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Why Incorporate?

February 29th, 2008

Every so often I need to step back and focus on the basics. I deal with corporations and limited liability companies (LLCs) every single day and for me it is an automatic slam dunk that Americans need to be incorporated.

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 and what are the benefits of incorporating your business?

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.

Posted by Garrett Sutton | Currently 1 Comment »

Your Annual Tax Increase

February 20th, 2008

If someone tries to tell you federal taxes haven’t increased for the last few years please set them straight.

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.

Posted by Garrett Sutton | Currently 3 Comments »

Using Quality Financial Professionals

February 13th, 2008

With all due respect to the many excellent accounting professionals out there, I am constantly amazed at the number of CPAs who willfully ignore the litigation explosion and the need for asset protection. These CPAs provide useless legal advice to their clients by suggesting that they are too small to incorporate.

Their advice is to operate as a sole proprietor, or worse, as a general partnership with others because it is easy and does not involve annual filing fees to the state. The problem, of course, is that you are never too small to get sued. And when you operate as a sole proprietor or general partnership the liability exposure is against all of your personal assets for many years to come. So the question isn’t are you too small to incorporate.

The accurate question is do you and your family have any sort of financial future to protect?

And given that that answer will always be yes, then the need to incorporate and utilize asset protection strategies is a given. You need to start protecting yourself as soon as you start your first business and buy that first rental property. You need to implement asset protection strategies at the start and then throughout your wealth building career. Remember, it is too late to protect your assets after a problem comes up. You need to act at the beginning so that there is no gap in your protection, no chink in your armor, as you move forward.

Another problem I have against lesser accounting professionals is that they argue that an extra corporate or LLC tax return is too cumbersome and/or expensive for their client. To this my first reaction is: Have you ever filed a corporate or LLC tax return? They are not difficult and should not be expensive. In my mind this particular ‘tax pro’ is giving the bad legal advice not to incorporate to cover up the fact that they do not know how to file anything other than a personal return. If you are dealing with such a person it may be that you have outgrown their services.

You need to work with professionals who understand the importance of asset protection, and will work with you to accomplish your important financial and protection objectives. It is important to know that the right team can make all the difference towards your future success.

Posted by Garrett Sutton | Currently 3 Comments »