If you are hiring employees, read more about federal and state regulations for employers.

Each state will have slightly different laws that govern a cooperative. Consult an attorney, your Secretary of State or State Corporation Commissioner for more information regarding your state’s specific laws.

Most businesses need to register with the IRS, register with state and local revenue agencies, and obtain a tax ID number or permit. A cooperative operates as a corporation and receives a “pass-through” designation from the IRS. More specifically, cooperatives do not pay federal income taxes as a business entity.

Instead, the cooperative’s members pay federal taxes when they file their personal income tax. Members pay federal and state income tax on the margins earned by the cooperative, though the amount of taxation varies slightly by state. Cooperatives must follow the rules and regulations of the IRS’s Subchapter T Cooperatives tax code to receive this type of tax treatment.

Advantages of a Cooperative
• Less Taxation. Similar to an LLC, cooperatives that are incorporated normally are not taxed on surplus earnings (or patronage dividends) refunded to members. Therefore, members of a cooperative are only taxed once on their income from the cooperative and not on both the individual and the cooperative level.
• Funding Opportunities. Depending on the type of cooperative you own or participate in, there are a variety of government-sponsored grant programs to help you start. For example, the USDA Rural Development program offers grants to those establishing and operating new and existing rural development cooperatives.
• Reduce Costs and Improve Products and Services. By leveraging their size, cooperatives can more easily obtain discounts on supplies and other materials and services. Suppliers are more likely to give better products and services because they are working with a customer of more substantial size. Consequently, the members of the cooperative can focus on improving products and services.
• Perpetual Existence. A cooperative structure brings less disruption and more continuity to the business. Unlike other business structures, members in a cooperative can routinely join or leave the business without causing dissolution.
• Democratic Organization. Democracy is a defining element of cooperatives. The democratic structure of a cooperative ensures that it serves its members’ needs. The amount of a member’s monetary investment in the cooperative does not affect the weight of each vote, so no member-owner can dominate the decision-making process. The “one member-one vote” philosophy particularly appeals to smaller investors because they have as much say in the organization as does a larger investor.

Disadvantages of a Cooperative
• Obtaining Capital through Investors. Cooperatives may suffer from slower cash flow since a member’s incentive to contribute depends on how much they use the cooperative’s services and products. While the “one member-one vote” philosophy is appealing to small investors, larger investors may choose to invest their money elsewhere because a larger share investment in the cooperative does not translate to greater decision-making power.
• Lack of Membership and Participation. If members do not fully participate and perform their duties, whether it be voting or carrying out daily operations, then the business cannot operate at full capacity. If a lack of participation becomes an ongoing issue for a cooperative, it could risk losing members.

4) Corporation:

A corporation (sometimes referred to as a C corporation) is an independent legal entity owned by shareholders. This means that the corporation itself, not the shareholders that own it, is held legally liable for the actions and debts the business incurs.

Corporations are more complex than other business structures because they tend to have costly administrative fees and complex tax and legal requirements. Because of these issues, corporations are generally suggested for established, larger companies with multiple employees.

For businesses in that position, corporations offer the ability to sell ownership shares in the business through stock offerings. “Going public” through an initial public offering (IPO) is a major selling point in attracting investment capital and high quality employees.

Forming a Corporation

A corporation is formed under the laws of the state in which it is registered. To form a corporation you’ll need to establish your business name and register your legal name with your state government. If you choose to operate under a name different than the officially registered name, you’ll most likely have to file a fictitious name (also known as an assumed name, trade name, or DBA name, short for “doing business as”). State laws vary, but generally corporations must include a corporate designation (Corporation, Incorporated, Limited) at the end of the business name.

To register your business as a corporation, you need to file certain documents, typically articles of incorporation, with your state’s Secretary of State office. Some states require corporations to establish directors and issue stock certificates to initial shareholders in the registration process. Contact your state business entity registration office to find out about specific filing requirements in the state where you form your business.

Once your business is registered, you must obtain business licenses and permits. Regulations vary by industry, state and locality. Use our Licensing & Permits tool to find a listing of federal, state and local permits, licenses and registrations you’ll need to run a business.

If you are hiring employees, read more about federal and state regulations for employers.

Corporation Taxes

Corporations are required to pay federal, state, and in some cases, local taxes. Most businesses must register with the IRS and state and local revenue agencies, and receive a tax ID number or permit.

When you form a corporation, you create a separate tax-paying entity. Regular corporations are called “C corporations” because Subchapter C of Chapter 1 of the Internal Revenue Code is where you find general tax rules affecting corporations and their shareholders.

Unlike sole proprietors and partnerships, corporations pay income tax on their profits. In some cases, corporations are taxed twice – first, when the company makes a profit, and again when dividends are paid to shareholders on their personal tax returns. Corporations use IRS Form 1120 or 1120-A, U.S. Corporation Income Tax Return to report revenue to the federal government.

Shareholders who are also employees pay income tax on their wages. The corporation and the employee each pay one half of the Social Security and Medicare taxes, but this is usually a deductible business expense.

Read more about tax requirements for Corporations on IRS.gov.

Advantages of a Corporation
• Limited Liability. When it comes to taking responsibility for business debts and actions of a corporation, shareholders’ personal assets are protected. Shareholders can generally only be held accountable for their investment in stock of the company.
• Ability to Generate Capital. Corporations have an advantage when it comes to raising capital for their business – the ability to raise funds through the sale of stock.
• Corporate Tax Treatment. Corporations file taxes separately from their owners. Owners of a corporation only pay taxes on corporate profits paid to them in the form of salaries, bonuses, and dividends, while any additional profits are awarded a corporate tax rate, which is usually lower than a personal income tax rate.
• Attractive to Potential Employees. Corporations are generally able to attract and hire high-quality and motivated employees because they offer competitive benefits and the potential for partial ownership through stock options.

Disadvantages of a Corporation
• Time and Money. Corporations are costly and time-consuming ventures to start and operate. Incorporating requires start-up, operating and tax costs that most other structures do not require.
• Double Taxing. In some cases, corporations are taxed twice – first, when the company makes a profit, and again when dividends are paid to shareholders.
• Additional Paperwork. Because corporations are highly regulated by federal, state, and in some cases local agencies, there are increased paperwork and recordkeeping burdens associated with this entity.

5) Partnerships:

A partnership is a single business where two or more people share ownership.

Each partner contributes to all aspects of the business, including money, property, labor or skill. In return, each partner shares in the profits and losses of the business.

Because partnerships entail more than one person in the decision-making process, it’s important to discuss a wide variety of issues up front and develop a legal partnership agreement. This agreement should document how future business decisions will be made, including how the partners will divide profits, resolve disputes, change ownership (bring in new partners or buy out current partners) and how to dissolve the partnership. Although partnership agreements are not legally required, they are strongly recommended and it is considered extremely risky to operate without one.

Types of Partnerships        

There are three general types of partnership arrangements:
1) General Partnerships assume that profits, liability and management duties are divided equally among partners. If you opt for an unequal distribution, the percentages assigned to each partner must be documented in the partnership agreement.
2) Limited Partnerships (also known as a partnership with limited liability) are more complex than general partnerships. Limited partnerships allow partners to have limited liability as well as limited input with management decisions. These limits depend on the extent of each partner’s investment percentage. Limited partnerships are attractive to investors of short-term projects.
3) Joint Ventures act as general partnership, but for only a limited period of time or for a single project. Partners in a joint venture can be recognized as an ongoing partnership if they continue the venture, but they must file as such.

Forming a Partnership

To form a partnership, you must register your business with your state, a process generally done through your Secretary of State’s office.

You’ll also need to establish your business name. For partnerships, your legal name is the name given in your partnership agreement or the last names of the partners. If you choose to operate under a name different than the officially registered name, you will most likely have to file a fictitious name (also known as an assumed name, trade name, or DBA name, short for “doing business as”).

Once your business is registered, you must obtain business licenses and permits. Regulations vary by industry, state and locality. Use our Licensing & Permits tool to find a listing of federal, state and local permits, licenses and registrations you’ll need to run a business.

If you are hiring employees, read more about federal and state regulations for employers.

Partnership Taxes            

Most businesses will need to register with the IRS, register with state and local revenue agencies, and obtain a tax ID number or permit.

A partnership must file an “annual information return” to report the income, deductions, gains and losses from the business’s operations, but the business itself does not pay income tax. Instead, the business “passes through” any profits or losses to its partners. Partners include their respective share of the partnership’s income or loss on their personal tax returns.

Partnership taxes generally include:
• Annual Return of Income
• Employment Taxes
• Excise Taxes

Partners in the partnership are responsible for several additional taxes, including:
• Income Tax
• Self-Employment Tax
• Estimated Tax

Filing information for partnerships:
• Partnerships must furnish copies of their Schedule K-1 (Form 1065)Download Adobe Reader to read this link content to all partners by the date Form 1065 is required to be filed, including extensions.
• Partners are not employees and should not be issued a Form W-2.

The IRS guide to Partnerships provides all relevant tax forms and additional information regarding their purpose and use.

Advantages of a Partnership
• Easy and Inexpensive. Partnerships are generally an inexpensive and easily formed business structure. The majority of time spent starting a partnership often focuses on developing the partnership agreement.
• Shared Financial Commitment. In a partnership, each partner is equally invested in the success of the business. Partnerships have the advantage of pooling resources to obtain capital. This could be beneficial in terms of securing credit, or by simply doubling your seed money.
• Complementary Skills. A good partnership should reap the benefits of being able to utilize the strengths, resources and expertise of each partner.
• Partnership Incentives for Employees. Partnerships have an employment advantage over other entities if they offer employees the opportunity to become a partner. Partnership incentives often attract highly motivated and qualified employees.

Disadvantages of a Partnership       
• Joint and Individual Liability. Similar to sole proprietorships, partnerships retain full, shared liability among the owners. Partners are not only liable for their own actions, but also for the business debts and decisions made by other partners. In addition, the personal assets of all partners can be used to satisfy the partnership’s debt.
• Disagreements Among Partners. With multiple partners, there are bound to be disagreements Partners should consult each other on all decisions, make compromises, and resolve disputes as amicably as possible.
• Shared Profits. Because partnerships are jointly owned, each partner must share the successes and profits of their business with the other partners. An unequal contribution of time, effort, or resources can cause discord among partners.

6) S-Corporation:

An S corporation (sometimes referred to as an S Corp) is a special type of corporation created through an IRS tax election. An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S corporation.

An S corp is a corporation with the Subchapter S designation from the IRS. To be considered an S corp, you must first charter a business as a corporation in the state where it is headquartered. According to the IRS, S corporations are “considered by law to be a unique entity, separate and apart from those who own it.” This limits the financial liability for which you (the owner, or “shareholder”) are responsible. Nevertheless, liability protection is limited – S corps do not necessarily shield you from all litigation such as an employee’s tort actions as a result of a workplace incident.

What makes the S corp different from a traditional corporation (C corp) is that profits and losses can pass through to your personal tax return. Consequently, the business is not taxed itself. Only the shareholders are taxed. There is an important caveat, however: any shareholder who works for the company must pay him or herself “reasonable compensation.” Basically, the shareholder must be paid fair market value, or the IRS might reclassify any additional corporate earnings as “wages.”

Forming an S Corporation

Before you form an S Corporation, determine if your business will qualify under the IRS stipulationsDownload Adobe Reader to read this link content.

To file as an S Corporation, you must first file as a corporation. After you are considered a corporation, all shareholders must sign and file Form 2553Download Adobe Reader to read this link content to elect your corporation to become an S Corporation.

Once your business is registered, you must obtain business licenses and permits. Regulations vary by industry, state and locality. Use the Licensing & Permits tool to find a listing of federal, state and local permits, licenses, and registrations you’ll need to run a business.

If you are hiring employees, read more about federal and state regulations for employers.

Combining the Benefits of an LLC with an S Corp

There is always the possibility of requesting S Corp status for your LLC. Your attorney can advise you on the pros and cons. You’ll have to make a special election with the IRS to have the LLC taxed as an S corp using Form 2553. And you must file it before the first two months and fifteen days of the beginning of the tax year in which the election is to take effect.

The LLC remains a limited liability company from a legal standpoint, but for tax purposes it’s treated as an S corp. Be sure to contact your state’s income tax agency where you will file the election form to learn about tax requirements.

Taxes

Most businesses need to register with the IRS, register with state and local revenue agencies, and obtain a tax ID number or permit.

All states do not tax S corps equally. Most recognize them similarly to the federal government and tax the shareholders accordingly. However, some states (like Massachusetts) tax S corps on profits above a specified limit. Other states don’t recognize the S corp election and treat the business as a C corp with all of the tax ramifications. Some states (like New York and New Jersey) tax both the S corps profits and the shareholder’s proportional shares of the profits.

Your corporation must file the Form 2553 to elect “S” status within two months and 15 days after the beginning of the tax year or any time before the tax year for the status to be in effect.

Read more about IRS filing requirements for S Corporations.

Advantages of an S Corporation
•Tax Savings. One of the best features of the S Corp is the tax savings for you and your business. While members of an LLC are subject to employment tax on the entire net income of the business, only the wages of the S Corp shareholder who is an employee are subject to employment tax. The remaining income is paid to the owner as a “distribution,” which is taxed at a lower rate, if at all.
•Business Expense Tax Credits. Some expenses that shareholder/employees incur can be written off as business expenses. Nevertheless, if such an employee owns 2% or more shares, then benefits like health and life insurance are deemed taxable income.
•Independent Life. An S corp designation also allows a business to have an independent life, separate from its shareholders. If a shareholder leaves the company, or sells his or her shares, the S corp can continue doing business relatively undisturbed. Maintaining the business as a distinct corporate entity defines clear lines between the shareholders and the business that improve the protection of the shareholders.

Disadvantages of an S Corporation
•Stricter Operational Processes. As a separate structure, S corps require scheduled director and shareholder meetings, minutes from those meetings, adoption and updates to by-laws, stock transfers and records maintenance.
•Shareholder Compensation Requirements. A shareholder must receive reasonable compensation. The IRS takes notice of shareholder red flags like low salary/high distribution combinations, and may reclassify your distributions as wages. You could pay a higher employment tax because of an audit with these results.

We are here to help

At Encure, we understand that it can be difficult to choose what kind of business structure is the best for your organizational/personal needs and that is why we have partnered with one of the top accounting and tax services firm in New York to serve our customers when it comes to this very specific task. Our partnership allows us to provide you with the most accurate and up to date information when it comes to new company incorporations or questions pertaining to personal and corporate taxes. Most consultations are free, just use the form below to contact us and we will be in touch with you as soon as possible.

6 Ways to differentiate yourself from the competiton

One of the most frustrating things for businesses of all sizes is the issue of dealing with a competitor. There is only so much marketshare, or cheese if you will, and every mouse in town wants a bite.

New businesses struggle to get their voices heard and be recognized as fresh, new, and different. Old, established business struggle to stay relevant and thwart competiton. Regardless of your comoany’s situation, always remember to differentiate yourself from the competiton. Every business has something special and unique to offer. Starbucks isn’t just a coffeeshop business now is it?

The following is a list of ways you can help your business differentiate itself from the competiton.

1) Elevate the conversation. Completely leave your competitor in the dust by offering a product or service so unique it is impossible for your competition to come up with a. fast enough counter punch. Tell the story and let it be known that you are not just a little bit better but that you are doing something significant and special. Something that plays an important role in the customers’ lives. If you are a paper company then go heavy on the recycled papers. If you are a healthcare provider then get the best doctors in your network. If you are a retailer then tout your customer satisfaction records. If you are a car dealer then advertise your transparency, honesty, and reasonable maintenance.

2) Outclass the competiton. The example of Bing vs Google and Microsoft’s Surface Pro vs Apple’s MacBook Air are precisely what we are talking about here. Make your competition out to be checklist driven and you position yourself as a company that matters to the customer. As much as Microsoft tries to show on paper that they meet more of the criteria of being a superior search engine or that their Surface Pro has more features than a MacBook Air, both Google and Apple will continue to win because they have outclassed Microsoft as brands that matter and make a difference in people’s lives. If you are in Microsoft’s position of being a newcomer, the pressure is on you to get rid of narcisism of small differences and stop the practice of highlighting immaterial nuances. It only cheapens your brand and makes you look desperate.

3) Stop following. What creates or exacerbate competition is the monotonous sea of sameness. The
“Me too” mentality as they say. Do you know why people bank with JP Morgan Chase despite them being known for their sky-high fees? It’s the business service they provide that is unlike any other bank. Sure every bank has online bank deposits, free checking and all the other bells and whistles, but what other bank would let you setup a read-only profile for a corporate accountant to download statements and help you stay ahead of the game? Set the trend. Don’t just follow.

5) Develop your brand. Avoid adopting stale, uninspiring statements and slogans. Have a slogan that stands out and represent what your brand stands for. Communicate that you are more than just another punching bag for your competiton. Consumers are just like us. Listen and know what is on their mind in order to develop your brand.

6) Build on past success. There are always going to be ups and downs in business. The key is to always assume a winning spirit and offer a message of victory. Talk positive. Exude encouragement. Success breeds nore success. Get inspired and inspire everyone around you to build a brand of positivity. Customers will respond to the positive vibes accordingly.

4 Ways to improve customer experience.

The case for a better customer experience.

Happy-Customer

Making a case for better customer experience is like convincing a fish to swim. It is understood and accepted by every business executive that providing exceptional customer experience is the best way to build customer loyalty and deliver superior service. It just makes perfect sense on paper. But how often is it followed through? I am writing this post as I am sitting at a branch of a top national bank waiting to open an account and give them my money. How long have I been sitting here you asked? Fifty minutes. And I haven’t even gotten to talk to the teller yet. And yes, I did ask them about opening the account myself online but they aren’t equipped to do that for this particular kind of account. They are very lucky that they have a product I want that no one else is offering or I would have been out of here 30 minutes ago. Needless to say, unless you are in a similar position and are able to provide a product or service that is so unique and so in-demand that customers will wait in line for hours for (iPhone 7 anyone?), your customers would simply go elsewhere.

For the rest of us who are not blessed with a holy grail and have to win customers the mere mortal way, here are some ways to improve customer experience.

1) Operational transformation. Let’s get the tough one out of the way first. Operational transformation involves changes in the operations which many times has to do with changing the culture of the business and how certain problems have been perceived in an organization for years or generations. This process could take a few years to complete. To begin, go through a customer touch-point assessment. Go over everything that is working well for the customer and identify what isn’t working so well. By doing this you should have a laundry list of things that need fixing. This will help you, as a company, prioritize what needs to be tackled first. Needless to say, you should begin by fixing smaller tasks first. Get the quick wins and build up inspiration and momentum along the way to get more difficult issues ironed out. Persistence and patients are your keys to success.

2) Digital integration. Using digital platform to communicate with customers such as social networks, a revamped website, accepting payments online, invest in creating a portal that enables customization of the customers’ products and services online. Online services are no longer “good-to-haves”. They are essential to doing business in today’s world even if your business doesn’t directly engage in doing any transactions online.

3) Listen. Have a feedback area on your website. Conduct surveys to obtain measurement and reporting of customer satisfaction levels. One of the more popular ways besides a survey is to gauge your company’s Net Promoter Score. With this method, you ask your customer only 1 question: “Would you recommend us?”. The more “Yes” you get out of the population, the better your Net Promoter Score. For anyone who answers no, make sure you ask a follow-up question with regards to their reason behind the answer. It may not be pleasant, but often truth isn’t, and growing pains is a part of business as much as personal life.

4) Cultural competency. Sensitivity training, cultural communication, interpretation and translation skills go a long way if you conduct business in a diverse geographical area or if you conduct your business internationally. Being sensitive to and understanding of your customer’s culture creates a rapport between the customer and the business and instills a sense of camaraderie. Suddenly you are no longer a business, but an adviser, a friend, a trust worthy ally they wouldn’t mind doing business with.

As mentioned earlier, making a case for improving customer experience is like convincing Congress to take a vacation. But for those who needs a gentle nudge, the following are some of the benefits of improving customer experience:
1) Increased brand loyalty.
2) Improved operational effectiveness.
3) Increased revenue and profit as a result of (1) and (2).
4) Improved customer retention.
5) Accelerated time to market for products.
6) Value added innovation for existing products.

Thanks for reading. Questions/comments are always welcomed.