Creating the Startup Creating the Startup The Accounting The Accounting

PanoramaPanorama

Forms of Business OwnershipForms of Business Ownership

Sole ProprietorshipSole Proprietorship PartnershipPartnership Limited Liability CompanyLimited Liability Company S-CorporationS-Corporation C-CorporationC-Corporation

Sole ProprietorshipSole Proprietorship

Only one ownerOnly one owner All debts of the business are debts of the ownerAll debts of the business are debts of the owner Owner has unlimited liabilityOwner has unlimited liability May do business with a trade name (dba) other May do business with a trade name (dba) other

than his or her legal namethan his or her legal name

Sole ProprietorshipSole Proprietorship AdvantagesAdvantages

Easy to start upEasy to start up Relatively fewer regulationsRelatively fewer regulations Full control over the businessFull control over the business Easy to discontinueEasy to discontinue Takes all the profits of the businessTakes all the profits of the business No double taxationNo double taxation Simple accountingSimple accounting

DisadvantagesDisadvantages Hard time raising capitalHard time raising capital Unlimited liabilityUnlimited liability

PartnershipPartnership Partners (owners) share with each other the profits or losses of the businessPartners (owners) share with each other the profits or losses of the business General Partnership General Partnership

Partners share equally in both responsibility and liabilityPartners share equally in both responsibility and liability Limited Partnership (LP)Limited Partnership (LP)

General partners (GP) and limited partners (LP).General partners (GP) and limited partners (LP). GP’s have management controlGP’s have management control GP’s share the right to use partnership propertyGP’s share the right to use partnership property GP’s share the profits of the firm in predefined proportionsGP’s share the profits of the firm in predefined proportions GP’s have joint and several liability for the debts of the partnershipGP’s have joint and several liability for the debts of the partnership GP’s have actual authority as agents of the firm to execute contractsGP’s have actual authority as agents of the firm to execute contracts LP’s have limited liability LP’s have limited liability LP’s have no management authorityLP’s have no management authority GP’s pay the LP’s an RIO (similar to a dividend) as defined in a partnership GP’s pay the LP’s an RIO (similar to a dividend) as defined in a partnership

agreement. agreement.

PartnershipPartnership

Limited Liability Partnership (LLP)Limited Liability Partnership (LLP) Especially popular form of organization among Especially popular form of organization among

professionals, particularly lawyers, accountants and professionals, particularly lawyers, accountants and architects.architects.

Some or all partners (depending on jurisdiction) Some or all partners (depending on jurisdiction) have limited liability. have limited liability.

One partner is not responsible or liable for another One partner is not responsible or liable for another partner’s misconduct or negligence.partner’s misconduct or negligence.

Limited Liability CompanyLimited Liability Company Provides limited liability to its ownersProvides limited liability to its owners Relatively new – has become popular in the past 20 yearsRelatively new – has become popular in the past 20 years Hybrid business entity – has characteristics of both a corporation (limited Hybrid business entity – has characteristics of both a corporation (limited

liability) and a partnership (pass-through income taxation)liability) and a partnership (pass-through income taxation) Advantages:Advantages:

Limited liability – acts and debtsLimited liability – acts and debts Much less paperwork and record keeping than a corporationMuch less paperwork and record keeping than a corporation Pass-through taxationPass-through taxation Check-the-box taxation. An LLC can be taxed as a sole proprietor, partnership, Check-the-box taxation. An LLC can be taxed as a sole proprietor, partnership,

S-Corp or C-CorpS-Corp or C-Corp Disadvantages:Disadvantages:

Although not required, should have operating agreementAlthough not required, should have operating agreement Some creditors want members of start-ups to personally guarantee liabilities.Some creditors want members of start-ups to personally guarantee liabilities.

Limited Liability CompanyLimited Liability CompanyKey Terms:Key Terms: Member – Owners of the LLC. Can be a natural person, corporations, Member – Owners of the LLC. Can be a natural person, corporations,

partnerships or other LLCspartnerships or other LLCs Membership Interest – Unless otherwise provided in the operating Membership Interest – Unless otherwise provided in the operating

agreement, a member’s distributions and control is proportionate to their agreement, a member’s distributions and control is proportionate to their membership interestmembership interest

Manager – May be managed by the members in proportion to their Manager – May be managed by the members in proportion to their membership interest. A manager or board of managers may be elected to membership interest. A manager or board of managers may be elected to oversee day-to-day operations. Their can be a managing member.oversee day-to-day operations. Their can be a managing member.

Articles of Incorporation – All LLC’s must file evidence of their existence Articles of Incorporation – All LLC’s must file evidence of their existence with the state where they choose to be organizedwith the state where they choose to be organized

Operating Agreement – determines, defines and apportions the rights of the Operating Agreement – determines, defines and apportions the rights of the members and the managers (if any). Not a statutory requirement.members and the managers (if any). Not a statutory requirement.

CorporationCorporation

A legal entity separate from the persons that form it.A legal entity separate from the persons that form it. Control of the company is placed in the hands of the Control of the company is placed in the hands of the

board of directors.board of directors. Limited liability of shareholdersLimited liability of shareholders Investor ownership – ownership by shareholdersInvestor ownership – ownership by shareholders Separate legal personality (right to sue or be sued in its Separate legal personality (right to sue or be sued in its

own name)own name) Transferable shares (usually on a listed exchange)Transferable shares (usually on a listed exchange)

S CorporationS Corporation

Corporation that makes a valid election to be Corporation that makes a valid election to be taxed under subchapter S of chpt. 1 of the taxed under subchapter S of chpt. 1 of the Internal Revenue Code. Internal Revenue Code.

Pass-through entityPass-through entity

Creating and Maintaining an EntityCreating and Maintaining an Entity

Research a trade name on the AZ Secretary of Research a trade name on the AZ Secretary of State or Corporation Commission websiteState or Corporation Commission website

Register your trade name with the Secretary of Register your trade name with the Secretary of StateState

Articles of Organization or Incorporation and Articles of Organization or Incorporation and Corporate Resolution creation and maintenance Corporate Resolution creation and maintenance is through the Corporation Commission.is through the Corporation Commission.

R4-28-302 and R4-28-303R4-28-302 and R4-28-303

Arizona Arizona Secretary of StateSecretary of State

Administrative CodeAdministrative Code Trade namesTrade names

Department of RevenueDepartment of Revenue Individual and Business TaxesIndividual and Business Taxes

Department of Economic SecurityDepartment of Economic Security Child Support – Note: the Dept of Child Support Enforcement has the Child Support – Note: the Dept of Child Support Enforcement has the

legal authority to suspend or revoke the professional or occupational legal authority to suspend or revoke the professional or occupational license of a person who has deliberately not paid their child support for license of a person who has deliberately not paid their child support for over six months.over six months.

UnemploymentUnemployment Worker’s CompensationWorker’s Compensation New Hire Reporting New Hire Reporting

http://newhire-reporting.com/AZ-Newhire/instruct.aspxhttp://newhire-reporting.com/AZ-Newhire/instruct.aspx

Payroll TaxesPayroll Taxes Payroll taxes are the state and federal taxes that you, as Payroll taxes are the state and federal taxes that you, as

an employer, are required to withhold and/or to pay on an employer, are required to withhold and/or to pay on behalf of your employees.behalf of your employees. You are required to withhold:You are required to withhold:

state and federal income taxesstate and federal income taxes social security and medicare (also known as FICA taxes)social security and medicare (also known as FICA taxes)

Employers are required to pay a matching amount of FICA Employers are required to pay a matching amount of FICA taxes.taxes.

Current social security tax rate is 6.2% - employer is required Current social security tax rate is 6.2% - employer is required to withhold until the employee reaches the wage base for the to withhold until the employee reaches the wage base for the year (currently 106,800).year (currently 106,800).

Medicare tax rate is 2.9% for the employee and the employer. Medicare tax rate is 2.9% for the employee and the employer. http://www.ssa.gov/OACT/ProgData/taxRates.htmlhttp://www.ssa.gov/OACT/ProgData/taxRates.html

Payroll TaxesPayroll Taxes Payroll taxes are the state and federal taxes that you, as an employer, are Payroll taxes are the state and federal taxes that you, as an employer, are

required to withhold and/or to pay on behalf of your employees.required to withhold and/or to pay on behalf of your employees. Employers must pay state and federal unemployment taxes (SUTA and FUTA). Employers must pay state and federal unemployment taxes (SUTA and FUTA).

The FUTA tax rate is The FUTA tax rate is 6.2%6.2% of taxable wages. The taxable wage base is the first of taxable wages. The taxable wage base is the first $7,000$7,000 paid in wages to each employee during a calendar year. Employers who paid in wages to each employee during a calendar year. Employers who pay the state unemployment tax, on a timely basis, will receive an offset pay the state unemployment tax, on a timely basis, will receive an offset credit of credit of up to 5.4%up to 5.4% regardless of the rate of tax they pay the state. Therefore, the net regardless of the rate of tax they pay the state. Therefore, the net FUTA tax rate is generally 0.8% (6.2% - 5.4%), for a maximum FUTA tax of FUTA tax rate is generally 0.8% (6.2% - 5.4%), for a maximum FUTA tax of $56.00 per employee, per year (.008 X $7,000. = $56.00 per employee, per year (.008 X $7,000. = $56.00$56.00). State law determines ). State law determines individual state unemployment insurance tax rates.individual state unemployment insurance tax rates.

Check with state about SUTA tax rates and the wage base. Generally, SUTA is Check with state about SUTA tax rates and the wage base. Generally, SUTA is based on the amount of unemployement claims that are filed by employees that based on the amount of unemployement claims that are filed by employees that you have terminated. When your business is new, your SUTA tax rate starts at the you have terminated. When your business is new, your SUTA tax rate starts at the maximum and declines if you build a history of few claims. maximum and declines if you build a history of few claims.

Payroll TaxesPayroll Taxes

For information on federal payroll tax For information on federal payroll tax requirements – IRS Publication 15, Circular E.requirements – IRS Publication 15, Circular E.

For state, contact AZ Dept of Revenue. For state, contact AZ Dept of Revenue. Payroll tax deposits – See supplement to outlinePayroll tax deposits – See supplement to outline

Monitoring, Maintenance and Monitoring, Maintenance and ReportingReporting

QuarterlyQuarterly Employer’s quarterly tax return (payroll taxes)Employer’s quarterly tax return (payroll taxes) State withholdings (payroll taxes)State withholdings (payroll taxes) Worker’s compensationWorker’s compensation

Year-EndYear-End 1099 to independent contractors1099 to independent contractors W-2s to employeesW-2s to employees W-3 to IRS (summary of W-2s)W-3 to IRS (summary of W-2s) FUTA / Form 940 (employers annual federal unemployment FUTA / Form 940 (employers annual federal unemployment

tax return)tax return) SUTA State unemployment taxSUTA State unemployment tax State and federal tax returnsState and federal tax returns

Year-End Accounting ProceduresYear-End Accounting Procedures

Back-up your financial data (multiple copies – on premises, off Back-up your financial data (multiple copies – on premises, off premises, to accountant)premises, to accountant)

Print hard copies of financial dataPrint hard copies of financial data P&LP&L Trial balance (A worksheet listing the balance at a certain date of each Trial balance (A worksheet listing the balance at a certain date of each

ledger account in two columns, namely debit and credit. the total of any ledger account in two columns, namely debit and credit. the total of any debits must equal the total of any credits. The trial balance serves as a debits must equal the total of any credits. The trial balance serves as a tool to detect errors. The total of the trial balance should be 0.)tool to detect errors. The total of the trial balance should be 0.)

LedgersLedgers Check registerCheck register Anything else your accountant feels is applicableAnything else your accountant feels is applicable

Depreciate fixed assetsDepreciate fixed assets Distribute profitsDistribute profits

Update Agent InformationUpdate Agent Information

VehicleVehicle Emergency ContactEmergency Contact Copy of Driver’s LicenseCopy of Driver’s License Proof of InsuranceProof of Insurance Agent license renewals (don’t forget your’s and Agent license renewals (don’t forget your’s and

your entity’s)your entity’s)

Monthly Monitoring, Maintenance Monthly Monitoring, Maintenance and Reportingand Reporting

Reconcile Trust Accounts & Operating AccountsReconcile Trust Accounts & Operating Accounts Never co-mingle accountsNever co-mingle accounts

Bank ReconciliationsBank Reconciliations Start with bank statement balanceStart with bank statement balance

Add deposits in transitAdd deposits in transit Subtract outstanding checksSubtract outstanding checks Adjust any bank errorsAdjust any bank errors

Ending bank balanceEnding bank balance Start with balance per booksStart with balance per books

Add/Subtract any non-recorded transactionsAdd/Subtract any non-recorded transactions Subtract bank feesSubtract bank fees

Ending book balanceEnding book balance Bank balance = book balance Bank balance = book balance

A 18-A

Understanding the Financial Statement Close Process

Prepare TrialBalance

Prepare TrialBalance

AccountingAccounting

ManagementAccounting

ManagementAccounting

FinancialPlanningFinancialPlanning

FinancialStatement

Close

FinancialStatement

Close

Tax Compliance

and Reporting

Tax Compliance

and Reporting

Maintain and Support Accounts

Maintain and Support Accounts

Process Adjusting Journal

Entries

Process Adjusting Journal

Entries

PrepareFinancialReports

PrepareFinancialReports

PrepareManagements’

Analysis

PrepareManagements’

Analysis

FinancialAccountingFinancial

Accounting

A 18-A

Sub-processes:

Prepare trial balance

Process adjusting journal entries

Draft financial reports

Prepare management’s analysis

Purpose:

� Closes the GL, including estimates and judgments made by management and converts the GL into the preliminary trial balance.

� Identifies and prepares final journal entries for posting. Takes the authorized journal entries and posts them to the trial balance.

� Takes the final trial balance and disclosure information and prepares financial reports.

� Takes financial information and develops management’s analysis of the financial and operational performance of the business.

Draft FinancialStatements

PrepareManagement’s Analysis

Process AdjustingJournal Entries

Prepare TrialBalance

FSCP

Understanding the Financial Statement Close Process

Draft Financial ReportsDraft Financial Reports

Balance SheetBalance Sheet Income Statement (P&L)Income Statement (P&L) Cash Flow StatementCash Flow Statement

Prepare Management’s AnalysisPrepare Management’s Analysis

Budget to Actual Budget to Actual Analytical Review ProceduresAnalytical Review Procedures

Month to Month comparisonMonth to Month comparison

Productivity EvaluationsProductivity Evaluations

Business Planning and Business Planning and MarketingMarketing

Fail to Plan – Plan to FailFail to Plan – Plan to Fail Remember Commissioner StandardsRemember Commissioner Standards

Broker Supervision and ControlBroker Supervision and Control Control Transactions, Files and PeopleControl Transactions, Files and People Need a Monitoring SystemNeed a Monitoring System Reasonable SupervisionReasonable Supervision

Chart of Significant “Mega” ProcessesChart of Significant “Mega” Processes

Description of Mega ProcessesDescription of Mega Processes Gain New Business: Gain New Business: The process of prospecting new customers (gain new listings and new The process of prospecting new customers (gain new listings and new

buyers).buyers).

Risk Management: Risk Management: The process of collectively managing risks from the net activity of all lines of The process of collectively managing risks from the net activity of all lines of business.business.

Operations: Operations: The process of providing efficient and fail-safe operations.The process of providing efficient and fail-safe operations.

Customer Service: Customer Service: The process of ensuring seamless service delivery despite the multi-faceted The process of ensuring seamless service delivery despite the multi-faceted nature of various lines of business and operations.nature of various lines of business and operations.

Support: Support: The process of providing for cultivation and maintenance of the organization’s human The process of providing for cultivation and maintenance of the organization’s human resources and physical plant. Providing legal, accounting and communications functions to resources and physical plant. Providing legal, accounting and communications functions to support operations. Ensuring the availability of adequate corporate funding.support operations. Ensuring the availability of adequate corporate funding.

Executive: Executive: The process of setting the strategic direction, policies and guidelines for the The process of setting the strategic direction, policies and guidelines for the organization as a whole as well as managing corporate level relationships with customers, organization as a whole as well as managing corporate level relationships with customers, shareholders, regulatory agencies, the public and any other stakeholders.shareholders, regulatory agencies, the public and any other stakeholders.

Value Chain and Major Business Processes Description The process of prospecting new

customers (gain new listings and new buyers).

The process of collectively managinge risks from the net activity of all lines of business

The process of providing efficient and fail-safe operations

The process of ensuring seamless service delivery despite the multi-faceted nature of various lines of business and operations

Value Chain Gain New Business Risk Management Operations Customer Service Major Business Processes

♦ Product Management

♦ Marketing

♦ Sales

♦ Relationship Management

♦ Liquidity Risk

♦ Transaction Risk

♦ Compliance Risk

♦ Strategic Risk

♦ Reputation Risk

♦ Transaction Recording

♦ Information Technology

♦ Collections

♦ Customer Inquiry

♦ Customer Notification

♦ Account Maintenance

Value Chain and Major Business Processes

Description

Value Chain Executive Support Major Business Processes

♦ Develop Strategic Plan

♦ Develop Business Relationships

♦ Establish Corporate Policies

♦ Allocate Corporate Resources

♦ Manage Stakeholder Communications

♦ Human Resources

♦ Accounting

♦ Legal / Compliance

♦ Corporate Funding (Manage cash, investments and debt. Provide availability of long-term financing.)

♦ Communications

♦ Information Technology

Understand Critical Business Processes Template

We understand critical business processes to help us:

• Further understand potential business risks, • Identify opportunities to add value

Critical Business Process:

Related Critical Success Factor:

Process Owner/Management Responsible:

Process owner’s/management’s views of the important strengths of the process: Process owner’s/management’s views of the important risks related to the process: How the process owner/management monitors and controls the process: Recent or anticipated key changes in the related people, processing activities, and technology:

Categories of RiskCategories of Risk

Liquidity RiskLiquidity Risk Liquidity risk is the risk to earnings or capital arising Liquidity risk is the risk to earnings or capital arising

from inability to meet their obligations when they come from inability to meet their obligations when they come due, without incurring unacceptable losses. Liquidity due, without incurring unacceptable losses. Liquidity risk includes the inability to manage unplanned risk includes the inability to manage unplanned decreases or changes in funding sources. Liquidity risk decreases or changes in funding sources. Liquidity risk also arises from failure to recognize or address changes also arises from failure to recognize or address changes in market conditions that affect the ability to liquidate in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value.assets quickly and with minimal loss in value.

Categories of RiskCategories of Risk

Transaction RiskTransaction Risk Transaction risk is the risk to earning or capital arising Transaction risk is the risk to earning or capital arising

from problems with service or product delivery. This from problems with service or product delivery. This risk is a function of internal controls, information risk is a function of internal controls, information systems, employee integrity, and operating processes. systems, employee integrity, and operating processes. Transaction risk exists in all products and services.Transaction risk exists in all products and services.

Transaction risk is also referred to as operating or Transaction risk is also referred to as operating or operational risk. This risk arises on a daily basis in all operational risk. This risk arises on a daily basis in all transactions processed. It is a risk that transcends all transactions processed. It is a risk that transcends all divisions and products.divisions and products.

Categories of RiskCategories of Risk Compliance RiskCompliance Risk Compliance risk is the risk to earnings or capital arising from violations of, or Compliance risk is the risk to earnings or capital arising from violations of, or

non-conformance with, law, rules, regulations, prescribed practices, or ethical non-conformance with, law, rules, regulations, prescribed practices, or ethical standards. Compliance risk also arises in situations where the laws or rules standards. Compliance risk also arises in situations where the laws or rules governing certain activities or clients may be ambiguous or untested. governing certain activities or clients may be ambiguous or untested. Compliance risk exposes the institution to fines, civil money penalties, Compliance risk exposes the institution to fines, civil money penalties, payment of damages, and the voiding of contracts. Compliance risk can lead payment of damages, and the voiding of contracts. Compliance risk can lead to a diminished reputation, reduced franchise value, limited business to a diminished reputation, reduced franchise value, limited business opportunities, lessened expansion potential, and lack of contract opportunities, lessened expansion potential, and lack of contract enforceability.enforceability.

Compliance risk is often overlooked as it blends into operational risk and Compliance risk is often overlooked as it blends into operational risk and transaction processing. A portion of this risk is sometimes referred to as legal transaction processing. A portion of this risk is sometimes referred to as legal risk. This is not limited solely to risk from failure to comply with consumer risk. This is not limited solely to risk from failure to comply with consumer protection laws; it encompasses all laws as well as prudent ethical standards protection laws; it encompasses all laws as well as prudent ethical standards and contractual obligations. and contractual obligations.

Categories of RiskCategories of Risk Strategic RiskStrategic Risk Strategic risk is the risk to earnings or capital arising from Strategic risk is the risk to earnings or capital arising from

adverse business decisions or improper implementation of those adverse business decisions or improper implementation of those decisions. This risk is a function of the compatibility of an decisions. This risk is a function of the compatibility of an organization’s strategic goals, the business strategies developed organization’s strategic goals, the business strategies developed to achieve those goals, the resources deployed against these to achieve those goals, the resources deployed against these goals, and the quality of implementation. The resources needed goals, and the quality of implementation. The resources needed to carry out business strategies are both tangible and intangible. to carry out business strategies are both tangible and intangible. They include communication channels, operating systems, They include communication channels, operating systems, delivery networks, and managerial capacities and capabilities.delivery networks, and managerial capacities and capabilities.

Strategic risk focuses on more than an analysis of the written Strategic risk focuses on more than an analysis of the written strategic plan. It focuses on how plans, systems, and strategic plan. It focuses on how plans, systems, and implementation affect a company’s value. It also incorporates implementation affect a company’s value. It also incorporates how management analyzes external factors that impact the how management analyzes external factors that impact the strategic direction of the company.strategic direction of the company.

Categories of RiskCategories of Risk Reputation RiskReputation Risk Reputation risk is the risk to earnings or capital arising from Reputation risk is the risk to earnings or capital arising from

negative public opinion. This affects the company’s ability to negative public opinion. This affects the company’s ability to establish new relationships or services, or continue servicing establish new relationships or services, or continue servicing existing relationships. This risk can expose the company to existing relationships. This risk can expose the company to litigation, financial loss, or damage to its reputation. Reputation litigation, financial loss, or damage to its reputation. Reputation risk exposure is present throughout the organization and is why risk exposure is present throughout the organization and is why companies have the responsibility to exercise an abundance of companies have the responsibility to exercise an abundance of caution in dealing with their customers and community. This caution in dealing with their customers and community. This risk is present in activities such as asset management and agency risk is present in activities such as asset management and agency transactions.transactions.

The assessment of reputation risk recognizes the potential The assessment of reputation risk recognizes the potential impact of the public’s opinion on a company’s value. This risk is impact of the public’s opinion on a company’s value. This risk is inherent in all activities. inherent in all activities.

Internal ControlsInternal Controls

WCGW AnalysisWCGW Analysis New Agent HiringNew Agent Hiring ICA’sICA’s Individual Production Plans for Agents Individual Production Plans for Agents Policies and ProceduresPolicies and Procedures