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8 Ways To Avoid Tax Surprises In 2019

November 30, 2018 By wrlaw

2018 tax changes

The U.S. government quietly overhauled the tax code with the Tax Cuts and Job Act. They passed the law in 2017, and big changes apply to taxes for the 2018 tax year, the 2019 tax year and beyond. The tax changes are big, and most taxpayers are going to notice when they begin to prepare their 2018 taxes.

What are the U.S. tax changes in 2018?

The 2018 U.S. tax changes increase the standard deduction. At the same time, the changes reduce the things that people can claim as itemized deductions. The net effect is going to be that fewer people itemize their deductions and just take the standardized deduction instead. There are changes to withholdings and changes to the percentage rates of certain tax brackets.

How do I prepare for the 2018 tax changes?

With a little bit of advance planning, you can be ready for the 2018 tax changes. You may not realize how big the tax changes are until you begin to work on your 2018 taxes. If you don’t make adjustments, you might be in for a good – or bad – surprise come tax time. Of course, with some planning, you can avoid tax surprises in 2019. Here are 8 ways to avoid tax surprises in 2019:

1. Review your withholdings for 2018

The best way to avoid a surprise tax bill in 2018 is to review your withholdings. Your withholdings are the amount that your employer keeps from your pay and sends directly to the IRS. If your taxes are going up with the proposed changes, you want to make sure that you adjust your tax withholdings so that you’re taking out enough from each paycheck.

Of course, whether you need to increase your withholdings or you can rest easy depends on an estimate of your overall tax liability. Even with changes that drastically reduce things that you can deduct, many people are going to pay less in taxes overall than they did before. On the other hand, if you’re on the losing end of the changes, you might have to write Uncle Sam a check. A mid-year review of your withholdings can prevent you from having April 15, 2019 come with financial setbacks.

2. Stay on top of standardized deductions

The old tax code had both standardized deductions and personalized exemptions. Standardized deductions are the amount that taxpayers can deduct from their income. Exemptions are an amount of income for each person that’s exempt from taxes.

Under the new tax code, standardized deductions are up, and personal exemptions are out. The new tax code increases the standardized deduction to $12,000 for one person and $24,000 for a couple filing jointly. That’s a big increase over the prior standardized deductions. At the same time, personal exemptions are completely eliminated for everyone.

Fewer people qualify to itemize their deductions under the new tax code. If you’re going to make the jump from itemized deductions to standardized deductions, it’s helpful to know ahead of time so that you can go about your business accordingly. It’s also important to know what expenses are no longer deductible from income.

3. Cap on state and local taxes

If you don’t look twice, you may get a big surprise when you find out that the new tax code caps state and local taxes at $10,000. For families who pay property taxes, they may quickly reach the ceiling. Before, property taxes may have just been seen as par for the course, but now, there’s even more incentive to fight your property tax assessment and lower that local tax bill.

4. Elimination of unreimbursed employee expenses

Most people put at least some of their own money into their work even if they’re an employee. If you’re a teacher, you buy supplies. If you’re an office manager, you might pick up a ream of paper in an emergency. Under the old tax code, employees could deduct unreimbursed business expenses. In the new code, that’s no longer the case. If you pay significant amounts of your own income towards your job, now is the time to renegotiate reimbursements or a pay raise to cover the cost.

You may have a rough time paying the tax bill when you find that the new code doesn’t allow for employee expenses. Teachers may still deduct a limited amount for classroom expenses. In addition, business expenses are still deductible.

5. Make charitable changes

Americans are among the most generous people on earth. With the new tax changes, you may get more bang for your charitable buck by grouping your charitable donations into the same year. For example, you can make twice the deductions in 2019 and then give nothing in 2020. That way, you can take itemized deductions in one year instead of falling into the standardized deduction category two years in a row. The amount of income that you can deduct for charitable contributions increases under the new tax code.

6. Make charity pay with IRA giving

One way to avoid the sting of the new tax code is to give to charity from your IRA. Giving contributions directly from the IRA to the charity lets you avoid counting the IRA withdrawal as income only to take a standardized deduction that doesn’t account for your charitable gift.

7. Your home is no longer an office

People work at home these days more than ever before. Unfortunately, if you’re an employee, you can no longer claim a deduction for your home office. If you’re self-employed, the home office is still a deduction. For everyone else, home is only home from now on.

8. Child tax credits are going to increase

The child tax credits are better for everyone under the new plan. The credits are higher, the maximum income to qualify is higher and even the definition of who is a qualifying child has expanded. The good thing about the child tax credit is that it’s a direct deduction from your tax liability and not a deduction from your taxable income. It’s a straight credit of the dollars you owe in taxes. Under the new tax code, $1,400 of the child tax credit is refundable, so it can even put dollars in your pocket.

Planning to avoid tax surprises in 2018

Paying taxes is never fun. There are a lot of changes in 2018 and again in 2019. The right planning can help you avoid surprises and use the new tax code to your advantage. The professionals at Wilson Ratledge can help examine your case in order to structure your personal and business taxes in the best way possible.

What Is A S Corporation And How Can It Help My Business?

November 16, 2018 By wrlaw

business entity choice

If you’re a business owner or you’re thinking of starting a business, the type of business entity that you choose has a big impact on what you do. Choosing a legal entity for your business can impact everything from who can own the business to how you pay taxes. The success of your business can ride on choosing the right structure. Make the right choice, and you can maximize your profits and grow your company.

Whether your business is large or small, the type of structure you choose matters. There’s no right answer based on size, either. Even small businesses have a number of structure options that might be right for them based on the circumstances.

One of the types of business entities that you might choose is an S corporation. An S corporation is a type of corporation that has some special tax considerations that may be beneficial in some circumstances. But what is an S corporation?

What is a S corporation?

An S corporation is a type of business entity. An S corporation is a unique business structure that operates a lot like other corporations only with some special tax advantages. The most distinguishing trait of an S corporation is that profits pass directly to owners before taxes. Owners might choose to have an S corporation in order to enjoy the corporate structure of a traditional corporation along with the tax benefits that come with S-corporation status.

S corporations have been law since 1958. They’re legally considered a corporation with federal income tax that’s a lot like a partnership. There’s only one class of stock in a S corporation. All outstanding shares of stock have equal ownership interests and rights, and shares of stock may be voting or non-voting shares. Profits and losses are distributed in proportion to shares.

Is a S corporation a corporation?

Yes, an S corporation is a corporation. It’s just a special subtype of a corporation that gets some special considerations. An S corporation comes with all of the corporate structure that you expect from a corporation like articles of incorporation. Not all corporations are S corporations, but all S corporations are corporations.

How do I start a S corporation?

To start an S corporation, you must file paperwork with the Corporations Division of the North Carolina Department of the Secretary of State. You must pay the state filing fee and file Form 2553 with the Internal Revenue Service. All corporations need Articles of Incorporation that explain how the company is going to be structured.

What makes a S corporation unique?

An S corporation gives you the benefits of a corporation in terms of corporate structure, but it gives you the benefits of a limited liability partnership or a partnership when it comes to taxes. Unlike other corporations, an S corporation doesn’t have double taxation. That is, the corporation itself doesn’t pay taxes. Instead, the owners of an S corporation pay taxes on the profits the business makes.

An S corporation is beneficial in that owners can take advantage of the things that help corporations succeed while they also maximize profits to owners by avoiding the double taxation that happens with traditional corporations. Shareholders must report income on their individualized tax returns through a Schedule K-1. The income is taxed at each shareholder’s personal tax rate.

You might be thinking that S corporations sound great and that everyone should incorporate as an S corporation in order to save on taxes. It’s not always that easy. In order to incorporate as an S corporation, the business must qualify.

An S corporation is governed by the laws of the state where it’s organized. Generally, an S corporation may have only a limited number of shareholders. The number can be quite high, with as many as 100 shareholders allowed in an S corporation. No non-resident aliens may be shareholders, and other corporations and partnerships are ineligible to be shareholders.

An s corporation may own a subsidiary s corporation. Trust and estates may also own shares of a S corporation. Non-profit organizations organized under IRS code 501(C)(3) qualify to own shares in a S corporation. Spouses are treated as a single shareholder.

What are the benefits of a S corporation?

The primary benefit of an S corporation is that unlike general corporations, business profit isn’t taxed before it’s passed onto shareholders. In that respect, an S corporation is a lot like a partnership. However, S corporations also have the added benefit of a corporate structure.

Corporate structure allows the corporation to continue to operate without much interruption when owners come and go. In addition, articles of incorporation provide structure or how the business operates. A S corporation continues in perpetuity until the corporation’s representatives actively take steps to end it.

Where do laws for S corporations come from?

Laws for S corporations come from both state and federal law. IRS laws determine how an S corporation pays federal income taxes or how they’re exempt from income taxes. Federal law also decides what form you have to file and in what time frame to file in order to have special status. Federal S corporation regulations come from Internal Revenue Code sections 1361-1379. The state the corporation is in also makes the laws for how to file the corporate entity and how to comply with periodic reporting requirements.

A S corporation shareholder must pay themselves a reasonable salary

At first glance, it might seem like the best plan to keep taxes low is to avoid paying salaries to any shareholders who work for the S corporation. North Carolina law requires the corporation to pay the shareholders who work for the company a salary that’s reasonable. States and the IRS may even put extra scrutiny on S corporations in order to ensure that they don’t try to skirt employee taxation laws by avoiding salary payments to working shareholders.

Should I file as a S corporation?

A S corporation may be the right legal entity whether your business is large or small. It’s not the right entity in all situations, but the tax benefits can be lucrative if you qualify to operate as an S corporation. If you’re considering choosing the S corporation status, other business entities that are worth considering may be a general corporation or “C corporation,” a limited liability company and a partnership.

Because the business structure that you choose may ultimately have a big impact on your profits, your business operations and what you must do to operate lawfully, it’s important to weigh your options carefully when you begin a business venture. Wilson Ratledge can help you explore your options and decide which business entity is right for you.

Protecting Your Wishes With A Living Will

November 4, 2018 By wrlaw

Planning for the future is important for everyone. While you might know that it’s important to make a last will and testament, you may not know how important it is to also write down your wishes for medical treatment. You can create a legally binding document that details what medical care you want in the event that you’re unable to communicate your wishes. Making a living will keeps you in control. Here’s what you need to know about protecting your wishes with a living will:

How do I go about protecting my wishes with a living will?

A document that details what you want to happen with your medical care if you can’t take care of yourself is called a living will. Even though it’s called a will, it has to do with your wishes while you’re living. A living will writes down what medical care you’re okay with in the event that you’re unable to communicate your wishes. Generally, it states whether you want life-saving efforts like CPR and hydration or you don’t want those efforts. With a living will, you can decide what medical care you want ahead of time so that you can have your wishes followed if you’re incapacitated.

What are the rules for a living will?

Your living will has whatever rules you want to have. Your living will can state that you want all life-saving efforts, or it can state that you don’t want life-saving efforts. It’s up to you what you put in your living will. You can make your living will as general or specific as you’re looking for.

When you make a living will in North Carolina, you need to comply with a few things to make it effective under the law. Once you comply with North Carolina’s rules to make a living will, what you put in it is up to you. A living will makes it clear what you want to happen with your medical care, so you get to decide what you put in it.

How do you make a living will?

To make a living will, you list out how you want your medical care to go in the event that you’re unable to speak for yourself. You can decide what to include, but there are some things that you usually talk about like CPR and life-sustaining hydration. For your living will to be effective, you must follow the rules in your state. When you write out the medical care you want in a way that’s legally effective under the rules of your state, you create a living will.

What do I need to do to make an effective living will in North Carolina?

To make your living will effective in North Carolina, it must be signed by two witnesses and notarized. You must make sure that the witnesses aren’t related to you. The witnesses can’t be people that get paid for your medical care. It’s important to make sure that you talk about all of the important things in your living will in order to make sure that it has the effect that you’re looking for.

Is an advance directive different than a will in North Carolina?

An advance directive in North Carolina is the same as living will. An advance directive is what it sounds like: it writes out your wishes ahead of time. When you’re incapacitated and unable to speak for yourself, it determines what health care you’re going to receive according to your wishes. Essentially, advance directives and living wills are the same in North Carolina.

What is a patient advocate in a living will?

In a living will, you can name someone as your patient advocate. That’s the person who makes choices about your medical care. Their ability to make decisions for you begins when you’re unable to make decisions for yourself. You can tell your patient advocate they can override your written wishes, or you can make them follow the wishes that you set out. You may want to let your patient advocate make a different decision in case unforeseen circumstances arise, or you may want to make sure that everyone honors your wishes no matter what. In any event, the patient advocate is a person who speaks and acts on your behalf according to your wishes when you’re unable to communicate what you want to happen.

Who do I choose for my patient advocate as part of my living will?

For your patient advocate, you can choose anyone who wants the job. Most people choose a family member, but you can choose anyone you like. Be sure to choose someone that you trust, and talk to them about your wishes when you create your living will.

Why do I need a living will?

You need a living will in order to make sure that your wishes are honored when you’re unable to speak for yourself. Without a living will, someone else makes the decisions for you. A living will lets you stay in control and live the life that you choose. A living will can be flexible, and it gives you choices as you and your loved ones face difficult decisions.

What are some things that you should include in a living will?

In a living will you should talk about the major decisions that your loved ones may have to make for your care. Whether or not you want CPR is a good thing to talk about. Whether or not you want life-sustaining hydration and nutrition are also important directives. You should also say whether you want to be an organ donor. Your attorney can help you make sure that you address all of the important points when you make your living will.

Are there any times where a living will isn’t applicable?

There are times where a living will isn’t applicable. A living will applies when a person has health problems that are likely to bring death. In an emergency, a living will doesn’t apply. Emergency medical professionals have to give life-sustaining treatment like CPR. Usually, in cases of illness, a living will applies to carry out your wishes. In some emergency cases, health-care professionals must provide emergency treatment.

Protecting your interests with a living will

A living will works to honor your wishes. By creating a living will, you can have the peace of mind to know that your wishes are going to be honored if you’re unable to advocate for yourself. Our estate planning attorneys can help you create your living will in North Carolina, and can help you make sure that you prepare an effective living will that talks about all of the things that are most important to you.

How A Special Needs Trust Can Help Your Family

October 26, 2018 By wrlaw

Families with special needs members have more options today than ever before. As caretakers age and special needs family members reach adulthood, it’s critical to plan for the well being of all family members. Fortunately, you have many options at your disposal.

Your loved one with special needs may qualify for important government benefits. While it’s important to set funds aside for your loved one’s care, it’s also important to structure the funds in a way that your loved one doesn’t lose eligibility for government benefits.

U.S. and North Carolina law allow you to do just that. If you have a special needs family member, you can create a special needs trust that can help your loved one get the help that they need while they remain eligible for government assistance programs. Here’s how a special needs trust can help your family:

What is a special needs trust?

A special needs trust is when you set property aside in a separate legal entity. One person manages the assets in the trust for someone else’s benefit. The funds are the property of the trust, and the trustee uses them for the good of the beneficiary. The person who manages the assets in the trust is called the trustee. The person who receives distributions of property from the trust is called the beneficiary.

In the case of a special needs trust, the trust exists to help someone who lacks the ability to manage their own finances. Because of a physical or mental disability, the beneficiary needs help providing for their basic needs and managing their finances. A special needs trust is the primary way that families arrange finances to care for someone who is unable to care for themselves.

What can a special needs trust cover?

You can tailor a special needs trust to meet the needs of the beneficiary. The trust can provide for the needs of daily living, or it can provide for supplemental care like vacations, education, vocational training, recreation and more. You may create the trust to be very generic or specific depending on the needs of your loved one.

How do you structure a special needs trust to keep the beneficiary eligible for government benefits?

One of the primary purposes of a special needs trust is to ensure that your loved one remains eligible for government assistance. When you have a loved one who has special needs, there’s a good chance that they qualify for government assistance programs like Medicaid, housing or cash benefits. Medicaid can be a welcome relief for a person who may have unique and extensive medical care needs. When you set up your trust, you want to make sure that the trust doesn’t impact their eligibility for benefits.

If a person receives assets directly in their name, these assets count against them when the government determines eligibility for assistance programs. The government requires them to spend their own funds first before they’re eligible for public help. By placing the funds in a separate trust with a separate legal entity, the funds are not the property of the beneficiary. They don’t count against the beneficiary when the government looks at their assets in order to determine eligibility for assistance programs. A special needs trust is an important way that families can make sure that what they set aside for their loved ones truly goes to help their loved one and enhance their quality of life.

As you prepare the special needs trust, it’s important to pay attention to the language that you use. The trust should state that it provides supplemental care beyond what government resources already provide. You should state that the trust is not intended to provide basic support. Your trust should reference relevant portions of U.S. law that are required to protect government benefits and make your intentions clear.

What if I don’t think my loved one needs government benefits?

Even if you don’t think that your loved one needs government benefits, you never know what might happen in the future. It’s likely a good idea to structure the trust in a way that leaves the door open if they need government help in the future. Special needs trusts are an important and common wealth-management tool for people of all economic groups. An experienced special needs trust attorney can help you examine your situation to determine the best path for your family.

Who can serve as trustee of a special needs trust?

Family members can serve as trustees, or you can work with a professional third party to manage the trust. There are pros and cons to each choice. A special needs trust is often a labor-intensive asset to manage. Family members may quickly tire of all of the work involved in managing the trust. On the other hand, a professional third party may charge fees for their services that can quickly add up.

There may be restrictions on who can serve as a trustee depending on who stands to receive the trust’s funds when the beneficiary dies. If the trustees are the beneficiaries, it might create a conflict of interest. In addition to these options, you might join a pooled trust where you join with other families to pool your resources under one management company. If you use a pooled trust, you still have your separate account, but you share management expenses and fees.

Can the beneficiary fund the trust with their own property?

If the beneficiary plans to fund the trust with their own property, there are a few special things to be aware of. Yes, it’s possible for the beneficiary to fund the trust with their own resources. In most cases, a self-funded trust must provide for reimbursing the government for Medicaid expenditures when the beneficiary dies.

When the beneficiary dies, the remaining trust property goes to the government to reimburse them for their medical expenditures through Medicaid coverage. In addition to the Medicaid reimbursement requirement, a self-settled trust is only an option when the beneficiary is disabled under the government definition of disabled.

How long does a special needs trust last?

A special needs trust typically lasts until the beneficiary dies or the funds run out. You can arrange for additional transfers of property to the trust in a way that doesn’t hurt your loved one’s eligibility for government benefits.

You can structure the trust to provide whatever your loved one might need including vocational training, recreation and vacations, communication equipment, accountants, attorneys and animal service. An experienced estate planning attorney can help you create a trust that meets your loved one’s needs and gives you the peace of mind to know that your loved one is cared for in the years to come.

10 Things To Know When Starting A New Business

October 12, 2018 By wrlaw

Congratulations on thinking about going into business. Having an idea or a dream for a business is the first step. To get your business off and running on the right foot, there are a lot of things to think about. You may be overwhelmed by everything there is to do, or you may be wondering what you don’t know. Here are 10 things to know about how to start a business venture from our North Carolina business attorneys:

How do I start a business in North Carolina?

To start a business in North Carolina, you need to choose a business name. You decide on a business entity, and you register your business. You might register your business in your county, or you may register your business with the North Carolina Secretary of State. Once the Secretary of State approves your filing, you’re in business. Be sure to comply with tax laws, employment regulations, workers compensation and other regulations as you operate your business.

1. Choosing a business entity for your business

Not all businesses are created equal. The type of business that you choose determines how your business operates, how you pay taxes and whether you’re personally liable for the debts of the business. If your business is a sole proprietorship or a general partnership, you’re personally liable for the debts of the business.

If you start an LLC, your liability is more limited. You may also want to start a corporation or a non-profit. It’s important to consider the taxes, management structures, risks and potential benefits for each business entity in order to choose the structure that’s best for you.

In North Carolina, the filing requirements depend on your type of business. If you start a sole proprietorship or general partnership, you file with your county. For other business entities, you file with the North Carolina Secretary of State. In North Carolina, there are lots of business entities to choose from. You should carefully consider which type of business structure meets your needs.

2. How to choose a name for your business

Every great business needs a great name. When you register your business, you must be sure to avoid a name that’s already in use by another business. Just like your business has legal protections, other businesses have protections, too. Be sure to choose a name that’s available in order to avoid complaints from other businesses.

3. How to minimize risks as an employer

If you’re going to hire employees, there are a few special things that you need to do. You must comply with federal and state employment laws. There are laws that prohibit discrimination. You must follow wage and hour laws. Health and safety laws are also important when you have employees. If you have three or more employees, you need to purchase worker’s compensation insurance.

Beyond regulations, it’s important to think about what your business can do to minimize risks. You may be wise to implement training programs for employees. It may be a good idea to adopt official policies and a corporate handbook. Following official employment laws and identifying other ways that you can be a good employer can help you avoid problems before you hire your first employee.

4. How to protect your intellectual property in business

When you go into business, there’s a good chance that you’re going to have some ideas, designs and other works that you need to protect. Even your business name or logo may be worthy of a trademark. If you have an invention, you may need a patent. If you make creative works, you may need to brush up on copyright enforcement laws. Protecting your intellectual property is key to your business success. Learning about the types of intellectual property that may impact your business can help you protect the assets that can make your business thrive.

5. What kinds of contracts do you need to run a business?

Most businesses rely on contracts. You might have contracts with suppliers. You may have contracts with purchasers. You’ll also need insurance contracts that may include worker’s compensation.

In business, disputes are inevitable. A contract may not seem important until you have a disagreement. Determining when you need to use contracts in business and what they need to say can help you start your business on the right foot.

6. What government laws and regulations do I need to follow?

There are federal, state and local laws that apply to your business. You may need permits or a license for your particular business venture. Knowing the laws and regulations that you must follow is critical to avoiding bumps in the road. Identifying the laws that apply to your business can be a big task. An experienced attorney can help you determine what you need to do in order to stay on top of laws and regulations that apply to your business venture.

7. How do I raise capital for my business?

When you start a business, you must think through the finances related with running the business. You must determine how you’re going to get funding. Is your funding going to come from personal sources, are you going to take out a loan or are you going to find investors? How much do you need to make in order to break even? Thinking through the finances involved in starting and operating your business can help you make sure that you take the best steps to help your business grow.

8. How do I pay taxes for my business?

Your business must pay taxes. If you sell anything, you need to register to pay North Carolina sales tax. Employers must pay unemployment and employee withholding taxes. When you start a business, it’s important to understand what taxes you need to pay and how you’re going to pay them.

9. What else do I need to know?

When you’re in business, it can be hard to know what you don’t know. An experienced North Carolina business attorney can help you identify things that may create trouble for your business. A business lawyer can help you both avoid problems before they start and react if unexpected issues arise during your business venture.

10. What do I need to do once I’m in business?

Even once you’re in business, there’s important work to do. You need to file an annual report with the North Carolina Secretary of State. You need to pay all of your taxes. It’s important to continuously asses areas where your business may need to make changes in order to thrive. The team at Wilson Ratledge can help you start your business in the best way possible and identify ways to help your business thrive. Fill out our online form or call us today to schedule a consultation about how to get your new venture started off on the right foot.

What Are The Most Commonly Used Business Valuation Methods?

September 28, 2018 By wrlaw

Selling your business is a serious undertaking. You need to agree on terms of the sale. You also need to agree on a selling price.

When you’re ready to sell your business, you might immediately wonder what your business is worth. There are several ways to value a business. It’s important to understand the most commonly used business valuation methods so that you can choose the right one for your business.

Choosing a valuation method for your business

Valuing a business is an art. It’s not a science. Business valuation methods vary based on the type and size of the business. There are several different methods, and they can produce wildly different results.

Ultimately, your goal is to agree on a purchase price with a potential buyer. When you settle on a business valuation method, it’s important to be able to justify your choice. Here are the most commonly used business valuation methods:

Business Valuation Method – 1. Profit Multiplier

The profit multiplier is a business valuation method that looks at the profits that a company makes over a period of time. First, you determine the company’s profit or their gross income minus expenses. Once you arrive at an annual profit, you multiply that amount by a multiplier that you determine. The result is the value of the business.

For example, say a business has an annual gross income of $500,000 per year. They have $350,000 in total expenses including supplies, rent, employee salaries and more. They make $150,000 each year in profit. To value the business, the owner applies a multiplier of 3. The total value of the business using the profit multiplier method in this example is $450,000.

How do you choose a multiplier for your business valuation?

A critical question in the profit multiplier valuation method is settling on a multiplier for your case. Multipliers can range from two to 12. Because there’s a big range for possible multipliers, the multiplier that you choose can make a big difference when it comes to the value of the business.

A small business might use a multiplier between three and five. A large, public company typically uses a multiplier between seven and 12. The reason for the difference is that a large, publicly-traded company likely has more growth potential than a small business. The profit multiplier method assumes that the business is going to continue to make the same profit in future years.

Considerations for the profit multiplier valuation method and a small business

When you apply the profit multiplier valuation method to a small business, there are some special considerations to keep in mind. A small business might operate out of the owner’s home. That can help the business save on rent. If the cost of rent isn’t factored into the business valuation, the value of the business can be too high using the profit multiplier method.

Similarly, a small business owner might not take a salary. If someone buys the business, they may have to pay an employee to do the work that the owner used to do. To create an accurate valuation estimation, it’s important to account for a salary for the owner. An accurate profit multiplier valuation has to consider and account for unique circumstances that may be present in a small, closely-held company.

Business Valuation Method – 2. Comparables

Another way to value a business is by looking at sales of comparable businesses. To use the comparables method for selling a business, you find similar businesses that sold recently. You compare their selling prices in order to determine the value of your business.

There are both pros and cons to using the comparables method. The comparables method has merit in that it looks at actual sales of real businesses whereas other valuation methods may be purely speculative. However, the comparables method is based on similar businesses, but no business can be exactly like the one that’s being valued for a sale. Even differences that seem small like location or assets can make a big difference when it comes to placing an accurate value on a business. In addition, there may not be enough examples available to use effectively, as most small business acquisitions do not have publicly disclosed terms. The comparables method may result in comparing dissimilar businesses, but it’s based on real sales rather than estimations.

Business Valuation Method – 3. Discounted Cash Flow

The discounted cash flow method of valuing a business projects future cash flow and discounts it to current-day values. The discounted cash flow method is similar to the profit multiplier method, but it reduces the total amount to present-day value in order to account for inflation. To use the discounted cash flow valuation method, you estimate cash revenues and deduct expenses. Once you determine your profit margin cash flow, you apply the appropriate multiplier. Finally, you reduce the amount to a present-day value. The result is the estimated value of the business.

Business Valuation Method – 4. Asset Valuation

Another method to determine the value of a business is the asset valuation method. Unlike other methods that focus on incomes and profits, the asset valuation method looks at all of the physical assets of a business. A business might have real property, fixtures, machinery, electronics and other tangible assets. All the assets are included in the asset total for the business. Then, you deduct debts from the value of the business. The total market value of your assets minus debts is the value of the business.

The asset valuation method must address depreciation. An object loses value over time. It’s impractical to appraise an item with the amount the company paid to purchase it. You need to rely on appraisals in order to determine the current value of an item. The asset valuation method is the most practical when a business has a large number of physical assets. Even though a business may not have many assets, they might have a large client base. It’s important to consider the type of business that you have when you decide what valuation method to choose and what adjustments to make.

Business valuation must be reasonable based on the true circumstances

When you’re selling your business, you want the selling price to be as high as possible. It’s important to work carefully and thoroughly when you perform a business valuation. You must be able to justify your methods to the person that you want to buy the business. You might use only one business valuation method, or you might use multiple methods. Ultimately, an accurate business valuation can help you find a willing buyer and determine the right sale price.