Pursue payment from debtor

Dear Karen: My new business completed a $1,000 contract but my client ignored my bills and avoided my calls and e-mails. Should I pursue this claim in court or chalk it up to experience?

Answer: You’ll never collect if you don’t try. Find out why the company isn’t paying. Call to remind them your bill is outstanding. Send a strong letter informing them of your intent to sue. These easy steps may scare your client straight.

If not, for a $30 fee you can file your small claim online, said Stephen Dem, an Encino attorney specializing in debt collection. Go to the website www.lasuperiorcourt.org and click on “efile small claims.” You will have to pay another small fee for process service, and show up in court if your client does not pay.

Consider this a learning experience, Dem said. In the future, get a 25% to 50% upfront retainer from new clients and ask if you can bill their credit card. Most important, know your customers: “Find out the exact name or business entity of the company you’re dealing with. Have them fill out a basic credit application that includes banking information, and get references,” he said.

ESOPs are not for every company

Dear Karen: Is an ESOP right for my business?

Answer: ESOPs (employee stock ownership plans) are tax-advantaged employee benefit plans, said Corey Rosen, executive director of the National Center for Employee Ownership ( www.nceo.org).

Because employees own the company stock, ESOPs create an additional benefit for them. A firm can issue new or treasury shares to an ESOP, deducting their value (for up to 25% of covered pay) from its taxable income. Or it can contribute cash, buying shares from existing public or private owners, Rosen said.

Regardless of how the plan acquires stock, company contributions to the trust are tax-deductible, within certain limits. As attractive as these tax benefits are, however, ESOPs are not for every firm and particularly not for very small ones. Set-up costs are substantial ($40,000 and up) and “any time new shares are issued, the stock of existing owners is diluted. That dilution must be weighed against the tax and motivation benefits an ESOP can provide,” Rosen said.

When the owner

takes cash out

Dear Karen: My husband just formed a single-member limited liability company. He does not take a salary, but we sometimes use business money to pay a household bill. How do I label this money, and do we need to pay self-employment taxes once he starts taking a regular salary?

Answer: These funds you take out of the company periodically are called “drawings,” said Leo Bruette, a tax partner at BDO Seidman, and are considered distributions of company profit for tax purposes.

After cash flow permits a regular salary for your spouse, he will have to pay self-employment taxes on that salary -- including Social Security and Medicare -- in addition to income taxes, Bruette said.

“It’s worth noting that a self-employed person who files a Schedule C may also deduct his or her health insurance premiums,” he said. “Deduct them on page one of the 1040 as an adjustment, not on the Schedule C itself.” Business owners can also deduct pension plan contributions for themselves, he said.

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Got a question about running or starting a small enterprise? E-mail it to ke.klein@ latimes.com.