Corporation Stocks and Payroll
I said repeatedly for the benefit of the audience that in many cases, if you want to grow a big business, you've just about got a set up a corporation. Get sticks there at the bottom. There we go. Why? Because the corporation allows you to easily raise a lot of money by issuing a lot of stock. Let's talk about that. First of all the slides, Bob, invest $1500 cash and image into image photography. We've gone through this one. Cash goes in the business. We saw it on the sea account. Bob gets a credit to his account off your run. What about common stock? Again? This is a little more accounting than this is pushing the envelope in the amount of accounting that I think you need to know. But if you're gonna go out there and grow a business and you're thinking about getting other owners and being a corporation, I have to go through this. It's important to go through okay, remember that there is. There are no capital accounts. If you're a corporation, we see that again. There are no capital ac...
counts of your corporation. Instead of Bob and Sue having capital accounts, Bob and Sue just own stock. Okay, Bob. Insurgents own stock looking slide again. We've got three accounts there in equity. If you're a corporation. Real, basic, issuing stock. Now again, I'm not going to win the QuickBooks because that is a sole proprietor. But we need to talk about this. For those of you who want to grow a business to be a corporation, do my tea accounts. I'm abbreviating a phrase called Additional Paid in Capital That's on the screen here. You see that common stock and additional paid in capital get increase by issuing stock. Now, I'm gonna simplify something that's tricky. Somebody buys $10,000 worth of stock in your company. Some of it is going to get a sign to common stock based on what's called the par value of the stock, which is just in accounting notation. So I'm going to say in my example and again, this is pushing the envelope on accounting stuff, but I got a mention. Let's say that this is 10,000 shares. Sorry, it's 1000 shares of $1 par stock, and it's just accounting entry, and it's annoying, but I have to cover it the par amount times the number of shares, which equals 1000. That's the amount that gets posted to the common stock. The other $9000 we call additional paid in capital. So 1000 plus 9000 is 10,000. Okay, What you need to know is that the credits get posted to these accounts and this is all equity. That's all equity again pushing the envelope. But I need to know that. And you also need to know it so that if you're two years down the road and you're looking at merging with somebody or you're looking about getting stock in exchange for doing something, you know down the road, you need to have Maybe you keep this in the back of your mind. Okay? Issuing? Yes. Don't you have to be careful when you're issuing stock? Because Kent, your company accidentally go public when you don't intend to to let me explain that there's a couple steps there and it's worth talking about any questions on this for a leave, it does this go on top of what we were just looking at with withdrawals, or does it negate that? Let me go. One more step. Okay. Okay. What I talked about before this is capital. So proprietor partnership. Okay, end of story being now, this is corporation issuing stock. Okay, that's the difference. How do these? How do these shareholders get money back? We saw an example earlier today about a dividend. You pay a dividend out of earnings, which reduces your equity. Okay, end of that story. Issuing stock increases your equity. You pay out a dividend, it reduces it. Okay, that's the difference. Now, let me talk about that going public thing, because there's a There's a misconception here. And especially for those of you who are out there trying to raise money, let me explain this misconception. You could be a corporation. Have a corporation. Yeah. You can issue stock in their corporation. I'm gonna call it, uh, Valentine, Valentine Flowers. Okay. You could issue stock Valentine flowers. Sure. However, there's a delineation. There's a separate. You will most likely start off with something that's called a private placement. Did anybody go out? Probably not. Because I'm a huge geek and you're not. But before Facebook went public, right before somebody had created a cycle. Who owns Facebook? Is everyone looked at it. Two owns facebook dot com. I don't know it's still out there because I was interested in seeing who the big investors were in Facebook. You know who the early investors were, and surprisingly not. Maybe it is. Surprisingly, it was to me. Bonneau from YouTube is part of a partnership that was a very early investor in Facebook that owns quite a bit of Facebook. So if you were concerned that Bottle was not making a enough money touring, let me allay your fears. He's doing OK. Those guys were actually my age. YouTube, every U two fan, a live album under a blood red sky and red rocks in Colorado. They came out when I was in college. I remember I was in a college fraternity and MTV started the fall in which a college and 81 and this is like 82. And I remember walking and looking and looking and somebody's door, and it's that Red Rocks concert. It was just like, who? What? Who are these guys? Was YouTube okay? Bono's partnership bought Facebook as a private placement, which means you are selling to a limited number of people, varies by state they have a certain amount of investment experience. They've got some net worth and some assets, and essentially they can afford to lose money and take more risk than the general public and varies by state. You usually register this by state. So Facebook, all of these companies that you know that have gone public recently started off probably as a private placement. There are stockholders, but it's not the general public. Okay, then you do an initial public offering. A typo. Now, Twitter is good example. Twitter only sold 10 15% of the company of the public, 85 90% of its still owned by the guys he bought on private placement guys and girls. Initial public offering means that you're selling it to the general public. Anybody who could fog a mirror can buy the stock. There is no requirement for experience level. There is no requirement for net worth annual income like a private placement. Depending on your state, anybody could buy. Now, the problem is, is that you have to create I'm going to step because it supplies to those of you who are eventually gonna try toe doing offering. You have to create a prospectus and you have to register the prospectus with the SEC. The Security Exchange Commission. What I'm getting at is that is a lot more disclosure. Then when you do a private placement where you have something called a registration statement, which is a lot more limited. Okay, Now, let me bring this back to this audience I mentioned. Step one. If you want a way, raise a good amount. I'm also what? One in ways, I sound like Barbara Walters. Wanna ways? You want to raise a lot of money issuing step corporations? Best way to go cause you can list you just about an unlimited amount of stock. How do I do it? Well, first, you're going to a private placement. Well, why you go to a limited number of people who have more experience and network because you have less of a track record. Okay, so, you know, angel investors venture capital folk are in this category. Then you can sell on initial public offering to the general public. You got it. Fill out a prospectus. Did anybody read the Facebook prospectus? Oh, my gosh. That sounds incredibly boring. I actually read a fair amount of it when they went public last summer. I don't remember. The difficult thing about a prospectus is now you've got to show your cards. I mentioned in a prior segment that Twitter. Maybe I didn't mention it. If you look at Twitter's prospectus, they say they're not gonna be a public. They're not gonna be profitable till 2015. 16. They had to disclose that. You basically got to disclose all your cards. Because why? Because the general public's buying stock and they're left sophisticated, and they may not be able to afford the risk. So you need huge, huge amounts of disclosure here. Huge disclosure here. Not so much. Okay, that all right? Okay. One more thing. I'm gonna tie net income to retain earnings. This is the last of the hard T accounts stuff. I gotta I gotta present to you, um, last little hitch. Last little hurdle. All right. Bear with. Because here's here's the problem. If I don't show this to you, this will happen in QuickBooks and you'll be asking your account. Uh, What? What happened? Where did the numbers go? Okay, this is my bias with when I used to. When I do some finance tutoring now, Did everybody use, like a T I calculator in college? If you did math. Okay. I'm still using president future value tables for calculating president future value that you can find on the web. Why? Because I can show somebody how the number where the number was taken from rather than image them just pulling up on a computer. All right, in the same way. If I don't do this, it's gonna happen in QuickBooks. And you're gonna what? Where did the number go? Why is this zero where? What? That's why I have to do this. Six months from now, you're gonna have this happen in your business, and you're gonna thank me. You're going to say so. Glad can told me how to do it. I'm gonna go back and watch this video again. Over and over again. You've got revenue, you've got expenses. And we talked about how they end up in equity. We're going to zero out the revenue of $1000 debit, which reduces the account. There's a reason why I'm doing this again. Bear with me. It goes over here. Revenue. There's a talk radio guy in ST Louis who just sports talk radio, and it was always yelling at people Have a point. So I do have a point. I credit. Yeah, I question reduce the expenses. I move the expenses over here. We saw that. And what I said was that this gets this is your profit. Now I want to add on one more thing, and that relates to the slide retained earnings, which gets increased by your profit. Your net income. I'm using those terms interchangeably and reduced by a dividend. This is the thing I'm gonna put on the screen now. And this is happening in your QuickBooks. Retained earnings is an equity account. One thing that increases your this profit number. That's an equity. It's actually inside retained earnings. I just called it equity. Keep it simple. Okay. If you choose to pay a dividend, it is a Dabiq that reduces retained earnings. Okay, One rial difficult area in QuickBooks is the equity section of QuickBooks. When I pull it up, I'll show you what I mean. People get the equity section. It doesn't matter if you're a sole proprietor or partnership doing capital or whether you're a you're a corporation to in common stock. People get messed up, which is why I'm covering this ground payroll. I do have a slide on this I want to cover. I highly recommend that you use a payroll company for payroll, even if you have one employee, and I think I've mentioned this before. The reason is, is that the payroll company takes liability to make sure that the withholdings air correct, cause there are penalties of it's wrong. Okay, there are penalties of it's wrong. I'm not an attorney. I don't run a payroll company, but generally they will take liability for keeping getting these calculations correct. I'm gonna and I'm gonna comment at the bottom and then talk about the rest of slide employees versus independent contractor. This is big for many people in this audience, and it's something that can you can easily get off track on as a business owner. Employees versus hasn't been a contractor. I've met a lot of people that hear a creative live who had careers as independent contractors, freelancers. Okay, let's look at this in the context of you in your business, it's very likely that the first person you hired to help you and we've already had this discussion. I think it's gonna be an independent contractor, right? Probably not a full time employee at the beginning. Uh huh. You have to be careful that the person you think is an independent contractor is actually treated as an employee. The person you think is an independent contractor is actually operating as an employee. There is an IRS publication on this. It used to be publication 15. If you goto ire s dot gov and your Google, he already there. If you're on that site and search what I meant to say, employees versus independent contractor, there will be an IRS publication that comes up. I would talk to an accountant about it first, but you can pull the publication if you want. It used to be publication 15. Okay. Why is this a problem? A couple of reasons we'll be back up. The ire s publication dictates who is an employee and who is not an employee. I'm gonna put a question mark. I think that's it. Essentially. Well, how do you tell the difference? Essentially, if you quote control enough of the actions of the person who's working for you, quote unquote, they're an employee there, not an independent contractor. And there's a laundry list in the in the publication of Who is and isn't. And I gotta tell you, accounting friends of mine are always They are very concerned about getting this right for clients. So your accountant, if they're good, they're gonna take a lot of time asking you questions, really drilling down to find out if the person's really an employee. There's a couple of reasons why If they are an employee and you didn't think they were, there's a couple problems. Problem number one is how you how you document how you compensate him. If they're an employee, they should be getting a W two that has withholdings on it. If you're an independent contractor like I am, you're getting 10 99. No withholding independent contractor required. Withholding employees. That's a big one. Okay, that's a big issue. So the first is the tax issue. The second is the legal issues and again, and I'm not an attorney. But, um, if that person is working on your behalf and there really an employee versus an independent contractor asking attorney, there are legal issues that come up because you've got more liability for the actions of an employee than you do for independent contract. Because the theory the concept of independent contractor is this person self sufficient? They work on their own. They don't need a lot of supervision. Independent contra don't need a lot of supervision, so they're kind out there running on the room. You know, I had a conference call this morning again and again. Can Why are you so glad you in San Francisco? Well, I had a conference call this morning with somebody in Hoboken, New York. Took her an hour and 1/2 to get to work today and somebody in Indianapolis who and it's like temple 10 degrees and there on the line. And they think I'm in ST Louis because I did not have the heart to tell him I'm in San Francisco. I don't have hard to tell, but this is a good example of independent contractor. So I'm writing another book and I won't bore you with what it is. But it's a dummies book, and the editors say to me on the on the line, Well, you know, you've been through this process a couple of times, so we're going to kind of let you run mawr than you know than we did at the beginning, because I need less supervision, and they're not controlling my activities like they were. So think about that. If you're running a film business and you've got a somebody as an independent contractor, you need to talk to your accountant about Well, you know, what can this independent contractor do and not do? And you need to go down that road with your account, please? Okay. I need to go down that road with your account. Is that okay? That was a big when I was asked to mention payroll. So now you've got somebody who is an employee. Why is perils Something that you need to contract out to somebody else? A lot of steps. There's got to be deductions from pay for tax withholdings. I'm gonna do an example in QuickBooks in a minute. There's tax forms. You got a senate, and there's also deposits. You've got to send in most likely federal tax deposits for your product, for your profit State tax deposits. Maybe not for most people, but maybe state tax deposits for estimated payments. I mean, for payroll maybe local, certainly federal and state, but maybe even local in ST Louis. Like I said, if you work in the city, there's a 1% earnings tax gotta feel out of form for that. So there's lots of theirs withholdings. There's forms, the third bullet point calculating benefits. And then we have the added issues starting in 2014. Although it's been delayed with affordable Care act, that's a big issue for friends of mine who are self employed. I have two friends who own home health care businesses, where they have lots of lots of employees doing home health care on an hourly basis. Are these people employees? Does the Affordable Care Act apply? Okay, a lot going on. Have a payroll company do it? What they will typically charge you is a rate a dollar rate per employee every time they run payroll. So if you run pay a little twice a month, they're going to charge you a rate for each employee. Now one friend of mine who owns the whole health care business. We were at a New Year's Eve party, and he made some comment that he had to quote, run, payroll and I about dropped my shortening on the ground and ran out of the room screaming because he has 60 employees and he is trying to do this himself with an employee. He is not using apparel company. Big mistake. He's burning way too much time doing that. Better off having somebody else do. It will be the best money you ever spent. Please, please don't do it yourself. Okay? Let me give you an example. Transaction on the board, and then I'm gonna displayed in QuickBooks. Okay, Payroll. You guys know this because we've all done, you know, just about everybody's had a W two. At some point, we've only third W two, so let's just make up a w two situation. You have gross pay of $1000. Keep it simple. You have federal tax withholding. Wh withholding $ and you have net pay 900. Okay. Real simple. One withholding. Okay, let's think about how that actually debits and credits. Okay, Cash. We debt. We credit cash to reduce cash. Right. So there is that part of the entry important point here. You earned 1000. You were only paid 900. The question is where the other 100 bucks go. Well, it's a federal tax withholding, and that is a liability if you're the employee employer. If you're the company, this number is here, and it's a liability. Another reason your payroll company, the payroll company, will discipline you to segregate and send in these withholdings. Okay, so you're not making the mistake of co mingling tax withholdings with other cash and reconcile ing. Keep it easy. Have the payroll company take that money out and send it in for you with the form. Don't do it yourself. Okay, so we have two credits we need. Debe Steagall credits salary expense. We debit $1000 for the expense which increases salary. Now, this is a This is a trick. This is a hitch that people have trouble with. The salary expense to your business is the full amount, right? The only difference between the salary expenses the cash the employee gets is withholding your your expenses, the full amount people get confused and they go. Oh, I wrote him a check for 900. My expenses. 900. No, your expenses for the whole thing, right? If you get that, that's great. But I've had people have trouble with that