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Reminder for S corps.
Don't forget - as an S corporation - you are a corporation - so annual meetings need to be documented. In addition, be sure that your operating agreement is up to date. If you don't have one - be sure to get one and in many states, an
LLC without an S corporation operating agreement defaults to partnership rules. This can give the IRS ammunition to declare your S election invalid since state laws often treat LLC's as partnerships by default. One additional note - even sole shareholder S corporations are subject to these rules - so meet with yourself in the shower if need be and document it!
S Corporation Update
Tax Hike Looms!
A service firm that is classified as
an S corporation faces a proposed tax increase starting next year (2011). The tax will be assessed on all profits of service firms, which includes accounting, law, health, engineering, architecture, consulting, investment management, sports & the performing arts, and others. As a revenue raiser, it was a late addition to the bill that reinstated a set of expired tax breaks, and is widely anticipated to be part of the final bill when it passes.
Owners of S corporations will owe self employment tax on their entire profit each year. Currently the tax is 15.3% of the first $106,800 and 2.9% above that. No exception will be allowed for amounts left in the firm for working capital purposes. Amounts passed thru to owners of firms that are not in professional service fields (such as manufacturers) will continue to be exempt from self-employment tax.
The bill has apparently stalled at the moment with disagreement over various provisions in the bill. Many GOP senators have expressed concern about this particular provision in the bill, and amendments have been proposed regarding this.
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Tips for Avoiding Fraud
The most common method of fraud detection (almost 1/2 of all cases) is a tip or complaint from an employee, vendor, customer or anonymous informant. About 1/5 of all cases are detected by accident, another 1/5 by internal audit, and about 1/8 by external audit.
Internal Controls
1. Separate the duties of receiving funds, disbursing funds, writing checks, signing checks, and reconciling bank accounts. Having one employee responsible for all cash-related functions makes small businesses vulnerable to fraud.
2. Have the monthly bank statement delivered unopened to the owner, who should review it for unusual transactions such as declining deposits and unfamiliar payees.
3. Owners should look for signatures or endorsements that look forged, missing checks, check numbers that are out of order, and checks where the payee listed does not match the name in the check register.
4. Consider an independent review of the cash accounts and bank statements by an anti-fraud specialist.
Employment Conditions
5. Institute background checks on new employees, and notify job applicants that their backgrounds will be checked.
6. Employees who receive regular and recurring training about the detrimental aspects of fraud are more likely to aid in controlling it.
7. Employees who feel well-treated and adequately compensated are less likely to commit occupational fraud than those who don’t.
8. Employees who hold grudges against their employers—whether or not justified—are more likely turn to occupational fraud and abuse.
Workplace Conditions
9. Insist that employees take a vacation for at least one week every year and use that time to have the books reviewed for discrepancies.
10. Adopt a tip hotline or complaint-reporting mechanism that will enable employees, vendors, customers, or outside sources to report suspected fraud anonymously or without fear of reprisal.
11. Employers can gain valuable information by simply asking questions in a non-threatening, non-accusatory manner.
12. Conduct internal and external audits, especially a “fraud audit” instead of a “general audit” if you suspect fraud.
Automation
13. Have an accounting software program expert, preferably a CPA, do the initial set-up of the program to make sure that helpful features are turned on and unhelpful features are turned off.
14. Access to personnel and vendor master file records should be password protected and restricted by job function.
15. Computer systems should create an audit trail of all changes made to the vendor master file records, including an identification of those who made the changes.
16. Changes to vendor master file records should require supporting documentation, supervisory approval, and independent review.
Organizers
Engagement Letters
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