Start-up Business — Options for Accounting and Financial Operations (Part 1)
There are 3 different options for managing your Start-Up venture’s accounting and financial operations, the Do-It-Yourself approach, outsourcing to a CFO/Accounting Firm, or hiring the employees directly. Each of these approaches has both positives and negatives and each may be the right fit for your Start-Up at different times of the growth cycle. This blog will address the first option: Do-it-Yourself approach.
The Do-It-Yourself (DIY) approach is where the entrepreneur will handle the accounting and financial operations themselves. There are many positive and negative aspects to this approach, so let’s address both aspects of this to help determine if this approach fits your current business needs.
Some of the positive aspects of the DIY approach are as follows:
- Low costs. Since the entrepreneur is providing the majority of the accounting and financial operations themselves there is little financial cost for doing so (ie. No need to hire any staff at a weekly or monthly cost).
- No staff training or oversight required of the entrepreneur. The burden of overseeing and managing employees will not exist if none are hired.
- Keeping overhead and staff to a minimum helps keep the start-up lean and flexible as the company starts out.
Some of the negative aspects to the DIY approach are as follows:
- Best use of the entrepreneur/owner’s time. Spending time managing the day to day cash management, bill paying, etc. can be very time consuming and take away from what the entrepreneur needs to be doing to grow the business effectively.
- Not having the expertise in managing financial operations can lead to missteps that could lead to stalling the company growth or even to its eventual failure.
When a new company is starting out the entrepreneur/owner can wear many hats and control many aspects of the company. They can keep the company lean during the early stages of development to better manage cash flows. In the early stages the cost savings by the DIY approach can outweigh the possible negative outcomes from doing so. In those instances it can make the most sense to take the DIY approach. It is recommended that you take this approach cautiously and continue to evaluate the need to move on to one of the other options (outsourcing or hiring employees.)
If you are a songwriter and are not yet affiliated with a Performing Rights Organization (PRO), it might be time to consider signing up. PROs, such as ASCAP and BMI, collect royalties on behalf of publishers and songwriters for the public performance of their music through a wide variety of sources. These sources include the performance of music on television, radio, live music venues, clubs, new media, restaurants and retail outlets, and just about anywhere else that you hear music being played in public. The PROs remove the burden from individual songwriters and publishers of having to issue licenses to and collect royalties from what would be an overwhelming number of sources.
In order to join a PRO, you must be able to verify that you have at least one work that you have written or co-written, that has either been released (physically or digitally as part of an EP, album or as a single download) or has been performed publicly in a venue that has a license with a PRO (i.e. a live music venue). That being said, if you are currently recording songs onto your computer at home and have no plans for a release or live performance, you do not need to affiliate with a PRO. Once your membership has been approved, you will be able to register all of your songs with the PRO in question on an ongoing basis.
Upon making the determination that it is time to affiliate, you need to consider which organization you wish to join. In the U.S., there are three PROs for composers/songwriters: ASCAP, BMI and SESAC. There are some differences in the way each operates. ASCAP was established by a composer, Victor Herbert, in 1914 and is member-operated as a not-for-profit organization. BMI, also a not-for-profit organization, was established in 1940 by the National Association of Broadcasters in order to provide a cheaper alternative - cheaper for the broadcasters that is - to ASCAP. SESAC, while far smaller in size than ASCAP or BMI, differ in that their membership approval process is more stringent than that of ASCAP and BMI. Furthermore, SESAC is a for-profit organization.
In terms of pay-outs, each organization keeps their royalty calculation methods a closely guarded secret, so it can be difficult to make a definitive determination on where you will be better off based on a forecast of what you might earn. However, there are some differences between the societies, based on the genre you operate in, which is something you should consider. For example, BMI has a strong presence in Nashville and endeavors to pay its country music songwriters the most competitive royalties in the industry. BMI also has a classic rock bonus based on radio play, while Top 40 songwriters at ASCAP who have smash hits might be eligible for significant bonus payments.
At Jess S. Morgan & Company, we act as on behalf of our clients in all of their dealings with their respective PRO. If you have any questions related to any of the issues discussed above, please feel free to contact us.
A private family foundation is a vehicle designed to allow families to achieve their philanthropic goals in a tax efficient manner.
A family foundation has an initial board of directors which typically includes the family patriarch and/or matriarch. Subsequent or additional board members usually consist of family members or close personal advisors that are familiar with the Founders’ goals and aspirations for the Foundation. When established, a private family foundation is funded with cash, appreciated securities, or other assets. The Foundation then reinvests these assets to fit the investment goals set forth by the board. It then uses the investment income and appreciated assets to make future donations or grants to charities approved by the Foundation Board.
There are several primary benefits to having family members on the board of the Foundation. Most clearly, it allows a high level of control for the Founder with the Foundation’s investment assets, and its charitable giving processes and decisions. A secondary but equally important benefit of the private family foundation, are its educational capabilities in serving as a training base for younger family members. It can teach invaluable lessons in charitable giving, handling money, choosing investments, articulating family values, and managing intra-family relations.
The tax benefits include income and estate tax benefits in one vehicle. All contributions to a private foundation provide immediate income tax deductions during the donors’ life. A private foundation will also provide estate tax benefits when receiving gifts at death. These gifts at death can include an IRA, a life insurance policy, or a charitable remainder trust, all of which pass onto the Foundation without incurring any estate tax.
The IRS imposes a tax of 2% per annum on the net investment income of the Foundation, which creates an excellent tax break when contributing appreciated assets that normally incur a 15% capital gains tax upon their sale. Additionally, the IRS requires that the Foundation distribute a minimum of 5% of its total assets every year.
Setting up private family foundations and administering them is complex. It is advised that both an experienced CPA and estate lawyer be consulted.
Earlier in the year I described what a family office is, namely an organization created for the purpose of supporting the financial needs of a specific family. Over the last months we have spoken with several wealthy families who have asked us if it would be more appropriate for them to form their own office or to rather become part of an existing family office that already has an established infrastructure to operate and administer family activities.
The answers to these questions are usually based on the size, type, complexity, activity, revenue of the assets, and sophistication of a particular family. Generally, the larger the overall asset size (usually in excess of $100mm), the more complex the investments, ( i.e. real estate & active businesses vs. more passive market investments) the more likely it would be that a family would opt to set up its own family office with many of the required professionals and associated costs ( i.e. accountants, investment professionals, real estate administrators and other experts capable of managing the specific assets of the family). Clearly, families with comparable asset and revenue profiles could combine efforts in an attempt to synergize and economize associated costs. But this can become a difficult endeavor because often privacy concerns come in to play. So the result is to go it alone or outsource some of the less specific activities to an outside organization such as an existing multi-family office or business management firm with an expertise in many of the areas needed.
Families with a less complex and smaller revenue generating asset base (i.e. under $100mm and more passive type investments), may want to focus on a multi-family office for their family office endeavors. This would include a family with very large but passive assets ( i.e. $250mm plus investment portfolio and/or concentrated positions) as well. Privacy concerns aside, this usually is the most efficient and convenient way to go because costs of formation, management and administration, etc. have already been spent. In this circumstance, the family desirous of a family office can consider becoming a member or even a client of an existing multi-family office. A multi-family office of course being a family office that handles the affairs of many or several families at once. The benefit is that established multi-family offices have the infrastructure, financial management experience, and often long serving professionals to handle the diverse needs of a family including sensitivities to privacy, discretion and intra-family issues.
Perhaps the best first initial step for an aspiring family office family is to discuss their family profile with professionals from an existing multi- family office or business management firm to explore what makes sense. The professionals at Jess S. Morgan & Co., Inc could certainly be one such first step.