I would like to thank you, as a reader of the first version, for making the revised edition even better. Your comments and questions have allowed me to better clarify and define the issues affecting entrepreneurs and investors.
So what is new in the revised addition? Well, we have new chapters and discussions on the following important topics:
In the coming weeks I will be writing about certain key elements of the new material. But if you want the straight scoop right now in 240 wealth and nugget packed pages you really should rush out today and buy "Own Your Own Corporation." We're shameless, I know, but I do believe that you will benefit from this book.
]]>It is no secret that the United States is the most litigious society in the world. That said, it is important to acknowledge that many of these lawsuits are a necessary component of our legal system, and possibly the only means to right many of the wrongs that occur in our society. However, the other side of this is that a certain portion of these lawsuits are based on nothing more than an attempt by one party to generate a financial windfall from a targeted defendant.
To help combat such legally permitted takings was born the concept of Asset Protection, the legal techniques of protecting one's assets from judgment. Asset protection is based on the principle that since assets held in your name (minus a few exceptions) can be seized by a judgment creditor, assets not held in your name (and subject to charging order protections) are better protected.
Unfortunately, many "experts" who provide asset protection strategies offer services that range from unethical to illegal. Beware of advisors touting Nevada corporations as a way to "hide" from the Internal Revenue Service (IRS) and thus avoid paying taxes. Take for example the recent case against a very high profile asset protection firm located in Las Vegas, Nevada. At first glance, this company appeared to be a legitimate organization providing advice regarding how to protect yourself and your assets from seizure. They had expensive promotional videos and a nice professional looking office. They even had a well known celebrity endorsing their services in a commercial. However, according to a recent court complaint filed by the Federal Trade Commission, if you cracked the shiny outer coating you found that this group was run by two men, one with a suspended law license and the other a convicted felon. Among the many services that this group provided was the option of having their company listed as the sole signatory on their clients' corporate bank accounts in an attempt to hide corporate owners from the tax liability of the company. This, according to the group's marketing materials, helped shield their clients from "capricious federal judges and any government agency".
Improperly hiding your assets from the government is not a sound asset protection strategy for several reasons.
First, if you owe money to the IRS you owe it. Evading the obligation is a crime. You certainly can use a corporation to minimize taxes and should always do so. But to hide assets and evade taxes leads to big trouble. Second, if you are brought to a debtor's exam, you will be forced to disclose what assets you have under penalty of perjury. A properly designed asset protection plan allows a debtor to disclose what assets they control, without sacrificing the protection of a proper structure. But anyone who advises you to set up a corporation to hide your assets and avoid paying taxes is going to get you into trouble.
Also be wary of anyone who is advising you to shield yourself through the use of "bearer shares". Bearer shares are corporation stock certificates which are owned by the person who holds them, the "Bearer", and are not recorded under the owner's name. Some unethical asset protection advisors tout bearer shares as a means to shield the corporation. The IRS has been aware of the practice for a long time and if they catch you using bearer shares to avoid paying taxes, be prepared to take an extended vacation in a federally funded resort with no pool and plenty of concrete. Any ethical asset protection advisor will tell you that the use of the bearer share is a bad idea and is now illegal even in Nevada and Wyoming. If an expert is telling you otherwise, politely excuse yourself and run away - quickly.
Further, be aware of advisors telling you it is possible to absolutely bulletproof your corporation from liability. No one can make that claim. There is no magic cloak of protection from liability. That being said, a sound asset protection plan is essential. Although you cannot completely bulletproof yourself due to charging laws and new court decisions, you most certainly can and should protect yourself to the best extent possible. With proper planning and advice, you should be able to adequately limit your personal liability and protect yourself from illegitimate claims and unscrupulous individuals.
Many new business owners make the mistake of not properly accounting for it all. Please know that companies live and die by numbers. They are defined by numbers. They grow with numbers. They bleed with numbers. Numbers define the health of your business at any given time and over time.
To be successful you must have a system to record, classify, report, and analyze your company's numbers. And you must use this system every day (or pay someone who will). Too many new businesses let the numbers slide. They never establish a system for their accounting, they don't write down all the incoming and outgoing money, they forget and/or guess at some transactions, they forget to file necessary paperwork. The main reasons for this are: 1) most of us hate dealing with numbers and 2) time taken on accounting is time taken away from business.
The first reason for avoiding accounting (your dislike of numbers) comes under the heading of "too bad." Numbers are a fact of business life. If you don't want to keep track of your accounts, that's fine, but find someone who will. Don't let your aversion suck the lifeblood out of your company.
The second reason for avoiding accounting (time taken away from your business) is just, to be blunt, ignorant. Whether you sell a product or a service, sales are what makes the time you spend a business rather than a hobby. And sales are defined by numbers. You need to know what you are bringing in and what you are sending out so that you can set appropriate prices, manage your overhead, market, and make a profit. Without a knowledge of income and expenses, you are leaving profit up to chance.
The best way to keep up on your accounting is to have a system - a method or plan - that becomes second-nature with repetition. This won't happen overnight. After all, it takes 90 days to form a habit. And it may take a while for you to find a system, that suits your temperament and your business needs. But once the habit is in place, you no longer have to think about it every day.
Regardless of the system you use - computer program, ledger, accountant, book keeper - your system will fall into one of two categories: cash-based method (you count income when it comes in and expenses when they go out) or accrual-based method (you count income when you invoice and expenses when you commit to pay). The difference is timing and can be important if you regularly have inventory or if credit is a part of your business. The accrual method is better under some circumstances, but the cash method is simpler. However, if you make more than $5 million you may have no choice but to use the accrual system, since the IRS may require it.
Accounting can be complicated, but it is also predictable. Here is a very basic outline of what you can expect:
Every day you need to record the day's transactions.
On a regular basis (dependent upon your personality, your business, and your revenue and expense levels), you will want to post all your sales and expenses to a general ledger.
Just as regularly, it's a good idea to adjust the ledger so that you don't lose sight of anything that doesn't get recorded on the day of the transaction.
At the end of your accounting cycle (usually monthly), when the ledger is complete, balanced, and up to date, post the profits to the owner's equity account. This balances revenue and expense accounts back to zero, preparing you for the next cycle.
The cycles add up to an accounting period. At the end of that period, you will compile your financial reports to give a picture of all financial activity during that period.
While there is much financial data you will want to keep in-house (and there are regulations stating how long you need to keep different records), much of it is also dependent on filing. If it isn't filed, it doesn't exist. Keep on top of those numbers.
]]>All corporations have paperwork that must be completed and kept on file to prove the business and its owners are acting as a corporation rather than an individual. C Corporations, S Corporations, Limited Liability Companies and Limited Partnerships all must have paperwork substantiating their existence as limited liability entities. No matter which entity you choose, you will need, at a minimum, articles of incorporation or organization. But you may also need meeting minutes, a resident agent, a Federal Identification Number, and initial organization filings.
In order for a corporation to remain legally and financially separate from its owner (which is the most likely reason you incorporated to begin with), you must have the paperwork that makes your corporation real and proves its existence. And you must file the appropriate paperwork with the appropriate parties (such as government agencies and regulators).
However, no matter how carefully you set up your initial corporate documents, no matter how perfect and thorough they are, you aren’t done. There are a variety of filings, records and documents due every year. Forget to file the right papers with the right people at the right time and your company is no longer independent. Paper is all that protects you and your assets from lawsuits. But that paper, done right and right on time, can be like corporate Kevlar.
]]>It helps to consider how you would approach buying a house. Would you sign a check and move on in? Or would you research everything first to make sure you aren’t getting a lemon? Treat starting your own business the same way. Don't invest your time, money, energy, and dreams in a business you don't understand inside and out. More businesses fail for want of proper planning than do for want of money.
Business plans are perfect for taking you from ignorance to understanding. In order to produce a good business plan, you must learn all the ins and outs of your proposed business. And the process of preparing the plan will teach you much of what you need to know in order to run that business.
The main reasons people skip business plans are often the same as the reasons people avoid accounting: 1) many people don’t like to write and 2) the time it takes to prepare the plan takes away from the time to run the business. But those reasons – those excuses, really – are just as inapplicable here.
Just because you don’t like doing something doesn’t mean you don’t have to do it. Running your own business will mean sacrifices. Luxuries like vacation time, sick days, salaries – these are the first things to go out the window (at least in the beginning). Taxes must be paid, shipments must go out, decisions must be made, invoices must be sent, and bills must be paid – whether you like it or not. Same with accounting. Same with planning. And, as with accounting, you can always hire someone to prepare your business plan for you.
The second reason people often skip the business plan stage is because they want to spend the time it would take to plan their business to be in business instead. They see the planning stage as taking time with no reward. But not only is that not true, it is also supremely short-sighted. It may be true that taking time upfront to plan your business will increase the time until you can start making money. But it will also likely increase the amount of money you can make. Writing a business plan allows you to explore your business before you start. It allows you to make your mistakes on paper rather than in the real world.
Write a business plan. You’ll be better for it. It will save you hassles and make you money in the long term. A good resource is my book “The ABC’s of Writing Winning Business Plans.” This book can be purchased here: The ABC’s of Writing Winning Business Plans
What are some of the hassles you might be saved if you take the time to prepare a business plan? How about quitting your day job only to find your great idea won't pay the mortgage? Or resorting to credit cards to finance the business? Many businesses fail within the first five years. Of those that fail, a staggering amount do not have business plans. An old carpentry adage says, "Measure twice; cut once." Let your business plan be your measurement.
]]>C corporations are great for a business that sells products, has a storefront and employees, and may or may not have a warehouse where it keeps its inventory. C Corps don't work well with businesses that want to hold appreciating assets, such as real estate, because of the tax treatment on the sale of these assets.
The most often-cited disadvantage of using a C Corp is the "double-taxation" issue. Double-taxation happens when a C Corp has a profit left over at the end of the year and wants to distribute it to the shareholders as a dividend. The C Corp has already paid taxes on that profit, but once it distributes the profit to its shareholders, those shareholders will have to declare the dividends they receive as income on their personal tax returns, and pay taxes again, at their own personal rates.
There are many things you can do to avoid the double-taxation scenario. Structure the C Corp so that there are no profits left over -- use all of the write-offs and deductions allowed by the IRS to reduce the C Corp's net income. Offer great benefit plans! Pay higher salaries to yourself and the other owner/employees than you would if you were using a flow-through entity such as an S Corp. Yes, you will have to pay payroll taxes and personal income taxes on those monies, but you would pay personal taxes on dividends paid to you anyway. And it may be that in the big picture, the savings on one side outweigh the additional taxes paid on the other side.
The decision as to what entity is best for you really does, in so many cases, hinge on taxes, and that is why, with any corporate-related decision, you are wise to seek the advice and assistance of a good CPA.
Some quick things to note on C Corps:
· They can have an unlimited amount of shareholders, from anywhere in the world.
· For Nevada and Wyoming corporations, officers and directors can reside anywhere in the world;
· They can have several different classes of shares.
· They are the most widely recognized business entity in the world, and are the premier entity for going public.
In Nevada and Wyoming, nominee, or stand-in, officers and directors can be utilized, adding extra levels of privacy.
While we like and often use S Corporations, we keenly appreciate that C Corporations have their merit and place in your entity structure strategy.
]]>Another downside is asset treatment. Both C and S Corps are not great vehicles if your business will hold appreciating assets, such as land, buildings, stocks, bonds, etc. The tax on them upon sale or upon distribution will be much greater if held in a corporation than if held in a limited liability company or a limited partnership. This is further explained in the book How to Use Limited Liability Companies & Limited Partnerships, written by Garrett Sutton and available at www.successdna.com.
The steps to create a C or S corporation are the same. Articles of Incorporation are prepared and filed, Bylaws are prepared, directors are elected by the shareholders, officers are elected by the directors, and shares are issued to the shareholders. This may sound difficult but we will be there to guide you through it all.
The S Corp Declaration, the IRS Form 2553, should be filed within 75 days of the incorporation date, so don't delay if this is how you see your company proceeding. If you don't file within that 75 day period, the IRS can deny you S Corp status for a full year, meaning that your first year of operations will be conducted at C Corporation tax rates.
The shareholders, directors and officers of the company must remember to follow corporate formalities. They must treat the corporation as a separate and independent legal entity, which includes holding regularly scheduled meetings, conducting banking through a separate corporate bank account, filing a separate corporate tax return, signing all documents related to the business in their official capacity and filing corporate papers with the state on a timely basis. If these steps are not followed, a business creditor may be allowed to “pierce the corporate veil” and seek personal liability against the officers, directors and shareholders. Adhering to corporate formalities is not at all difficult or particularly time consuming. In fact, if you have our affiliate handle the corporate filings and preparation of annual minutes and direct your accountant to prepare the corporate tax return, you should spend no extra time at it with only a very slight increase in cost. The point is that if you spend the extra money to form a corporation in order to gain limited liability it makes sense to spend the extra, and minimal, time and money to insure that protection.
And remember, while there are some downsides to the S corporation there are some significant benefits as well. Work with your advisor to see if the S corporation is right for you.
]]>From a taxation standpoint, an S Corp is a great fit for a company that offers a service, because in many cases the revenues can be split and paid to the shareholders in two categories: salary and distribution (or profits) earnings. A flow-through tax structure means that the profits and corresponding losses, deductions and expenses are divided up among the shareholders, in proportion to their ownership percentages, and reported on each shareholder's personal income tax return. Therefore, if your income from an S Corp is split into two streams, salary and profits, each stream will be taxed differently. Your salary stream will be subject to both income tax and payroll taxes which amount to a whopping 15.3% for Social Security and Medicare. However, the profit income stream will be subject only to income tax. So, by taking a reasonable salary from the S Corp and the rest in profits your taxes will be lower than if you were take your entire share of the earnings as salary. By allowing a percentage to flow through to you as profits you can save thousands of dollars a year in payroll taxes which, as we all know, we will never see the benefit from since Social Security is broken and bankrupt.
An S Corp is also a great entity for businesses with low start-up costs that do not have to purchase a significant amount of assets to begin operations. For example, buying a working laundromat would be an excellent choice for an S Corp. You are purchasing a turnkey business - it's already operating, and you aren't going to be laying out significant cash to get it up and running. So, you will have a pretty good income stream immediately, and that income stream can best be disbursed to you and your partners, if any, through the S Corp structure. Two other great matches for an S Corp are network-marketing and Internet-only businesses. In each case, the business is likely to have no storefront, low operating costs, and probably doesn't maintain a warehouse. Most network marketing and Internet-only businesses drop-ship from their suppliers directly to the end consumer when they are delivering products at all. Again, as these can be high-income, low cost operations, they work great in the S Corp structure.
Here's another reason we suggest S Corps for many service-oriented businesses: To avoid being characterized as a Personal Service Corporation, or "PSC" by the IRS. PSCs are C corporations that are classified by the IRS as providing a service, such as consulting, to the general public. Now, as you may know, the United States government, in an effort to boost the economy and keep business working, assesses C corporations with a pretty low initial rate - 15% on earnings up to $50,000. That's quite a bit lower than you would pay personally, if you were receiving that same $50,000 as salary. And that 15% rate is also lower than you would pay if your business was an S Corp. So, to head off the anticipated revenue drain, the IRS closed that loophole by designating C corporations that provide services to be PSCs. The additional tax rate for PSC earnings can be a flat 35% or the regular C Corporate rate plus 15% of the corporation’s undistributed personal holding company income. That may be higher than you would pay through your S Corp, if you took a reasonable salary and the rest as profit income. And, it's enough, in many cases, to make the difference between choosing an S Corp and C Corp. Next week we’ll look at one significant downside to the S Corporation.
]]>Here is the law for corporations:
In addition to any records required to be kept at the registered office pursuant to NRS 78.105, a corporation that is not a publically traded corporation shall maintain at its registered office or principle place of business in this state:
A current list of its owners of record; or A statement indicating where such a list is maintained. The corporation shall:
Provide the Secretary of State with the name and contact information of the custodian of the list described in subsection 1. The information required pursuant to this paragraph shall be kept confidential by the Secretary of State.
Provide written notice to the Secretary of State within 10 days after any change in the information contained in the list described in subsection 1.
Upon the request of any law enforcement agency in the course of a criminal investigation, the Secretary of State may require a corporation to:
Submit to the Secretary of State, within 3 business days, a copy of the list required to be maintained pursuant to subsection 1; or
If a corporation fails to comply with any requirement pursuant to subsection 3, the Secretary of State may take any action necessary, including, without limitation, the suspension or revocation of the corporate charter The Secretary of State shall not reinstate or revive a charter that was revoked or suspended pursuant to subsection 4 unless:
The corporation complies with the requirements of subsection 3; or
The law enforcement agency conducting the investigation advises the Secretary of State to reinstate or revive the corporate charter.
The Secretary of State may adopt regulations to administer the provisions of this section.
It is important to note that Nevada is not asking for the owners of the entity up front. The requirement is that the registered agent either keeps a list of the owners or the name of a contact person who has a list of the owners. The Secretary of State will request the ownership list only when a law enforcement agency needs it for a criminal investigation. Not for a civil case mind you, but only for a criminal case.
What this means is that if your business and asset protection plans are on the up and up, your privacy will be protected. (If you are engaged in fraud and other crimes, we would ask that you go elsewhere.) But for the good guys, you will still maintain your privacy.
Two points are worthy of further note. First, for limited partnerships the only owners the new legislation aims for are the general partners. While the generals do indeed control a limited partnership, frequently they only own 2% or less of the entity, and are usually just a management corporation or LLC. The limited partners will own 98% of the limited partnership and, except for management, are the economic beneficiaries of the entity.
Whether the new law intentionally just wanted information only on the general partners or will be corrected to include the limited partners' identities remains to be seen. But for now, people very concerned about privacy may want to use Nevada limited partnerships.
The second point has to do with Wyoming. The corporate law of Wyoming does not have such an ownership disclosure procedure. Yet.
Apparently the federal authorities are working to get a similar legislation approved in other states, including Wyoming. We will keep you informed of such developments. Until then, once again, those very concerned about privacy may want to use Wyoming entities.