June 10th, 2010

Understanding financial statements


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This article deals with the financial statements, the last of the three primary financial statements that all public companies must be in the SEC. In the first article we discussed the profit and loss account and the second article looked at the budget.

The purpose of these financial statements. The financial statement has two main purposes. One tells the investor how much money flowed into or out of the economy in the long term, usually a year or three monthsQuarter. Second, balance the two other financial statements – income statement and balance sheet. reconciled to the profit and loss account, which deserves the accounting principles with the actual cold hard cash business. For the balance sheet, cash flow statement shows the differences in the amount of assets or liabilities from the previous reporting period.

A major difference between the financial statement and brother, is that there are no assumptions or accountingEstimates of the financial statements. The income statement includes many things like accounting for depreciation and taxes. Similarly, the budget estimates the value of assets acquired (goodwill) and intangible assets such as patents or trademarks. The figures of the financial statements are very real – that is the exact * amount of cash into and out of business. Since the creation of liquidity is the basic function of any business, good cash flowsearned the reputation of value for investors the most important of the three reports.

Financial statements are divided into three sections. The first, the cash flow from operating activities is the most important. This is the section of net profit and losses reconciled and adds back non-cash expenses, as well as accounting for the change in working conditions, activities such as inventory, and so on. The second is flow from investing activities, where the company lists items such as capitalExpenditure, acquisitions and the purchase / sale of equity shares or bonds. The third, cash flow from financing activities is where the payment of dividends, share buybacks, cash received from loans and repayments are listed.

We continue to be in Intel (INTC) fiscal year 2007 cash flow statement look, and then briefly explain each item. All figures are in millions of U.S. dollars, and parentheses assume negative values (in cash). To keep this somewhat 'short, someItems were grouped.

Net income: 6976
Depreciation: 4,546
Share Based Compensation: 952
Asset Impairment: 564
Tax benefits from share-based payments: (118)
Amortization of intangible assets: 252
Gains from equity investments (157)
Gains on the sale: (21)
Deferred tax: (443)
Changes in Assets and Liabilities of work: 74
Net cash flows from operating activities: 12,625
Additions to property, plant and equipment (capital expenditures):(5000)
Acquisitions, net of cash acquired funds: (76)
Purchases of available for sale investments (11,728)
Maturities and sales of investments available for sale: 8011
Investments in stocks of liquid: (1459)
Net revenues from sales: 32
Other investing activities: 294
Net cash from investing activities: (9926)
Decrease in current liabilities: (39)
Proceeds from government grants: 160
Excess tax benefits from share-based payments:118
Additions to Long-term liabilities: 125
Proceeds from the sale of shares to employees: 3,052
Purchase and withdrawal of ordinary shares (2788)
Payment of dividends (2618)
1990, net cash flow from financing activities: ()
Net change in holdings: 709
Free Cash Flow: 8079
Payout ratio: 32.4%
Free cash flow margin: 21.1%
Free cash earnings ratio: 181%

A brief explanation of each item:

Net income. The line net income fromProfit and loss account. Cash is reconciled against this starting point.

Depreciation. Depreciation in income not affecting cash. For a personal example, think of the depreciation of the value of your car each year. Even if your net worth decreases, reducing the amount you could sell this car, has no impact on its liquidity.

Share Based Compensation. Tech as Intel often reward your employees, giving them stock or sharesOptions. The final estimated value of this should be credited to the income statement as an expense, but the problem is or options do not require payment in cash, the amount as an expense is taken up again here.

Impairment of assets. The value of assets in the balance sheet are in most cases estimated. Intel decided that accounting was due to weak demand, the value of some assets is less than that made in the budget. The resulting impairment affects the balance sheet value, but no effect on cashThe industry, which is shown here. This item also includes one-off costs that have been detected in the current period as expenses including but not yet paid in cash.

Tax benefits based on compensation. When employees exercise their option rights, the amount of profit you can get the written account of Intel's tax, as compensation, an employee of the deductible. The financial statements, this value will be deducted from operating cash and added cash from investmentsReclassification exercise.

Amortization of intangible assets. Similar to depreciation or devaluation of assets, Intel has a timetable to reduce the carrying value of certain intangible assets for a period of time. While these effects on the budget and is counted as an expense in the income statement, this has no impact on cash and was here again.

Gains from investments. As mentioned in this article in the balance, Intel Capital holds positionsFew companies work, especially with VMware (VMW) and Micron (MU). How portfolio, unrealized gains and losses affect your personal value, but not in cash. Therefore gain recorded in the income statement is here again deducted.

Deferred tax. As indicated in the budget post, deferred tax assets is over or underestimated the payment of the tax forward. This is also a book value accounting, but only for the pursuit of sales tax, the variations are strictly ITfor accounting purposes and not for cash.

Changes in work activities and liabilities. Intel claims, inventory, accounts payable and other working capital vary, of course, on a daily basis. Two things to consider here are increasing demands (Intel is not able to collect cash payments in respect thereof), and inventory increased as a percentage of sales. These are the weakness of Intel's customer base and the inventory is always an important concern,high-tech products worth degrade very quickly. Over time, this position should determine the break-even over. Here consistently negative values indicate poor management of collection and demand forecasts.

Net cash flows from operating activities. The sum of all the positions above. This is the amount of money won on time Intel reported, one of the most important pieces of information available.

Additions to plant and equipment (capital expenditures). EachThe company's products is the purchase for the business travelers that are useful over a year as "capital expenditure". These are not recorded in the income statement as an expense, but goes gradually through depreciation. For Intel, these things like the new chip-equipment, office furniture, computers and so on.

Acquisitions, net of cash acquired funds. This is Intel spent the money to buy other companies.

Purchases of investments available for sale. "Intel CashPut in the equity purchase and / or bonds, for the ability to gain a higher return. "Available for sale", these are usually carried out on the open market.

Maturities and sales of available for sale investments. "The opposite of above. Income from investments and / or bonds that have matured or sold during the period.

Investments in liquid stocks. Cash spent a considerable wealth of companies that has been made out. In this particular case, Intel1500000000 invested some $ for a stake in the joint venture, IM Flash Technologies.

Net income from disposals. Proceeds from the sale of various assets and businesses the company no longer strategic. Looking at the 10-K, contains this Optical Networking Components Group, the media and business reporting, and some others.

Other investments. The catch-all for products that do not conform to invest anywhere else. These consist of a series of productsspread over 10-K, which are not listed here.

Flow from investing activities. All products are based Net investing (here the previous 7), he added.

Decrease in current liabilities. Intel cash to pay some of its balances short-term debt.

Proceeds from government grants. It is much closer than the 10-K. Presumably, Intel will receive a nominal amount of money from some government agency.

Excess tax benefits from share-Payments. View similar entry in the section of operating cash.

Additions to long-term liabilities. Bonds cash from the sale of the company.

Proceeds from the sale of shares to dipendenti.-Tech most companies, and many other companies also have programs for employee stock program, employees can buy discounted price of capital. The amount of the cash-Intel employee, the company paid for these actions will be recorded here.

Purchase and retirement of commonPlan. The amount spent on the acquisition and Intel to rest his own shares.

The payment of dividends. Exactly what he – it seems the cash dividends to shareholders in the form of.

Net cash flows from financing activities. All the basic elements of funding (hence the previous 7), he added.

Change in cash installments. Calculated as (net cash from operating activities + cash flow from investing activities + cash flow from financing activities). This is the amount of cash added or subtractedIntel's budget package in time. In this case, Intel is the cash balance increased by $ 709,000,000 dollars in the year.

Free Cash Flow. Free cash flow can be calculated in two ways. Classically, it (is the net cash flow from assets + depreciation – investment). MagicDiligence and Joel Greenblatt in the little book that beats the market, calculated as (net cash flow from assets – depreciation). Free cash flow is to invest the money for the company,Growth or the repayment to shareholders through share buybacks or dividend payments. MagicDiligence amortization, as it is a more accurate picture of the maintenance costs "of capital. The traditional calculation includes capital expenditure for growth can be used (eg purchase of new buildings or buildings), which unduly distorted the calculation of free cash flow for companies in rapid growth.

Payout ratio. Calculate how (dividends / free cash flow). This percentage indicatesSee how the free cash flow is currently being paid in dividends. A high percentage (more than 60-70%) could be an unsustainable dividend.

Free cash flow margin calculations. Like (Free cash flow / sales). This is the amount of each dollar of revenue, which is converted in free cash flow. The higher the better here. Find at least 5%. Intel 21% the number very high, is a further indication of the quality of the nature of society.

Free cash earnings report.How to Calculate (free cash flow / net income). A big red flag, if this is always less than 100%. We will discuss this further, the red / green flag articles.

We now have a working explanation of all three financial statements that all public report with the SEC. Subsequently, 10 red flags to look for when examining these statements look for.

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June 9th, 2010

Business Bookkeeping Blunders & Accounting Errors

As tax season approaches, many small business accountants, CPAs and bookkeepers find their anxiety levels increasing.

In only a few short weeks, these accountants know they’ll see silly bookkeeping errors in many of their small business clients’ books–errors that have meant the business owners have paid too little or too much in taxes. Errors that mean the business owner hasn’t really been able to effectively manage the finances of the business.

Fortunately, these common bookkeeping blunders are easy enough to fix–if you know what they are and if you know the simple steps you can take to avoid making them.

Bookkeeping Blunder #1: Pretending No Accounting System is Needed

The first–and perhaps most serious blunder–is especially common with new business owners. The neophyte business owner sometimes pretends he or she can make do without a real accounting system.

In place of a real bookkeeping system–something like Microsoft Small Business Accounting or Intuit’s QuickBooks–the business owner simply collects receipts in a box or keeps a check register by hand. Or maybe the business creates the illusion of an accounting system by using something like Microsoft Excel to, at least, add up some of the numbers.

Unfortunately, the “no accounting system” doesn’t work. Before you have your tax return prepared, someone (perhaps your tax preparer) will need to cobble together some sort of makeshift system. And that’s too bad, really. Such a system will allow your tax return to be prepared. But such a system almost surely won’t capture all your tax deductions. And the information that this crude “system” provides will be too late to help you better run your business.

Bookkeeping Blunder #2: Slow Entry of Accounting Data

Another common blunder? Taking too long to enter the accounting data into your system. Which is surprising, in a way…

You would think that people who’ve gone to the modest effort and expense of having a real accounting system set up would keep the system up to date. But often they don’t.

The problem with pokey data entry is that any useful insights that come from your accounting system, come too late.

Whoever is doing your accounting should keep up to date on the data entry. Within a few days of some transaction actually occurring, the accounting system should reflect the activity.

Bookkeeping Blunder #3: Skipping Account Reality Checks

An important yet simple point: Of course people make errors in using their accounting systems. But the nature of double-entry bookkeeping means that it’s usually relatively easy to catch errors. How? You need to reconcile your bank accounts at the end of each month when the bank statement arrives.

Furthermore, if you hold other valuable assets like inventory or investments, periodically you should compare what the accounting system says to an actual physical count or statements from an external source.

Regularly performing reality checks on key accounts (especially cash) cleans up all sort of easy-to-miss errors.

Bookkeeping Blunder #4: Financial Complexity Beyond Bookkeeping Skill Levels

One common bookkeeping blunder makes for awkward conversations between accountants and their small business clients. But you deserve to know what the blunder is…

Unfortunately, accountants regularly encounter business clients with finances that are too complex for their bookkeepers. And that’s a huge problem. If the business gets too complicated for the in-house bookkeeper (often the owner’s spouse), the accounting system slowly becomes more and more unreliable. And this accounting unreliability usually means the business will shortly get into big trouble. (How can someone successfully manage a business if they don’t know when they’re making or losing money or how much cash they have in the bank?)

By the way, you’ll easily be able to determine if the accountant or bookkeeper is overwhelmed. She will be falling further and further behind on the data entry. She will be producing reports that make less and less sense. And, often items, the profit and loss statement or the balance sheet will include a suspicious catch-all account named something like , “Ask the Accountant,” “Suspense,” or “Intercompany Transactions” that keeps increasing in size.

Only two true solutions exist for the “too much complexity” problem. You can simplify the business (probably the best idea). Or you can find a more experienced (and probably more costly) bookkeeper or accountant.

Bookkeeping Blunder #5: Co-mingling Personal and Business Assets and Liabilities

One final bookkeeping blunder should be mentioned given the approaching tax season.

Many small businesses don’t clearly separate their business finances from their personal finances. For example, the businesses may use a single checking account for both personal and business banking. The business may regularly borrow personally to pay for business expenditures–and vice versa. And the business owner may too frequently mislabel personal expenses as business deductions.

Sadly, rampant co-mingling of finances makes financial records and books pretty much useless for tax preparation and for use in managing the business’s finances.

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June 8th, 2010

Employment Practice Liability Insurance (EPLI)

Companies of all types and sizes face employment-related liabilities. In increasing numbers, current former and potential employees are filing claims against employers alleging sexual harassment, age and gender discrimination and wrongful termination. Indeed, more than 30% of civil litigation cases heard today involve employment-related liabilities. Disturbingly, this percentage has been on an increase in recent years.

Large organizations with multi-layers of management and large number of employees have the greatest chance of facing an employment practice liability claim. But no company is immune. For example, small businesses lacking an experienced and well staffed human resource department are also at high risk. Other warning signs include:

- A high growth rate.

- A high turnover rate.

- A lack of written employment guidelines and human resource manuals.

- A lack of supervisory training programs.

- An inexperienced management staff.

- A history of employment problems.

- Poor performing employee benefit programs.

Reducing Your Risk

There are a number of prudent steps a company can take to reduce its employment practice liabilities. All such remedies center on installing a comprehensive human resource management program and then training managers and employees in proper workplace conduct.

Protective measures begin in the hiring process. Ensure that all managers with the responsibility for interviewing and hiring recruits are well aware of state and federal laws regarding employment discrimination and sexual harassment. Institute consistent hiring guidelines and ensure they are consistently applied. Provide training for hiring managers and regularly provide feedback on their performance.

Once a recruit is hired and becomes an employee, managers need guidelines and training on how to manage their subordinates. Institute sound policies regarding performance and salary appraisals as well as disciplinary procedures. A zero-tolerance sexual harassment policy is a must. Policies regarding management-employee personal relationships are often advised. Sensitivity training is needed regarding age and gender discrimination.

Should an employee file a complaint against a member of management, swift, prompt and documented action is required. Employment practice issues that are ignored or treated in ways that may be considered retaliatory often lead to large and expensive lawsuits and settlements.

Valuable Insurance Protection

Employment Practice Liability Insurance is an important safeguard that can cover the sometimes exorbitant costs of an employment-related claim or lawsuit. EPLI covers both the cost of any judgment or settlement, plus defense costs, up to policy limits and subject to the policy deductible.

Generally, EPLI covers legal actions from prospective, current and former employees for age or gender discrimination, sexual harassment, wrongful termination, wrongful discipline, wrongful failure to hire or promote, mismanagement of benefits, emotional distress and similar employment-related claims. Policies are typically written on a claims made and reported basis, meaning that an incident against the employer must occur and be reported to the insurance company currently providing coverage in order for it to be covered.

The premiums charged for EPLI will depend on a number of factors including the amount of coverage, the size of the company, the number of employees, the turnover ratio, human resource policies and the company’s claims history. Companies with clean claims histories and good human resource practices can typically find adequate coverage at an affordable price.

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June 7th, 2010

Set Up an LLC Business For Double Liability LLC Protection

Did you know that the limited liability company provides two types of liability protection? The corporation only provides one type. Learn about how you can protect yourself and your business when you set up an LLC.

PERSONAL LIABILITY PROTECTION

The main reason business owners set up an LLC for their business is to protect themselves and their personal assets from being lost due to business obligations and lawsuits. The LLC protection laws basically state that an owner of a limited liability company is not personally liable for the debts, obligations and lawsuits of the business merely because he or she is an owner.

Without the use of a limited liability entity such as an LLC, the owners would be personally liable for all such liabilities. Given the number of lawsuits filed today and that we have a litigious society with too many predatory litigation attorneys, this protection is necessary to reduce the risk of starting a new business.

This LLC protection is the same sold protection offered by the corporation entity but the great thing about the limited liability company is that when you set up an LLC, you are not required to meet the same formalities and number of requirements as a corporation in order to gain this protection. The limited liability company is easier to maintain.

BUSINESS LIABILITY PROTECTION

What many business owners do not know is that a limited liability company also provides what it known as reverse liability LLC protection which protects your business assets from your personal liabilities and obligations.

Under the LLC laws of most states, there is a provision called a Charging Order Provision. This provision basically states that a creditor or person who obtains a judgment against an owner personally, cannot foreclose on his or her LLC interest and take over control of the business.

This protection is not offered by corporations. Let me give you an example of the power of this business liability protection.

Let’s say you were driving to the grocery store one day and were at fault in a horrible car accident. The case when to court and you were found liable for an amount greater than what is covered under your automobile policy.

If you were a shareholder in a corporation business you ran, the person you are liable to could file an action which would allow them to take over your shares of stock and take over your business. In most events, they may liquidate your business or sell it to someone who would pay value for it. The creditor is looking to extract money from these assets to pay for the judgment.

On the other hand, if you were an owner (called a member) of a limited liability company, and the creditor did the same thing with your LLC interests, the charging order provisions prevent the creditor from coming in and taking control over the business. You will still control and be able to manage the business.

What the creditor does get is merely the rights to be given any profits distributed to you from the limited liability company. Here is the great thing. As the manager, you can decide not to distribute any profits and to reinvest them in the business. In this case, the creditor gets nothing.

But, this reverse LLC protection gets even better. If the limited liability company business were profitable and the profits got reinvested, a creditor who forecloses on the LLC interest not only gets no cash, but then is stuck with the tax liability allocated to your LLC interests. Given this potential scenario, a creditor will almost never try to take over the ownership interests of a member. This results in your business and its assets being protected from personal creditors.

Please note that given a recent federal bankruptcy case, it is likely that this reverse protection is only available for multi-member LLC businesses. If you run a single member limited liability company, it is likely the federal laws will prevent you from benefiting from this reverse liability protection (at least until another case comes out to the contrary).

SUMMARY

When you set up an LLC, you get two types of protection that you cannot get under other alternate business structures. Both of these LLC protections are not absolute but the go a long way in helping to protect you and your assets.

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June 7th, 2010

Debt Settlement Companies Help People Get Rid of Huge Liabilities

For some, the credit offers kept coming. Always preapproved and always offering a low introductory rate, these credit cards were a gateway into a false sense of abundance. When the collapsed housing market sent a tidal throughout the economy, the rising unemployment rate meant that more and more credit card consumers were unable to make payments on their debts. The credit card companies’ irresponsible lending practices spawned anxiety and stress for millions of households.

Unfortunately, unethical lending policies morphed into harassing collection practices. Consumers who fell victim to predatory marketing strategies now found themselves intimidated by highly trained debt collectors. Perhaps the only thing that grew faster than the financial fear many debtors found themselves in was their plastic card balances, as late fees and overage fees were piled on.

Debt settlement companies can act as the card consumer’s advocate. They can negotiate with credit card companies to stop fees and settle debt for less than what is owed. Paying less than the balance may sound too good to be true. But, it is as advantageous to the credit card companies as it is for the consumer. The longer a debt goes unpaid, the greater the likelihood that it will remain unpaid. Escalating collection practices cost money. While plastic card companies can bring lawsuits against past due debtors, they must hire lawyers to do so. If the debtor resides in a different state than the creditor, those costs rise even more. Even if a debt is eventually paid in full, accepting a lower amount that is paid immediately actually benefits the credit card company by providing it with cash assets.

Settlement companies are well-versed in the factors that influence credit card companies settlement decisions. These companies act as a mediator between the card company and the consumer. They work on behalf of the consumer by negotiating a lump sum settlement that is less than what is owed. As soon as a consumer hires a debt settlement company, credit payments are sent to a special account while negotiations commence. Once a settlement is reached, the debt settlement company uses funds from the account to pay the debt.

Although consumers can negotiate settlements themselves, reliable settlement companies have the reputations that help insure the best outcome for the debtor. Credit card companies prefer dealing with these settlement companies because they can be confident that agreements will be fulfilled in a short time.

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June 6th, 2010

What Government Debt Entails

The government borrows money from the public, other states or from international lending institutions in order to balance its expenditure and income. When it borrows from the public, it does so through issuing bonds, bills and securities to the citizens. This is also referred to as national or public debt.

The debt may be owed through various levels of the government. This could be either the local, central, federal or municipal government. The other categorization of government liabilities is terming the bills as internal to external. Internal means that the liability is borrowed within the country as earlier mentioned. External liabilities are those that have been borrowed from elsewhere, including international lending institutions like the world bank among others.

Government debt is a macro issue that should be looked at through experts eyes. This is because, there are many components of the same, some of which include future pensions payments and payments for goods and services that the government has not yet paid for, but which it has already contracted. Such liabilities can be contracted through international institutions.

Government liabilities can either be long or short term. Short term in many cases refers to those liabilities that have been borrowed and are meant to be repaid in a period of less than one year. Long term liabilities on the other hand are those that can be repaid in a period of more that ten years. In between the two extremes are the medium liabilities which should be repaid between one and ten years.

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June 5th, 2010

Why Should You Compare Insurance Quotes?

Getting the right car insurance is the biggest concern for many people. Especially if you are a student driver getting car insurance at a low rate is particularly difficult as most if not all insurance companies consider student drivers as high risk. When you think of paying for it each month for the rest of your life, it seems like a daunting process. You can still find a good policy if you compare insurance quotes.

When you compare insurance quotes, you will be able to figure out which one you can opt for despite your financial state. Student car insurance quotes are generally higher and it is recommended that you do not go for cheap car insurance as it can lead to numerous problems in the event of an accident. If you can find good car insurance for your vehicle rather than the cheapest one, it will be better or you will find that you will have to pay a heavy price later. If you have a second hand car or an old one, then you can always think of taking a third party insurance which will be cheaper and can cover you for liability.

In case you have an expensive car that you have saved to buy, you should consider taking a full coverage or collision insurance. There is also separate fire insurance and theft insurance all of which can be quite advantageous especially in student life. After getting the car that you always wanted, you would not want to see that it incurs huge losses for you. Make your driving experience safe and secure by choosing the right insurance for your car after you compare insurance quotes.

Students can find various ways to save on car insurance. When you compare insurance quotes, you will find certain clauses that will help you in achieving this goal. Make sure that your car is parked in a well-lit space or at least find an overnight garage for it. Install a good burglar alarm which is a safeguard in one way or an immobilizer which also helps enhance the security of your car. Some insurance companies will agree to offer you a better deal in case you can adhere to certain conditions.

One of them is to agree to stick to a mileage limit. Another is to agree t pay a higher deductible amount if you take good care of your car and are a careful driver, you can avoid most accidents and thus just have to pay a minimum rate premium. This makes you eligible for no-claims bonus where you have no liabilities from any accidents.

When you compare insurance quotes, the ideal way to do it is to apply to an agency and give them your particulars and then have multiple insurance quotes sent to your mailing address or email. This will allow you to take time and evaluate the quotes to decide which one will work best for you. In case you feel overcrowded with details and choices, you can always go for an online comparison and figure out pros and cons of each of them which will make it easier to make a choice.

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June 4th, 2010

Chapter 7 Bankruptcy Eligibility – An Easy-to-Follow Test


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Filing for Chapter 7 Bankruptcy isn’t easy given the new rules in the 2005 BAPCPA. Prior to filing for bankruptcy under any chapters of the Bankruptcy code, the debtor should vie for eligibility.

A person whose current assets can’t keep up with his liabilities can apply for a Chapter 13 or Chapter 7 Bankruptcy. Many applicants prefer the Chapter 7 petition, owing to the immediate relief it brings, it has several conditions. First, the debtor should calculate using the means test his average earnings six months before applying for bankruptcy and compare it to the average income of the state. Chapter 7 Bankruptcy is for individuals with below-average income.

If your income is higher than average, you’ll then need to make further computations to see whether you qualify for asset liquidation. The debtor’s expenses will be deducted from his income, and the result is then multiplied by 60. An applicant with an income of $10,000.00 or more for a five-year period won’t be eligible for filing a Chapter 7 Bankruptcy.

For individuals who earn above average, but can’t make the $166.67 monthly payment of debts, they’ll need to do the last part of the test to file for Chapter 7 Bankruptcy. A monthly income of $100.00 to $166.00 is compared to the 25% of the sum of the debt to be paid in five years. If the result is between $6,000.00 to $10,000.00 and is less than 25% of the total debt, this qualifies the debtor for Chapter 7 Bankruptcy. Otherwise, the debtor has to file under Chapter 13 Bankruptcy.

Hire a lawyer after all computations making you eligible for Chapter 7 is completed. The lawyer should help you prepare the necessary documents to file for bankruptcy, such as a list of all your creditors, your assets and liabilities, and a list of your liabilities secured by your assets. When you file everything needed, you’re immediately protected by automatic stay.

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June 2nd, 2010

C-Corp Asset vs Stock Sale Dilemma

Shareholders of C-Corps often experience significant anxiety when it is time to exit their business. If they are fortunate, they will exit by way of a stock sale. In these cases, their Corporate Tax is $0 and then when the proceeds are distributed to the shareholders, the capital gains taxes will be approximately 20%.

To minimize future taxes and third party liabilities, the majority of buyers prefer to purchase selected assets of the seller rather than its stock. The total taxes associated with the asset sale of a C-Corp is typically more than 50% of the corporate gain (i.e. approximately 40% of the gain over the basis is taxed at the corporation’s income tax rate. The gain often drives that corporate rate to the highest level because the gains are treated as ordinary income by the corporation. When the remaining funds in the C-Corp are distributed to the shareholders, they are taxed again at the individual shareholder’s capital gains tax rate, normally 20%.

In many cases, C-Corp shareholders receive offers for asset rather than stock sales. Due to the huge tax implications discussed above, the sellers often reject an offer at current fair market value because the net after tax proceeds from the transaction is too low to meet their personal financial requirements. The C-Corp then asks for a higher price and negotiations stall.

How C-Corp Shareholders Can Increase Their Net Gain After Taxes

There is a solution to this dilemma that enables the shareholders of the C-Corporation to increase their net gain after taxes significantly from an asset sale. The following is a summary of how this strategy works.

C-Corp shareholders sell the operating assets of the Company to an asset Purchaser at the negotiated fair value. They leave the cash proceeds from the asset sale inside the Company.

Then, C-Corp shareholders sell the stock of the Seller to another purchaser (Stock Purchaser) in an independent transaction that does not involve the original Purchaser in any way.

In such a transaction, the Stock Purchaser pays the C-Corp shareholders cash upon closing of the stock sale and the Stock Purchaser assumes the ongoing liabilities of the Company, including the corporate tax liability (approximately 40% of the corporate gain) from the sale of the assets of the Company. The shareholders, relieved of the corporate gain liability, are now only responsible for paying the capital gains tax, approximately 20%, on the proceeds received from the Stock Purchaser from sale of the stock.

The transaction works because the Stock Purchaser is in a position to shield the gain from the asset sale with solution assets from other operations. Subsequent to the sale, the Stock Purchaser re-engineers the Seller into a new line of business that is expected to be profitable.

As the new owner of the Seller, the Stock Purchaser is responsible for running the Company on an ongoing basis and satisfying the current and future corporate tax liabilities of the Seller.

Here is an example of how it works:

Let’s assume the corporate gain resulting from a C-Corp asset sale is $10M. The shareholders would typically net approximately $4.8M after taxes (in most states) after paying taxes on both the asset sale and the personal capital gains taxes upon distribution of sale proceeds. Utilizing the solution described above, the C-Corp shareholders could net as much as $6.4M after taxes. This represents a gain in take home cash of more than 30% as compared with the traditional asset sale scenario.

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June 1st, 2010

Types Of Background Checks

There are quite a few types of background checks that can be done on a job applicant. These include credit checks, criminal record checks, driving records, and past employer checks. Even though it may be difficult to find candidates to fill all positions within an organization, cautious business practices require a person to conduct certain essential checks on potential employees. This is undertaken for the sake of restraining probable liabilities that can occur from neglectful hiring practices.

Credit checks are often carried out for positions that contain financial responsibilities. The Fair Credit Reporting Act (FCRA) directs using credit checks for employment selection purposes. This is particularly true if the position involves handling large sums of money or exercising financial prudence. If the position does not involve this type of responsibility, the employer must be very cautious. It is a good practice to curb the use of credit reports to circumstances where this type of information is essential. Credit checks are of two types investigative consumer credit reports and consumer credit reports. An analytical consumer credit report contains a written report along with interviews from friends and neighbors. A written notice is to be given to a candidate before an analytical credit check is carried out

Criminal background check refers to the checking of a person?s past record in order to find out whether the person has carried out any criminal activity or not. Information regarding the same can be obtained from the police department or public courtrooms. Conducting a criminal background check enables a person to satisfy himself regarding the other person?s status. Employers are required to conduct a criminal record check for positions, which contain close, unsupervised contact with the public.

Employers should check the driving records of all aspirants who will be operating a company vehicle. This should be done before hiring the applicant and periodically right through the period of employment. It is the responsibility of the employer to check the driving records. Employers are also required to check if the applicant has a legitimate driver’s license.

Other types of background checks include previous employer record checks, Social Security number checks, educational credentials check, and nanny background checks.

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