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.

There are many advantages to being able to relocate your business to a friendlier state. One important benefit that many business owners do not consider has to do with the statute of limitations. All lawsuits have time limits. The statute of limitations refers to the legal deadline by which a lawsuit must be filed. These deadlines vary based on upon the type of claim being asserted. For instance, the statute of limitations in many states is six years for asserting a claim on a written contract, and four years for an oral contract. So if your business made a blunder, you could be held accountable for it, several years after the fact. Thus, it is important to maintain your entity for at least as long as the longest applicable statute of limitations. If you are thinking of closing shop, go ahead, but keep your entity active in the low annual fee sate of Wyoming. Let's look at an example.

Tom had owned and operated Ajax Construction, Inc. in Illinois for nearly twenty years and he was ready to retire. He knew that with a corporation there were some steps he needed to take before he closed shop, so he made an appointment with his attorney to ask about the best way to wind things up. Among the recommendations his attorney gave, Tom was informed that the statute of limitations in Illinois for construction issues could be ten years. Thus, Tom needed to keep his corporation active for ten years after he stopped working. Because it was a Illinois corporation, this was going to cost Tom $500 per year. Tom was understandably aggravated about this - after all, he was trying to retire. Tom, however, had a good attorney. After explaining the situation to Tom, he offered a solution to the financial drain of Illinois fees. Tom could continue his company into Wyoming. By continuing Ajax Construction, Inc. into Wyoming, Tom could maintain his limited liability status without a break and get away from Illinois' high rates. Wyoming would charge him only $50 annually. That means Tom could leave his corporation intact for ten years for $500 rather than $5,000! Tom gave his attorney the go-ahead to complete the necessary paperwork and retired a much relieved entrepreneur.

It should be noted that, as is typical, California is difficult in this regard. They won't allow you to continue into Wyoming. Instead, you have to form a new Wyoming entity to merge with your old California. When the merger is complete the California entity goes away, but the new Wyoming entity does not have the old California incorporation date. Still, you are better off implementing this strategy and saving the $800 annual California fees than not taking these steps.

But if you engage in money structuring - well, you are headed for big trouble. The case of Eliot Spitzer has certainly taught us one thing: It is getting harder and harder to discretely pay for sensitive transactions. What caught the former governor of New York with his pants down were these new post 9-11 anti money laundering rules.

Deposits on withdrawals that total more than $10,000 within the same day automatically prompt a currency transaction report to the federal government. But if you slice up the transactions - say deposit $9,000 into different bank accounts - to avoid detection that is called money structuring, which is strictly illegal.

I know - it's hard to imagine. But take the case of a newlywed couple who received $40,000 in cash at their Greek wedding. Rather than deposit it all at once and wait in lines to provide the bank with a bunch of information, they deposited it over time in smaller amounts. The new Big Brother software caught them and soon they were being investigated by the IRS. After a great deal of money spent in attorney's fees they were eventually not charged.

But here's the lesson, if you know about the $10,000 requirement and attempt to avoid it, you have committed a crime. And let's be honest, thanks to Eliot Spitzer, we all know about the $10,000 requirement now.

There are still a few ways for untraceable transactions to occur, at least until the feds find a way to shut them down.

Eliot Spitzer would still be governor if he had used a prepaid or stored value card. You can buy an American Express gift card with cash at a retail store in amounts as high as $500. For now there is no limit on the number you can buy.

Of course, cash is still a good way to go. But remember, if you withdraw more than $10,000 in cash in one day a report is sent to the feds. And once again, if you slice up withdrawals to avoid detection - money structuring - you are breaking the law. The best way to get your cash out is in smaller and more frequent transactions.

But listen to what we are discussing: How to get your money out of your own bank account without breaking a draconian law. Will this ever end, or only get worse?

Insurance is the first line of defense in protecting your business and real estate assets. You should always have a reasonable amount of insurance coverage to protect against standard claims.

But you should never forget that insurance companies do not want to cover certain claims. They are certainly not willing to cover every imaginable claim.  As well, they are quite clear about excluding these claims from your policy. While it may not be detailed in bold capital letters,  and more often than not is in eye numbing miniscule print, the exclusions will be laid out somewhere in your policy.

As such, you will always need a second line of defense, which is the proper use of LLCs, LPs and corporations to protect your assets. The use of a second line of defense may be at odds with your insurance agent, who may stridently assert that your policy completely covers you. Such agents may further assert that with such a bulletproof policy you do not need to implement asset protection strategies.

First and foremost, you need to know that many commissioned insurance agents are less concerned with your asset protection needs than their need to sell lucrative, commission laden policy. Secondly, you need to know that they are not licensed to give legal advice. So feel free to questions their motives when they practice law without a license by saying you don't need asset protection because insurance is enough.

Insurance policies may cover most situations, but there is no absolute 100% guarantee that you will be covered in every imaginable situation-- which is why you need to use the proper mix of entities to supplement your asset protection planning and why you need to steer clear of insurance 'professionals' who would tell you that insurance is all you need.

If you are like most people, you put your life insurance policy away after you bought it and have never looked at it since.  Many life insurance agents do not follow-up with their clients on a regular basis and as a result, the client has no idea how their contract is performing.  There have been so many positive changes in the life insurance industry over the past decade that everyone should seriously consider having their life insurance policies reviewed by a professional.  InsuranceReview.net will provide you with an up-to-date written description of your policy and allow you to see if it is performing as originally planned.  We see policies all the time that were supposed to be “paid-up” and after our examination of the contract, we discover that the policy is actually scheduled to expire.  Just imagine paying your premium for years only to find out that your policy may not be there when you need it most.

Click here to begin the free policy review process or call us at 866-474-3100. 

My incredulity is further stretched when these so-called experts claim that APTs are the right choice for U.S. real estate holdings.

If you own real estate in California, for example, will holding title in either an LLC owned by an APT or directly in an APT provide you with any greater protection?

The answer is no.

If you get sued over an accident on the real estate a California court will have jurisdiction over the case. California law - not the law of the Caymans, Belize or your promoter's favorite island - will govern the case. The California court is free to ignore the tens of thousands of dollars you spent on your 'bulletproof' APT.

If you get sued personally on a claim unrelated to the real estate a domestic LLC (set up at a fraction of the cost) will protect  you as well as any overblown APT will a judgment creditor will have the same trouble collecting from a properly structured and maintained Wyoming or Nevada LLC as they will from an APT.

So what have you accomplished, besides spending a lot of money by going offshore? Well, you have probably angered the judge in the case. Let's be very clear: judges do not like to deal with people who set up offshore structures. They are immediately suspicious of a citizen who would go offshore for legal protection. And in a court case, you want to do whatever you can to keep the judge on your side. An APT is at least one strike, perhaps two, against you.

As well, after 9/11 there is a much greater scrutiny of offshore transactions. Many promoters will not tell you about the new filings that must be made when you use an APT, or the consequences of failing to file.

Going offshore presents many traps of the ill informed. Don't be another future audit. Wyoming and Nevada entities can protect you as well as any APT at a fraction of the cost and without raising any eyebrows.

And I always get a laugh when I answer it with: “Because I have offices there.”

But in truth, the reason I have offices in Reno and Minden, Nevada, and in Jackson Hole, Wyoming, is because the two states offer truly excellent corporation and LLC benefits.

First of all, there are no state taxes, either personal or corporate, in either state. Everyone knows why there are no taxes in Nevada – gaming revenues cover the bill. Granted, the casino industry has been charged with privatizing the profits and socializing the problems but for now and into the future no one is complaining too much as long as there are no state taxes.

Wyoming has no state taxes as a result of mining royalties. They are digging up coal and other resources at a prodigious rate, and the royalties have produced a significant surplus for the state.

So you won’t pay extra taxes for choosing Nevada or Wyoming as your corporate home. You will pay an annual fee ($225 for Nevada/$50 for Wyoming) but for that small amount of money you are getting a favorable asset protection law.

Both Nevada and Wyoming have the charging order protection for LLCs and LPs. Nevada just added charging order protection for corporations with two or more shareholders. You can be certain Wyoming will follow suit. The subject of another post, know that charging order protection offers excellent asset protection.

Wyoming and Nevada both allow for nominee officers. By using a person other than yourself (a “nominee”) to be listed as the company’s officers and directors on the public record you can gain a great deal of privacy.

Privacy, no state taxes and excellent asset protection are the three answers to the question: Why Nevada and Wyoming?

But I need to remember that we are not taught in schools why we should be incorporated. And we’re certainly not born with it. So now and then it is important to step away from all the bylaws and agreements and strategy brainstorming and pose the question: Why incorporate?  The answer is threefold: Protection, Taxation, and Credit.

The first big reason to incorporate is to gain asset protection. As you probably know – doing business in your own name as a sole proprietorship (or worse yet, as a general partnership) offers no asset protection. One claim and everything you own – not only your business assets but your personal assets as well – are exposed.

Using corporations and LLCs can protect your personal assets from creditor claims. And provide you with peace of mind.  You can also use more than one entity for even greater protections. For example, if your business corporation gets sued a judgment creditor could reach inside the business. But what if the valuable assets – the equipment, the trademarks and the machinery – were in separate LLCs and leased back to the corporation?

The answer is that those assets are not owned by the corporation. They are beyond the creditor’s reach. The right use of entities can also save you on taxes, particularly on payroll taxes. Work with a good CPA and you will see the savings immediately. And remember, sole proprietors are audited at a five times greater rate than corporations and LLCs. A good financial advisor can help you maximize the benefits of business taxation.

The third excellent reason to incorporate has to do with credit. Credit for your business can be obtained through a corporation or LLC separate and apart from your personal credit. Remember, as your business grows and your credit needs grow with it, you will certainly hit the limits on your personal credit. You need to establish an independent business credit profile for your future success. A corporation or LLC is the best vehicle for carrying forward this important strategy.

Three important strategies – asset protection, tax minimization and credit enhancement – are the core reasons for why you should incorporate.

Federal taxes increase every year.

Although the individual, capital gains and corporate tax rates may not have changed, the most insidious of all taxes continues its skyward march.

Payroll taxes. The money deducted for Social Security and Medicare. The money that is supposed to be set aside in a trust fund for future retirees. The money that actually gets spent by the government the minute they get it.

Payroll taxes are imposed at the rate of 7.65% on the employer and employee alike. So on a $1,000 paycheck the employee loses $76.50 and only receives $923.50. And the employer has to pay $76.50 on top of the $1,000 to the employee (and the government).

But what if you own the business and are the only employee? Then you are paying 15.3% on everything you pull out in salary. So don’t believe the apologists who say it is only 7.65%. When you own the business it is double that: a hefty 15.3% on all the salary you take up to the yearly wage base. Which is why you may want to use an S corporation to minimize your payroll taxes by taking some money out as a dividend distribution, which isn’t subject to the 15.3% tax. But that’s another post.

The point is that these payroll taxes keep going up every year because the government keeps raising the wage base. This year the 15.3% rate applies to all income up to $102,000, resulting in a tax of $15,606 per employee. On salary above $102,000 wage base, the Medicare tax of 2.65% continues to apply.

In 2009, the wage base is expected to be $106,800, up to $4,800 from this year. Or, for the owner of the business another $734.40 in extra payroll taxes. On just one employee!

The government is already estimating a wage base of $111,600 for 2010, $116,100 for 2011, and $121,500 for 2012. So in 2012, your payroll tax will be $18,589.50, up almost $3,000 in four year’s time.

Remember, these taxes are insidious because they get paid throughout the year by your bookkeeper or payroll service. You may not notice them.

But they are very real and you and your team must plan for them.