Entity Structuring for Tax Savings Part 1
<h2> Structure your Entity for Tax Deductions and Asset Protection <h2>
<p> This is a topic that I’ve covered more extensively in my audio program: “Incorporating Brilliance – What the Rich do to reduce their taxes, protect themselves and increase their privacy.” I want to discuss this because it is so fundamental to your business life. <p>
<p> There are five forms or types of business structure: sole proprietorship, general partnership, corporations “S” and “C”, limited partnerships and limited liability companies (LLCs). <p>
<h2> Sole Proprietorship <h2>
<p> A sole proprietorship is the simplest form of business. It is established simply by making the decision to go into business. You don’t need to file any corporate documents (though you may still need a business license) – there are no corporate formalities. Just print up a business card (if you want) and off you go. <p>
<p> It’s simple, but fraught with danger and misjudgment. Here’s why. Sole proprietorships provide absolutely no asset protection from within or without. That means that if you are sued because of something business related (product liability, for example) you can lose everything. Now, most people realized that as business people, their investment and business assets are at risk. They are willing to accept that risk as part of the risk/reward calculation. <p>
<p> What many people don’t realize is that as sole proprietors, their personal assets are also at risk. That means if you are sued, not only can you lose your business, but you can lose your personal assets as well. That’s right, your home, your car, your bank accounts, etc. Virtually you could lose everything. But there’s also a great tax reason NOT to have a sole proprietorship. It’s called self employment tax. I call it the self employment tax penalty. Sole Proprietors are subject to self employment tax of 7% of approximately the first $85,000 in income. That’s about $6,000 per year! The cost of setting up and maintaining a corporation is a fraction of that amount, so it makes no sense. So, never do business as a sole proprietor! <p>
