Special Earthquake Edition

Yesterday when the earth began trembling, I did what I do every time I am in a life threatening situation. I asked myself, “What would Jennifer Aniston do?” So I kicked off my high heeled pumps and ran screaming from the building. Then I went shopping. What really happened isn't as interesting. I was working at a client's office in Manassas when the building started shaking. I was entering a couple of journal entries into their accounting system and didn't see a need to interrupt that. One of the owners came by and remarked, “Wow, Frank didn't even stop working.” I replied, “Did you really want me to keep billing you as I ran screaming out of the building like a little girl?” When I was done at that client's office, I rushed back to my office to make certain none of our Jennifer Aniston pictures had fallen off the men's bathroom wall. That would have been a real tragedy. We can rebuild the Pentagon, but an autographed picture of Jen is irreplaceable. Thanks to all of you who expressed your concern for Jen's pictures on Facebook. I tried calling Jen on her cell phone to make certain she was unhurt, but all of you wussies were busy calling your families and prevented me from getting through. As I drove back to my office post-quake, I listened to WTOP news on the radio. They had someone from everywhere call in to share their experiences – even Woodbridge. Who gives a damn about how people in Woodbridge feel? The Loch Ness monster called in from Scotland to tell us his lake shook. Big Foot probably couldn't get through on his cell phone. AT&T service was down – as usual. If you've made it through my earthquake diatribe, you at least deserve some real business advice. I wish I had a good stock tip to pass on – say what to buy when the earth is shaking, but I don't. There is a punch line in there that eludes me. If I find one, I'll post it on Facebook. If you have a good one, let me know. I'll take the credit for it – but not the blame if it bombs. Last week, I was preparing a set of financial statements for a client. This was no big deal. I spent a few hours working on them and then send the owner a draft. After reviewing the draft, he called me, “Frank, I need you to make me look good for the bank.” You might reasonably inquire why he would make that statement. I might reasonably answer that his company's financial statements weren't very impressive. By that, I mean that he had small losses, not profits, for both years presented in the financial statements. He was hoping to get a new bank loan. The financial statements certainly would not look great to a bank. I hear this owner's plea about a dozen times per year. In each case, a company owner is looking for something from a bonding company or a bank and needs financial statements prepared by a CPA. I prepare the financial statements as requested and then get the phone call. “Frank, can you make my financial statements look better?” Apparently, there is some trick I missed in CPA school that will magically turn losses into profits. Jesus turned one loaf of bread into many. That is a miracle. I dare him to turn some of these ugly-assed profit and loss statements into something a banker might believe. Take a guess why banks and bonding companies want financial statements prepared by CPA's. No that isn't right. That isn't either. You get half credit if you guessed that banks just want someone to sue when the loan goes bad. The real reason is that banks trust CPA's to present financial statements that are truthful to the best of our abilities. That reason would seem to eliminate the possibility of my fudging the numbers to make the company owner happy. I should mention, however, that in the past I have had mortgage companies ask me to falsify financial amounts. We all know where that practice led the mortgage industry. In case you haven't guessed by now, my answer is “No.” My job isn't to make a company's financial statements look good. My job is to make them look accurate. The owner's job is to make the financial statements look good – by managing his company well. Now that you have accepted my plea not to ask me to commit fraud, let's discuss the types of financial statements a bank or a bonding company might request. There are three basic types of financial statements a CPA can issue. They are compiled financial statements, reviewed financial statements, and audited financial statements. These three types of statements differ in the amount of responsibility the CPA takes for the accuracy of the numbers and consequently the amount of work the CPA performs. A quick explanation of the three types of financial statements is as follows. If it looks like a duck, it is a duck. That describes compiled financial statements. If it looks like a duck and quacks like a duck, it is probably a duck. That describes reviewed financial statements. If it looks like a duck, quacks like a duck, and is genetically proven to be a duck, it is a duck. That describes audited financial statements. Let's look at the three types in a little more detail. When a CPA prepares a set of compiled financial statements, he takes no responsibility for the accuracy of the financial statements. The CPA is required to read the financial statements and gain an understanding of the company, but that is all. There is no assurance whatsoever that the financial statements are correct. This, obviously, is the lowest level of assurance a CPA can provide in that no assurance is provided at all. The only responsibility for correcting the financial statements arises when the CPA notes an obvious departure from accounting principles generally accepted in the United States. Then he can either correct the financial statements or note in his report the departure. From a practical standpoint, most CPA's including me, don't issue compiled financial statements without performing at least some work to determine that the numbers in the financial statements aren't total garbage. We will normally make certain the bank accounts and a few other important balance sheet accounts have been reconciled. But – we aren't required to do that. Compiled financial statements are the least expensive set of financial statements a CPA will issue. Compiled statements normally run from $500 to $2,000 depending on the complexity of the statements and the amount of work the CPA performs. Reviewed financial statements provide a higher level of assurance than compiled financial statements. A CPA is required to do at least a little more work before issuing reviewed financial statements. We have to perform all of the procedures for a compilation, but we must also make inquiries as to the balances in the financial statements. In other words,we might inquire as to whether the bank accounts have been reconciled and whether all accounts receivable are collectible. From a practical standpoint, most CPA's will prepare workpapers that support the balances of all the significant balance sheet accounts and some of the accounts on the income statement. We aren't required to actually test any of the transactions that make up the financial statements. In other words, we don't examine canceled checks or confirm accounts receivable balances with customers. We also do not do any testing for fraud. A set of reviewed financial statements gives some assurance that a company's financial statements are accurate, but certainly not absolute assurance. A set of reviewed financial statements will typically cost between $1,000 and $5,000 for a small business again depending on the complexity of the financial statements. The highest level of assurance that a CPA can provide comes with audited financial statements. An audit includes all of the compilation and review procedures but also includes testing on a sample basis the transactions in the accounting system. For example, in an audit, a CPA will test count year end inventory and confirm bank account balances with a company's bank. The CPA will also evaluate the risk that fraud may have occurred and perform some fraud testing. However, testing extensively for fraud isn't part of an audit. This surprises most people. The general public perception is that an audit is primarily about detecting fraud. It is not. An audit for a small business will typically start at not less than $15,000 and could run to over $100,000. Audits aren't for most small businesses. Audits are also risky for CPA firms from a liability standpoint. We don't perform them for that reason. They also aren't nearly as much fun as preparing tax returns. Yes, I take medication for this condition. What type of financial statements should you want for your small business? Banks and bonding companies love audits for obvious reasons. They also understand that most companies can't afford them. For companies with less than $10 million in annual revenue, most banks and bonding companies will accept reviewed financial statements. For very small companies with less than $1 million in annual revenue, banks will typically accept compiled financial statements. In most cases, I recommend selecting the least costly service that your bank or bonding company will accept. Yes, I would love to bill you for reviewed financial statements. However, if I ask myself what Jennifer Aniston would do, I realize that she would probably go shopping. So she is no help there. I try to put my clients' best interests first. I sleep better that way. I end up with plenty or work to do anyway. As always, if you want non-snarky tax and accounting advice, please visit our main S&K web site at HTTP://www.skcpas.com. In the meantime, make certain your life insurance bill is paid. With the next earthquake, we will all surely die!

Deduct Your Spouse

A friend from Facebook, Angelina J. writes, “Frank, I am taking a business trip in a month with my husband, Brad P. How can I make his travel expenses deductible?” That's a great question. I am in a similar situation. My future wife, Jen A., and I are opening a sex toys business. She needs to find a way to make my travel expenses deductible. In her new movie, “Horrible Bosses”, Jen demonstrates her knowledge of sex toys. She plays a cougar dentist, who enjoys seducing / torturing her dental assistant. I would have been great in that role.

The key to making spouse travel expenses or any other spouse related expenses is involvement in the business. In other words, your spouse must have some substantial, active role in your business. In my case, I plan on being Jen's sex toy model. She can test the toys on me.

Angelina J. runs an adoption agency. She has to find a way to make Brad P. a contributor to her business. She could have Brad fill any of a number of roles like bookkeeping, searching for orphans to adopt, or marketing foreign kids to rich, useless American actors. For Brad's expenses to be deductible, his role in the business must be essential. The I.R.S. has seen and rejected all sorts of schemes. The more Brad's arrangement in Angelina's business looks like something an unrelated employee might do, the better the changes of sustaining deductions related to Brad's involvement.

A second factor Angelina must consider is Brad's compensation. His compensation must be commensurate with his involvement, and his expenses must be reasonable based on his level of compensation. You wouldn't spend $10,000 in travel expenses on an unrelated employee making $15,000 per year. We CPA's say, “Pigs get fat. Hogs get slaughtered.” If you get greedy, the I.R.S. will disallow your deduction.

You have some choices in how you structure your spouse's involvement in your business. If you already have employees, putting your spouse on the payroll with a salary is a great idea. If you own a pass thru entity such as an LLC, partnership, or S corporation, your spouse's salary will increase your personal income but be offset by your business's deduction for his salary. There can be some Social Security tax and Medicare implications. So you have to actually work out the numbers to make certain the additional spouse travel deductions are worth the hassle.

If you don't have employees already, you can make your spouse your only employee. However, then you begin to incur the additional administrative expense of processing payroll. That expense eats into the benefit of deducting your spouse's travel. A way around having to process payroll is to make your spouse a minority owner. If you are the only owner of an LLC, now you have created a partnership for income tax purposes when you add your spouse as an owner. If your spouse is involved in your business, his / her expenses are deductible to the business since he / she is an owner.

There is a definite downside to making your spouse an owner in your business. If you get divorced, the consequences aren't happy. If you think your marriage isn't on solid ground, give up the deductions. I am only addressing deductions in this article. I ain't no Dr. Phil. Your marriage is your business. I was bad enough at my first one that I shouldn't be giving marriage advice.

There is a more aggressive way to make spouse travel deductible. If you have a legal entity such as an LLC or corporation, you can make your spouse a member of the board of directors. Corporations are required to have annual director meetings. Hold yours someplace nice like Hawaii.

The key to successfully defending your spouse travel deduction is documentation, documentation, and more documentation. If you go to Hawaii to hold a directors' meeting, meet every day of the trip for some substantial period each day and keep detailed meeting minutes. Don't think you can create the minutes after the fact. Your computer file creation dates had better be consistent with your trip dates. If your spouse is an employee, keep the same time records you would keep for any other employee.

Arranging your business affairs to make spouse travel deductible is definitely an aggressive income tax reduction technique. If you are audited, expect the I.R.S. to question the deductions. However, if you can prove through solid documentation that your spouse is actively involved in your business, you will be able to defend your deduction successfully. But, expect a fight. If you aren't willing to have the fight, pass on the deduction.

If you are looking for not so snarky tax and business advice, please visit our main S&K web site www.skcpas.com. Thanks for reading.

Blame Your Customers – Santa Closes Up Shop

Here's how you can tell the last recession was a severe one. Santa Claus closed his shop at the North Pole. The elves pension trust held the mortgage note on the workshop. They threw Santa out on his ass, when he fell six months behind on the mortgage. Santa applied for federal stimulus money to save the shop, but like most Americans, the loan to value ratio didn't work even with lower payments. What happened to the reindeer was just wrong. They didn't just lose their jobs. Wegman's told us they were selling bison, but we really know the truth. Make mine medium rare, please.

Santa fell on hard times in 2007 when he had a falling out with his main benefactor, Osama Bin Laden. Santa refused to deliver suicide-bomber Barbie dolls to girls in Israel. Santa packed up his tools and fixtures from his shop and moved to Danslowne, where he opened a retail toy shop in 2008. Danslowne is an affluent residential community twenty-five miles west of Washington, DC. Shortly after opening, Santa's toy shop won the prestigious small retailer of the year award presented annually by the Douloun County Chamber of Commerce. Santa was proud of his award and thought he was on the way to financial success.

Early in the summer of 2011, the president of the Douloun County Chamber of Commerce, Hony Toward, sent a message to past winners of the small business award. He asked each of the winners to provide a few words explaining how winning the award benefited their businesses. Hony was shocked when Santa replied that he couldn't provide a quote, because he didn't believe winning the award had helped his toy business at all. His business was struggling.

Santa explained that Douloun County residents had changed their buying behavior between 2008 and 2011. Residents ignored small local retailers, like Santa, in favor of big box stores like Wal-mart and Best Buy. He couldn't understand why consumers would forsake the incredible customer service he provided in favor of the rock bottom prices of Target and the other large discount chains. He told Hony that someone, presumably the Douloun County Chamber of Commerce, should start the fight for the little guy in Douloun County. Someone should convince county residents to buy local. Santa explained that he was too busy trying to save his business to participate in his proposed program, but that somebody should do it. Hony presented Santa's message to the small business committee of the chamber. One of the members was a stunningly handsome, young CPA, named Srank Ftitely. Srank brought Santa's message to my attention.

Santa thought winning the small retailer award validated his business expertise and anointed him a small business leader who would surely succeed. The award judges were forward thinkers, who understood the genius of his business model. That model was selling upscale toys to affluent consumers in Danslowne. A toy from his store would have your little Timmy solving Einstein's relativity equations by combining data from the Hubble telescope and the Large Hadron Collider. His toys would have your child graduating from Harvard by age twelve.

Here's the truth about the small retailer award. The award isn't judged based on the viability of a business's model or its financial results. The judges review packages submitted by award nominees. The best package wins. Santa had submitted a beautiful brochure featuring Stephen Hawking brand toys. The brochure was produced by an amazing printer, named Mave Dorey. Mave owned M & M Printing. Yes, I switched the M & M. You still get M & M. Santa won based on his package.

Let's take a look at Santa's actual business plan. This isn't how he would express the plan, but we will be closer to reality. Here is Santa's business model. Rich people are willing to pay too much for toys. The underlying assumption is that rich people are stupid. They are willing to pay more for a pedophile Ken doll or slutty Barbie to Santa than they are willing to pay Wal-mart. Santa thinks his outstanding service will be the difference. How much service do you need to buy toys?

To compete with big discount warehouses, small retail stores have to offer something the warehouses can't offer. That seems obvious. What wasn't obvious to Santa is that customers have to want that something. That something isn't service in the case of a toy store.

If I could retool Santa's business model, I would eliminate the retail part completely. Small retail toy stores can't exist any more than the Loch Ness monster can exist. Santa needs a niche market. Osama Bin Laden might have had the right idea. Santa could sell suicide bomber Barbie dolls over the internet to the children of Al Quaeda terrorists. The reason he can't do this with a brick and mortar location is that there aren't enough terrorist families in Danslowne. The market isn't big enough to support a store. However, an internet business with almost no inventory and overhead could work great selling internationally. He could have a customer loyalty program. If you buy suicide bomber Barbie, you get a free Taliban Ken.

What really offended me about Santa's message to the chamber of commerce was the implication of entitlement. He is a small business. Therefore, we owe him. If Santa had been at the meeting, Srank Ftitely would have told him Stitely's rule of seven billion. There are seven billion people on the planet,who don't give a damn about his business, and not a single one owes him anything. I quoted George Thorogood two weeks ago, but the quote applies to Santa as well. “Get a haircut and get a real job.”

A good friend and client, Ken Irish, passed away tragically in an accident this past week. Ken was a former military guy, who had created a really amazing business. Every moment I spent discussing business with Ken was a real joy. Ken was no Santa. He not only had a great business idea, but he knew how to make money with it. He will be sorely missed by all who knew him.

Thanks for reading. For real tax and accounting advice, please see the main S&K web site at http://www.skcpas.com.

Start a Non-profit Organization

So you're feeling you should contribute more to the world. Maybe you feel blessed to be financially successful and secure. You see lots of pressing human needs. People are starving. Children are homeless. Animals are battered and abused. You feel there is no better way to serve your fellow human beings than to start a non-profit organization. Before you rush to a lawyer's office to start a new corporation, please read on.

I'll skip the cheap shot about how many people start non-profit organizations without intending to. I am better than that – then again maybe not. Before you ask the fine people at the state corporation commission to interrupt their nap time to process your corporate application, ask yourself this one question. “Have I ever successfully managed any organization in my life?” In other words, have you successfully started and managed a business? Have you ever successfully managed a department with financial responsibility in a large company? Please note the word, successfully.

If no one has ever trusted you with the financial responsibility to manage an organization, why do you think you are qualified to run a non-profit organization? Step one in starting a charity is good intentions. However, step two is having the talent and experience to run one. There are two parts to having talent and experience. Part one is having expertise in your charity's mission. I like dogs. That doesn't qualify me to run a dog rescue organization anymore than watching the Redskins qualifies me to coach football. Part two is having general business experience. Charities are businesses too. Fools don't have higher success rates in charities than they do in for-profit businesses.

Sue opened up a new corporation ten months ago to promote better breeding opportunities for teenage male giraffes. Giraffes need to get laid too. For the last ten months, Sue has been trying to qualify her organization as a charity under I.R.S. rules. The chief benefit of Sue's qualifying as a charity is that she can then solicit tax deductible contributions to support her effort to find slutty female giraffes. Six months ago, Sue sent a cheerful e-mail missive to all of her colleagues and friends announcing that her organization had qualified as a charity. She was a bit premature.

Starting a charity is not an easy process for experienced non-profit executives in the best of circumstances. First, you create a corporation with specific wording, required by the I.R.S., in the articles of incorporation. This is not a do it yourself task. Setting up a corporation varies state by state. I strongly recommend using an attorney with experience in non-profit organizations. I know a couple if you need a referral. Operators are standing by waiting for your call.

Next, you complete an application with the I.R.S. to be classified as a charity. The application is form 1023. Form 1023 is the bureaucratic equivalent of the Bataan death march. It is twenty-six pages of pure administrative torture with short pauses for sheer horror. The CIA makes terrorism suspects fill out this form when water boarding doesn't break them.

The questions to be answered and the schedules to be completed could only be designed by mindless, bureaucrat-zombies. For instance, the form requires that new organizations complete budgets three years into the future. What is wrong with this? What is the point? Is there a particular brand of crystal ball they recommend? The I.R.S. can't reliably produce its own historical financial statements, but they can require new organizations to predict the future. Similarly, the form asks for details of future operations that don't exist yet.

The I.R.S. hopes that this insane paper chase will allow them to spot and eliminate scam charities before any money gets stolen. In reality, scam artists are typically VERY good at paperwork. Remember Bernie Madoff? Bernie was a paperwork genius. Filling out stacks of S.E.C. disclosure forms was how he kept his scheme alive. The easiest way to complete a form, like the 1023 form, is to lie.

What the I.R.S. has really accomplished with the charity application is the creation of a business plan competition for charities. The twist is that I.R.S. employees are the judges. If you have had the misfortune to have extensive interaction with I.R.S. employees, you know they aren't exactly business geniuses. For the most part, they are moderately competent at what they do, but what they do certainly isn't business consulting.

Let's see how Sue stacks up as a potential charity executive. First, does she has experience in her charity's mission? Of course she does. She is the world's foremost expert on all the lines male giraffes use to pick up chick-giraffes at local watering holes. Any dude-giraffe, who is striking out with the ladies, would be happy with her expertise.

Does she have any business experience? Sadly no. She has been an employee all of her career without much supervisory experience. She is an excellent technician, but not a good candidate to run an organization. Nonetheless, she feels her enthusiasm for providing sex toys to giraffes trumps her lack of experience. I disagree.

Four months after Sue sent her cheerful message announcing her organization's acceptance as a charity by the I.R.S., she received a notice from the I.R.S. that she had lost the business plan contest. She hadn't permanently lost. They sent her a list of twelve additional questions before they would reconsider her application. This is not unusual. Winning the I.R.S. business plan competition the first time isn't nearly as likely as it was ten years ago.

One of the items requested was a detailed description of Sue's as yet non-existent facility. Not surprisingly, this confused her. The I.R.S. was really asking for her plans for the future, although that wasn't how the question was worded. This gave Sue license to indulge her fantasies about providing government subsidized giraffe condoms. I do wonder how they put them on. Sue concocted, I should say prepared, answers to the twelve questions.

A month later, the I.R.S. sent another list of nine additional questions. Apparently, they weren't impressed with the giraffe porn that had been enclosed with the earlier questions. Sue was angry and made an ill-advised call to the I.R.S. agent in charge of her application. From my experience dealing with the I.R.S., I know there is a time to indulge your worst qualities and scream at an I.R.S. agent. This wasn't such a time. We needed the agent in a happy frame of mind. Sue threatened to call the agent's supervisor, the President of the United States, and his holiness, the Pope. None of this upsets the average I.R.S. employee. They get threats like this ten times a day. A disgruntled taxpayer flew a plane into an I.R.S. building a few years ago. What really throws them off is being nice. Answering their inane questions also works pretty well – eventually.

Sue wanted to debate the statutory authority of I.R.S. employees to ask questions that went way beyond the questions actually on the 1023 form. We could debate that with James Madison, George Washington, and Thomas Jefferson on our side, but that wouldn't get the tax exemption for her organization. The only way to get the exemption, before the sun burns out and the universe ends, is to appease the I.R.S. employee in charge of the application. This is like paying alimony to your ex – distasteful but necessary.

Here is where Sue's application is today. I am working on repairing the relationship with the I.R.S. agent. I got her to laugh at one of my jokes. That's a good start. We are working on answering the additional questions. Sue will eventually get her charity status unless she actually calls the Pope or does something else stupid. However, I don't have much hope that her organization will succeed. This experience has convinced me that Sue doesn't have the business experience and maturity to lead an organization. Because of her phone tantrum, thousands of horny male giraffes aren't getting the romantic assistance they need.

After Sue's story, if you are still intent on helping your fellow earth inhabitants, please consider joining an existing charity instead of starting one. According to the National Center for Charitable Statistics (www.nccsdataweb.urban.org), in 2010 there were 1,014,816 charities in the United States. Maybe you aren't a fan of horny giraffes, but that still leaves 1,014,815 charities that could use your help. I sit on the Board of Directors of Christian Relief Services (www.christianrelief.org). C.R.S. is involved in relieving hunger and deprivation in the United States and around the world. Please consider joining our efforts.

As always if you are looking for less snarky tax and business advice, please check out the main Stitely & Karstetter web site, www.skcpas.com. Thanks for reading!

Even More Messing With the IRS

Last football season, I wrote a few times griping about the Redskin's quarterback situation. Because I am the fine person I am, I don't believe in criticizing without offering a solution. I am lobbying Dan Snyder to sign Jennifer Aniston as a free agent. Given the sorry state of the Redskins offensive line, Jen will make a better Redskins quarterback than either John Beck or Rex Grossman. She enjoys getting sacked. If you haven't seen Jen's latest movie, “Horrible Bosses”, I highly recommend seeing it. Her bra could win an Oscar for best supporting an actress.

Over the last year, I have become a home wrecker and destroyer of marriages. Men, keep your wives away from me. You might think it is because I am a dead ringer for Brad Pitt. He's richer, smarter, and better looking than I am. Damn, he is also a better actor. But outside of that, we could be twins. Venturing back to reality, I wreck marriages with tax returns.

In the middle of last tax season, a female business owner called me to get copies of her company's tax returns for the prior two years. I had to tell her that the last two years' returns had never been completed. A few years ago, her husband had quit his job to help her run her business. She had relied on him to coordinate the preparation of the tax returns. He had done precisely nothing.

Her business is a multi-level marketing business. These businesses, typically Amway or something similar, never make money. At least statistically they never make money. Her business makes a lot of money. It is unique. I have never seen anyone make money like this in multi-level marketing. Making money in multi-level marketing is about as likely as winning the lottery. Of course, I have some clients who have won lotteries. So it happens – just like people win once in a while in Las Vegas – just not very often. If people won very often, Las Vegas wouldn't exist. I was more surprised that she was making money in this business than I would have been if she told me she had won a $150 million lotto jackpot. The lotto odds are better.

Not only had her husband not arranged for the tax returns to be prepared, he hadn't even done the bookkeeping for the two years. I arranged for her to see a bookkeeper, who got the work done in less than a month. Then we prepared the business tax returns. As a result, she owed a lot of money. I mean a lot of money to the IRS – plus penalties and interest.

As you can imagine, she wondered exactly what her husband had been doing for the past two years if he wasn't doing anything on the administrative end of the business. He had nothing to do with sales. She did that. She was a little more than mildly peeved. Here's a hint for all the men reading this. If you are going to work for your wife's business, you should actually do some work. Sloth isn't sexy.

This whole situation caused enough tension in the marriage that they soon separated and are on the way to a divorce. Normally being the sexist I am, I would side with him. No chance here. As George Thorogood sang, “Get a haircut and get a real job.”

I broke up another marriage a couple weeks ago. Right after tax season, I prepared and presented a draft tax return to a married couple. They had some changes and comments. I revised the return and gave them an updated draft. Weeks went by with no word from them. If we prepare your tax returns, you know that our web-based client center sends automated e-mail reminders when we give you a tax return draft. Every five days, you get a reminder until you approve the draft, and we are able to finalize the returns. After a couple of months, I also begin sending out personal reminders just to get the process moving.

On a Monday, I sent a personal e-mail reminder to this couple. The following Wednesday, the husband called me. I expected the conversation to be about finalizing the draft tax returns. I was surprised that he wasn't calling about the draft. He called to ask some tax planning questions for the current year.

“Frank, I am hoping to avoid owing taxes the way we did for 2010. How can we change our exemptions to not owe money for this year?”

“Dan, the 2010 returns haven't been finalized.”

“Why not?”

“Because you haven't approved the draft I posted a couple months ago.”

“My wife was supposed to handle that. She handles all of the finances.”

Oops – I stepped into a steaming pile of poo with that conversation. He continued, telling me about how he no longer believed they were real partners in the marriage. He told me she was hiding things from him – financial things. I felt like I was in the opening scene of an Investigation Discovery episode. In the next scene, a dead body floats down the Potomac River into Georgetown to be found by a collegiate rowing crew. The only question is, “Whose body?”

Now you see how I have become a home wrecker. Here is some advice for married couples when it comes to family finances. First, leave me out of it. Second, marriage requires complete honesty in financial affairs. Third, leave me out of it. I ain't no Dr. Phil.

Ignore an Unhappy Customer

This week, I am lucky to have Rhonda Miller as a guest blogger.  Rhonda A. Miller is an attorney with over 15 years of experience specializing in Estate Planning, Asset Protection Planning and Business Planning.  Ms. Miller is the co-founder and Principal at Matsen & Miller, PLLC, and is licensed to practice law in Virginia, California and the District of Columbia.  You may contact her at rhonda@rhonda4law.com.  Rhonda and I have many shared clients.  Take it away Rhonda.....

You own a business.  What should you do if someone threatens to sue you?

If you are a business owner, chances are someday you are going to make someone unhappy.  It is just the law of averages.  It is what you do when that happens and how well you have protected yourself that will affect how much it hurts. 

A few months ago, I got a frantic phone call from my client.  Let’s call her Sue. Sue is a decorator, and she had just gotten a letter from an attorney representing Mary, one of her customers who was unhappy with the price she was paying to design her vacation home.  After the work was done, Mary decided she was being charged too much.  Sue had collected only half of her fee, but she had completed all of the work. 

Sue’s knee-jerk reaction was to call the lawyer who wrote the letter.  She just wanted to make this go away and she did not want to hire her own attorney.  After all, attorneys are expensive!  When speaking with Mary’s lawyer, Sue blurted out, “Fine, I will just refund all of the money.”  Mary’s lawyer responded, “Well that is a good starting point.”  Realizing she was in over her head, Sue hung up and called me.  Then I called the attorney.  The problem was the negotiation in his mind was starting at a full refund and only going up. I had to find something to counter his positions.  This is a situation that was made far more complicated because of a knee-jerk statement made by my client. 

 What should Sue have done?  She should have stayed calm, listened, said nothing, and then called me!

 If you have an unhappy client, do not promise anything.  If you hear from an attorney, do not communicate with him.  Instead, call your own attorney.   We all have a natural instinct to be sympathetic, but that sympathy can and will be held against you.  Anything you say or write is admissible to prove fault. 

Now, back to Sue and Mary.  In Sue’s case, I contacted the other lawyer and we were able to come to a mutually agreeable arrangement.   But what if that had not worked and Mary went ahead with a law suit?

Let’s take a look at a situation in which one of my other clients found himself.  I bring it up here because it’s a great example of how a business owner can be proactive in ensuring the protection of his or her personal assets in the event of any future lawsuits.  Let’s call this client Jim.  When Jim started his business, I helped him set his company up as a Limited Liability Company (LLC).  Many years later, he was sued by a disgruntled employee.  Not only did the employee sue Jim’s LLC, but she also brought suit against Jim himself, trying to get at his personal assets as well as the assets of his business.

Once the lawsuit started, our main focus was to get the personal claims against Jim dropped.  However, the attorney on the other side was very clever and immediately tried to “Pierce the Corporate Veil”.  What does that mean?  It means that the lawyer was trying to show that Jim and his corporation were one and the same. The first thing the lawyer did was ask to see all of the corporate books.  He wanted to review the Operating Agreement, yearly minutes and the financial records of the company.  He was looking for any indication that the company was not being run separately from the individual and was instead just a front being used to hide Jim’s own assets.

 For example, was Jim paying for personal items out of the business account?  Did Jim’s LLC have the required Operating Agreement and yearly company minutes?  By arguing to the court that the company and the person were one-and-the same, it would not have mattered if we got Jim personally dismissed from the lawsuit.  If the Court allowed the “Corporate Veil” to be pierced, all of Jim’s business assets and personal assets would be at risk for all of the claims in the lawsuit.

 Fortunately for Jim, we had been keeping his company books for years.  We also had worked closely with his accountant so everything was squared away. Although the attorney went fishing, he caught nothing.  Jim’s personal assets were safe.

 The take-away lessons from this post are many.  But most importantly I hope that you can see how critical it is that business owners be proactive and prepared.  And that having a good relationship with your lawyer and your accountant will go a long way towards your security and success.

Thanks Rhonda! Thanks for reading - as always, you can get great tax and accounting information at www.skcpas.com.  Frank

Sports and Business: "Refuse to Lose"

I am sports mad – I always have been. As a young man I played representative rugby at school and in the Army. I sat on bench for the County under-18s. My consolation at not making the starting fifteen is that the position was occupied by one Richard Hill who went on to captain England. I ran cross country for the County at schoolboy level. I played football for the Academy first eleven when I was at Sandhurst and I played Rugby, cricket and football for my regiment, I captained the regimental cross-country team and I was the regimental 800 metres champion. I only list this achievement to illustrate that I have a small insight into the psychology of the sportsman.

I discovered my passion for business in my late twenties at about the time my serious sporting days were beginning to wind down. I don’t think there was any connection between the decline of one and the rise of the other. However I do think there is a remarkable analogy between successful sportsmen and successful businessmen and this is something I want to explore in my blog over the coming weeks and months.

I have enjoyed this year’s Wimbledon as much as any of recent years. I especially enjoy watching Rafael Nadal play. I would love to know what goes on in his head when he is playing. Whatever it is, he has built a mindset that I describe as “Refuse to lose”. How often do we see him chase down shots that other players would give up on and concede the point? Often he still loses the point but sometimes he doesn’t – he rescues a point from a seemingly impossible position and turns a certain lost point to his favour. The key here is that unless he tries he won’t know whether he will win it and he is willing to try anything and everything.

This translates almost perfectly into the world of business and particularly into the world of sales. In my experience there are two types of salesman – there are those who give up on an opportunity as soon as it starts to get difficult. They only seem to want to work on low hanging fruit. And then there are the Rafael Nadal’s – people who keep fighting even when the odds seem stacked against them. Like Nadal they will lose plenty of these seemingly lost causes, but they will also win some and everyone they win is one more customer for the company that you would not have achieved from the low hanging fruit pickers.

As an example I remember a situation in my days at Transmit International, my first business start up. We had been through a formal tender process with the London offices of a leading Swiss investment bank. We were already an incumbent supplier to part of the bank and we knew they were very happy with what we did so felt we were well placed. So we were very surprised and a little confused to receive a letter out of the blue announcing that the bank had selected another company. Now many people would have accepted an official letter as the end of the matter – but we didn’t. We pulled some strings with our existing contacts and after a number of phone calls we managed to get an audience with the Managing Director of the division concerned. We met him and laid out our case that we felt we had been treated very unfairly and surely the low risk option was to use us as a known quantity rather than try someone completely untested. To cut a long story short, the decision was reversed and we were awarded the new contract. It was always a long shot, but on this occassion it worked.

So when things don’t seem to be going your way, remember Rafael Nadal sprinting to the far boundaries of Centre Court chasing down a ball that to most players would be dead. If you apply the same “Refuse to lose” mentality to your sales campaigns the worst that can happen is that you will be no worse off than if you hadn’t tried. But occasionally you will win business that you would otherwise have lost and in doing so you will also make yourself a very valuable asset to your sales team.