I am passionate about helping entrepreneurs fix their accounting problems. Makes me crazy that small business owners and entrepreneurs often suffer with bad accounting and messed up financials statements. No expertise in tax, I don't know any more about taxes than you do. Founder of Venturity Financial Partners, largest provider of outsourced accounting services to small businesses and entrepreneurs in the US.
I like Kerby's answer. I'd also suggest working with a fractional CFO service like B2B CFO. Someone with them who is experienced in building models like this will have a good template to start from should be able to put together one for your business in 5 - 8 hours on an hourly basis. If they are quoting more than that, find another fractional resource.
My firm, Venturity, can also do this for you. We're an outsourced accounting firm with higher level resources that can tackle these sort of tasks quickly and effectively. We do this for a lot of our clients already, and because we're accountants, we truly understand projecting all three statements, not just the income statement. Happy to discuss at no charge, just reach out to me with a follow up.
I don't have any tools or articles off the top of my head, but I can share some tips on evaluating decisions like this.
I think there are two key questions to answer when evaluating investment decisions like this. First, what is my outcome I hope to get? Secondly, are there any objective metrics I can use to evaluate whether I've achieved that outcome?
The first question is to help bring clarity on why you are making the investment. For example, if you decided to invest $30,000 in marketing for your company, you could do that a lot different ways. In order to deploy those funds most effectively, you need to be clear on the outcome you are trying to get. Is that outcome more awareness of your brand? Or is it to generate new business in the near term? The first objective would lead to one type of marketing, perhaps targeting advertising. The second objective might lead you instead to a lead generation program, perhaps by hiring a third party lead gen firm.
Once you've answered the first question, you can move on the second one regarding metrics. This question is important because it leads you to how you are going to measure and hold your organization accountable for the success of the investment.
So if you are investing in a lead gen program, you need to quantify how many incremental qualified leads the program should generate which then lead to X number of new customers which leads to X amount of new business. Then you can decide if it's a good investment before you spend the money, and you have an objective measure of whether it's successful as it progresses.
Keep in mind that not everything will have objective measures of success. For example, if you are investing in a branding awareness program, it's going to be much harder to measure that success objectively. However, you should still try to have some measure or idea of what success looks like at the end of that investment. In this example, perhaps the firm handling the campaign has some measures they can track based on their experience of whether the campaign was successful.
I think answering these two questions before you spend any money within your organization is important, not just major investments. It's a little mental math you should go through in your head each time something new comes up. Why am I doing this (what outcome do I hope to achieve, what needle will this move) and how will I know if it's successful? Sometimes it just 30 seconds in your head, sometimes you get the management team together and talk it out.
Hope this is helpful.
In my experience, someone is either good at bookkeeping or a good admin, but rarely both.
One thing you want to keep in mind is your plans for growth going forward. The way you’ve asked the question, the two roles basically add up to a full time job today. So if either of those roles expands as you grow, this person will quickly become overwhelmed.
My suggestion would be to hire a top notch admin and separately engage a top notch bookkeeper for 15 hours a week who can grow with you as your company grows. The admin position is almost already a full time position, and I bet you will quickly fill that person’s plate if you hire a good one. For the bookkeeping piece, you can engage an individual that does this work on a part time basis for various companies, or a firm like ours that provides this on an outsourced basis. The firm solution is typically a little more expensive, but is more flexible as you grow.
If your concern is from an ethical standpoint or a concern over a segregation of duties, there is no problem at all having your tax person handling your bookkeeping.
The bigger issue is something that few people understand about accountants. There are different specialties within accounting, and you should go to the right specialist for the right task. Tax accountants are experts in tax law, filling out tax returns and finding ways to minimize taxes. They must immerse themselves in the field to maintain their expertise. Financial accountants (which include bookkeeping) are experts in debits and credits and keeping all your transaction straight in your accounting software so that you can get good financials each month. Financial accountants have to immerse themselves in your day-to-day accounting so that they can keep it accurate and up to date. Full disclosure, this is the work that my firm specializes in, we don’t do any taxes.
Because each type of accountant must immerse themselves in their individual fields of expertise, they don’t have the time to focus on the other expertise. Not that they are both not great accountants, they just have a different specialty.
Here’s a good analogy. If you developed a heart condition, would you go see a neurologist? No, you’d go see a cardiologist. They are both outstanding physicians and know a lot about the human body, but the cardiologist spends all their time thinking about, studying, and treating heart conditions and is going to be the best equipped and most knowledgeable about treatments for your heart condition.
The last point I’ll make is that tax work is very seasonal and requires incredible focus and incredibly long hours leading up to major tax deadlines. This is not only during the period from January to April 15th, but also leading up to major deadlines on August, September and October 15th. Companies I have worked with that used tax accountants in the past for their bookkeeping find during these periods their tax accountants are forced to put all other work besides taxes on hold until their tax work is complete. What often happens in these situations is that these company’s bookkeeping falls three or four months behind. This can be devastating for a small business that needs to know if they are making money or losing money on a very up to date basis.
So my suggestion is to find yourself a good bookkeeper that can handle your books. Your tax person may even be able to suggest a good resource, and deep down may be glad to do so because her first love is taxes, not bookkeeping. My firm could likely handle the work as well.
Hope my thoughts above are helpful and addressed your question, but feel free to reach out to me if you have any follow up questions.
This is really more of a philosophical/partnership question than an accounting question. At my company and those of most of my clients, if all three partners are equally active in the business and make a similar salary, then usually business related expenses are paid the same for all. If these are more “perks” (country club memberships, car payments, etc.), then a decision has to be made as to who gets what, just like what salary gets paid to each partner.
Because no one owns a majority, you are going to have to come to some sort of agreement among the partners. Even if someone owned 51% though, you would probably still want to reach a consensus. When the 51% owner makes these types of decisions unilaterally, then it tends to undermine the spirit of the partnership. So the answer is, you guys need to decide what everyone can live with and go with that. I can tell you all day that the 50% partner should get a nicer car, but that’s not going to stop the other two partners from being unhappy if they don’t like that solution. So if you are the 50% partner looking for me to give you an answer you can show to partners and say “See, everyone else thinks I should get a better car,” I’m going to advise you that’s a really bad idea all the time, not just as it relates to this topic.
The last comment I’ll make is a little bigger picture. I’d suggest not instituting a lot of perks and running a lot of semi-personal expenses through the company. Profits will be distributed at the end of the year based on your sharing ratios. If one partner wants to join a country club, they can use their profits to do that. Expenses like that aren’t deductible for tax purposes anyway, so there’s no benefit to running them through the company. Make your business about business, and leave the other stuff for people to spend on their own.
This is a great question. The world of accounting/bookkeeping can be a confusing array of options for non accountants.
Let's address the software question first. Let me start by saying that my firm is relatively agnostic to software, we work with dozens. I'm familiar with Xero and my firm has worked with it, and if someone comes to us already on it, we stay with it. It's a solid piece of software, certainly works. And it's a very fashionable choice right now due to inroads their marketing has made with the startup community. The big dog in the market is QuickBooks On-Line (QBO), and when I say big dog, various version of QuickBooks have easily 10x the number of current customers that Xero has. Why does this matter? The usability of the software from a user experience is about the same, but Xero is still trying to play catch up to QuickBooks On-Line in terms of features. For instance, they have payroll rolled out for "a few states and are adding more each month". Anything innovative that Xero comes out with QuickBooks is going to quickly copy and add to their product, because they are huge and have the resources to quickly adapt. This is not a situation of the iPhone putting Blackberry out of business, QuickBooks isn't going anywhere. Likely end game is that at some point QuickBooks acquires Xero and moves everyone over to QBO. Lastly, every bookkeeper knows QuickBooks, some know Xero, and there are hundreds of developers developing software that integrates with QuickBooks. So, while Xero is a perfectly adequate piece of software, we’re talking the platform for your accounting, go with QuickBooks On-line.
The subject of a bookkeeper is tricker. Do you go with a person or a process solution? Full disclosure here, my firm does outsourced bookkeeping for a living, so you have to take that into account when viewing my answer.
I haven’t worked with Bench.co, but it looks very intriguing, and pricing is quite aggressive. They also look very easy to engage with. The down side is that is appears to be a person based solution. You get assigned a bookkeeper, and then good luck. The skill of individual bookkeepers varies widely from damn good to truly awful. They often hook up with several services like this, so their loyalties are divided. Additionally, they are often working with up to a dozen clients, and what typically happens is one of their clients starts growing quickly. All other clients get pushed aside while they focus on their largest client because they can’t afford to lose them. A couple of other disadvantages are that, because they are on their own, you are limited to just their skill set, they have no one else to check with in sticky situations, and when they go on vacation, your accounting goes on vacation, too. These are all things that may be fine for you if you’ve got a relatively small business that doesn’t need daily attention to its accounting.
The other alternative is a firm that specialized in outsourced accounting. There are several firms out there, you can find them (and us of course) with a simple search of the internet. The advantage to the better firms in this space is that they typically will assign you a team of bookkeepers/accountants so that you have backup in case one member of the team is on vacation or leaves to take a full time job somewhere. These solutions also will typically come wrapped with software they would suggest for your business. Finally, you aren’t limited to knowledge base of the one person working on your account. You have a team, and really the knowledge base of the entire firm at your fingertips. Of course you pay a little more for this, but the hourly rates are often not that much more than individual bookkeepers. And in the long run you may end up spending a lot less by not having to come behind a bookkeeper that maybe wasn’t so good and clean up the mess. So if you plan on scaling your business beyond a few $200k a year, it may be best to start out with a firm based solution rather than an individual solution.
Side note on Bench.co: I can’t tell what software platform they are on. If they are using a proprietary platform, you will find it very hard to move your accounting to another solution if you’re not satisfied with their solution. Something to ask if you go with them.
So, I think that about covers it. I’ve probably told you way more than you wanted to know, but I’m always available to schedule a call if you want to dive in a little deeper. Just let me know.
There are three angles to look at this structure from: 1) Is it the best way to set things up to hold your investment from a legal perspective? 2) Is the it the best way to minimize your taxes? and 3) Is the best way to set things up from an accounting (i.e. bookkeeping) perspective? In your question above, you initially ask about tax, but then ask about accounting at the end, so I'll address all three.
The first angle is best answered by your attorney, and it sounds like they've already advised you in this regard. I will say that the structure you've described is one I've seen used often and seems to work well from a legal perspective.
For the second angle, it is imperative that you engage an experienced tax CPA to advise you, and do it right away if you haven't already. Know that sometimes the best legal structure is not always the best structure to minimize taxes, and vice versa. These two sometimes work at cross purposes and you'll have to strike a compromise based on which is more important to you. For instance, having the sub as a C-Corp is likely excellent from a legal perspective due to the liability protections afforded by a C-Corp. However, it may not be ideal from a tax perspective as the subsidiary C-Corp pays taxes on income and then the income is taxed again when it is distributed to your LLC.
I am neither an attorney or a tax CPA, my expertise is in the third angle, how to set up your financial accounting to track your financial results in a way that gives you useful information you can use to make decisions. From a financial accounting (i.e. bookkeeping) perspective, this setup should serve you well. It segregates the revenue and expenses from the new project from the operations of your own LLC, allowing you to separately measure the operations of both. Of course having two separate entities to track is more time consuming, and therefore involves more expense for accounting. But it's necessary based on the fact that you are going to have a different ownership structure and different owners for the spun out entity than the original LLC.
In summary, I'm not an expert on legal or tax matters, I know just enough to know that you need good advisors talking to each other and you in each of these areas. From a financial accounting perspective, I think your set up is a good one because it segregates operating cash flows and allows for different ownership classes. I can consult with you if you need some guidance in how to set up the recordkeeping properly. However the legal and tax questions should take precedence over financial accounting.
Helpful? Let me know if you need additional clarification, happy to help answer further questions. Also let me know if you'd like to set up a call to discuss further.
You are correct that these assets are certainly fully depreciated for tax purposes. I'm not a tax expert, but typically your tax CPA would have deducted these costs fully during the first year they were purchased by your consulting firm. So from a tax standpoint you don't need to do anything.
From a bookkeeping standpoint, have three options: 1) do nothing, 2) keep the assets on consulting company's books and charge a rental fee to start up company, 3) move the assets to the new company at their current values on consulting company's books.
I would do option number 1 unless you are an exacting accountant that can't stand for these assets to be on one company's books while another company get's the benefit or you want to show some assets on the start ups books. However, the assets are so immaterial at this point that they really don't matter, just a bunch of needless recordkeeping for the sake or recordkeeping. In other words, options 2 and 3 would be the "right" answer from an accounting standpoint if we were talking about a huge amount of assets, but because we're probably talking about a few thousand dollars of fully depreciated assets, you should take option #1.