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Strategic Planning: A Costly Start-Up's Wise Moves

A few wise tips to manage a capital-intensive start-up from an independent record label's CEO, including tax strategies.
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Managing a capital-intensive start-up requires special skills. Take it from Randall Jamail, owner of five-year-old Justice Records, an independent record label in Houston that specializes in "roots" and "college radio" music. His start-up costs of more than $1.5 million over the first year called for tax-savvy strategies early on.

As a first step, building the right financial team was nothing short of essential. "I started consulting my accounting and legal advisers before the company even existed," says Jamail. One key decision was to establish the company as a Subchapter S corporation. "Since I anticipated personal income from other sources, I could offset that with the tax losses we'd accumulate from Justice," he explains.

Those tax losses came from two sources: capital expenditures (mainly to set up a distribution network) and record-production costs. "My CPA grilled me about every possible expense that might justifiably be written off in connection with the production of a record." (Easily overlooked items included union pension contributions, which are required by film and television studios should the studios buy the use of re-cordings.) Since records have a long sales life span, "those expenses were amortized over a range of years -- during which we earned higher and higher revenues," says Jamail.

Balancing tax benefits with other business-plan goals was also essential, Jamail notes. "I wanted to build a production studio and headquarters building on a half acre of land that I owned, which I could then lease to Justice. But my accountant warned me that we were better off renting until the company grew to a size at which we could accurately predict how much space and equipment we really needed." Jamail says his accountant's judgment was on target. "Anything we would have built in the early stage would have become obsolete, given how fast we've grown. Maybe we didn't get all the tax breaks we might have liked, but waiting was the better business decision."

It was also smart to hire a top-quality chief financial officer by the time Justice was three years old. "If I had to do it over again, I'd have hired him even sooner," Jamail notes. "In a fast-growth company like ours, we needed someone to keep track of all the documentation for our tax losses and the financial reporting involved in keeping our budget and cost-control plans in place."

Thanks to shrewd planning, Justice, whose revenues last year were $1.2 million, is only now about to go "tax-positive" (although further capital investment might generate more tax credits). With sales expected to top $4 million in 1994, Jamail anticipates -- if not this year, then next -- paying taxes on profits that will finally exceed accumulated tax-loss credits.

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Tax tip: Qualified business losses that exceed a company's current income can be carried either back 3 years or forward 15 years to reduce taxes.

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