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Test your business IQ Featured

6:27am EDT July 28, 2003
It doesn't necessarily take an MBA to run a business, and a degree does not come with a promise of success.

But even successful business owners may think they know more than they do about some basic business principals.

"One of the secrets to business is knowing the questions to ask," says Peter Constantino, CPA and partner at C&P Advisors. "You need to know about the businesses life cycle. There are different cycles that require different knowledge."

See how your business IQ holds up to a few basic questions.

If you are negotiating to buy a business, you should generally try to buy ... ?

A. The stock of the company

B. The assets of the company

C. The goodwill of the company

The answer is B.

"The buyer want to buy the assets," says Constantino. "For one thing, when you buy the stock ... you step into the company's legal shoes, and all liability is yours."

If you are negotiating to sell a business, you should generally try to sell which of the above three?

You guessed it -- A.

The answer is the opposite if you are the seller. Selling the assets is likely to result in at least some ordinary income that is subject to higher tax rates.

Are Christmas gifts given to customers or clients deductible?

Yes and no.

You can deduct a client gift, but only up to $25 per recipient, per year.

"The rule is you can deduct client expenses that are reasonable," says Constantino.

But these expenses are gone over with a fine-tooth comb in the wake of an audit.

If you operate your business as an S-Corp, must you take a salary?

The answer is somewhat of a qualified yes, if you don't want to do a lot of explaining to an IRS agent somewhere down the line.

"Because an S-Corp is a pass-through entity, it may be tempting to take a lower salary or no salary so not to pay as much in taxes, but the IRS requires you take a 'reasonable salary,'" cautions Constantino.

What advantage does an LLC have over a corporation?

A. Owners are liable for fewer losses than a corporation.

B. LLC owners can determine their own allocation of profits and losses.

C. LLC rules differ from state to state.

The answer is B.

Unlike a corporation, profit and loss allocation in an LLC does not have to be based on a pro rata share of ownership.

"With an LLC, you get the pass-through like an S-Corp, but it is great for investment groups because there are less limitations about who can be a member (and) ... has more equity options," says Constantino.

The definition for "break-even" is ... ?

A. The point at which a company's sales are covering only overhead.

B. The point at which sales and cost are equal.

C. The point at which gross profit is 50 percent.

The answer is B.

Break-even is when revenue covers the cost of running the business.

"Every company should be aware of its break-even point," says Constantino. "You need to know how many units cover your fixed costs ... to be able to react if your fixed costs rapidly alter." How to reach: C&P Advisors, (216) 831-7171 or www.cp-advisors.com


Bad business form

Snapping your fingers and yelling for your waiter is more than bad form, it's a bad business decision.

According to a group of executives surveyed, being rude to the waitstaff tops the list of the fastest ways to make a bad business impression at a breakfast, lunch or dinner meeting. It's second only to being late for the meeting.

The survey, developed by Creative Group, a marketing and advertising staffing firm, asked professionals from Fortune 1000 firms, "Which actions hurt the chances of impressing a current or potential client the most?"

* 50 percent said being rude to the waitstaff is the biggest faux pas one can make

* 36 percent regarded tardiness as a sign of disrespect

* Displaying poor table manners and dressing too casually garnered about 5 percent each

So next time, if you lose your tempter at a waiter, you may also lose your client.

Preparing for risk

More than one-third of the nation's leading companies report they are not sufficiently prepared to protect top revenue sources and have room for improvement, according to the 2003 Protecting Value Study.

This study was conducted by commercial and industrial property insurer FM Global, the Financial Executives Research Federation and the National Association of Corporate Treasurers. It polled nearly 400 CFOs, treasurers and risk managers at national and international companies from a broad variety of industries.

Every company surveyed said that a major disruption to a top revenue source would have a negative impact on earnings, with 28 percent stating such an event would threaten business continuity.