Over the last 25 years people have asked me what the benefits are of setting up a Corporation or an LLC. I always say, there are a lot of reasons to form one but let me go over the five primary reasons.
- Liability Protection: This means that you and your personal assets are separated from any liability that can affect your Company. Yes, insurance is always a first line of defense, however if someone claims negligence or punitive damages, insurance will always find a way to not get involved or remove themselves from the equation, so they do not have to pay. This means that the liability falls through to the business. If you do not have a properly structured Corporation or LLC, this means that you the Proprietor would assume the liability. Should this be a lawsuit situation, that means your personal assets and business assets would all be considered one and could be seized in the event a Judgment is achieved by said Creditor.
- Tax Savings: I hear this all the time, “My CPA said not to incorporate or form an LLC until I am making over $50k.” If you are looking to build a successful business, you need to incorporate or form an LLC now. Operating your business or investments as a Sole Proprietor gives you very limited deductions, roughly about 15-30 different deductions on your Schedule C. Whereas, if you use a Corporation or LLC, the IRS Corporate Tax Code is comprised of 81,000 pages, which equates to 233-305 different deductions you can take advantage of that will not only allow you more use of your money upfront, but also reduce your tax payment to whom I like to call our silent partner, “Uncle Sam.” As a Sole Proprietor you are also subject to Self-Employment Taxes if you are in an active business which is equivalent to 15.3% of your hard-earned money. So just know that you will not only pay Federal Income Tax, but State Income Tax and the Self-Employment Tax. This all could add up to 40%-45% of your revenue. When the government talks about taxing the rich, they are talking about W2 wage earners and Sole Proprietors. As the old saying goes, “The more money you make personally, the more money they, (the IRS & State) take.” As a Corporation or LLC, you can play the “game” by the rules that the IRS wants no one to know about.
- Protection against Creditors: What does this mean? Let us say you were operating as a Sole Proprietor and had a liability issue that resulted in a judgment or you went through a marital dissolution and your “Creditors” kept coming after every asset you acquire. If you establish a Corporation or LLC, you can limit the amount of how much the Creditors could take. They can only garnish what you draw personally but cannot attack the Corporation or LLC since it was not involved in the previous liability issue. This would be like someone going after your employer if you personally had a liability issue.
- Can build its own Credit Score: Corporations and LLCs have the ability to build their own separate credit from you. This will allow you to double if not triple your borrowing ability depending on whether you have one Company or three. This allows you to keep your personal FICO score up & Debt To Income Ratio down since you are not the only credit profile being used. Building credit immediately in your business is essential to not only maintain cashflow but to also build up the credit history of the Company to show that it can manage and sustain debt without you the Principle personally guaranteeing everything.
- Estate Planning: If you are looking to build your business to either sell or pass it on to the next generation, you need to form a Corporation or LLC. Corporations and LLCs have perpetual existence which means they do not die; they simply get a new President or Member. When you have a properly structured Corporation or LLC, you will receive a Record Book which contains Ownership Certificates. Once these are issued to your Family Trust, the Company becomes part of your estate plan which allows your estate including the Company to by-pass probate, should something happen to the owners. This is how you create true Generational Wealth.
If these five primary reasons do not explain to you why you should setup a Corporation or LLC right now, I encourage you to contact my office at 775-384-8124 or send an email to email@example.com to schedule a time to speak with my Senior Strategists. We look forward to speaking with you and assisting you in building a more profitable & protected future!