Accounting & Bookkeeping & Small Business Forum

[Richard Noot]

bottomline wrote: Richard Noot wrote: I think you need to know the meaning of GAAP. No corps and partnerships do NOT need to keep books according to GAAP. They can use the cash basis. For any business to be in compliance with GAAP they must use the accrual basis. Like I said there is nothing that requires a business to use an accrual basis.

What GAAP means:
The common set of accounting principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information.

Yes, you are correct in that a company does not have to use the accrual basis (unless they have inventory) and yes, full compliance with GAAP requires the accrual method, and no, GAAP is not required by law (unless you are publicly traded, then the SEC requires GAAP and the accrual method). However, GAAP (other than using the accrual basis) are still the recommended way to compile information.

GAAP are imposed on companies so that investors have a minimum level of consistency in the financial statements they use when analyzing companies for investment purposes. GAAP cover such things as revenue recognition, balance sheet item classification and outstanding share measurements. Companies are expected to follow GAAP rules when reporting their financial data via financial statements. If a financial statement is not prepared using GAAP principles, be very wary!

GAAP Assumption
Economic Entity Assumption assumes that the business is a separate entity because the revenues and expenses should be kept away from personal expenses. This applies even for partnerships and sole proprietorships

I need to correct my previous statement that companies need to be in compliance with GAAP to protect their corporate veil. The following are actual requirements"

"Corporate Requirements

Corporations are subject to a number of other ongoing requirements and formalities. History has dictated that such requirements must be satisfied in order to protect the corporate status. These formalities include, but are not limited to:

Hold initial meeting of directors. After the formation of the corporation is complete, the corporation should hold an initial meeting of directors, also called an organizational meeting. At this meeting, the bylaws are adopted, officers are elected, and stock is issued to all shareholders. Adopt bylaws after incorporating. Each corporation must adopt bylaws, which is a document that outlines how the internal affairs of the corporation will be executed. The bylaws are the second most important document behind the articles of incorporation, as it indicates how the company will be operated. As mentioned above, the bylaws should be adopted at the initial meeting of directors. Conduct business on the corporation's behalf. Officers and directors should visibly be acting on behalf of, and in the best interest of the corporation. This is very important when it comes to officers or directors entering into contracts for the corporation. Hold annual meetings of directors and shareholders. One requirement of all corporations is that they hold annual meetings of both directors and shareholders. It is also important that the minutes of these meetings be kept with the corporate records. If items of business are determined by unanimous consent in lieu of holding a meeting, which is popular with many closely-held corporations, the unanimous consent documents should be kept with the corporate records. Keep documentation of corporate activity. In addition to keeping minutes of all director and shareholder meetings, it is important for corporations to maintain a stock ledger that records all shares of stock issued to shareholders and the contributed amount each share represents. Also, be sure to keep contracts into which the corporation enters, including leases or major business contracts. Keep documentation of corporate financial activity. Corporations should record all disbursements, payments received, invoices issued (accounts receivable), and invoices received (accounts payable), and keep those records for a period of 7 years.
Corporations should also keep balance sheets and profit and loss statements for each year. Additionally, it's important to document any loans taken by the corporation, as well as the repayment terms.

LLC Recommendations

While LLCs do not have the formal ongoing requirements that corporations have, it is recommended that LLCs undertake many of the same steps.
(Remember, these recommendations are to protect the corporate veil )Common recommendations for LLCs include:

Hold an organizational meeting. After the formation of the LLC is complete, the members or managers should hold a formal meeting to adopt an operating agreement and issue membership interest to members. Adopt an operating agreement. As with the corporate bylaws, the operating agreement for an LLC is an important document that outlines the internal governance of the LLC. Keep documentation of the LLC's activity. It is typically considered beneficial to keep record of any changes in membership interest and also to keep record of all major business decisions of the LLC, such as contracts and leases. Keep documentation of financial activity. LLCs should maintain the same financial information outlined above for corporations. Hold annual meetings of members. Holding and documenting the business conducted at annual meetings of the members or managers helps LLCs keep updated ongoing records of decisions made by the owners.

Again, I was only trying to correct the error in your original post.
As far as the corporate veil portion of your posting I find that an exceptionally well presented case. In fact I plan on using it when I meet with a new business who wants to establish a corp or a partnership as a LLC. All they hear is that if your a corp you get to write off all kinds of expenses . My opinion is that I know enough sch c businesses that can use my services without having to go the corp or LLC route. Am I a LLC?
YES but only as a diregarded entity. Not a corp.

[bottomline]

[quote="Richard Noot] Am I a LLC?
YES but only as a diregarded entity. Not a corp.[/quote]

Hmmmm. the pros & cons of reporting a "single member LLC" as a "diregarded entity" (reporting on Schedule C of the memeber's 1040) as oposed to reporting as a Corporation.

What I know is that many chose to be taxed as a corporation and make a Sub-S election. The idea was to be able to set up a 401k as well as to have the liability protection of the LLC form. Of course, now you can have a "soloK" so even a disregarded entity could do that. The Sub-S is somewhat more complicated and 1120s is due in March, not April. But it has advantages to be treated as a corporation. For example, your entity can lease your car from you, making all your auto expenses deductible. This would also be true of any other property, real or personal, you use in your business, and creates a way to get income from your business without having to pay payroll taxes on it. And of course, you have a wide range of options for retirement plans (and tax deferral on your income).

[Richard Noot]

bottomline wrote: [quote="Richard Noot] Am I a LLC?
YES but only as a diregarded entity. Not a corp.

Hmmmm. the pros & cons of reporting a "single member LLC" as a "diregarded entity" (reporting on Schedule C of the memeber's 1040) as oposed to reporting as a Corporation.

What I know is that many chose to be taxed as a corporation and make a Sub-S election. The idea was to be able to set up a 401k as well as to have the liability protection of the LLC form. Of course, now you can have a "soloK" so even a disregarded entity could do that. The Sub-S is somewhat more complicated and 1120s is due in March, not April. But it has advantages to be treated as a corporation. For example, your entity can lease your car from you, making all your auto expenses deductible. This would also be true of any other property, real or personal, you use in your business, and creates a way to get income from your business without having to pay payroll taxes on it. And of course, you have a wide range of options for retirement plans (and tax deferral on your income).[/quote]

This is the general missconception that is held by alot of small corps. That is until they get audited and find out otherwise. As far as my being an LLc I can assure you this would not be the case if I did business in California. California is one of the worse places for a LLC to do business.
In that case I would agree with you that a Corp would be better. but again only if income and expenses are reported correctly.

[bottomline]

Richard Noot wrote: [This is the general missconception that is held by alot of small corps. That is until they get audited and find out otherwise
Corporations do get certain tax benefits That's a fact. Needing to make sure you understand the requirements does not make the benefits of a corporation a "misconception".

Exactly what is the misconception you are talking about, and what does the audit have to do with your choice in entities?