Author: margento

Consider phantom equity instead of giving employees stock compensation. Phantom Equity is just one of the many vehicles to incentivize employees. This article will explain what it is, why you should consider it for your business, and how it differs from regular stock-option plans. 

“Focus more on making the pie bigger than on exactly how to slice it” – Ray Dalio.

The more money you can make for other people, the more you will make yourself. This is not just limited to your customers; this applies to the team you work with. Think of your profits as a pie. Giving equity to your employees is one way to share the pie (aka profits). 

Let’s say you are a business owner that has made some key hires, and you want to give them a percentage of your business but not the whole business. This gives your team a piece of the pie in your business and gives them “ownership” so that they would treat the company as if it were their own. This has many incredible benefits, such as someone willing to work harder and be more dedicated to your company’s success. At the end of the day, if you give a slice of the pie to someone who can help you grow the total size, your pieces ultimately become bigger, so it’s a win-win situation for you and your teammate.

One of the biggest things that will influence growth in your company is a stock-option plan because of the high level of buy-in you will receive from your high-level employees. However, stock-option plans can have adverse tax consequences for the owner of the company and the employees and incur expensive legal fees to establish.

The alternative to giving your typical stock options is something called phantom equity.

What is Phantom Equity?

Phantom equity is equity that is not vested but has events that can trigger its vesting. Remember that vesting is when someone acquires the stock for legal and tax purposes. Phantom equity can be triggered at an event such as a sale of the company. For example, phantom equity vests if the company changes ownership or is sold. That means if an employee is working for a start-up and granted phantom equity, there could be a clause in the agreement that states if the company is sold, then the employee can liquidate their shares of the company and the owner. The benefit at the end of the day is that the employees can participate in the wealth generated when the company is sold.

As an owner of the company, you want your employees to have owner-like thinking and owner-like behavior so that the entire organization is more focused on succeeding. It’s essential to keep in mind that you want to only give a proportional amount of phantom equity to the contribution an employee makes to the company. One of the pitfalls to watch out for would be giving a disproportionate chunk of equity for the level of contribution from your employee.

From a wealth perspective, phantom equity is significant because as the company earns more enterprise value, the owner and employees increase their wealth when the company is ultimately sold.

How does Phantom Equity affect your taxes?

It doesn’t! That’s one of the great benefits of phantom equity. Let’s consider ordinary equity for a moment. When an employee is granted your typical stock-based equity of a company, the downside is that there is a transfer of equity, and the employee must pay tax on the value of the equity they are receiving. Depending on the value of that equity, this could be a hefty tax bill to pay. For example, Jeff Bezos can’t just give shares of Amazon to someone. The person who receives those shares will have to pay tax on the value of the shares they receive.

It’s a taxable event. Phantom equity, on the other hand, doesn’t vest until a trigger occurs, such as a sale of the company. Which means no tax is paid until that happens.

What if your employee leaves?

Your access to phantom equity is given over a period of 5 years. Each year, 1% of the phantom equity gets granted. That way, the employee could earn 5% phantom equity if they work with you for five years. But what if that employee leaves early? You could agree that if the employee leaves, you can have them lose the phantom equity. This incentivizes the employees to stay with the company long-term and grow the business.

This protects the owner of the company.

Legal liability and how that affects phantom equity

With phantom equity, the employees are not legally liable, which benefits the employee. Since if the employee had ordinary shares of the company and that company was sued, there could be held responsible for actions taken against the company.

Conclusion

The more aligned you can make your team and their success in life with your outcomes as the company owner, the more successful everyone will be overall and the faster the company will grow in that direction.

It allows those granted phantom equities to generate wealth when your company is sold. It keeps employees thinking about the company’s enterprise value, protects the employees from adverse tax consequences, and protects the company’s owner if someone leaves. It’s a win-win situation!

If you have any questions, please feel free to contact us.

We’re always happy to help!

Contact Argento CPA today if you have any questions or looking for expert advice.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Ecommerce accounting is a hot topic in the world of business today. It’s become one of if not THE most important aspects for companies who wish to compete well in the market and ultimately succeed as time goes on – which means you need this knowledge!

Okay, so you have just started your own eCommerce business and are focused on ordering inventory and managing it well to keep costs down.

Your business needs some accounting, and you think, how hard can it be?! That information should be easy enough for a beginner like yourself to find. You could find all the answers on Google or by asking friends who are also entrepreneurs – even if they have different experiences from yours, to see what has worked best for them and tweak it for your eCommerce system… perfect!

But what if eCommerce accounting is quite a bit different? What should you do then? The assumptions behind most of these methods are that all businesses have a similar workflow- which isn’t always valid with online retailers!

This type of accounting is a new field, and there are many things that bookkeepers need to learn about this type of business. For example, they should know how different payment methods work on an e-commerce site so it can be accurately recorded in the books as revenue or expenses when clients purchase products from your online store!

eCommerce accounting, the differences

Accounting itself is a complicated subject. It can be even more challenging to keep up with your particular industry’s nuances. Still, it’s imperative that you do so if you want accurate numbers and informed decision-making!

These numbers being precise is one of the most crucial aspects in any company, as it can lead to success or mediocrity. Uncovering secrets for profitability and cash flow through your books will help you grow with eCommerce accounts now more than ever before!

Many bookkeepers will need help navigating the differentiating aspects of this type of accounting.

The four main areas that accountants need to be aware of when working with eCommerce businesses include: Where transactional data resides; understanding inventory levels and COGS so they know if there will ever come the point where more products must go out than what has been already shipped/held in stock; knowing tax rules related both at home AND abroad since many countries have different types -or no-, regulations surrounding these topics specifically; and lastly reducing overseas transaction costs.

This insight dives into each area so you learn about e-commerce financials and how they differ from traditional business practices!

Where does transactional data reside?

One of the main ways that eCommerce accounting is different is that it’s often much more difficult to track everything. With traditional businesses, bookkeepers can look at bank and credit card statements to see what transactions have taken place and then add accrual transactions to get a full picture of the company’s financial health.

However, with eCommerce businesses, so much of the transactional data can reside in different places – such as in online marketplaces, payment processors, or banks – making it difficult to track everything. This means that bookkeepers need to be extra diligent in tracking all of the different revenue and expense sources to have an accurate picture of the company’s finances.

The input tells us that when a bookkeeper sees income in their bank account from Amazon or Shopify, they will record this transaction as “income” on the deposit date. The main problem with this is that the income numbers and the timing of those transactions need to be more accurate.

Inaccuracy of accounting numbers

You might think that when you sell products online, the money is in your bank account immediately and counted as income. But what if those deposits take a few days; what if there are adjustments? The transactions we’re talking about here are called, ‘net deposits.’ Net deposits are the total amount of money that comes into your bank account after all sales and other transactions have been taken care of. These include returns, tax-free customer purchases, chargebacks for items not delivered or sent as ordered, payments on accounts receivable from credit card spending, etcetera!

The back end of your sales channels is where you will find accurate numbers for transactions and all other activities. Luckily, there’s an easy way to get all of that information from your sales channels and smoothly into accounting software. With tools like A2X, it can be done in no time!

Transactional timing is inaccurate

If you’re recording the “net deposit” in your bank account, consider any activity that occurs before or after this date. For example, suppose Shopify deposits money onto our business’ accounts on January 5th. In that case, we’ll see transactions for those deposits during December. Still, it might not be accurate timing depending on how long ago they happened- sometimes people need to remember exactly what came into their wallets, especially when there are many other things going on at once!

Inventory and COGS

Another difference is that eCommerce businesses often have much higher inventory levels than traditional businesses. This is because conventional companies often sell products already in stock at their physical location, while eCommerce businesses may need to order products from suppliers based on customer demand. This can make it more difficult for bookkeepers to track COGS (cost of goods sold) and determine if the business is making a profit on individual products.

You’ll want to brush up on your accounting skills if you plan to do any business in this field. You should understand:

• How to calculate a COGS number for each SKU
• Inventory management processes – which includes knowing when an item is considered ‘available’ or not available due date-ISOs etc.
• Bookkeeping principles behind inventory and cost calculations called “cost of goods sold”

Expensing all of the product immediately when you buy it from your vendor is one common mistake.

The Tax question in online sales

Tax rules for eCommerce businesses can differ from those for traditional businesses. For example, many countries have specific regulations surrounding how digital products – such as ebooks or music – are taxed, while others do not have any specific rules. This makes it difficult for bookkeepers to know precisely how much tax they need to pay on various types of revenue and expenses. Top all of this off with the fact that tax laws are constantly changing!! This is why employing a tax specialist is vital.

International transaction cost reduction

Ecommerce businesses often have a lot of international transactions, which means they’re at risk for higher costs. But with the right tools and experience from an accountant who understands how these networks work in different countries worldwide, you can reduce those expenses to profitability!

On into the sunset..!

eCommerce is a fascinating industry that’s only going to grow in popularity. And with good reason, it provides an opportunity for businesses of all sizes worldwide who want access and exposure without having any overhead costs or employees on their payrolls! To learn more about how ecommerce accounting works, we need something else first–accounting knowledge…

If you have any questions, please feel free to contact us.

We’re always happy to help!

Contact Argento CPA today if you have any questions or looking for expert advice.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Deciding when to incorporate your business is a big one. It can be an exciting time, but it’s essential to take the time to make sure you are ready and that you have all of the information you need.

There are many factors to consider, such as:

• Financial resources
• Financial goals
• Tax situation
• What type of industry do you operate in
• Whether you are ready to take on the added responsibility

By researching and asking for professional input, you can make an informed decision that will be best for your business and future!

1. What is incorporation, and why do businesses choose to incorporate? 

2. The different types of business structures and the benefits of each 

3. What you need to do to incorporate your business 

4. The costs associated with incorporating a business 

5. How to get started with incorporating your business

6. The disadvantages of incorporation 

7. When is the right time to incorporate your business? 

8. What are the risks of incorporating

What is incorporation, and why do businesses choose to incorporate? 

Incorporating a business is the process of forming a legal entity separate from the owners of the company. This legal entity can then be treated as its own individual regarding taxation and other laws. There are many reasons businesses choose to incorporate, including:

1. Limited liability – One of the most significant benefits of incorporating your business is that owners are typically shielded from personal liability for the debts and liabilities of the corporation. For example, if you are a construction company and the corporation gets sued, the shareholders of your corporation won’t be risking their personal assets in a court case.  However, if you are a corporation and this happens, the assets exposed to the risk will only be those held by the corporation.  Depending on the nature of your industry, this could be a very important factor to consider when choosing to incorporate or not.

2. Tax benefits – Corporations are taxed separately from their owners, which can result in tax savings for the business since corporate tax is lower than personal tax.  For example, let’s say you earn $150,000 in income after expenses and spend $50,000 on personal living expenses.  As a sole proprietor, you will pay tax on the entire $150,000 of income you earned – you will end up with approximately $103,000 after-tax income.  Lets consider the same situation but for someone who was incorporated and paid themselves a dividend for $50,000 – you will end up with $130,000 after-tax income if you can leave $100,000 of the $150,000 profit inside your company.  This gives you a significant tax benefit which allows you to use that extra cash to reinvest in your corporation and grow your company.  However, if you are a big spender and spend $150,000 of your income on personal expenses (not advisable!), then there is no tax benefit to incorporate.

3. Lifetime capital gains exemption – If you decide to sell your shares in the company at a later date, your corporation may qualify for the lifetime capital gains exemption, and you will be able to receive up to $913,630 tax-free.  For example, let us say you had incorporated a construction business and grew this business to be worth $900,000.  Along comes someone who wants to buy your company.  Your business was built from nothing, so the value you paid for it is nothing.  If you qualify for the capital gains exemption, you could sell your business for $900,000 without triggering the tax.  If you didn’t have this exemption, you would be paying around $196,000 in personal tax.

4. The ability to raise capital – One of the most significant benefits of incorporation is raising capital by selling shares in your company. This can be a great way to get started if you don’t have the financial resources to start your own business.

5. Credibility and professionalism – By incorporating your business, you are showing potential customers and partners that you are serious about your venture and taking steps to protect yourself legally. This can help you build trust and credibility with those you work with.

The different types of business structures and the benefits of each

When starting your business, one of the first things you need to decide is what type of business structure to choose. There are three main types:

1. Sole proprietorship – This is the simplest and most common structure. The business and the owner are legally the same, with a sole proprietorship. This means that the owner is personally liable for any debts or lawsuits against the company.

2. Partnership – A partnership is similar to a sole proprietorship but involves two or more owners instead of just one. Like a sole proprietorship, the owners are personally liable for any debts or lawsuits against the company.

3. Corporation – A corporation is a separate legal entity from its owners. This means that the corporation can own assets, enter into contracts, and sue or be sued independently of its owners. The corporation is also taxed separately from its owners.

What you need to do to incorporate your business

You need to take a few steps to incorporate your business legally. Here is an overview of what you need to do:

1. Choose a business name – Your business name will be the name of your corporation. First, make a trademark search to ensure the name is available and not already taken by another company.

2. Speak with a lawyer – A lawyer will ensure you file your incorporation application and get set up correctly. 

3.  Do-it-yourself incorporation – People often make mistakes when they incorporate themselves.  It does save you some cash up-front since the filing fees are $350 in BC, but most likely, you will have to pay a lawyer to adjust your records.

The costs associated with incorporating a business 

When you incorporate your business, there are a few costs that you will incur. These costs can include filing, legal, and accounting. Make sure to budget for these expenses when you plan to incorporate your business.  Typical lawyer fees will charge around $1,500, and once incorporated, there will be annual legal filings and corporate tax returns.  The prices for these services range based on the complexity of your tax and legal situation.

How to get started with incorporating your business

Now that you know what is involved in incorporating a business, here is some advice on how to get started: 

Talk to an accountant or lawyer. The best way to learn about the incorporation process and what type of incorporation is right for your business is to talk to an accountant or lawyer specializing in incorporation law. They can walk you through the process and answer any questions you have. 

Do your research – There is a lot of information available on the internet about incorporation, so take advantage of these resources and learn as much as possible about it before making any decisions. 

The disadvantages of incorporation

1. Cost – Be prepared for the costs of incorporating a business, including filing, legal, and accounting fees. These costs can add up, so make sure you budget for them when making your decision.

2. Paperwork – Incorporating a business can be time-consuming and complicated, so you must be prepared to handle more paperwork. 

3. Extra tax filings – You must file a separate corporate tax return each year and your personal tax return.

When is the right time to incorporate your business? 

This is a question that many entrepreneurs ask themselves, and there is no easy answer. You need to consider several factors before deciding, such as whether you are ready to take on the added responsibility, whether you have the financial resources, and what type of entity you want to form. By researching and asking for professional input, you can make an informed decision that will be best for your business and future!

As a rule, from a tax perspective, we recommend that you incorporate once you earn more cash in your business than you need to personally spend in one year. Then, if you can leave most of your retained cash in your corporation, you will only be subject to corporate tax, which is lower than personal tax. This means you will effectively have more after-tax money to reinvest into your business.

If you are concerned about legal liability, we recommend incorporating your business. For example, a taxpayer who has significant personal assets and wants to start a business will want to ensure they incorporate so that they safeguard their personal assets.

What are the risks of incorporating

There are a number of risks associated with incorporating a business, including the following:

1. Complex regulations – Incorporating a business means following complex rules set by the federal government, which can be challenging to keep track of. You could face fines or other penalties if you don’t comply with these regulations. So long as you find a good accountant, you will protect the downside from this risk!

2. Increased costs – There are costs associated with incorporating a business, including filing, legal, and accounting fees. These costs can add up, so make sure you budget for them when making your decision.

Lastly, if you are a sole proprietor and decide to incorporate your business, educate yourself on the section 85 rollover and determine if it’s right for you.

Conclusion

When deciding whether or not to incorporate a business, there are many factors to consider. By researching and asking for professional input, you can make an informed decision that will be best for your company and future. Incorporating has both advantages and disadvantages, so it’s important to weigh all of the pros and cons before making a final decision. Incorporating a business is a big step, so it’s important to seek advice from experts who can help you navigate the process.

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I want to tell you the story of Procrastinator Pete.

Pete was a charismatic young and healthy man full of energy. An electrician by trade. Pete was ambitious. His number one passion in life was being an entrepreneur and building something from scratch. And he was good at it too.

After earning his ticket as an electrician, Pete was so excited he could finally start his own company. It turned out to be a great success. 24 months into his business, he had already built up a great client base and hired 2 journeymen and 4 apprentices on his team. The reputation for their work was outstanding and well-respected.  

Pete was a jack of all trades and took pride in his skills. He was great at marketing, organized on the job, and delivered outstanding personalized customer service.  

However, the one thing Pete could have gotten better at was his procrastination. Pete hated administrative work and kept putting off a task on his to-do list “hire an accountant.”

One day Pete received a letter from the Canada Revenue Agency. He opened it up, and to his surprise, they let him know there was a discrepancy in his payroll remittances, and they wanted to review the last 12 months of pay slips.  

That night after work, Pete got to work on compiling the information for the CRA. Hours went by, and Pete had trouble re-calculating CPP and EI. It was now 2 am, and Pete still wasn’t finished. Plus, he had to be on-site at 6 am. Starting to feel flustered, Pete stopped working on the response to CRA and went to bed. The next day he showed up at work tired and exhausted from the lack of sleep the night before. In his exhaustive state of mind, he made a big mistake in some wiring and received a one-star Google review for that job. This was a shocker to Pete since he always had a good experience with his clients. 

Time went on, and Pete still hadn’t responded to CRA. Then, two months later, he received another letter in the mail. This letter said that Pete owed the CRA $27,000! Now in shock, Pete scrambled to figure out what was going wrong. It turns out that Pete neglected to calculate the payroll tax correctly. This was devastating for Pete, and his savings were wiped from this debt.  

This could have been avoided if Pete hadn’t been such a procrastinator and had hired an accountant and automated his administrative task of payroll.

“If you’re going to run a business and don’t understand accounting, you are already behind the eight ball.” – said Mark Cuban.

What Mark meant was that as an entrepreneur, you must understand the language of business. That language is Accounting. Your primary understanding of debits and credits and the difference between cash flow and net profits is crucial to your success.   

Most trade business owners don’t want to learn accounting or have anything to do with crunching numbers. That’s fine. However, somebody has got to do it. Therefore, it would be best if you had an accountant who could speak to you about your numbers so that you understand.

Where do you start?

You start at the same place as you would when building a new home—the foundation. The foundation of your accounting is a proper bookkeeping system. Without bookkeeping, you have no idea how your company is performing. 

“I do my own bookkeeping” – we get this statement a lot from our new clients. So why is doing your bookkeeping a terrible idea? You aren’t a bookkeeper. Stick to what you are good at—your trade. You wouldn’t find us trying to wire a home or install a new air conditioner. A do-it-yourself mentality means you are stepping outside of your specialty and making significant mistakes. This leads to the old saying, “garbage in, garbage out.” Your time is your most valuable asset, and best spent growing your business.

You don’t just want any bookkeeper. It would help if you had a specialist who does more than that. It would help if you had someone who would automate your accounting processes and deliver expert advice.  

Technology is changing the way we do business, and cloud applications are speeding up how all administrative tasks are performed. You can bet that your competitors are taking advantage of this, and you will be left behind if you fail to adapt. Therefore, you need an accountant who can advise you on what apps to use and how to get them to work together. In our world, we call this a technology stack.

Now that you have a solid foundation

“You can’t manage what you can’t measure.” – says Peter Drucker. With accurate bookkeeping, you can take measurements of where you are now and use that as a stick in the sand. With that, you can envision where you want to go and determine the gap from where you are now to where you want to get to. This is when you work with your accountant to create an action plan on how to get there.  

Avoid the 7 most common mistakes business owners make

1. They don’t plan
2. Don’t know (or understand) their numbers
3. Think they can play every role and don’t have the right team at the right time
4. Run out of cash
5. Lack of systems or failure to upgrade as they grow
6. Not knowing their customers, what they want and what they value – trying to be all things to all people
7. Ignore culture, core values, and brand

How Argento CPA will help

1. Explain your key numbers to success
2. Visually explain what small changes to key drivers will do to your profit and cash
3. Develop action plans to bridge the gap
4. Suggest what apps may be relevant to your plans
5. Hold you accountable
6. Provide insights and inspiration
7. Scale and help you grow your business
8. Give you the confidence to act

Contact Argento CPA today and get yourself setup for success from the start! Let this story of Procrastinator Pete be a good lesson!

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