The Check Clearing Act for the 21st Century - It Will Impact How You Do Business!
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What Is Check 21?
Every month you get your bank statement and in it you have either the actual check you wrote or images of the checks you wrote. The original paper check is either in your hands or stored by your bank and available (at a minimum as a legible copy) for the next seven years as prescribed by UCC section 4-406(b). The ability to see the actual check and have it available for proof of payment, review and control in case of fraud, alteration or other payment error is something that we are familiar and expected. All of that is about to change.
Check 21 refers to The Check Clearing for the 21st Century Act which was enacted on October 28, 2003 and becomes effective on October 28, 2004. This act is designed to improve the efficiency of check clearing and the payment systems. The enables banks to truncate (remove the paper check from the payment process and create a "substitute check" or electronic image of the check, with or without the subsequent delivery of the original paper check back to the originating bank or account holder.) checks.
Substitute checks:
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Are paper reproductions of the original paper check that contain images of both the front and back of the check,
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Carry the MICR line of the original check,
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Conform to prescribed industry standards for document, and
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Are suitable for automated processing consistent with the original check.
The ability to replace the original paper check enables banks to process the checks electronically and to not rely on the transportation and handling of the paper checks via air or road carriers. A bank is not required to accept an electronic form of a check. Banks not accepting electronic forms of the original paper check can request a "substitute check" from other banks for them to process.
Businesses will be impacted by Check 21 in the following ways:
- Recordkeeping and internal document controls for checks and verifications of payments will need to be improved to address the fact that the original paper check will no longer be available as proof of payment in your records. Most, if not all, checks will not be returned to the company (or consumer) or the company bank.
- Checks will clear more rapidly. The checks you write to vendors and employees will be processed the same day they enter the recipient bank, so accounts payable and payroll accounts will see the outflow of cash much more quickly. The same cannot be said on the accounts receivable side of the business. While banks will be processing and clearing the checks more rapidly, the law does not reduce the holding period on funds credited to your accounts.
- Bank fees may increase. Banks will be saving on processing fees due to electronic processing, but they are not required to pass those savings on to you. Also, service fees for providing substitute checks for your records have not been capped. If you request substitute checks to provided with your statements (more on this later), then you will need to be aware of the potential costs associated with those documents.
- Neither you nor your bank will have the original check, nor access to it.
- Neither you nor your bank will have the ability to control when the original paper check is destroyed or if not destroyed where it is stored. Previous requirements for your bank to hold checks for 7 years for recordkeeping purposes, if checks weren't returned directly in your bank statements, will not apply.
- Not all electronically processed checks will be treated the same for the right to correct or re-credit the transaction. When substitute checks are provided to the business (or consumer), the business will have 10 business days to get funds recredited for transactions that were processed twice, processed at the wrong amount or otherwise had a payment error. When substitute checks are not provided, the business' rights are ambiguous as to what options they have for payment errors.
- To maximize your rights under the new legislation, businesses should request return of substitute checks with their bank statements.
- Substitute checks will be legal equivalents for proof of payment.
- Use of information gathered from electronic check images by the bank is not restricted. A bank will be able to build a database from check images to profile customer buying patterns and other consumer characteristics.
The points above are just some of the aspects of the new law that businesses (and consumers) need to be aware of. There are additional limits on payment error corrections and other concerns - like proving fraud, forgery or alternation related to the original check.
Businesses need to start evaluating the payment, recordkeeping and internal control processes. Some of the points you should look for:
- What controls currently exist for issuing checks?
- Are you using duplicate (or triplicate) checkbooks?
- Who can sign checks?
- What is the procedure for verifying the amount of the check to the invoice?
- How will you monitor your account between bank statements?
- If you don't request substitute checks with your statements
- How will you provide proof of payment in a dispute?
- How will you monitor transactions for payment errors between statements?
- What process will you use to minimize the risk of fraudulent transactions in your payment system? (Remember you have no control of the original paper check for detecting alteration or forgery.)
- What will be your recordkeeping processes to support taxable transactions?
- What will the bank account reconciliation process look like? [You may have a mix of electronic transactions, substitute check transactions, and original paper transactions.]
- What will the impact be on your cash flow? Payments clearing more quickly, receipt of cash not increasing.
Some banks have already begun converting the original paper check to electronic transfers. Chase Bank has in the past few months been converting the paper check payments made by credit card holders to ACH (automated clearinghouse) transactions. The change is coming, so start making the changes to your business processes that will reduce your risk and help you manage your cash flow under the new law.
From the e-Mailbox: LLC or S-Corporation How To Decide? Part 1 In Series on LLCs and S-Corporations
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From the e-Mailbox - I'm throwing my hands up in frustration. I've been to 2 accountants and 3 lawyers and all seem to contradict each other on which is the preferable organization for a new business. Is anyone able to describe in plain English the way to go? LLC or S-Corp?
There is no one answer for everyone. The trend currently in North Carolina appears to be LLCs. In the February 27, 2004 edition of the Triangle Business Journal an article titled "LLCs gaining favor across N.C." by Lee Weisbecker stated the growth rate for LLCs is 63% in NC since 2001.
Just because the LLC is gaining in popularity, it doesn't mean it is right for every situation. Here are some of the points to know about LLCs and S-Corporations:
BOTH
- limit the personal liability for business debts and court judgments against the business
- are legal entities independent from owners
- separate the company debt from the owners (unless owners have personally guaranteed the debt)
- pass income through to the owners.
LLC
Management/Ownership
- Can be owned by individuals, LLCs, Corporations (S and C) or partnerships
- Have no restrictions on number of owners
- Restrict ownership transfer (other members must approve)
- Have Managing Members
- Run the business
- Vote on actions
- May have Owner Members
- Invested in the business
- Don't vote
Tax
- Is generally taxed as a partnership (Note: LLC may opt to be taxed as corporation.)
- Does not separate owners from the company for tax purposes (when taxed as partnership)
- Requires filing of estimated quarterly tax payment to IRS by individual members
- Files Form 1065 informational return with IRS
Formation
- Is formed by filing Articles of Organization with Secretary of State
- Names members
- Lists other key information
Dissolution
- May be required by some states to set a dissolution date in articles of organization
- May be triggered by withdrawal or death of a member in some states if not overridden in articles of organization and operating agreement.
S-Corporations
Ownership
- Restricted to no more than 75 shareholders
- Cannot be owned by C Corporations, other S Corporations, some trusts, LLCs or partnerships
- Can be transferred without restrictions
Management/Operations
- Must have directors and shareholders meetings
- Must have record of corporate minutes
- Must have shareholder votes on actions
- Must file annual reports
- May hire someone other than owners/shareholders to run
Taxes
- Can retain some profits in the company for funding growth
- May have advantages for owners for self-employment taxes in some instances
Formation
- File Articles of Incorporation with Secretary of State
Dissolution/Change of Ownership
- Sell or transfer of ownership interest
- Dissolution through court or owner actions
There are a number of questions each person needs to think about when setting up his/her own business. These questions include:
- How much time do you have for tracking and complying with filing requirements and tax issues?
- How much money do you have to spend on setting up your business legal structure and making sure the agreements are sound for your needs?
- Do you plan to have investors?
- How many people are going to "own" the business?
- What role or roles will he/she play?
- Are you hiring someone to run the business or are the owners going to run it?
- What type of product or service are you going to be offering?
- What type of activities will that require?
- Where are you going to do business - state, county, and municipality?
- What will the tax implications be personally for each owner?
- Will you want to retain any of the business income for future business growth inside the company?
Attorneys and CPAs:
- provide the answers to questions that are put to them
- will talk to you about the various legal or tax aspects of the options
- will point out what they believe are significant points for you based upon the information you provide.
Finding the "best" answer for you and your business requires analysis of more than the legal or tax definitions. You should also seek a business advisor who will work with you through the existing or planned business operations, products/services, and activities, as well as take a look at the personal aspect of the decision. You need a combination of the legal, tax, accounting, business and personal aspects to find the legal and operating structure that best suits your needs.
Some resources that will help you understand LLCs, S Corporations, and other legal structures include:
Nolo's Quick LLC
Working for Yourself
Incorporate Your Business
All of these titles and others are available from www.nolo.com or your local bookstore.
Workshops, Events and Resources return to top
Manage Your Momentum - Get Clear and Get Going
Saturday, March 27, 2004, 8:30 am to 4:30 pm
Registration begins at 8 am
Location: LaQuinta, Cary, NC
The first in a three part series of workshops for the entrepreneur, small business owner or intrapreneurs. This interactive workshop takes the hands-on approach that engages the participant in developing the action plan for his/her business. Participants work on the business issues critical to them through a mix of concept presentation and work sessions each person develops tangible, written action plan to put to work in the business.
For more information and to register, go to: www.manageyourmomentum.com.
Presented by F.O.C.U.S. Resources, AISIS Performance Advisors, Ltd., and the Institute of Management Accountants Triangle Chapter
Focus on Execution
Dates: Thursdays, April 1st - 22nd 6:30 to 8:30 pm
Topics:
Session 1: Define the Challenge and Set Priorities
Session 2: Identify Process Gaps
Session 3: Select and Assess Resources
Session 4: Choose Tactics and Actions
Who should attend:
- Anyone who wants to get more done
- Executives
- Mid-level managers
- Small business owners/managers, and
- Entrepreneurs
The workshop takes actual issues (non-confidential) and works with participants to analyze, strategize, and act to get results. Enrollment is limited due to the "hands-on" approach to the issues. To register:
http://www.meredith.edu/professional/business-marketing.htm#focus
Presented by F.O.C.U.S. Resources and Meredith College Professional Studies Program
Manage Your Momentum - Pick Up Your Pace
Presented by F.O.C.U.S. Resources, AISIS Performance Advisors, Ltd., and the Institute of Management Accountants Triangle Chapter
The second in the series of workshops moves participants from simply having a plan and targets into the processes it takes to deliver on the plan and achieve better results. Through hands-on activities and small group work sessions, participants work on their businesses and get the tools to take action and make changes in their organizations.
To register and for more information, go to: www.manageyourmomentum.com.
Presented by F.O.C.U.S. Resources, AISIS Performance Advisors, Ltd., and the Institute of Management Accountants Triangle Chapter
Enterprise Risk Management
Saturday, May 22, 2004 8 am to Noon
Topics include:
- Regulatory Environment: Sarbanes-Oxley, Privacy, HIPAA, FSLA, and other legislation
- Business Processes
- Contingency Planning
- Media Relations
- Role of Finance and other fiduciaries to stakeholders
Legal Aspects of Human Resources and Payroll
Saturday, May 22, 2004 1 pm to 5 pm
Topics include:
- Fair Labor Standards Act
- Employee Classification
- Overtime Compliance
- Reporting
- Privacy
- Other issues
Location for both workshops: LaQuinta, Cary, NC
These sessions are educational programs that cover the basics of each topic. They are a mix of workshop leader and participant discussion on the points presented - both technical points and experience are shared. The intent is to provide participants with new information and perspective on the topics and to provide insight into the topics.
These session participants are awarded 4 CPE hours for each session by request through the IMA. To register and for more information, www.imanctriangle.org.
Presented by F.O.C.U.S. Resources, AISIS Performance Advisors, Ltd. and the Institute of Management Accountants Triangle Chapter
IRS May Require Withholding on 1099-MISCs return to top
The IRS estimates that $48 billion in taxes are not being collected on the income reported on 1099-MISC forms. This doesn't include income that falls below the $600 reporting threshold for 1099's.
Because so many 1099 recipients are failing to pay the taxes owed, the IRS is proposing that the businesses who contract with the self-employed withhold the estimated tax liability. This translates into your accounts payable department adding an additional step (or steps) to the payment process - calculating the withholding tax and remitting it to the appropriate revenue offices (federal or state).
How is it expected to work? Withholding would have to be made on any payment that is reportable on a 1099-MISC form. There are two different rates to use:
- 3.5% for payments that include items other than services - say parts or materials
- 5% for payments that are strictly services.
If you have an independent contractor, consultant, etc. and you have multiple transactions that eventually accumulate to more than $600, you will have to withhold the appropriate percentage on the cumulative amount paid when the "trigger" payment takes you over the $600 threshold.
Example: You pay for administrative support - a temp (not through an agency). In January you pay him/her $250, in March another $250, and in April $150. The April payment has taken the total payment to this individual to $650. You now would calculate and withhold 5% of the $650 to "catch-up" on the withholding, since these transactions are now reportable.
What this means for your business is:
- You will need to maintain your vendor files to support tracking of the cumulative amounts paid.
- You will need to establish a procedure to notify 1099-MISC vendors concerning this change in payment process.
- You will need to review procedures for selecting and hiring new 1099-MISC vendors to ensure that all the necessary information is obtained for your records, so that you can readily comply (Social Security Number or Taxpayer Identification Number, Business Name, etc.).
- It is recommended that you take this as an opportunity to check your backup withholding processes too.
- You may want to develop
- a standard letter to notify your vendors, and
- a vendor acknowledgment form for them to sign when they start doing business with you.
The one "benefit" is that if vendors want to get credit for the taxes being paid on their behalf, they will have to provide you with the tax payer identification number and keep your records current.
For more information on this, you can go to: www.irs.treas.gove/advocate/article/0,,id=119520.00.html
F.O.C.U.S. in the News return to top
Ask An Expert Column: Carolina Newswire
Lea Strickland, President of F.O.C.U.S. Resources, is now a featured expert for Carolina Newswire (www.carolinanewswire.com). Recent articles included:
- Ten Things to Consider When Launching Your Business (Two Part Series)
- Ten Reasons Business Fail (To Reach Full Potential)
- How Will Check21 Impact Your Business? [This article is included in this newsletter.)
- The "New" Entrepreneur [This article is included in this newsletter.)
Both articles are available via the Carolina Newswire and in the F.O.C.U.S. Resource Library (www.focusresourcesinc.com).
Look for more featured articles in the Carolina Newswire!
Featured Speaker on Entrepreneurship at IBM in March
Lea Strickland provided an overview of the entrepreneurship challenge to IBM workers whose positions have been outsourced. She presented the perspective that entrepreneurship is a logical and financially rewarding alternative rather than the "I can't find a job, so until I do" option.
Presenting the challenges and the upside of running your own business, Ms. Strickland touched on the independent contractor role in the economy. She also provided some insights into the choices of business structures for the independent contractor or consultant.
The "New" Entrepreneur - Technical and Professional Employees return to top
Today's entrepreneur is yesterday's business executive, computer programmer, staff accountant, public relations specialist or any of the thousands of job titles and specialties you find inside of corporate America. The changes in the traditional business models, the trend to outsource and off-shore operations, has lead to the outplacement of many of the mainstream business processes.
As a result, more and more individuals are faced with taking a new approach to financial stability/security and to finding the best career path for them entrepreneurship. Setting up your own business isn't a stopgap between jobs; instead it is the first step to achieving a number of objectives:
- Free Agency
- Financial stability
- Control of outcomes
- Control of work content
- Work/life balance
- Meaningful work.
These are just a few of the rewards of having your own business. They don't come easy and the learning curve is steep. Because no "specialist" coming out of the traditional corporate world is fully prepared to take on every facet of the business, every person stepping into the role of entrepreneur embarks on an odyssey of learning. Regardless of the wide variety of responsibilities you have held in the corporate world, as an entrepreneur you have ALL the responsibility.
Whether you are a programmer, a project manager, a senior executive, a lawyer or an accountant - whatever your specialty - you enter into business typically to provide the service (or product) you know best. What you don't know is "total" business. And the truth is you don't know what you don't know!
As an entrepreneur, you most likely start out solo or with a few friends or colleagues of like background. Let's say you are project managers. You know how to do everything related to juggling the many tasks and resources of funded project. You can read basic financial reports, coordinate marketing roll-outs, and a hundred other tasks and subtasks. But chances are, you can't generate all of the data necessary for the financial reports, do market research, generate market statistics, produce a prototype of a product, set-up equipment for the production line, and so on.
As an entrepreneur (especially solo) you are accounting, marketing, sales, customer service, and the technical expert. You are boss and subordinate, executive and front-line staff. How well you juggle the roles and tasks determine how successful you will be.
As you start out there are many things you need to think about, plan for, and understand. Here are a few of them:
- Personal
- How much effort are you willing to put in?
- How much can you invest in the business? (financially and emotionally?)
- How much do you spend each month on your household expenses?
- How good are you at establishing your own priorities and following through?
- Are you a "self-starter"?
- Do you work well alone or do you need others?
- Are you going to work out of your home?
- If you work from home, will you be able to "separate" work from home life - interruptions, etc.?
- Where do you plan to work?
- Are you going to setup separate phone, fax, and computer lines?
- How long can you go without cash coming in from your business?
- How do you think you are going to feel about not having income coming in immediately or sporadically?
- What will the impact be on your family, good or bad?
- If you need additional resources to live on while your business is getting started, where can you get them?
- Business
- What type of business - product or service based?
- Are you going solo or working with others?
- Are you actually starting a business or are you going to be an independent contractor working through agencies or both?
- What restrictions exist on the type and nature of the work you can do that are holdovers from past employers?
i. Geographic
ii. Line of business
iii. Business process
iv. Intellectual property
v. Other
- How extensive is your existing business network?
- How much money are you going to need for initial start-up costs (legal, tax, equipment, stationery, marketing materials, software, etc.)
- What areas of business - excluding your specialty if it is accounting, operations, etc. - are you familiar with?
- How much research have you done into legal and tax structures?
- How much do you know about pricing?
- How much do you understand about marketing, sales, and public relations?
- How well known are you in your area of expertise - not at all? Locally? State-wide? Nationally?
Well, you get the idea. There are a lot of personal and business issues to consider. The personal choices and realities impact if, how, when and what type of business you start. You may look at the dollars you need to setup your business and find that the initial outlay is around $2500, over the first year you may need to spend $20,000 on getting the business established. Your personal standard of living may be another $60,000 for the year. If it takes you a year to get to positive cash flow in your business beyond what you need to reinvest in the business, do you currently have $80,000 available to fund your first year?
There is a sense of accomplishment beyond anything experienced working for someone else, when you establish a successful business - built on "you". Coming through the adventure of learning "what you don't know you don't know"; making the mistakes; learning to get not just the sale, but the payment; building the business operations and delivering the product or service; then seeing the first $1 of profit on the bottom-line - that is a reward beyond price. When you work for you, you experience the down-side and the up-side, and the up-side looks great!
So here are ten recommendations for those of you considering joining the ranks of "The New Entrepreneur":
- Take the time to gather information on legal structures of business
- Talk to other entrepreneurs - solos and those working with others - at various stages in the entrepreneur process
- Read, read, read books and articles on business
- Talk to trade associations, business groups, networking groups and find out what the business climate is, what resources they offer
- Look for classes (not just the free ones) that take you through the processes you need to understand - accounting systems, marketing, business plans, and so on
- Interview potential business partners, service providers (CPAs, lawyers, marketers, trainers, consultants, and coaches)
- Seek out mentors that have gone through the process and are willing to advise as you go along
- Get good business advisors (at least one ˇ°totalˇ± business consultant that can advise you on how different options will work for you - this person ideally will help ˇ°translateˇ± the advice of CPAs, lawyers, and other specialists and work with you to develop your skills and abilities in running the business)
- Prepare to make mistakes - you'll learn more from them than the successes
- Find a network of friends, colleagues, other business owners that you can rely on for support and "connections" (This is especially important for solo entrepreneurs - you need to stay connected.)
There are a lot of reasons to not to start your own business, to not to take on the challenge of entrepreneurship. It truly isn't for everyone.
There are even more reasons to start your own business. It is challenging, dynamic, terrifying, exhilarating and exasperating. In the space of day, you can go from the peak of achievement to the despair of not closing the deal you've worked so hard on. As time goes on and you increase your business expertise, you get more "stable" in that you can plan for and offset some of the worst lows. And one day you may just find that the highs occur more often than the lows and the lows make the highs much better.
Books to Checkout return to top
Tax References:
2004 Guide to Sales and Use Taxes $75.00 (www.riahome.org)
2004 All States Tax Handbook $53.50 (www.riahome.org)
These two books give you the details of this year's tax legislation. These are updated annually.
Legislation:
What is Sarbanes-Oxley? by Guy P. Lander $12.00
Provides an easy to read and understand perspective on the Sarbanes-Oxley act.
Intellectual Property:
Patents, Copyrights and Trademarks (www.nolo.com) $39.99
Written in plain English, this book provides details and explanations of the various intellectual property laws and how to obtain the various forms of protection. This is a good overview to prepare you for meeting with an intellectual property attorney.
Copyright © 2004 F.O.C.U.S. Resource, Inc.
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