Good morning all… today is a short one because it is very simple.  As a business owner you have more flexibility than a regular wage-earner employee because you can sometimes choose to defer business income from one year to another.  You can also choose in many cases to time your purchases of business expense items when they are most favorable.  Since the way our tax system is set up punishes you for high income with much higher marginal tax rates, you can often use this ability to time income and expenses to your advantage.  I told you this one would be simple.

I thought of a fourth way to reduce your taxes that had slipped my mind originally, and it is a HUGE ONE that many people aren’t even aware of.  I’ll share it with you tomorrow on Tax Day…

Have a great day… 

Rob

Morning All…

There are two major types of limited liability business… the Corporation and the LLC.  For most small businesses, you are going to be choosing between these two.  Specifically, for most small businesses the choice is between an S Corporation (which is just a regular corporation with one extra form filed one time) and an LLC.

It is Mainly a Tax Decision

I believe that this decision is primarily about potential tax savings. The information below may not be accurate for all states and situations, you need to figure this out yourself or with the help of your accountant and attorney if you don’t know what to do.  I am going to greatly simplify this decision below as it applies to many small one or two owner businesses…

The biggest drawback with an LLC is that, as an owner, you have to pay payroll taxes on all of the corporate profits, not just on salaries and wages.  This can be a significant amount of additional taxes that you pay with an LLC and was the main reason I went with the S corp.

Let’s look at an example to clarify this.  If we assume that the business is generating $200,000 in total income and total deductible business expenses of $100,000 then the net profit is $100,000.  With an LLC, you will report this as personal income and be required to pay payroll taxes on this entire amount.  

How Much Are Payroll Taxes?

Payroll taxes are the taxes that are paid on salaries to fund the government Social Security and Medicare programs.  The employee pays a certain amount towards each and the employer is required to match that same amount.  When you own your own business, you pay both parts, so it is double what you are used to seeing on a paystub. 

In 2008, the payroll tax calculation is 15.3% of the first $102,000 plus 2.9% of everything over $102,000.  The $102.000 number increases every year and in 2009 it will be $106,800. 

Going back to our example of $100,000 profits, the owner of the LLC would be required to pay $15,300 in payroll taxes on that $100,000. 

S Corporation Payroll Tax Savings?

So, an LLC generating $100k profits you pay $15,300 in payroll taxes.  How about an S Corp?  With an S Corp, you can pay the owners a reasonable salary for the job that they do.  And you pay the payroll taxes on this salary.  The rest of the profits are considered the income generated by the fact that you took the risk and invested the money to start the corporation and you pay income tax on this money but not payroll taxes. 

If we assume that you determine that a reasonable salary is $55,000 for your job then you will pay $4207.50 in payroll taxes, the corporation will also pay $4207.50 in payroll taxes for a total of $8,415 in total payroll taxes.

Remember that the LLC owner paid $15,300 in Payroll taxes. 

So, the S corp in this example saves you $6,885 per year in payroll taxes.  Assuming that you are going to be in business for a while, this can add up.  In under 15 years this is $100,000 savings.  And the payroll taxes just keep going up…

With these tax savings, why would anyone start an LLC instead?  Well, one reason is that if you are already maxing out your payroll tax contributions at a regular job, or in another business, then these tax savings are greatly reduced.  Here are few other factors…

Limitations and Requirements of an S Corp…

There are a few limitations on S corps which might affect some people:

□      Can’t have more than 100 shareholders

□      Can’t have foreign owners

□      Can’t be owned by other corporations or LLCs

□      S corp profits need to be distributed according to the percentage of ownership

And, S corporations require the owners to follow a bit more corporate formality… to “follow the corporate rules”.

It is not too big of a deal, once you understand the rules and have an easy to use system in place to stay ahead of the game.

My simple Cover Your Assets package is a Clear, Concise, Step-by-Step program to assist small business owners to know what to do and when to do it with regards to their corporate record keeping requirements.

Have a great day,

Rob

[Disclaimer: None of these posts should be considered legal or financial advice.  You should consult an attorney or CPA in your area to advise you on the specifics of your situation.  Life Tip: Don’t believe anything you read on a blog on the Internet unless you have checked it yourself.]

Hello Reader… 

Are you dreading Tax Day April 15? (If you want a place to blow off steam, there is a big Tea Party movement underway here in America protesting the current direction of our government bailouts- you might want to join them on April 15 in your town– google it)

I think that we reap the benefits of living in America, and we are obligated to pay the exorbitant taxes that the various levels of government confiscates from our earnings each year under threat of imprisonment.  However, I do not believe that there is anything good or patriotic about paying more taxes than we are legally obligated to do.  Our only choices is to vote for more economically-literate politicians or to move to another country.    

I believe that the most important thing that you MUST DO in order to minimize your taxes is to own your own business…

Besides the tax advantages, you also get liability protection for your personal assets should your business “harm” someone resulting in a lawsuit and you are looked at as more professional by many people you want to do business with.  We’ll discuss these aspects in more detail later, but let’s concentrate on the tax savings…

There are three ways owning your own business allows you to reduce your taxes legally… We’ll talk about one each of the next three days. 

1. Business Expense Deductions
2. Payroll Taxes
3. Timing of Income and Expenses

Business Expense Deductions

In the most simple explanation, businesses have income or revenue that comes from their customers in exchange for goods or services.  And they have expenses that are generated in the course of doing business.  For tax purposes, we take the income and subtract the expenses (also called Deductions) and we pay taxes on the profit that is left over.  So we want to keep track of as many deductions and business expenses as we possibly can, while remaining within the law. 

Regular individuals do NOT have the same ability to total up and subtract deductions without setting up a business. (even a Schedule C sole proprietorship business which I wouldn’t recommend in most cases)

As a simple example, if you have a small jewelry business, then you will have all of the revenue from selling the jewelry in all the many ways that you can find to sell it.  You will have a number of expenses such as:

¨     the jewelry that you purchase from the manufacturer

¨     the commissions you pay to those who sell your jewelry

¨     your automobile expenses incurred in the operation of the business

¨     your travel expenses (plane, hotel, meals) incurred in the operation of the business

¨     advertising, website and Internet expenses (including training and Education)

¨     computer, phone, etc.

¨     office supplies

¨     rent- office, warehouse, storage

¨     and a whole lot of other things that you spend on your business (you just need to keep good records and document the business use)…

In many cases, people build their businesses out of things that they are passionate about, and turning this into a business allows you to “write-off” a lot of expenses that might otherwise be paid for with after-tax dollars.   Since most of your income is reduced by 35-50% in taxes (add up 7.65% Payroll Tax plus 15-35% Federal (and going up) plus whatever State and Local taxes (6% in GA) and you are often paying 40-50% in taxes on any dollars that you earn in wages.  If you can pay for some things using untaxed dollars (and deduct them from your business, and thus from your reported income) then you are able to get things at an effective 40-50% discount.

So, you must have your own business.  Tomorrow, we’ll talk about what kind of business allows you to Minimize Your Taxes the best…

Have a Great Day,

Rob

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There are a few limitations on S corps:

·       Can’t have more than 100 shareholders;

·       Can’t have foreign owners

·       Can’t be owned by other corporations or LLCs

·       S corp profits need to be distributed according to the percentage of ownership

An S corp requires a bit more corporate formality to “follow the corporate rules”.  It is not too big of a deal, once you understand the rules and have an easy to use system in place.My

Corporate Veil Pro package is a Clear, Concise, Step-by-Step program to assist small business owners to know what to do and when to do it with regards to their corporate record keeping requirements.  It Corporate Veil Pro package is a Clear, Concise, Step-by-Step program to assist small business owners to know what to do and when to do it with regards to their corporate record keeping requirements.  It

demystifies the process and shows how easy it can be to operate an S corp within the rules.  A one-time investment of $297 plus an hour or two a year of simple fill-in-the-blank tasks, and you can save a lot of taxes and do it totally legally.  For me, it was a no-brainer to decide on an S Corporation for my primary business.

Disclaimer: This is not intended as legal advice, just my understanding.  You need to research it yourself and get professional help before proceeding.  Life Tip: Don’t believe anything you read on a blog on the Internet unless you have checked it yourself.

Rob

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What is at Stake?

Everything you own personally (now and in the future) could be at stake in this decision…

“Limited Liability” business means that the business is a separate thing from you personally and if setup and managed properly it gives the owners of the business a level of protection from things that happen within the business.  Put simply, it makes the business liable for things that happen as a result of business dealings and situations, rather than the owners personally. 

Before we get too deep into discussing what form of business you should start, let’s talk a little about whether or not you need to have a limited liability business at all… 

The Sole Proprietorship is the Default Business

When you start an informal business and don’t incorporate or start an LLC, you are automatically a Sole Proprietorship without filling out anything else.

The IRS expects you to report all the income you generate in this business on your own personal tax returns.  You are also able to deduct many of your business expenses on your tax form, but the taxes for the business and you personally are all on your personal tax return.

The Sole Proprietorship Offers No Protection

There is no distinction between you and your business legally or financially. The business is officially your name although you can “do business as” a different name.  Even with a Sole Proprietorship, you should maintain a separate bank account and records of income and expenses for this business, but this is for ease of recordkeeping and tax preparation.  If someone sued your business, then all of your business and personal assets would be fair game to payoff any judgment against you. 

The sole proprietorship is acceptable for one-person micro-businesses with extremely low revenue,  no expectation of growth, and low liability risks.  If you are buying and selling $5,000 a year in beanie babies on eBay then you are probably ok to stay a sole proprietorship until you dream to expand and get larger.

The Six Triggers

There are at least six “Triggers” that I think make it almost mandatory that you start a limited liability business (it isn’t that hard or expensive):

·       Having a partner in the business OR

·       Having employees in the business OR

·       Startup losses likely to be incurred OR

·       Future Revenue Projections more than about $20,000 per year (not a hard number) OR

·       Business requires outside investment to fund operations OR

·       Business has risk of harming someone physically, financially, etc.

If even ONE of these Triggers describes your business, then you likely NEED a limited liability business. 

There is one other HUGE BENEFIT to having this more formal business structure.  It provides a structure to realize your financial dreams.  Once you have a business, your mind starts to look for business opportunities, and they are everywhere.  If you are looking to escape your Hamster Wheel job, then starting a business of your own could provide your escape route and there is something about the formality of a Corporation or LLC that is psychologically more valuable….

To be continued…