tarting a business is undoubtedly one of the more significant endeavors a person can attempt in life. That’s true regardless of whether or not it turns out to be a lasting success. Starting a business can be more than just a ticket to greater financial independence. In some cases, it can provide substantial wealth, yet also be an important outlet for pursuing one’s passion.
Let’s take a look at some of the most successful entrepreneurs and business people in our society. People like Bill Gates, Warren Buffet, the founders of Google, and others. You may notice that many of them say that they simply followed their passion through their business activities. In other words, their business actually enabled them to better chase their passion. That is, they didn’t simply chase wealth for the sake of wealth. Even if a venture folds, and that’s always a possibility, those who start businesses can always learn from their mistakes. Successful business people often just find other means to follow their bliss.
In this post, we’ll discuss potential business debt problems and four tips to help with business debt. Our goal is to help people craft a healthier financial future for themselves and their business.
Excessive Business Debt Can Sink a Business
For those who do decide to set up a business, one of the chief concerns on their minds at all times will be to keep their business financially sound. Starting a business can indeed be a means to pursue one’s passion. No business, however, can survive without adequate revenue. Accordingly, every successful business person needs to be concerned about the financial health of their company. In some cases, though, business people resort to taking on business debt when revenues fall short. This business debt often takes the form of a line of credit or a business loan.
They do so in order to financially keep afloat in what may be lean economic times. Almost always, it’s done with the expectation that things will pick up in the future. Though this can work, it’s always better for people to avoid business debt whenever possible. Far too often, we see business owners fail to pay payroll taxes to the IRS or New York State. Business owners do it with the best of intentions. They think that the’ll catch up next month, or maybe the month after that. Far too often, though, this “robbing Peter to pay Paul” strategy comes up short.
Trust Fund Recovery Penalties
The fact is, neither the IRS nor NYS Department of Taxation and Finance want to be your unwitting business partner. They’ll be none too pleased to learn that they’ve been unknowingly made a lender financing your business debt. When that happens, they’ll often assess a trust fund recovery penalty against responsible persons associated with the business. This has the nasty effect of turning at least a portion of your business debt into your personal debt.
Maintain a Healthy Balance Sheet
A balance sheet is a document which provides a snapshot of the financial condition of a company at a given point in time. Balance sheets show the present financial situation of a company by displaying the company’s assets, liabilities and total equity. A balance sheet breaks down each category in detail. It shows the individual components which make them up. So, for instance, assets will be divided according to type (e.g., current or long term) and then further broken down to show each specific asset (i.e. cash reserves, notes, accounts receivable, etc.).
Keeping a close eye on your balance sheet can help your business stay financially solid. If you regularly analyze your balance sheets, you’ll always know exactly where you stand financially. You can also get a clear sense of where your business is heading. Keeping well-informed in this way will help you make appropriate financial decisions. You can also modify your budget over time in order to avoid future financial mishaps.
Hire Employees Who Create Value
When it’s time to hire employees, a good way to think about an appropriate salary can be summed up as follows: salaries stem from the value employees produce. Very often people have no idea where salaries come from. Some literally the figure appears out of thin air. Other times, people think certain positions or professions require or “demand” salaries of a certain amount. It’s true that more sophisticated skill sets will tend to command better salaries in the marketplace. This simply reflects the economic realities of supply and demand. Ultimately, though, a given salary is justified, or not, depending on the value an employee creates.
Let’s look at a simplified example. Suppose you hire an accountant and pay him or her $70,000 a year. If that accountant finds creative ways to reduce your tax burden by $80,000, that employee clearly justifies their salary. That’s because he or she has created value for the firm in excess of that salary.
On the other hand, suppose you have a salesperson who constantly loses prospective clients or fails to satisfy existing ones. Or maybe they simply make more in salary than they bring in. In such cases, these particular employees don’t justify their salary. As a business owner, you avoid financial trouble by making sure you only hire employees who create value for your business. You want employees who are value-creators, not value-takers or value-removers.
Hire a Talented Accountant
This tip is easily among the most important you can receive as a business owner. Specifically, you need to be sure to hire a highly capable, reputable accountant for your business. A talented accountant will be able to help you identify available deductions and credits. These are money-saving opportunities that you can capitalize on to grow your business. A good accountant will help you reduce your tax liability. That, in turn, can free up cash and other resources for other activities or for saving. Remember, avoiding tax through legitimate means is perfectly fine and legal. A good accountant will help you do just that. They do so by keeping up with changes to the U.S. tax code. This ensures that you utilize every perk and benefit available to your business.
Many accountants have specialized practices often focused on specific industries (e.g., law, medicine, dentistry, etc.). When choosing an accountant, you should look for a niche practice that complements your business. Conducting adequate advance research before hiring is the key. Doing so will help you ensure that you receive the highest level of professional compatibility and, thus, likelihood of success.
Work With a Qualified New York Attorney
Here at Mackay, Caswell & Callahan, P.C., we understand issues with business debt on a very deep level. We regularly assist clients that have fallen behind on their financial responsibilities, often tax debt. As a result, we’re intimately familiar with how these problems arise and how they’re best resolved. If you currently have debt or tax issues with your business, please don’t hesitate to contact us. One of our top New York City tax attorneys we will give your matter the full attention it needs.