Choosing a Credit Card Processor

Credit cards

Recently I did some research for a client on selecting a credit card processor. I knew this was a complicated topic but found out that it is even more complex than I thought.

If you just start Googling “Credit Card Processors”, you will find a lot of pages that compare discount rates. The comparisons usually start with a “Qualified” rate. The “Qualified” rate is the lowest rate available, but it’s not the one you should use to compare rates! It’s likely that the bulk of your transactions will not fall into this category.

To get the “qualified” rate, depending on your processor, a lot of things have to be in place. You will probably need to be swiping the card. The card is most likely a bare-bones-basic type of card that is not a business card, not a rewards card, and the transaction is not international.

The other 2 types of rates are the “non-qualified” (the highest rate) and the “mid-qualified” rates. The processor can decide which cards or transactions will fall into either of these categories. Rewards cards will often be mid-qualified, as will keyed-in transactions. “Non-qualified” cards or transactions will often be corporate or certain types of rewards cards, or the transaction may be international. Other things that can push you into this rate are not using the Address Verification System (AVS), a mismatch between the billing address and the address associated with the card, or not batching out the transaction within 48 hours.

Because the definition of which transactions fall into each of these categories can vary, it’s important to understand how your processor is defining the categories.

Using these 3 types of discount rates is considered to be a “tiered” plan. Alternatively, you may be offered an “Interchange-Plus” rate. There are standard, fixed rates associated with all cards, the most basic of which is the “Interchange” rate. An “Interchange-Plus” rate will add a certain percent to the base rates for each card (this can include the interchange rate, plus any other assessments associated with that particular card such as rewards programs).

Which plan is most beneficial depends largely on how your processor defines the 3 tiers in the Tiered plan. When I was shopping, I was told that the Interchange-Plus plan would always be the best, but when I checked back with the bank, I found that my client would actually be getting the bulk of the rewards cards transactions classified as “Qualified”, making it a much better deal, considering how many rewards cards are being used.

Besides the discount rate, other fees to look out for are monthly or annual fees, early termination fees if you are in a contract, Gateway fees if you process cards online (and PCI Compliance fees as well–PCI Compliance is a topic for another day) and the per-transaction fee. If you will be swiping cards, will you be buying or leasing the equipment (buying generally works out better, and you don’t need to buy from your processor).

Be sure to have a list of questions prepared when shopping and ask a LOT of questions, particularly about the fees and how transactions are classified in the Tiered System. I found when talking to some of the broker companies that the sales people really didn’t know some of the answers about those fees and how the particular transactions would be classified.

The best fit will probably depend on how you process transactions (swiped, keyed-in, online, etc), the number of transactions you will process, the average dollar amount, whether you have international transactions, etc. If you have a lot of activity, a monthly fee may be offset by lower discount rates. If you only have occasional activity, you may want to avoid the monthly fee and pay a higher rate.

Good luck and happy shopping!

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Changing Your Business Structure, With an Eye to Bookkeeping

Entity TypesMany businesses start out as a sole proprietorship and, down the road, decide to change their business structure. Usually this means an LLC or an S-Corp, and sometimes a C-Corp. There can be both tax and liability advantages to making the change.

Deciding on the right entity type is a complicated issue and we won’t tackle it here. You will need the help of both an attorney and a tax accountant to help you decide on the right structure, depending on your individual situation and business. Once the decision to change has been made, though, there are some standard steps to take. Your attorney and tax accountant should help you with these, and be sure you have a plan in place to get these done before starting business in your new entity!

I do not recommend trying to set up your new entity yourself. Consult with the appropriate professionals. The tax benefits may not be as great as you think, especially considering the extra paperwork and the additional tax return preparation costs. The liability protection may also not be as good as you think, and insurance may be a better answer. If the new entity is a good choice, you will still want the advice of these professionals to make sure all the steps are completed, and the entity is set up correctly to take advantage of the tax and liability benefits.

Generally, it’s easier to make the change at the start of a calendar year. You will file your tax return as a sole proprietor one year, and as your new entity the following year. (NOTE: if you go from a sole proprietor to a single-member LLC, you may still file as a sole proprietor on your Federal tax return. LLCs are not recognized by the IRS and you will elect to file as a sole proprietor, a partnership if there is more than one member, or as a corporation). If you have employees, your payroll will be run under one EIN in one year, and the new EIN the following year. A clean transition at the end of the tax year makes for less paperwork. Check with your state employment department about running payroll under the new company. While you do need a new EIN for your Federal payroll taxes, your state may allow you to maintain your existing employer account.

Of course, it’s not always feasible to make that change at the end of the year, and most business start their new entity sometime during the year. The end of a calendar quarter is a good time, especially if you have payroll.

Once the new entity is set up, some of the steps to take before conducting business include:

  • Filing for your fictitious business name, or modifying your existing fictitious business name so that it is now under your new entity. This is usually done with a county agency.
  • Get your new EIN and set up payroll under that EIN. If you use a payroll company, notify them and work with them so they can get it set up correctly and on time to process the first payroll. If you process payroll yourself, check with your payroll service. If you run payroll from QuickBooks Desktop, for example, you can run payroll for up to 3 EINs under your subscription.
  • Update any licenses you may have (business etc) to be under the new entity
  • Update your banking and insurance services.
  • If you have a seller’s permit, update that information with the appropriate agency.

The SBA has a good post on this topic:

Now that you’re ready to conduct business, what about the bookkeeping? You already have a system in place to run your business as a sole proprietor, such as a QuickBooks file. Can you just continue on using the same file?

Because this is essentially a new business, it is best to start a new QuickBooks file. If you are running payroll in QuickBooks, you will definitely want to start a new file as your payroll subscription is tied to the EIN, and the EIN on the file will need to change.

If you start a completely new QuickBooks file, you can export your lists from the old file to the new file. Accounts Receivable and Payable will need to be set up. If you have loans in your sole proprietor file, you will want to check with your attorney and accountant to see if they can legally be transferred to your new entity.

There may be an instance where you want to use the same file because of history or work-in-process that needs to transfer over. This can be done with some careful planning. You will also want to work with your tax accountant to make sure the old data gets converted to some opening entries that will work for tax return preparation. The process is to make a backup of the sole proprietor file, then restore it and give it a new name to reflect the new entity. Then you can change the EIN, legal business name, and tax form. You’ll need to add the EIN to your payroll subscription and set up payroll. Now you will have the original sole proprietor file and a new entity file. Again, work with your accountant on this! You can condense data in the new file before the business start date. There is an Intuit post with more details on this:

This covers some of the things you will be dealing with when you change your entity type. While there are costs and a time investment involved in setting up correctly, they are small when compared to the cost and time to clean things up if they are not set up right from the start! Careful advance planning and consulting with the right people can make this a smooth transition.

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