Taxes Anyone?

by Michael Iannuzzi

Starting a franchise as either a franchisee or a franchisor is a very exciting time. There are so many factors to think about such as locations, branding, marketing, hiring employees and generating business, among many other things. One of the most overlooked components of franchising, and with business ownership in general, is the initial set-up and creation of the business entity. How much time and effort did you put into creating the appropriate corporate structure? Do you have a general ledger program ready to go, such as QuickBooks, or will you be running your business based off bank statements and spreadsheets, potentially leading to mistakes and missed opportunities? There are a number of different things to consider when getting started and this article will touch on some of the basic areas to think about before forming your entity.

Entity selection:

There are three main types of entities business owners could choose from when structuring their business, including the C-Corporation (“C-Corp”), the limited liability company (“LLC”), and the S-Corporation (“S-Corp”). There are pros and cons to each of these entities and one size certainly does not fit all. The entity selection process is extremely important when starting up either as a franchisee or franchisor and there are many things to consider such as:

• The number of owners or investors you will have (certain entities like S-Corps have limits on the number of shareholders)

• Asset protection considerations (shielding leases and intellectual property from third parties)

• How taxes will be paid to the IRS and various states (either by the owners or the company itself)

• Future goals and plans (multi-unit franchisee or franchisor with company owned units)

• How everyone is sharing in profits or will there be various forms of distributions to partners? (investors with preferred distribution rights vs sweat equity partners)

• Do the owners want to receive K-1s or do they prefer all filings and payments happen at the company level? (C-Corp structure vs pass-through structure such as an LLC)

Those examples are very high-level considerations when you are looking to form an entity. There are many different examples where two different franchisees of the same system choose different entity types because of certain factors above. No one can predict the future, and as you grow the business will change. What you are doing today may not be right for the next phase of the business, such as bringing in a private equity investor.

“One of the most overlooked components of franchising, and with business ownership in general, is the initial set-up and creation of the business entity.

General ledger program:

Many business owners can relate to the classic question – “My books say I am profitable, but how come I have no cash?” I have heard this question many times and most often it comes down to a single factor: either the owners or someone involved with the business is handling the books from a pure cash perspective and they are not recording the entries correctly. This method of running the finances of your business invariably leads to improper budgeting, mistakes and bad decision making. Here are some tips to help you out:

• Create a 12-to-18-month cash flow budget and be realistic.

• Make sure you factor in everything such as debt obligations and tax distributions and, of course, your salary.

• Reconcile all monthly accounts, such as bank accounts, credit card statements and loan statements.

• Every quarter, take a hard look at your numbers, compare actual results to your budget and identify differences.

• Bring in an experienced bookkeeper to make sure all accounts are properly coded to the correct asset, liability, equity, revenue and expense accounts so you can make informed, well-thought-out decisions.

Many business owners look to save costs by doing this part themselves. Consider how much your time is worth per hour. Is it $250 an hour? Is it $500 an hour? Compare that to what you would pay a bookkeeper to do your books. Not having a bookkeeper could cost you more money than if you were paying someone. Making these types of strategic decisions allows you to focus on the business, generate sales, and create strategy.

Michael Iannuzzi is a partner and co-leader of the firms franchise practice providing audit and accounting, business consulting and advisory, and tax planning services to a wide spectrum of franchise related businesses. Michael works with franchisors and multi-unit franchisees in a variety of industries, including, but not limited to, fitness and athletic centers, children entertainment centers, junk removal companies, mobile concepts, Quick Service Restaurants (QSRs), and grocery stores.

“Citrin Cooperman” is the brand under which Citrin Cooperman & Company, LLP, a licensed independent CPA firm, and Citrin Cooperman Advisors LLC serve clients’ business needs. The two firms operate as separate legal entities in an alternative practice structure. Citrin Cooperman is an independent member of Moore North America, which is itself a regional member of Moore Global Network Limited (MGNL). miannuzzi@citrincooperman.com

Links –

Franchise Website Link - https:// www.citrincooperman.com/industries/franchising Social Media: Michael Iannuzzi - https://www. linkedin.com/in/michael13/ Citrin Cooperman: https://www.linkedin.com/company/ citrin-cooperman/ https://twitter.com/citrincooperman https://www.facebook.com/Citrin. Cooperman.CPAs/ https://www.instagram.com/citrincooperman/