ASK CHERI S HILL

If you are an inventor, entrepreneur, investor, educator, student, industry executive or a curious CEO, I invite you to join us for this special event being held March 13, 2010 at C4Cube (300 East 2nd Street, 12th floor) in Reno, Nevada. 

Come celebrate the Spirit of Invention with a day devoted to creativity and commercialization “From Your Mind to the Market”

Plan to spend all day! There will be speakers and a range of panels with experts starting at 9:15 to 4:30.  (I am on the “Are You and Your Idea Ready for Funding? - Investing in New Ventures” at 1:30 pm.

Registered online at: www.usa-canada.les.org/reno

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FACT: Sooner or later the ownership interest of your business will change hands.

- Owners leave for a variety of reasons
- Owners become disabled and can’t work
- Owners get divorced
- Owners become incompatible (business or personal conflicts)
- Owners die
- Owners go bankrupt
- Owners who hold their interest in another entity sometimes terminate that entity

It’s a huge mistake to ignore this fact since often the result is major conflicts that literally destroy a company. The same is true for family owned businesses. To think that families are always harmonious and that severe discords never arise among parents, siblings and children is foolish. In truth they fight, in some cases, with a savagery that makes most business battles look like petty squabbles.

Reality is that things change, people change, we get restless or we’re just not on the same page anymore. Sage International, Inc. deals a lot with these issues and has helped many of our clients get through the transition easily.

Whether you are admitting a new member, selling an ownership interest to an outsider; or a member wants to withdraw from the LLC, there are certain steps you need to take so it’s done right and everyone is protected.

Admitting a new LLC member

1. You have to like the person.
2. They need to show up with some form of capital contribution – cash, property or services. Be careful with services. If the new member receives an interest for the performance of services, that member could owe taxes on their membership interest. Verify with your CPA before admitting a member for “sweat equity.”
3. All members must consent and approve the admission of a new member. This requires a discussion and a vote and needs to be documented either through a regular or special meeting of the LLC with a resolution to admit a new LLC member.
4. The Operating Agreement spells out the rights, responsibilities, and interests (capital, profits, and voting) of the members. The new member must consent to the terms of the operating agreement. This can be done by having the new member sign a statement agreeing to be bound by the terms of the operating agreement or if there are other changes that affect the other members regarding capital, profits, and voting interests (which is often the case), a new operating agreement can be prepared and signed by all the members – new and existing.

Example: Happiness LLC currently has two members, Bill and Mary. Their friend, Jason an online marketing wizard is eager to join their company. He will be given a one-third capital interest in exchange for his contribution of $10,000 and will also receive a one-third profits interest in the business for building up the online presence of the company and increasing their online product sales. So that means that the capital and profit interests of Bill and Mary will change too. Instead of 50/50 they are now 33 1/3% each. They are excited to have Jason join the company and have approved his admission. A new operating agreement is prepared showing everyone’s new capital and profit interests in the company.
5. If you are selling interest to an investor (passive-inactive in the business) member please consult with a Securities Attorney so you don’t violate any SEC laws.
6. If the LLC is Manager-Managed and the new member is also going to be a Manager, often times an amended annual report or list should be filed with the state showing the new member has authority to transact business on behalf of the LLC.

Transferring an ownership interest

Typically the sale of a membership interest to an outsider includes all the departing owners’ responsibilities and rights: economic - profits & capital, managerial, and voting to the Transferee. There are some additional issues to be aware of with regards to tax consequences, so I would highly recommend consulting with your tax advisor well in advance to figure out how to handle the transaction (on the books) to minimize the tax consequences for both the selling member and the Transferee.

1. Members still need to approve the sale (Meeting/Resolutions). If they do not, the buyer may end up with only an economic interest (profits and capital distributions), but not voting or management rights. Usually, the member who receives the transferred LLC interest attains noneconomic rights, such as management and participation, only with the agreement of the nontransferring members. The Articles and the Operating Agreement often dictate the terms under which noneconomic membership interests are acquired.
2. Selling your interest does not transfer any liabilities or obligations you may have incurred while you were a member. You should have a written agreement prepared and signed designating that the purchaser of the interest and/or the remaining members indemnify (agree to be responsible) for these liabilities upon your departure.

Withdrawal of an LLC member

1. A withdrawing member must give notice; at least six months in advance that they wish to withdraw from the LLC. Check your operating agreement for exact details.
2. Determine who is purchasing the withdrawing members’ interest. The LLC or the other members?
3. Check the LLC articles and operating agreement for any buy-sell provisions (can the LLC or the other members buy it?) or any other restrictions related to a member cashing out before the liquidation or sale of the LLC. If nothing is stated, then you will have to check your state’s LLC statutes to find out how to legally handle the departure of an LLC member. Every state is different in its treatment of a withdrawing member. (NOTE: Now would be a good time to review your operating agreement to make sure it has those provisions and if it doesn’t get it updated to avoid future hassles).
4. This is a taxable event to the withdrawing member. Consult with your tax advisor before the sale to determine the amount of capital gains (sold at a profit) or if sold at a loss, any issues related to the passive loss limitations for the withdrawing member, and how the withdrawing member is to be paid.
5. The remaining members of the LLC should hold a meeting to approve the purchase of interest (whether by the LLC or another member) and to also consent in writing that the remaining members wish to continue the business after a member withdraws. This should be done within 90 days after a member leaves.
6. If you are a two member LLC (partnership taxation) and a member leaves, you are now a one person LLC which is disregarded for tax purposes. This completely changes the tax structure of your LLC. If you are taxed as an S corp there could be additional tax related issues. I highly recommend you consult with a tax advisor before any change in ownership occurs!

As you can see there are many ways out: some easy, some difficult, some voluntary, some involuntary. The Articles of Organization and the Operating Agreement need to have clear language related to the transfer of membership interest, however contemplated. State laws are specific and proper procedures must be followed to protect the rights of all members, coming and going. If you need help contact Sage International, Inc. for additional insight and guidance as determined by your specific situation.

With the onslaught of LLC filings, I find it very interesting that most people forming a limited liability company have no idea they have a choice on how their LLC can be taxed. In fact, I can say with certainty that the majority of them are paying more than their fair share of taxes and have left themselves with very little opportunity to significantly reduce their taxes.

I also know that a lot of tax professionals advise against forming an LLC because they don’t see the advantages and tell their clients it’s just more paperwork for them if they do. I don’t want to get off track on that conversation because frankly, it demonstrates that most people have no idea whether they’re getting good tax advice or not – and in this case it’s not.

As a business owner,

anytime you can separate yourself from your business’ debts, liabilities and obligations it makes sense to use a structure like an LLC

vs. not having an entity when you operate as a sole-proprietor. If for no other reason than liability protection, it certainly makes sense to operate from an LLC.

Your decision to form an LLC also needs to include a discussion about how you want the LLC to be taxed. We have saved our clients thousands of dollars in unnecessary taxes simply because we took the time to explain that they actually have a choice as to where all of the tax liability is going to land. Simply put, do you want to pay Uncle Sam from your personal checking account or from your business checking account? The following will explain why?

SINGLE-MEMBER LLC
Many LLCs, such as those formed for a simple home-based business, are structured with one owner. For federal income tax purposes, these LLCs are ignored, the term used is “disregarded entity”. If you have a business, you will report the income or loss from the business on your personal tax return, Form 1040, Schedule C. If your single-member LLC owns a rental property, that income or loss will be reported on Schedule E. The income taxes paid are based on your individual income tax bracket.

TWO OR MORE MEMBER LLC
The majority of all LLCs that have two or more members are characterized as partnerships for income tax purposes. Because LLCs do not pay federal income taxes, LLC income is taxed at a single level - to the members. Each year the LLC will file IRS Form 1065, U.S. Partnership Return of Income. LLCs annually issue each member a Form K-1, showing the member’s annual share of the business’s profit or loss which is reported on Schedule C of their individual income tax return.

This tax structure is ideal when you are earning passive income (rents, royalties, distributions). However, if you are actively engaged in a business and have earned-income (you earn it by providing goods and services to customers), this tax structure doesn’t make a lot of sense because you will be subject to self-employment taxes on your earned income.

LLC TAXED AS A CORPORATION
The IRS has made it possible for an LLC to be taxed as a corporation so that it can retain, instead of distribute profits to meet future business needs. The advantage is that a member will pay individual income taxes on only the profits actually paid to them through their W-2 wages. You essentially become an employee in your own company, subject to the federal and state withholdings on your wages. This means you pay your taxes as you go.

The business will file IRS Form 1120, U.S. Corporation Income Tax Return to pay taxes due on any retained profits at the reduced corporate tax rates.

The argument I hear all the time about this strategy is that a C corporation is subject to double taxation. The corporation pays taxes on any retained profits and then when it pays a dividend to the shareholders, the shareholders have to report and pay taxes on that distributed income on their personal tax return (hence double taxation). The maximum federal income tax rate on C corporation dividends is now only 15 percent (through 2010). So the double taxation of corporate earnings is not nearly as big a problem right now as it was before the 2003 law change when dividends were taxed at high ordinary income rates.

But my question, “Why in the world would you pay yourself dividends?” At Sage International, Inc. we teach people the benefits of knowing the difference between Advanced Tax Planning versus the status quo of merely tax compliance. This means that you understand and are doing everything possible to maximize the tax code to your advantage so that by year end, you have minimum or no taxes to pay!

An LLC taxed as a corporation offers tremendous tax advantages and tax-free fringe benefits to its employees. You have so many more options for taking cash or benefits out of the LLC besides issuing a dividend (salary, bonuses, commissions, loans, leases, sale of assets, employee benefits) that I cringe whenever I hear someone say, “MY CPA said I shouldn’t form a corporation because of double taxation!” And in this case, most don’t understand why you would form an LLC and have it taxed as a corporation. That’s such an old way of thinking and frankly, completely outdated advice.

LLC TAXED AS AN “S” CORPORATION
An LLC that elects to be taxed as a corporation may also elect S corporation status by filing IRS Form 2553. The main reason for this election is to eliminate self-employment tax on distributed income if you are operating an active business through your LLC versus passive activity.

With an S election all of the income from your business “passes through” to you and is reported on your personal tax return. Taking this election makes sense if you are going to

● experience losses in your business because those losses can offset other sources of income, or
● if the owners are earning less than $106,800 (2009); and
● you don’t need to retain any capital for equipment, inventory, advertising or marketing; and
● all financing will be provided by the shareholders; and
● you meet all the tests for qualifying as a Subchapter S Corporation.

Here’s how it works: You compute the corporation’s gross income and subtract any business deductions to arrive at the net taxable income. You then file an individual return on your pro-rata share of the corporation’s net income or loss. The S corporation would not pay any tax on the income.

The key to saving Social Security taxes is that with an S corporation you pay self-employment tax on wages, salaries, and bonuses but not on dividends. Your share of undistributed earnings is deemed dividends and not wages and is treated as an actual dividend distribution which is not subject to self-employment tax. So you pay yourself a little bit of salary and pay the rest in dividends if you want to wipe out most of your social security tax.

C Corp vs. S Corp COMPARISON
If you draw a salary (W2) from the corporation and pump all of your profits back into the business, you will come out ahead as a C Corporation because the money that remains in the business will be taxed at the lower corporate tax rate (15% on the first $50,000 of net earnings).
Example: The first $100,000 of annual corporate income is taxed at much lower rates than those that apply to high-income individuals. Specifically, the average rate on the first $100,000 of C corporation income is only 22.25 percent. If that same $100,000 was earned by an S corporation and passed through to you and the other shareholders, the tax hit would almost certainly be at higher rates  probably 28 percent or more. If your C corporation’s annual taxable income is above $335,000, the company pays an average federal rate of 34 percent. That’s still one percentage point below the 35 percent maximum rate for individuals.
NOTE: If you elect to have your LLC taxed as a corporation, generally you cannot go back to flow-through taxation for a period of 5 years. The IRS can waive this limit if there has been a greater-than 50% ownership change in the LLC.

State Taxes on LLCs
In some states, like California, the LLC has to pay income taxes even though no taxes will be paid to the IRS.

Is An LLC The Right Structure For You?
Honestly, I don’t know because there are more issues to address before a decision can be made. What I do know is that a lot of people jump into an LLC without a clue if this is actually the right structure for them to accomplish the goals and results they desire. Before anyone forms a corporation or an LLC they should talk to someone (like Sage International, Inc.) to make sure all of the right questions are being asked and to make sure you have the ongoing support required long after the entity has been formed.

© Sept 2009 Sage International, Inc.

The 2009 SageAdvisers Teleseminar Series for July and August showcased the newest member of the Sage network, Dan Pilla. For three decades Dan has been the nation’s leader in taxpayers’ rights defense and IRS abuse prevention and cure. Regarded as one of the country’s premier experts in IRS procedures, he has helped countless thousands of citizens solve personal and business tax problems they thought might never be solved. In fact, according to Dan there is no such thing as a hopeless tax case because there is ALWAYS a way to solve the problem.

Let me just say that he blew me away. The information and insight he provided on both calls has forever changed my attitude towards the IRS. And even more important, knowing that someone like Dan is working tirelessly on behalf of every American to first ensure that we have these rights; second, that we fully understand our rights and third, taking it one step further by teaching us how to avoid IRS issues to begin with and then if they do arise, how to effectively fight back (and you must fight back!) so we can be free of any fear with regards to the IRS.

Anyone that files a tax return needs to tap into www.taxhelponline.com.

Thank you Dan Pilla, you are a blessing to us all!

I attended a networking function yesterday (Women Entrepreneurs of Nevada) and was standing alone when a woman approached me and said she was very uncomfortable with networking. The reason she approached me is because we both belong to a different women’s networking group (eWomenNetwork.com).

Now some of you know that I teach Super Networking and have been asked numerous times to come into a group, large to small, to share my knowledge and expertise about how you effectively network. The power and magic of building solid relationships and the steps you must take to move through the different phases: visibility-credibility-profitability.

Most people think networking is about showing up, handing out a business card and forcing yourself onto someone else and then later wondering why you’re not doing business with those people?

As I explained to her, networking is about showing up, spending time and making a decision if this particular networking group (their members, philosophy, mission, cost to join and meeting schedule) is something that resonates with you. If so, then you can make the committment to join. Because the committment to join means you will show up and participate. You will show up to build relationships and support your fellow members in both their personal and professional endeavors. You will show up to support the mission and in turn, be passionate about promoting the philosophy/cause of the organization. You will show up because it is fun and rewarding.

You will not show up once in a while. You will not show up to sell. You will not show up to take. This is all about giving. Giving of your time, resources, knowledge, and support. Anything less is not networking.

After I explained that to her, she stated, “I wish someone had told me that a lot sooner. Thank you, I get it and now I can be proactive in my choices about the networking groups I’m invited to attend and join.”

One by one, group by group, I will continue to teach the importance of networking: Working together through collaboration and cooperation; buiding solid relationships that transcend the test of time; learning how to make the best connections - for business and personal success; referring and connecting people; and enjoying the rewards associated with being surrounded by like-minded fabulous individuals who genuinely care about YOU.

In my never ending efforts to educate business owners, I always remember this statement: Through Perserverance the Snail finally made it to the Ark!

If you would like me to come and teach your group how to be more effective in their networking (how to make the best connections for business and personal success which in turn, is a sure-fire way to generate new business for every member) plus when my system is implemented, I can personally guarantee you will provide a much greater member benefit when they join your association. To learn more, contact me through the website (www.sageintl.com).

One of the biggest decisions you can make is to go into business for yourself.

Whether you are opening a pizza parlor, a construction business, starting an internet based business, insurance or investment advisor, financial planner, direct sales, real estate investor, doctor, lawyer, architect or other professional service provider…

Whether you are a small business owner, large business owner, home-based business owner, or independent contractor…

Bottom line— YOU are a business owner.

So what is truly preventing you from moving forward and operating in the most tax-efficient, lawsuit-deterrent, financially-tested, safe and secure way?  Confusion?!! 

If you are ready to begin taking full advantage of being a business owner, and learn the strategies and solutions that will maximize your business potential, reduce your tax liability, increase profitability, build a firewall between your personal and business assets, secure your financial future, and leave a lasting legacy for your family…

Join Sage International, Inc. October 7-9, 2009, for three days of education and fun that we guarantee you will never forget. To learn more, visit www.sageintl.com or email: corpinfo@sageintl.com

For over 16 years we have taught thousands of business owners, investors, professionals and entrepreneurs how to properly structure their business and personal assets to avoid The Three Flaming Arrows of Challenge: Income Taxes, Liability Exposure, Probate & Estate Taxes.

Register by August 15, 2009 and receive a $100 discount.

This is your opportunity to learn first hand how to grow, protect and leverage your hard-earned wealth!

I went on vacation and when I came back, my entire back yard had become a red ant (fire ants) hill. Now how I know this is because my daughter Sierra sat down on the lawn and got bit at least 50 times…Ouch! At first, we were in a panic and then as I looked on the internet I found some wonderful information about the progression of the bites and what we could do to inhibit the itching, pain and possibility of an infection (if she scratched them!) and also what we could do organically or with chemicals to get rid of these nasty little pests.

Now mind you, I try to never kill any bugs. I catch spiders in a cup and put them outside. I don’t feel like I have the right to end a bugs life if it should wander into mine. However, I make an exception to Ants.

I grew up with Ants…millions of them. My brother and I would wait until the other one got home from school first just to see who had to deal with the ants. Giant black trails leading from the ground to the kitchen. One time, I woke up and my entire bedroom wall was covered with ants…CREEPY. When I was in Belize there are millions of ant trails, perfectly carved roadways throughout the entire jungle all leading to ant hills the size of Mt. Rose with a perfect line of ants going in both directions. The line heading into the hill had leaves, dead creatures and whatever else they needed on their little heads. This was an amazing site (and don’t get me started on all my jungle spider stories!)

So realty is this. I have fought and fought and fought the ant population my entire life and frankly, there is just no win. I can’t stand to use chemicals, especially Raid and stomping around the garage smooshing them to death doesn’t seem very nice.

I have resigned myself to the fact that the ants go marching on, and as long as they stay outside of my house I will allow them to live (the exception of course, is red ants that bite!) too close to home.

I always try and remember that they are one of God’s creatures designed to do a job on earth.

Every problem I have ever experienced in growing a business revolves around people. More specifically the issue of loyalty or aptly put, a lack of it. Those experiences were the ones that caused me the most pain (sometimes I was deeply hurt), frustration, sadness and a sense of loss. It zaps your energy and forces you to seriously question your faith in people and your ability to choose the right individuals in which to build a mutually beneficial relationship.

On the flip side, looking back over the years, there are still many people I can count on for support, those who believe in building a strong relationship that encourages open and honest communication. Why is that important? The journey of success in my opinion, is inclusive not exclusive. The people you love (family, friends, business associates, clients, vendors, strategic alliances, joint venture and referral partners) are in your life because they’re integral to your goals and dreams. You support each other through the good times and definitely need to stick together when times get rough. You share a common bond. You help each other. You look out for each other. You tell each other the truth.

Trust spawns loyalty. When you lose trust (faith) in someone it creates bad feelings. Bad feelings create negative energy. Negative energy is unproductive. However, it is in our nature to express those bad feelings, to tell the world about our horrible experience with that person or business. This of course, causes a swirl of resentment (that often, we feel like we bare alone) because we hope with all of our might that someday their bad Karma will catch up with them. And it will….. Most of us believe that you can’t claw and scratch your way to the top casting aside those who have become unnecessary without leaving a nasty scar.

The difference is your attitude and how quickly you choose to put the negative thoughts and emotions behind. You have to look at every unpleasant encounter as a lesson and focus on what was gained or learned from that experience?

I have also figured out that it takes 20 years to become an overnight success! And of course, this is directly attributed to who is in your life. Do you believe in them and in return, do they believe in you? I have come to realize just how important it is to spend time with someone before committing to any type of business relationship. This “rule” was obviously learned the hard way. I suggest you do not entertain or even enter into any type of working relationship with someone until you meet them face to face and spend time getting to know them. Most of us know in our gut within an hour if this is a person (we do business with people not companies) that you can build a lasting relationship. Someone that you would without hesitation, refer them business; someone you truly appreciate because of their knowledge, integrity and ability to help and serve others; someone you will be proud to call a friend. You might think that’s hard, but really it’s not. You have to do your due diligence. If it means web conferencing, using Skype, Googling their name on the internet, checking out their social networking sites, meeting them at a location half-way, or asking for references, DO IT! By taking the time now, you will have a much better chance of avoiding future “surprises”, heartache and grief.

I encourage you to look beyond the immediate and visualize this person in your life 2, 5, 10, 30 years from now. Are you willing to give them your unswerving allegiance? Are you willing to put in the time and energy necessary to work on this relationship? Do you have their best interest at heart? Would you invite them home to meet your family? If the answer is yes to all of those questions, then I believe you have found a very important key to personal and business success: Good people > good relationships.

By working together through a philosophy of cooperation, collaboration and unselfish contribution it creates a flow of abundant energy that each of us gets to enjoy. How much more fun and rewarding would it be if everyone in your circle of influence was able to achieve their own definition of personal, financial, and spiritual freedom simply because we stood shoulder to shoulder, hand-in-hand with those wonderful, caring people we love? There is an absolute truth about strength in numbers that if utilized, is very powerful and very exciting!

If you’re running the 100-yard dash alone, think about putting yourself on a relay team instead. That way, more of you get to cross the finish line and more of you get to win!

I just called their 800# number today to cancel my alarm subscription because my 80 year old Grandmother, who lives with us gets up in the middle of the night to let out her dog. Grandma would certainly struggle with turning the alarm off and on. The renewal date on the agreement is May 29, 2009. I was informed that the agreement automatically renewed for another year and that there was no way that I could cancel it because I did not write in 30 days prior to the renewal date and also because their company offers ABSOLUTELY NO EXCEPTIONS. The woman on the phone even stated that if you are one day late with writing in, you are automatically renewed for a year - because once again, there are ABSOLUTELY NO EXCEPTIONS! The truth is that SAI - Security Associates International, Inc. knows that most people will have no idea when their expiration date is up - specifically 30 days in advance - because they just won’t.

I find their policy egregious. I was not requesting cancellation after the date, but before. The fact that this company automatically renewed it without any notification or heads up to me the consumer (no notice in the mail - no email reminder - no phone call), is an excellent example of a complete and total disregard of the needs of their customer. The excuse on the phone was that I was supposed to read my contract - I was supposed to write in to cancel within 30 days -not 29 days in advance, because I signed that agreement 3 years ago!

Bottom line, a simple email reminder or notice in the mail stating that the contract was about to expire from SAI would have given me the choice to continue or to cancel. But to insist that it is only my responsibility to know when my 3 years is up is quite frankly, just bad business. My perception of their company went from being a service provider to one that they are in the business of ripping people off. What’s in it for SAI (shhh… Don’t tell the customer their contract is about to expire – just keep it a secret so we can automatically renew and collect for another year!) That’s horrible, unnecessary, frustrating, and quite frankly, really pisses me off!

So my “policy” is that when I experience horrible customer service or a company that doesn’t play well with others, I have to share that information with the world. My personal philosophy is that business is about collaboration, cooperation and being flexible. Treating people with respect and making sure everyone is happy in the end.

Apparantly, that concept has escaped the leadership of SAI.

I have to thank one of my bestfriends, Leslie for this fabulous statement.  So simple and so true.  The more I learn about effective communication the more profound it becomes.  I find myself impatient with people who cannot get to the point or worse, don’t have one.  This is not to say that I don’t enjoy conversation or the development of a topic as the conversation evolves.  

Effective communication is a skill that everyone should spend time developing and the best way to do it, in my opinion, is by joining Toastmasters.  It’s not everyday that someone will stand up in front of an audience and give a speech.  Yet, every single day you will talk to someone - spouse, business associate, kid, vendor, friend, potential customer, exisiting client, or a complete stranger.  

The question to ask is, “How did you feel after your last interaction with another person?”  Did you feel more positive or more negative? Every single interaction no matter how brief affects everything in your life: your relationships, productivity, health, and longevity.   So if that is truly the case, then maybe you need to think about how you really come across to other people.  Are you getting the results you want?  If not, remember this: “The Quality of My Communication is the Quality of the Response I Get”.

That means its totally up to you to be clear and precise.  Is it easy?  No.  Can it get easier?. Absolutely. And that means working on it today, tomorrow, always.  Everyone is different.  How we learn, listen, share and speak.  If you’re struggling, and have the desire to do something about it, Just know the tools are there to help you.

Stand at my desk, want to sell me something, or explain a process, then my expectation is that you will Be Brief. Be Brilliant. Be Gone!   

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