Smart Money: Closing business won't deter possible IRS audit

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Bruce Williams is a national radio talk show host and syndicated columnist|ret||ret||tab|

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Dear Bruce: Back in 2000 when I was still in high school, my friends and I incorporated our first company. It is still running today. I haven't kept good records of my transactions and receipts. In October 2002, I started keeping everything in order. My tax preparer now suggests that I close this company and open up a new one so I won't get audited and have a fresh new start. The thought is that the company now has good credit references with a couple of companies. If I start a new company that would take over the existing one, I would have to re-establish accounts with them along with the trouble of opening up new accounts elsewhere that require at least six months experience with other existing companies. |ret||ret||tab|

I know a lot of people tell me getting audited is a very slim chance. I started this company with $20,000. It wasn't until 2002 that I started to show a profit. What do you suggest I do? Reader|ret||ret||tab|

Dear Reader: Cutting through the nonsense, I don't know what your tax preparer fears with an audit. If you failed to pay taxes or file appropriate documents, you could be subject to some heavy-duty penalties. In addition, dissolving a company involves filing a number of documents, which may capture the attention of the tax authorities. You use the word "tax preparer" whether this person is a competent corporate accountant is another matter. |ret||ret||tab|

I would ask this person to find out exactly where I would be if I went forward and corrected all of the problems in an appropriate fashion. Oftentimes, this is the least-expensive way to go. From what little you've told me, it would seem to me that getting the problems appropriately solved would be the most desirable way to go.|ret||ret||tab|

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Dear Bruce: I own my own catering business with three full-time employees. My main income is from catering weddings, Christmas parties, company picnics, etc. With the current economy, business is really slow. I do most of these events at a local private club. They are charging me $250 a month for rent. They run the bar, charge $200 to rent the hall and keep all of the profits. Am I getting taken by having to pay rent, plus $1.50 per plate for all catering events? I have to pay even when no event has taken place for the month. P.R., Ohio|ret||ret||tab|

Dear P.R.: How much of the business comes through the private club? Whether you are being taken is very hard to determine without more detail. If you own the place, whether you had business, you would have to pay the mortgage. If you feel that you are being taken advantage, why not buy a place? I don't know what the liquor license situation is in your part of the world a variable that must be addressed. If you are generating enough business on your own, then owning your own place may be the way to go. On the other hand, if the club is providing the majority of the business, they are entitled to the earnings.|ret||ret||tab|

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Dear Bruce: I'm thinking about going into a service-oriented business with a friend who wants to set it up as an association. Is a regular partnership or corporation the better way to go? What are the liabilities, both professionally and personally? T.H., via e-mail|ret||ret||tab|

Dear T.H.: I don't know what an "association" means in this context. You will notice "P.A." after the names of many attorneys, dentists and other professionals, which stands for "professional association." Ordinarily, the three options available to individuals would be a trade style (registering a fictitious or trade name and doing business as individuals), which is not recommended; Sub Chapter S corporations (a general for-profit corporation that pays income tax on taxable income generated by the corporation.); or LLC, limited liability company, a hybrid between a partnership and a Sub Chapter S. |ret||ret||tab|

I prefer a Sub Chapter S corporation, but talk to your attorney about advantages that may apply to you under an LLC. While it could be argued that it's an unnecessary expense, everything that I have done in my business life has been separately incorporated. While the corporate shield is in no way complete, it certainly cannot harm you.|ret||ret||tab|

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Dear Bruce: I read the piece about the self-employed couple looking to refinance. I am a loan originator at a mortgage company. One of our niche products is our no-income-verification-stated loan. It helps people who do not want or cannot show income with W-2s/tax returns. It seems that I may be able to assist the couple in refinancing their home and give them very low payments. If you could forward their name and number on to me I will see what I can do for them. Lisa Margolis, Berwyn, Pa.|ret||ret||tab|

Dear Lisa: Thank you very much for your letter. I can't put you in touch with specific individuals but perhaps they will see this in the column. I think it should be noted that "no verification" mortgages may sometimes come at a slightly higher interest rate than the conventional mortgage. You will need to do your homework.|ret||ret||tab|

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Dear Bruce: I would like to find an honest, reliable, multilevel marketing company that won't cheat me or require thousands of dollars in start-up fees to work with at home. Any suggestions? F.W., via e-mail|ret||ret||tab|

Dear F.W.: I am not a fan of multilevel marketing, although there are some multilevel marketing operations that have done well over the years and have enjoyed a decent reputation. The mortality rate is generally quite high. The problem I see with multilevel marketing is that it constantly requires proselytizing, adding new people to your downline. If everybody does as they are requested to do, that is recruit like crazy, you will soon run out of a population. Of course, in theory it could happen, but never will. |ret||ret||tab|

Where I disagree with the multilevel marketing people is that the emphasis is on adding people for the downline rather than on selling the product or service. If the company requires that you sell a minimum amount of product before you are allowed to add to your downline, I would be far more comfortable.|ret||ret||tab|

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Dear Bruce: I'm 28 and want to start a business with my brother a mall kiosk with massage beds. There is very little overhead. We only need four part-time employees, kiosk space and the equipment, which costs about $28,000 per bed. Massages will be $5 for five minutes. At 40 people on each bed per day, 10 hours a day, seven days a week, we should gross $72,000 a year on each $28,000 bed. We've seen these businesses work. |ret||ret||tab|

My problem: I can't nail down the financing. We have about $20,000 available, plus my IRA. My credit is good, but my brother's is shaky. I've been told that if I had a home everything would be fine, but I don't. We've even tried leasing the machines, but we need substantial capital. Am I wasting my time chasing my tail? A.D., via e-mail|ret||ret||tab|

Dear A.D.: Your problem is common: No capital and a very iffy venture at best. I understand that you feel this is a solid venture, and it may well be. Banks are not in the business of loaning venture capital and, for a small enterprise of this kind, legitimate venture capitalists also have no interest. If you're going to get any financing, it's going to come from the manufacturer of the equipment. I don't know whether these beds are highly marked up to allow financing, etc. Otherwise, the money for these kinds of projects usually comes from family or someone who loves you.|ret||ret||tab|

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