Choosing an Organization Type

At DMF, we often meet with prospects who are, have, or have thought about starting a new business. Usually these people want to "ask just a few questions" about how their business should be set up. More specifically, they want to know which organizational type they should be.

If you've ever researched or talked with prospective clients about organizational structure types, you know that trying to educate a potential client on all the possible pros and cons of each option is the equivalent of trying to get a drink from a raging fire hose; it's just too much information for their brains to absorb in an hour consultation.

So what are the options? Well, briefly, new businesses can choose between a general partnership, limited partnership, limited liability company taxed as a sole proprietor, limited liability company taxed as a partnership, limited liability company taxed as a c-corporation, limited liability company taxed as an s-corporation, s-corporation, c-corporation, or plain 'ole sole proprietorship. And I'm sure there are some options I'm leaving out.

Suffice it to say that, as in anything dealing with small businesses, there is no "one-size-fits-all" solution for organization type. When we have the organization type discussion with clients and prospects, we usually end up fighting off some argument that starts with "my brother-in-law's neighbor's pastor told me that his nephew's mother-in-law started a corporation and that's what I should do."

Well, did that person have partners? Did they contribute assets to the business? Is it a possibility that they will take on additional partners? Are there any partners with limited participation in the business? Are they paying themselves or others? How are they paying themselves or any other partners/members? And so on...

If you're worried about your organization type or thinking about starting a business, do some research. Get a good background of your options. Understand what your intentions are for the business, both short-term and long-term. Then go talk to your CPA.

Generally, we like to use the K.I.S.S. method at our firm: Keep It Simple, Stupid. Start with something easy, because there ARE rules to follow if you start something complicated and it's much easier to unwind something simple than a partnership that also has corporate owners.

That's all. KISS.

Why an Accounting System?

Most CPAs will tell you (just like we will) that if you're running a small business of any kind, you need to be on some type of accounting system. It doesn't have to be any specific type of system, just something that works for your operation.

But are we as CPAs just going around telling our clients and prospects that "you need to be on an accounting" just to see them suffer through setting it up and learning something new? Are we perhaps getting kick-backs from companies like Intuit (QuickBooks) or Sage (Peachtree) for every new client that buys their software?

While we DO actually like watching a few of our clients suffer through learning a new software (we won't name any names), we actually do have their best interests in mind when we recommend moving to an accounting software. Recently, an encounter with a client really drove our point home. It went something like this:

A client of mine has never accepted the fact that his business needs to move to an accounting system. He runs a business that grosses around $500k per year. The first year that I did his business tax return, he actually brought his information to me on 14 column paper. It was horrendous. To this day, I'm still dealing with a payroll issue from 4 years ago.

Recently, this client put his business up for sale. What was the first thing he needed? That's right...financial statements. The business broker wanted the financials for at least 2 years. And he didn't have them. And neither did I. We had to scrounge around to put the most recent financial statements together, just so my client could have an intelligent conversation about his business with the broker and prospective buyers. I believe my client's inability to adopt an accounting system severely hampered his ability to successfully sell his business.

Here's the lesson. If my client had been using an accounting system, the financial statements would have been easy to develop. We could have produced them for each month and at any point during the year. But each time they are requested, we have to start the process of collecting the information all over again, which is labor-intensive...which translates to higher costs for my client.

If you're a small business and you don't currently have a system, it's a perfect time of the year to start. It's not too late to add everything from this year into the system, but the farther into the year we go, the more difficult the process becomes.

Here are some things to remember when picking an accounting system:

1. It needs to be easy for YOU to use.

2. It should simplify some process of your business, such as billing, collecting money, paying vendors, or producing financial statements.

3. Make sure it comes with support should you have questions.

If you have questions about possible accounting systems, ask someone who has used them. Like your CPA. He actually knows what he's talking about.