How An Entrepreneur Can Have The Same Legal, Financial, and Tax Advantages Of Fortune 500 Corporations


by Shawn M. Casey, Esquire

It really doesn't matter whether you're in a one-person business or have several employees, your financial position can be tremendously enhanced by incorporating.

The corporation has been called the Ultimate Tax Shelter and the Last Way Left for the Little Guy to Get Rich and you're about to learn why. You see, when you incorporate, all the great money-saving tax advantages that benefit and protect billion-dollar giants like IBM, GM and GE, are put into place to protect you, save you money and help speed up the growth of your business .

When you do business in your own corporation, you open up a whole new world of opportunities for increasing your net profit through proper tax planning. The Corporation will also protect you from personal liability for problems involving corporate assets or employees.

Why Incorporate?

• Avoid personal liability. Risk is something we all face in business. But with proper analysis and reduction of risk we can prosper without fear of losing everything. The corporation was originally conceived to provide business owners with protection from liability. The idea was to encourage people to create and grow businesses by eliminating some of the risk of personal loss.
• If you structure your corporation properly, you can make it virtually impossible for any lawsuit to seriously hurt you.
• The owners of a corporation are its shareholders and no matter how many shares they own, shareholders are not liable for corporate activities. If the corporation is sued, only the corporate assets are at risk, the shareholders remain safe and secure.
• If an employee causes an accident, the victim can obtain a judgment against the corporation, but not against the shareholder. If an employee becomes disgruntled, he can obtain a judgment against the corporation, but not against the shareholder. If someone is injured on corporate property, the result is the same.
• As long as the corporation is properly run, the shareholders are not at risk.
• Gain important tax advantages. As the Internal Revenue Service and Congress developed the tax code, two methods of taxing corporations were created. Depending on your choice of tax treatment as a C corporation or an S corporation, you can alter the level and effect of taxation. With proper tax planning, you can greatly reduce your income taxes and dramatically increase your net income. You’ll find a further explanation of tax advantages below.
• Avoid being designated as a real estate dealer . If you are a real estate investor who buys real estate with the intent to sell (property you flip or quick turn ), the Internal Revenue Service can choose to classify you as a dealer.

  The problems with being classified as a dealer are:

  1. You cannot depreciate any real estate, including long term investment property. This greatly increases your taxable income.
  2. Instead of reporting rental income on Schedule E of your personal tax return, you must report it on Schedule C. The net income you report on Schedule C is then entered on Schedule SE, the schedule used to figure your self-employment income tax. You will pay up to 15.3% of your net income as additional taxes using this method.
  3. You cannot defer the tax due on the sale of a property by using tax-deferred exchanges under Section 1031 of the Internal Revenue Code. Section 1031 allows the owner of investment real estate to sell his property, escrow the net proceeds, purchase additional investment property and avoid paying part or all of the income tax which would otherwise be due. For more information on tax deferred exchanges, please refer to the report titled, How To Never Pay Taxes When You Sell Real Estate .
  4. You cannot elect to use the installment method of reporting the sale of real estate. Usually, when you sell a property and receive payments in lieu of the complete purchase price, you can choose to report the money you receive as income only when you actually receive the money. Without the option to elect this installment method of reporting, you must report the total amount of the sale and pay the full amount of tax due, even if you have not yet received the money. If you sold a property for $50,000 with a $5,000 down payment, then you could actually owe more income taxes than the $5,000 you received from the purchaser.

  To avoid being classified as a dealer, savvy real estate investors buy and sell real estate through their corporations. If the corporation is classified as a dealer, the individual is not affected. The individual can continue to report his rental income on Schedule E and receive the appropriate tax advantages.

  If the corporation’s tax status is hurt by being classified as a dealer, you have the option to dissolve the corporation and start a new one. The corporation’s tax status is usually not affected by the classification as a dealer because the penalties for being a dealer do not hurt the corporation when it simply buys and sells real estate.

What Does It Take To Become A Corporation?

The first step in forming a corporation is to choose the state in which you will incorporate. You have two basic choices the state in which you operate or Nevada.

Assuming you will be doing business in your home state, this is an obvious and excellent place to form your corporation.

1. You should be aware, however, that more corporations are formed in Nevada than in any other state. Nevada’s laws provide more privacy and protection for shareholders than any other state. Some of the primary advantages of Nevada are:
2. Nevada does not levy any corporate or individual taxes. Most other states have corporate income taxes, franchise fees or both.
3. Nevada does not require the shareholders to be disclosed. If the shareholders’ names are not included in the filed information, then no person can discover them from the public information.
4. Nevada allows the articles of incorporation to eliminate any liability of the directors. In other states, the directors can be held liable to outside parties and to the shareholders.
5. Nevada is the only state which does not have an information sharing treaty with the Internal Revenue Service. Other states share your personal and corporate income information with the Internal Revenue Service.

Because of these tremendous legal advantages, forming a Nevada corporation is the choice of thousands of businesses of all sizes. This course is made even more attractive by the fact that you never even have to visit Nevada. There are several incorporation services which will file all the necessary documents. These services will also act as the required registered agent within Nevada.

After you have filed incorporation papers, the next step is to hold initial meetings with shareholders and determine who will serve as officers and directors.

A corporation is required to have three officers a president, a secretary and a treasurer. In most states, one person (you) can act as all three officers. Your entire board of directors can be just one individual in most states.

As owners of the corporation, the shareholders elect the directors to the board of directors. The directors then elect the officers. The directors and officers serve for a term of one year or until their successors are elected.

After electing officers and directors, it's necessary to authorize and approve the bylaws, articles of incorporation, stock certificates, and other such matters at the initial meetings. Once you have completed these meetings and filed the appropriate information in the corporate record book, you have finished the process of incorporation.

Many people wonder whether they should try to do all this themselves or hire an attorney. An attorney will charge anywhere from $500 to $750 plus the cost of the state filing fees.

If you have the right information available, you can file the correct documents with the state and complete all the corporate documents yourself.

Once incorporated, you are required to hold annual meetings of the shareholders and directors and to record the minutes of those meetings. An attorney will charge from $200 to $400 to complete the minutes of these meetings. Again, with the proper information, you can hold these meetings and complete the minutes yourself.

Forming and running your own corporation is actually fairly simple. Certainly, you can handle all the required tasks yourself. Doing it yourself provides you not only with a significant cost savings, but assures you that everything is done just the way you want it.

"C" or "S" Corporation, Which Will Work Best?

The Internal Revenue Service automatically treats every corporation as a Subchapter C corporation. The shareholders can unanimously elect to be treated differently, as a Subchapter S corporation.

• A C corporation has no limits on the type of shareholders, the number of shareholders or the classes or types of stock issued. An S corporation is limited to 35 shareholders who must be individuals or certain types of trusts. An S corporation can only have one class of stock which must be common voting stock.
• A C corporation is a separate taxpayer. This means a C corporation pays tax on its net income. If you are the owner of the corporation and an employee, you can make certain that the corporation never pays taxes by spending all the money each year. If profits are still undistributed as you approach the end of your tax year, you can pay yourself those profits as a bonus. Because the C corporation is a separate taxpayer, you will have a variety of tax planning options that are not available with an S corporation.

If you choose to leave profits in the corporation, there are tax brackets for C corporations just as there are for individuals. The tax rates increase as corporate income rises. Many people think corporate tax rates are very high, much higher than individual tax rates. While this is true at the higher income levels, corporate tax rates are quite reasonable at lower income levels. For example, the first $50,000 of corporate net income is taxed at only a fifteen (15%) percent rate. This rate is sometimes lower than your personal tax rate.

An S corporation files a tax return, but does not pay taxes. The shareholders pay taxes on the net profits in accordance with their respective shares of ownership. If the corporation has a net profit which it retains and does not distribute, the shareholders pay taxes on the money anyway.

An S corporation is particularly useful in one specific situation when you are starting a business and expect to lose a substantial amount of money for a few years. The losses will be reported on the shareholders’ tax returns and can offset other income.

How Choosing Your "Tax Year" Can Save You Thousands

According to the 1986 Tax Reform Act, an S corporation is generally required to have the same tax year as the shareholders (you). For an S corporation the tax year will begin January 1st and end December 31st.

Example: If you do business as a sole proprietor, a partnership or S corporation and you end up with a large undistributed profit in December or receive a large of sum as profit in December, you will have no choice except to recognize the income in the current year and pay taxes accordingly.

A C corporation can have its tax year begin in any month of the year. The only requirement is the tax year must end on the last day of a month. Since your personal income tax year ends December 31st, you may want to choose a corporate tax year with a different ending day. A common choice is a tax year which begins July 1st and ends June 30th.

Let's say you run your business as a C corporation with a tax year ending on June 30th. If you have either of the situations described in the "Example" above, you don’t have to worry about distributing the income until June 30th of the following year. You have the right to shift the income from the current year to the next year. When you set up your C corporation correctly, you will have the opportunity to engage in this type of tax planning.

Here's how a "C" corporation allows you to adjust to changing situations. When the profit is still sitting in the corporation in December, you have two choices: The first is to leave the money in the corporation and deal with it next year. The second is to pay the money out in expenses and bonuses to yourself, and pay taxes in the current year. You can decide based on what works best for your specific situation. Your goal is to pay the least amount of income taxes.

If you leave the money in the corporation, you can then pay yourself a salary on January 1st. You have now shifted the income and the tax to the next year, but you have the money available to you now. You could also choose to leave the money in the corporation until the end of the corporation’s fiscal year. You would then determine how much money you should distribute to keep your income taxes as low as possible.

How You Can Get the Best Employee Benefits Available

As an employee of your corporation, (especially if you're the only employee) you want the best benefits available. You can also provide some or all of these benefits when you have additional employees. Please be advised that you can only provide yourself with a limited amount of tax deductible benefits if you don’t make them available to the other employees.

The most important benefit you can provide (yourself) is a Medical Reimbursement Plan. This plan provides for the payment, by the corporation, of all medical expenses for the employee, his spouse and his dependent children. The corporation will pay for medical insurance, co-payments, deductibles, pharmaceutical drugs, and expenses not covered by insurance, including elective surgery. These are all expenses you would pay anyway, however, when the corporation pays them, it gets a tax deduction for each expense. As an individual you don’t get a tax deduction for medical expenses except for that part which exceeds seven and one-half (7.5%) of your adjusted gross income.

If you are paying $5,000 annually for medical insurance and expenses, wouldn’t it be great to have the government give you a break and contribute a little something to help?

To really understand the huge benefit to you, you have to realize how pre-tax and post-tax incomes differ. When you personally are paid $10,000, you pay about $3,000 in federal, state and local taxes. You have just $7,000 of post-tax income left to pay your bills. Wouldn’t it be better if you could pay your bills using the entire $10,000 instead of just $7,000? The corporation can and does use the entire $10,000 as pre-tax income available to pay expenses. When the corporation provides medical or other benefits to you, these benefits are tax deductible expenses to the corporation. In other words, neither the corporation nor you will ever pay income tax on the money used by the corporation to pay benefits on your behalf.

Since you are going to pay expenses such as medical and automobile costs anyway, doesn’t it make sense for you to allow your corporation to pay them on your behalf and get the tax deduction?

The medical reimbursement plan requires special language and documentation during the formation of your corporation. You must set up the plan correctly to get the tax deduction. It is only available to you as an owner if your corporation is treated as a C corporation. This does not apply to an S corporation.

The corporation can provide additional insurance coverage for you. It can pay for life insurance, disability insurance, long term care insurance, catastrophic illness insurance and any other type of insurance you can find to purchase.

How To Have Your Own Company Car And Other Corporate "Perks"

Most self-employed people need a car or truck to carry out the work of the corporation. The corporation can pay the car payment, gas, oil, maintenance, insurance and repairs. The employee can use the car for personal as well as business reasons. The corporation will receive a tax deduction for the business use percentage of all expenses.

The Internal Revenue Service imposes limits on the price of the vehicle you, as a corporation, may purchase. If the price of the vehicle is greater than about $15,000, the corporation may not be able to deduct the entire cost of purchase. Many entrepreneurs take advantage of certain alternate methods so they can deduct the cost of a more expensive car.

Educational expense deductions are readily available to corporations engaged in a particular business. For instance, education is tax deductible for business purposes if you are maintaining or improving your skill in your current business. Education is not tax deductible to the individual or the corporation if the education is for the purposes of learning a new skill or learning how to invest.

If, prior to incorporating, you incurred expenses such as education to improve your skills in your chosen business, you should be certain to reimburse yourself. The corporation will then receive a tax deduction for the expenses incurred.

If you work from your home, you have the opportunity to deduct the portion of your home’s expenses that correspond to the business use of your home. To determine the percentage you can deduct, you first have to figure out how much space you use which is solely used for your office. Your dining room table doesn’t count. Your living room table doesn’t count. You must use the space solely for business.

For example, if you use an 8-foot by 8-foot room for your business, you are using 64 square feet. Divide the 64 square feet into the total amount of square footage of your house (we’ll use 1,800 square feet). You can use 3.55% of your house expenses as a business deduction. Since you are already receiving a personal deduction for your home mortgage interest and your real estate taxes, you will only be deducting expenses like utilities.

For most people, the home office deduction is more trouble than it’s worth. The home office deduction is also an item the Internal Revenue Service (IRS) will always look at closely. The IRS is so concerned with this deduction because they know many people exaggerate the space they use for business and the actual expenses.

Even if you don’t take a deduction for the home office, you can deduct the actual expenses associated with your business. These include the usual business expenses as well as alterations or improvements necessary for your business such as telephone or electric outlets.

If you purchase expensive pieces of equipment such as a computer system, you usually can’t take a deduction for the full amount of the expense. You are required to amortize the cost of the asset over its useful life (normally 3 to 5 years). An important exception to these rules is contained in Section 179 of the tax code which allows your corporation to deduct the full cost of any equipment purchases up to an annual total of $17,500. In other words, the tax code allows you to do the obvious, get a tax deduction in full when you spend money now.

Travel the World in Tax-Deductible Style

In the course of your business, you may be required to travel to various places both inside and outside of the United States. Your costs of travel, including meals, are tax deductible for business purposes.

You can use this tax deduction to your advantage in several ways. You might, for instance, desire to travel to a particular city on a regular basis. You might be visiting your son at college. You might just be hanging out at the beach. If you combine business with pleasure, the corporation can pay for the entire trip and get a tax deduction for it.

First, you must have a business purpose for the trip. If you’re a real estate investor, you could own one or more properties near the location in which you’re interested. You are visiting the properties for a business purpose so the trip is tax deductible. If you are making sales calls on businesses in that area, the trip is tax deductible.

If you are going to combine business with pleasure, make sure you keep complete and accurate records of your business activities and the time you spent.

Becoming A Corporation Makes Financial Sense

When you put it all together, you can easily understand why your business should be incorporated. From the tremendous tax deductible benefits you receive to the liability protection you enjoy, you benefit in a myriad of ways.

Frankly, I believe it’s foolish to engage in business without doing so as a corporation. I should warn you right now, however, some accountants and attorneys will advise you not to incorporate. They’ll tell you it costs too much money or that you don’t make enough money to incorporate.

These people are absolutely and unequivocally wrong. You should incorporate as soon as possible. If you are just starting your business, you should incorporate immediately, even if you are losing money, especially if you are losing money. When you start to make a profit, you will be able to use the previous loss to reduce the profit.

In plain English, this means you will be able to take tax deductions now for expenses you are paying anyway like medical and automobile bills. These tax deductions will pile up and you will use them to offset future income. You can do it now or you can waste thousands of dollars of deductions and pay huge amounts of unnecessary taxes.

Should You Hire An Attorney Immediately?

Well, do you like spending money? If you do, forming a legal corporation is a service that can be performed by practically any general practice attorney. For filling in a few standard forms and a few hours office work, most attorneys will charge you around $500. If you want them to handle your annual meeting, it's about $300 every year. But there's an excellent way you can avoid these costs.

In my law practice, I formed corporations for clients regularly. Today, however, I lecture to audiences from coast to coast on how to protect themselves legally and financially without the aid of expensive attorneys. I've decided that one of the most valuable services I can provide is to help others follow a few simple instructions and form their own corporations.

I have put all the easy-to-follow, step-by-step guidelines into a low-cost kit called "How To Create And Use Corporations". After only a few hours with this vital information, you'll have ultimate control over your own corporate future. You'll be secure knowing you're receiving every single benefit the law allows you. You will save hundreds of dollars in fees, a lot of valuable time, and eliminate the inconvenience of trips back and forth to an attorney's office. Best of all, you'll receive thousands of dollars in tax deductions you didn't have before.

I strongly believe this is a kit that absolutely every small business person should own. With it you will . . . Learn how to properly create and run your corporation to obtain the maximum benefits for yourself and your family. Find out how to save hundreds of dollars in attorneys’ fees by holding your own required corporate meetings. Examine the differences between S and C corporations to understand which one is right for your specific situation. Create your personal Medical Reimbursement Plan under Internal Revenue Service guidelines. Learn the truth about Nevada corporations and how to maximize their value for your business. Understand the rules about the Dealer classification and how they affect you if you are a real estate investor.

Whether you're in business now, about to start or just thinking about "someday" starting a business . . . whether you are a sole proprietor or employ dozens, this is information you need to have in your hands immediately. The sooner you get these facts, the better you'll be able to organize and guide the growth of your business.

"How To Create And Use Corporations" includes six audiocassettes, a comprehensive workbook (over 250 pages) containing every form and checklist you need, plus step-by-step instructions that tell you when, where and how to file your corporate papers. In addition, the kit includes computer software formatted for both IBM-compatible PC's and Macintosh Computers, allowing you to create and print the forms and documents you need, right in your own home. You'll have literally everything you need to form your own corporation - - or as many corporations as you wish -- all for one low cost, just $497. WIN members only $397.

Remember, even if you're just thinking about getting into business someday soon, NOW is the time to get this information. Then you'll be "ready to go" when the time comes. There's just no better way to get the huge tax deductions, health benefits, liability protection, and all the other perks big companies enjoy -- than to incorporate.