Not Your Fathers Tax GuideFINALconverted

Joseph Rose, CPA, CTC

Not Your Father’s Tax
Planning Guide

A Business Owner’s Manual to Slashing Taxes in the
21st Century

Joseph Rose, CPA, CTC

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Not Your Father’s Tax Guide

Copyright © 2016 Joseph Rose
All rights reserved.

ISBN: 978-0-9982584-0-9
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DEDICATION

To my loving wife, Sue, whose unwavering support and confidence helped
see this project through.



CONTENTS

Acknowledgments i

Introduction 1

1 Those Who Fail to Plan 3

2 The Cost of DIY Accounting 13

3 The Advantages of Small Businesses 18

4 Plan and Play 25

5 The Millionaire’s Secret 30

6 When a Hobby is a Business 45

7 Business Deductions Most Don’t Know 61

8 Shifting and Splitting: Build Your Wealth 78

9 Tax Liability (DPAD) 96

10 Healthcare Strategies 106

11 Tax-Free Money Strategies 123

12 More Tax-Free Money Strategies 146

13 Real Estate Wealth-Building 161

14 CHIC Talk 175

15 Tax Shelters and Liability 191

16 Creating an Exit Strategy 214

17 Retiring in Style 233

18 Estate Planning 251

19 Surviving Audits 268

20 Shams and Scams 282

Not Your Father’s Tax Guide
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ACKNOWLEDGMENTS

Undoubtedly a project of this undertaking requires a whole host of people
to share in the load. I have been wonderfully graced with the exceptional

talents and assistance from my editor, Melody Bussey, Mason Bussey’s
extraordinary illustrating efforts, as well as those involved in the printing,
proofing, and submission of this work. But most of all, to you, my clients,
both past, present, and future. You continue to drive home to me how very
needed this type of information is, and I am continually honored to be part

of your own personal financial history.

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INTRODCUTION

At first I did not set out to try and change the world, or set the world on
fire. Like many CPAs I came to work, treated my clients with the respect
they deserved, and lived my life. But before long I began to notice the same
questions being asked of me. What can I do to reduce my tax burden? Why
does the government seem to have it in for the small business guy/gal?
What can I do to keep my business alive in this economy? The benefit of
nearly 25 years of working with small businesses in the US have been
brought together in this book to offer some help and advice that is perhaps
well timed, and at the very least needed.

This book isn’t intended to replace the face to face interaction that you
should be having with your certified tax coach, but what it can do, and what
I hope it will do for you dear reader, is to open a dialogue. More than that,
maybe it will open your eyes to the wide range of tax options that do exist
in the US to assist small business owners, so that they can keep their doors
open.

In the end, all of the advice in the world doesn’t mean much if you don’t
apply it, and this is where the book goes that one step further, to show you
how to take the advice and put it into action…now, as well as planning for
later. It comes down to a good plan, and then working the plan. And, you
know, the plan that worked for your dad, or granddad for that matter,
simply doesn’t work anymore. Most of the tax laws that were in effect
during their day and age, as well as the economy, are gone. What has

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replaced most of it leaves most business owners scratching their heads, or
even worse, in over their heads.

This is not your father’s tax guide, and some of the information in its
pages may be new information for you. I hope that it will save you some
headache, and heartache, when it comes to being a small business person in
today’s market. Better yet, I’m hoping it will help you continue to build a
very solid foundation, one that will assist you in your own wealth building
goals.

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CHAPTER 1

What I’m about to reveal isn’t rocket science. It isn’t even something that
can be relegated to the common sense file. For the most part, there are
some commonly held myths in regards to tax planning that costs business
owners (particularly small business owners), thousands of dollars each year.
With proper planning, it may shock you to know that you could reduce
your taxable income to $0. Finding legal ways to protect your assets, while
minimizing your income taxes is the process that is commonly called ‘Tax
Planning’, but to small business owners it could be your ticket to greater
wealth and freedom. After all, that’s why you became a business owner in
the first place, isn’t’ it?

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To start, you need to take a closer look, a review, of not only your business
accounts, but also your personal finances. Then utilize strategies that are
designed to keep more of your money in your pocket. Developing a plan
gives you a blueprint to savings, and an overall roadmap to successful
wealth building. These strategies could include such tactics as taking
advantage of the gray areas to write off, or take deductions through your
business for family medical expenses, tuition, and writing off allowances
paid to children. The tax code is difficult to decipher, which is why you
need a competent partner in the process. The fully licensed and certified tax
coach can explain the tax codes and how thousands of ways that exist for
tax reduction.

The certified tax coach should be someone who has a working knowledge
of current tax laws, the IRS guidelines, rules and regulations, as well as
many years’ experience in preparing and working with businesses and taxes.
Finding a great tax coach, and there aren’t that many of them out there, is
like having a silent partner in your corner, because they can help you avoid
the minefields that exist and explode on a regular basis in the faces of
unwitting small business owners.

In my 25 years of working in the tax industry I’ve witnessed some horror
stories, all of them stemming from lack of adequate preparation. The old
adage, “Those who fail to plan, plan to fail” was never truer in these
instances. Time and again I’ve watched exited entrepreneurs open their
doors only to have to close them a few years later because they can’t keep
up with the tax burden. This is a crying shame, each time it happens,
because it never should have occurred in the first place. “There is
something you can do!” I want to shout at them.

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The other silent partner that the wise and savvy business owner employs is
a bookkeeper/accountant. At first blush, it may seem that you wouldn’t
need someone to just do data entry, but in all reality, there is much, much
more to it than that. The trained professional keeps and generates up to
date reports for you that help you make better decisions, give you a very
clear idea of where you are, and if you are going off track from your
established financial blueprint. Ever ask yourself where the money went?
The bookkeeper can tell you, at a glance where it is going and the waste will
be very, very evident. This allows you to make adjustments.

One client that I have used to do his own books, but hired a bookkeeper
part time at my suggestion. After about a couple of months, he called me to
say that he’d hired his bookkeeper full time because the reports she was
sending him illustrated that he was wasting almost five hundred dollars a
month just on late fees or ATM fees. That’s nearly $5000.00 dollars a year
in savings, alone. She was worth what he was paying her.

The certified tax coach can assist you in creating a viable plan for your
personal and business landscape. Here are some of the top items that can
be deducted on your income taxes each year.

1. The Home Office
2. Pay Yourself a Salary
3. Hire Family Members
4. DBA
5. Childcare Expenses
6. Retirement Planning
7. Equipment Rental
8. Athletic/Gym Expenses

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9. Medical Expense Plan
10. Transportation

There are ways in which these can be structured so that you can take them
as business deductions, which is why it is so vitally important to seek the
advice of a trained professional. In general, this is how these top ten
deductions are utilized.

Office Space
If you are a home based business then you can deduct the square footage of
the office space from the overall mortgage of the home. This will be
depreciated, and the business will ‘pay’ the owner of the space (yes, that’s
you) for rental of the space. This adds up. Consider that the rent of a small
bedroom would be approximately $500/month. That’s $6000.00 dollars a
year that the company has spent on rental which can be deducted at the end
of the year. Of course, this will show up on your personal income as earned
money, but against this you’d write off expenses for a portion of the space
(which includes utilities, mortgage, repairs, property taxes, etc...).

Pay Yourself
This is one of the key components to keeping the IRS at bay. Many
business owners don’t think that they are large enough to give themselves a
salary. This is one of the key mistakes because if you are ever audited the
IRS will assess what others in your industry make per month, and will
assess back taxes and payroll fees. It could get ugly fast. Start now by giving
yourself a salary, making regular payments to yourself and any others that
work for you. Make a solemn vow, from this point on, that you will not
simply remove money from the business account for personal expenses.
Just. Don’t. Do. It.

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Pay Your Family
Along the same lines, paying your family is a great way to enjoy tax savings
while giving the kids money that you would have most likely been giving
them anyway. Here’s how. Set up a regular salary schedule for the kids per
week, or per month. As long as they participate in some manner in the
business, for example setting up the room for a business meeting, catering
or serving, or cleaning up the office after hours, then they work for you and
you can give them money. This gives you a tax break, as well as setting the
kids up for financial benefits when they are of age to go to college. For
example, if your child has been paid a salary for several years working for
you, when they go to University then they can file for financial aid as an
independent (which means they will qualify for more money). Or, if your
children attend private school, they can use the money they receive as a
salary to pay for their tuition. Family members can offer a wealth of

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assistance from website maintenance, social media campaigns, cleaning, and
other clerical duties.

DBA (Doing Business As)
If you are currently a sole proprietorship then
listen very carefully. You are throwing away
thousands of dollars each year, and in the end,
you may never get ahead of it. And, worse yet,
you have no legal protection if things go
sideways. In the event that someone decided to
sue your company, because you are a sole proprietorship, if they win their
case in court, not only is your business on the hook for damages, but your
personal savings and assets could be in jeopardy. If you are existing (and I
use that term loosely) as a sole proprietorship, then you are paying at least
15% self-employment tax that no other business entity does. Why would
you do that to yourself, especially, when it is so easy to avoid.

It is no secret that the single most audited tax form out there is the
Schedule C form that is attached to each sole proprietorship’s tax return. It
just doesn’t pay you to continue on as a sole proprietorship. So then what?
There are several options. here.

S-Corporation
S-Corps are not subject to the 15% self-employment tax like the sole
proprietorship is. Secondly, you will avoid the double taxation that a
corporation would. S-Corporations limit liability by the owner in case of a
lawsuit. There are some exceptions to that rule, but overall, S-Corporations
allow the profits (and losses) to be combined with your personal taxes. The
stipulation, of course, is that you as the business owner are being paid a
salary by the company, itself.

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Regulations vary from state to state, so you’ll want to check with your
state’s guidelines. Most require you to file as an S Corporation, sign and file
Form 2553, which will register you as a business. Once this is done you
must obtain a business license in the state where the business operates
along with any other licenses that are required. Detailed information is
always available on the IRS website and it is broken down by state. Another
good resource is the Small Business Association’s website. Of course, if you
would rather relegate this to someone else, like a certified tax coach, then
much of the headache will be gone, and decisions will be easy.

C-Corporation
There are several advantages to this type of corporation. It is one of the
most common types of corporations in the US because it allows the owner
to sell stock in the company, which means you can also accept investors.
Like the S-Corp there is limited liability to the owner’s personal assets.
Suppliers and vendors, even business loan lenders, prefer this type of entity.

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There are inherently more fees that are associated with this type of entity,
so electing to be a C-Corporation isn’t for everyone, and there are very
specific rules and regulations in regards to taking tax deductions.

Daycare
Did you know that you can reimburse yourself for daycare? Set up a
Dependent Care Reimbursement Account. This allows you to use pretax
dollars to cover expenses for daycare (also for elderly parents or a disabled
family member). The IRS allows you to contribute up to $5000.00 per year
to this account. Each month when you pay the daycare bill, submit the
receipt to the business, which reimburses you for the amount. Being
reimbursed for the full fee tax free is the way to go.

Retirement Plan
Retirement plans are tax deductible and also offer a way to shelter income
from taxation until later on in life when you would be in a lower taxable
bracket. Most business owners opt for something like the Roth IRA
accounts, 401k accounts, or SEP (Simplified Employee Pension). The goal
is to assess what the financial goals are and what the retirement needs will
be in the future, and then structure the plan to reach the goal. Financial
planners are invaluable in helping to develop this plan and can guide you
toward determining exactly what those goals are, and how to best go about
reaching them.

Equipment/Furniture Rental
Most small business owners, and especially those that work out of their
homes, don’t know that they can rent the furniture back to themselves.
Even if you’ve purchased the existing equipment or furniture yourself, the
business is viewed as a separate entity and thus can actually pay you, the

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owner, for the use of equipment such as printers, fax machine, phones,
computers, computer chairs, desks, and other fixtures and furnishings. This
will show up on the personal taxes, but it can be written off with
depreciation, repair and maintenance of the equipment and furniture.

Athletic/Gym Facilities
If the business is operated from home and if there is existing athletic or
gym equipment there, then the business employees have access to this
‘gym’. You can write off the purchase of the equipment, the maintenance of
it, and the repairs because it is being used for employees’ benefits.
However, there are specific guidelines for this, so this is where speaking
with the certified tax coach would come in handy.

Medical Expenses
The IRS allows for medical expenses to be deducted if it is more than 10%
of their income. So, it pays you to set up a medical expense reimbursement
plan (MERP), which allows you to write off prescriptions, co-payments,
exams, any type of physical therapies, and even braces. Since it is a
reimbursement this money is not taxed and it does not have to be reported
on the tax return.

Transportation
If you use your personal vehicle for any sort of work related trips, then
keep a very accurate log of your mileage. Then, each month, submit this
mileage to the company (you or your bookkeeper) for reimbursement. This
is not money that you have to report on your personal income, and it is
money that the corporation can use as a business deduction.

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Using just these top ten tips for saving money on taxes, the average
business owner could save nearly $30k a year, and after deducting expenses
many businesses can successfully have a taxable income of $0. It is VERY
important, and should be said, that you must have all loose ends neatly tied
up. Documentation is the key and all paperwork must be in order. Keep a
record of your mileage, all receipts, and create a paper trail whenever
possible, including pay stubs from where you pay yourself. The best overall
strategy, and as a way to hedge your bets, is to assemble your personal
financial team, whose most key team member should be your tax planner.
Doing this will set you up with a plan to succeed, and will keep you from
being yet another casualty of over-taxitis.

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CHAPTER 2

No doubt when you first started your business it was so small that you
could keep up with the accounting duties. However, there is a cost to trying
to do your own accounting for very long. Consider that you went into
business in your particular field because you were good at it, and enjoyed it.
As a necessary ‘evil’ you have most likely learned to wear a good deal many
hats. Unfortunately, wearing the accounting hat could be costing you
hundreds of dollars each month, and more than that in tax dollars at the
end of the year.

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Filing your own taxes is one of the surest ways to miss things. Those who
are certified public accountants have gone through many years of training,
and continued training, not to mention have earned a degree. Most who
operate a business must have a license in order to practice. So, given all of
that information, are you really the best candidate for the job? Not likely. It
just makes good sense to benefit from someone’s expertise, in much the
same way that others benefit from your own expertise in your area of
interest.

The tax codes change often, sometimes numerous times throughout the
span of a year. Just because you feel you may understand them one year,
practically guarantees that you won’t understand them the following year.
Taxes are certainly popular with politicians during an election year, and this
accounts for most of the tax laws and the continual changes once new
people are elected into office. A good example of this was the Roth IRA. It
is one of the more popular types of investments since it is not taxed. But,
Roths are only available to those whose incomes fall below a certain limit.

But, get a new politician in office, and these limitations could be changed,
or the Roth take a major facelift and end up not having a tax-deferred status
at all. Then there are insurance investments. They are the heavy hitters
when it comes to Washington’s politicians. Those investments are not likely
to see any changes to their regulation because the insurance industries
maintain a very vigorous and healthy lobbyist organization. These are just a
few ways in which having someone on the inside, a tax expert, can help you
to take advantage of a tax opportunity, and one that would most likely be
missed out on. This can be a costly mistake.

You do get what you pay for when it comes to tax and financial planning
experts. The cost of hiring an inexperienced tax professional or planner, or
doing it yourself, will cost you even more in the long run when you end up

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having to hire a professional to bail you out of a tight spot (one that could
have been avoided). Hiring someone because they are cheaper is not always
the best strategy because even though you may be saving money in the
present, in the long run you will miss out on opportunities which will cost
you even more money.

The tax strategies offered in this guide are designed to keep you from
making the types of choices that could ultimately keep you from wealth
building opportunities. Thousands of dollars can be saved with the right
professional in your corner. For example, if someone told you that for a
few hundred dollars you would receive several thousands in return, would
you do it? Of course you would. Any sane person would. And the time that
you save by hiring someone to do what they do best and you go and do
what you do best, is the win/win solution for everyone involved. Ask any
self-made millionaire what one of the secrets to success is and they will tell
you that they learned to delegate activities and tasks to those who were
most qualified for the work.

When people think of tax planning and accounting, the last thing they think
of is ‘creative thinker’, but in reality most tax planners, especially those that
are certified tax planners, are extremely creative as they look to build
successful tax strategies for each individual person and business’s needs.
The brilliant accountant will employ at least a few of the following:

*Knowledge of the Tax Code: They will know it inside and out. This
allows them to find loopholes and keep up to date with the ongoing
changes. They will be able to modify your personal tax strategy to take
advantage of these changes.

*Moving Money: Most experienced tax professionals know how to move
money from high tax areas to low tax areas to save on the overall tax

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impact at the end of the year. This could mean that they advise you to place
more money in tax sheltered investments, or open up a secondary business.

*Good Prognosticators: Brilliant tax planners have been in the business
long enough to know when it is time to take the necessary steps to position
their clients so that they can enjoy the full advantage of a financial shift.
This could include cashing out investments, advice with stocks, deductions,
or changing investment strategies. Investments are taxed at a different rate,
and as such make great tax shelters in most instances. The trained tax
professional can guide you in building wealth through dividends as well as
earned income.

Let’s talk about the elephant in the room, shall we? There are a number of
very popular tax planning and tax preparing software on the market and
internet today. Users can quickly plug in their information, check a few
boxes, and spit out a return to file with the IRS. They can even have it
electronically submitted. Herein lies the problem: one size does not fit all.
Your taxes, and your businesses taxes, have individual differences that place
them into a better position to take more deductions than the next guy. You
cannot ask the software questions, nor will it ask you important questions
beyond those of a basic sort. And in the event of an audit, you are going to
receive minimal assistance. It’s just risky business when you own your own
company.

How to Choose a Good Tax Professional

First of all, there should be a common misconception cleared up: a tax
preparer is not necessarily a tax planner. They are most often separated by
expertise, licensing, and knowledge. Most who prepare taxes are reactive,
instead of proactive, and do not dispense any type of advice other than how
to best file your taxes. They don’t walk you through the creation of an

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overall tax plan, and they certainly will not assess or consult with you on the
development of a wealth-building tax plan.

If there are some available where you are, always opt for the Certified Tax
Coach. They receive additional training, above and beyond the other
requirements, and most often they are also entrepreneurs so they have a
connection to small business owners. They are ones themselves. Likewise,
these types of tax coaches are better suited to working with small businesses
than regular CPAs for many reasons, most of those reasons including a
larger worldview than the rather narrow myopic view of the typical CPA.

When choosing a good tax professional ask yourself these questions:

*After meeting them, do you have a good ‘vibe’ from them? Do you like
them and think you could work with them on a regular basis?

*Are they creative thinkers? Are they comfortable pursuing some of the
strategies mentioned in this guide?

*How much experience do they have? How long have they been practicing?
Do they have referrals?

*What is their expertise with the tax code? What sort of continuing
education do they adhere to?

*Do they have any knowledge about your industry at all? Have they worked
with others in your field?

Tax professionals, the good ones, are literally worth their weight in gold.
Taking the time to choose one wisely, making the determination to bring
them onto your financial team, is one of the first, and best, steps toward
creating a viable and healthy business, and for building a company, and a
lifestyle, that is everything you’d like it to be.

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CHAPTER 3

Each year thousands (some statistics say on average 600,000) people
take the leap and begin their own businesses, chasing the Great
American Dream. There are many reasons that people decide to start
their own business. Some are looking for the freedom to be their
own bosses, while others want to have a more flexible schedule. Still
others are pursuing a lifelong passion. Many fall into their own
business startups because they have suddenly found themselves
without a job, due to downsizing and the slow economy.
No matter the reason, it must be said that a great deal of what has
made America the powerhouse it has become over the centuries is
the blood, sweat, and tears of the small business person. It is the

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innovation that has come from this sector that has built super
computers, discovered cures for terrible illnesses, and has had the
freedom to think outside of the box that, even today, continues to
challenge and push the envelope which leads to significant change.
But you don’t have to be a Steve Jobs working out of your garage to
enjoy the same sort of rewards that come from owning your own
business. Legitimate tax exemptions are there waiting for you to take
advantage of them. Many of the tax laws, in fact, are specifically
geared toward individually created and run businesses. As unique as
each business is, and each owner is, so too, must your tax plan be as
versatile, flexible, adaptable, and unique.

Pre-Tax Versus Post-Tax Dollars: Why You Should Care

One of the key strategies that the competent tax coach will suggest is
to know what sorts of after tax dollars can be shifted over to pre-tax
dollars. Think of it this way: any sort of tax deduction you can legally
take will reduce the amount of income you are taxed on. This can
actually move you into a lower tax bracket, which saves you money
all the way around. Post-tax to pre-tax shifting can happen as simply
as electing to pay business expenses first, then you would only pay
taxes on whatever is left over.

Tax credits are your friends. But do you know what they are and how
they can help? Think of them as dollar for dollar tax reduction
minions. They do not care what tax bracket you are in…the
deduction is the deduction. And that spells big savings for you. What
much of this rides on is the type of business entity you set yourself

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up as (which can also be switched if you’ve elected a structure that no
longer works best for you).

Chances are very good that after you’ve read this guide you’ll rethink
the structure that you’ve set up your business under. Unless you’ve
received good advice from the start, most first time business owners
start out as sole proprietorships (the default) and after gaining a little
knowledge, and help from a certified tax coach, they realize that the
business structure needs a little makeover.

Understanding the Basic Business Structures for Small
Businesses

The IRS recognizes three basic types of structures for small
businesses:

• Sole Proprietorships

• Corporations

• Partnerships (LLCs)

One of the absolute WORST (pause to reread that word) structures,
from a tax standpoint, is to elect to be a sole proprietorship. All of
the tax and financial advantage goes to the government, not you.
And, in the event of a, forbid it all, lawsuit, even your personal
finances are fair game. It is the easiest business structure, the least
expensive to get started, and requires a Schedule C to be filed with
your taxes. There are direct and rigid rules as to what you can and
cannot use as a deduction with this type of structure.

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Corporations come in two main ‘flavors’. There are S-Corporations
(often called S-Corps) and there are C-Corporations, C-Corps. S-
Corps’ net profits go on to the shareholders, who then pay taxes on
what their portion is from that net profit. They are taxed at their own
tax bracket. The S-Corp is seen as its own separate entity, an entity
that pays you, the owner, a fair wage for the work performed. IN
essence, your real income has two components to it: actual wages
earned, and what is called pass through distributions. These ‘pass
through’ distributions don’t fall under the amount that will be subject
to a self-employment tax, which is VERY good news for you. A
typical scenario is that the owner of the company takes a wage, and
then the remaining profit is seen as shareholder distributions.

C-Corporations can take a lot more deductions, but it also comes at
a price. Like the S-Corp they are a separate entity and pay the owner
a wage. However, when profits are earned they are subject to
corporate tax. When they are distributed, they are called dividends
and the owner is taxed on this according to their own tax bracket. So,
in essence, you are being taxed twice, once on the profits at the
corporate level and then again as a withdrawal by the owner. This is
where you have to weigh the advantages and disadvantages closely.
Enlisting the help of a knowledgeable professional can make all the
difference in this sense because they know what those deductions are,
are fully aware of what the benefits are, or aren’t, for a particular
structure, and better yet, they know you and your vision for your
business. The biggest question you and your tax planner can evaluate
is where you spend most of your money, and which structure allows

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you to keep more of it in your pocket via tax deductions.

It’s Not Too Late to Fix Your Tax Return

The IRS realizes that not everyone is a tax aficionado and that
mistakes can happen. In many cases, there are forms that you can fill
out to retroactively reclaim the money that you overpaid on past tax
returns. These are called ‘amended tax returns’. There is a statue of
limitations on how far back you can amend a return, and how many
returns at a time you can amend. If you opt to move from one
structure into another one or if you find deductions that you should
have taken and didn’t, your tax planner can help you navigate
through the necessary forms in order to recover that money.

What’s Your Business Model?

For the sake of argument, I’m going to assume that you have one.
Without one you are taking a trip without a map or clear idea of
where you are even going. It is critical to have a business plan for
your business so that you can know and gauge the vitality (or lack
thereof) of your business. If you can periodically look to see where
the money is going each month, then you can make adjustments.
Maybe you aren’t charging enough per product or service to cover
the increase in goods and materials. Maybe you haven’t changed your
pricing structures for a decade, even though times and economics
have shifted. Having this business plan, and a solid model for
success, will ensure that it is less likely that you will fall behind the
curve in comparison to others in your industry.

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If you’ve just started your business, or are planning to get one going,
take some time out to do a cash flow projection. Where’s the money
going to come from? How long will it take before you break even?
What contingency plans do you have in place in case Plan A fails?
Having both offensive as well as defensive strategies to protect
yourself and your fledgling company is one of the crucial and most
vital components to a healthy and robust business.

One of the largest reasons that I have become a Certified Tax Coach
is because I watched so many great ideas and truly genuine and
passionate people lose their shirts on business ventures, when all they
really needed was a good tax man in their corner. There are fantastic
reasons to become your own boss and run your own business, but if
you do not go into it with your eyes wide open, instead of bring
freedom and the Great American Dream, it can bring disaster and a
nightmare of epic proportions.

Owning your own business gives you the opportunity to expand your
horizons, on both a personal and financial level, if done correctly.
The businesses that have made it in the US all share some common
characteristics. Here are the top ten:

• They are planners and organizers.

• They know where their money is and where it goes.

• They love what they do.

• Shamelessly self-promote.

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CHAPTER 5

So you’d like to be a millionaire? Aside from being the name of a
once famous television game show, it is an aspiration for many. I can
honestly tell you that it is possible to get there from here, especially if
you are a business owner. With the proper strategy and planning,
many people achieve just such a goal each and every day. But it isn’t
done overnight and it does take perseverance and some due diligence.
If you do not own your own business, then the only way to become
wealthy is to spend less and make more. This is often difficult if you

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are someone’s employee as there is a limit as to how much you will
be allowed to earn each year. As a business owner, your earning
potential directly correlates to your ability to do well in your industry,
and to put into place sound fiscal procedures.

One of the largest of these procedures is to simply select the right
business entity. Selecting the correct business entity means that
you’ve chosen the proper structure for not only your personality and
the way you like to do business, but it also means that you’ve chosen
the best structure that will give you the maximum in deductions, tax
benefits, and lowered tax liability. One of the first things I do when I
evaluate someone’s business for them is to first speak to the owner
and then apply what I’ve learned about him or her to their business
structure. So many times, if they are experiencing fiscal discomfort,
it’s because they’ve utilized a structure that no longer works for them
(if it did at all). This is why you can literally view two people in the
same industry and one will be making a very good living while the
other is just barely limping along. Much of it boils down to what is
the number one millionaire’s secret: choosing the right business
structure for your small business.

Why Choose?

Aside from the hundreds, if not thousands, of dollars you could be
saving instead of sending it off to Uncle Sam, choosing well affects
the way the IRS looks at you on tax day and the overall amount of
tax liability you, as the owner, will carry. Knowing the pros and cons
of the different types of entities is crucial toward making that

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decision. Educating yourself, of course, is only one part of the
equation. I would still strongly urge you, once you’ve done some
reading and studying on the matter, to locate and work with a tax
planning specialist, a tax coach, someone who can verify that the
structure you are considering truly is your best option. The last part
of that equation is YOU. Without you following the plan and strategy
that you select, your ship of dreams sails nowhere.

Sole Proprietorship

Pros

For some, a sole proprietorship is not a bad choice. It is very simple
to do and all you really have to do to get started is to register your
business name and apply for any business licenses your state or
industry requires. Because it is so simple to start, there’s also less
paperwork come tax time.

With other types of entities, aside from the sole proprietorship, your
business is considered separate from you, which means much more
paperwork. There would be separate statements for finances, and
you’d be required to file an annual report. Those who are running
part time hobby based businesses, or who do their business on the
side as additional income, this might be the better way to go.

Since there’s no distinction made between you or the company (the
IRS considers you one in the same) all of the income that you earn is
considered yours. You’ll use a Schedule C come tax time to report
income and expenses. For those that like to keep things simple and

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no fuss, having to just file one tax return is attractive. A lot of people
start side businesses to use as a tax write off because in many
instances, new businesses lose money anyway. Those that already
have jobs but are making significant money and need some sort of
major deduction will often create a small business to offset some of
their tax liability.

Cons

Being a sole proprietor is a double edged sword. True, there’s less
paperwork, but there’s a reason for that. The IRS sees you as the
same entity as your business. This means that if something happens
in the business, you are personally liable. This can run the gamut
from law suits, personal injuries, to financial defaults. Your personal
assets are fair game. So becoming a sole proprietor may not be a
good idea if there is the possibility of these sorts of risks. Ask
yourself how much risk you and your family are willing to take on
this venture. If the answer is little to none, then this is not the entity
to select. There is no safety net with a sole proprietorship.

Do you love the IRS? If you choose a sole proprietorship you have
more likelihood of being audited, and the only protection you’ll have
is business insurance (which is fairly limiting at best). Come tax time,
you’ll pay both income tax as well as self-employment taxes, and
that’s no fun either. For most, there is simply a better way.

Sole proprietorships are kind of limiting, too. If you ever wanted to
expand and take on partners, or add someone else to the business,
you can’t. A sole proprietorship, by its very title, means one, and only

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one, person. And, keep in mind that if you plan to work with other
organizations, groups, or corporations, they often don’t look
favorably on businesses that are sole proprietorships. Why? Statistics
indicate that of all the business types out there, sole proprietorships
fail more than any other type. They want to work with a business that
is stable and will be around for a while. Sole proprietorships don’t
often lend credibility to its owners in certain industries. It certainly
bears keeping all of these things in mind when working toward
creating more wealth.

Partnerships

The Partnership option is another type of business entity that some
pursues or consider. If a company has partners, like in a law firm, or
medical practice, then the obvious choice is to form a partnership
including all involved. But, like other business structures there are
some pros and cons to selecting this structure as well.

Most do not realize it, but the US government recognizes three types
of partnerships: General, Limited, and Limited Liability

General Partnerships

Pros

At its core, general partnerships involve more than one person who
agrees to be responsible for the business. In other words, they share
equally in the profit and loss, management decisions, and other
responsibilities that occur in the normal running of a business.
Though they are seen as one entity, each individual member is still

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taxed as an individual. The business income would still be included
on the individual’s tax return.

There are more deductions allowable for this type of business, and
since the business, itself, isn’t actually taxed, the income, credits, and
any deductions are passed along to the partners. This type of
structure is almost as easy, from a paperwork standpoint, as the sole
proprietorship. There is a type of flexibility that can be built into this
type of structure too. For example, you might want to have a
centralized operating structure similar to a corporation, or have each
partner being responsible for some facet of the business. The other
advantage, here, is that each partner contributes their own resources,
time, energies, talents, and financial commitment. It means that not
one person has to shoulder the load for making the business
successful.

Cons

Much like the sole proprietorship there are disadvantages when it
comes to liability. Partners are each individually liable in the event of
law suits, as well as financial defaults. So, if one partner, for example
and unknown to the rest of the partners, goes out and uses company
money to fish on the Riviera, the debts incurred are shared by all of
the other partners that stayed at home and actually did some work.
Because of this type of liability that each partner can incur, often at
the hands of the others, general partnerships are not allowed, or are
severely curtailed in regards to their ability to open their business up
to investors or fundraising.

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Limited Partnership

Pros

This is a type of partnership that offers a little more protection from
your partners should they decide to do something unscrupulous.
With a limited liability partnership there are several partners, but
other than the governing partner, the other partners have no liability
for those partnership obligations (other than monetary). You would
share in the profits, and be taxed accordingly, but you would not be
personally liable for the partnership’s debts, or in the case of a law
suit have your personal assets considered.

This is a way for those who were once sole proprietors to actually
open the door for limited investors. This is attractive because
investors can commit resources without incurring any negative
liability. And unlike a corporation, whose shareholders’ dividends can
be confiscated when there is a personal lawsuit (think Madoff),
limited partnerships protect the partner’s interest in the event of a
law suit. There is also the pass through tax advantages as in the
General Partnership, which is often the draw to this type of structure.

Cons

The drawbacks are that the limited partners cannot be involved in the
day to day decisions, or they then become liable and the insular
properties go away. They can also have more regulations than the
general partnership in regards to tax filing.

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Limited Liability Partnership (LLP)

Pros

Many confuse the Limited Partnership with the Limited Liability
Partnership, but the IRS denotes a definite distinction between the
two. If you like the partnership idea, but don’t want to have any
liability or threat to your personal assets, then the limited liability
partnership is a good structure to consider. Just like the other two
types of partnership structures, you’d enjoy the benefits of the pass
through profits and losses. More importantly, there is no penalty for
being involved in the management decisions or the day to day
activities.

Cons

LLPs have many stipulations as to who can actually form them. For
the most part, attorneys and doctors use this type of structure. Each
individual partner is vicariously liable for their own misdeeds, without
endangering the rest of the business or the business associates.
Likewise, any employees that are in the business, should they act in a
negligent way that leads to an accident or lawsuit, and then each
individual partner for whom that employee worked is liable.

Corporations

Corporations are considered independent entities all on their own. It
is as if they are a living breathing organism. This offers the CEO vast
protection from any sorts of personal liability, especially in regards to
lawsuits or financial defaults. Just as there are several different types

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of partnerships, there are also several different types of corporate
structures to consider. Which one you choose is depending primarily
on the type of industry you are in, your risk factors, and whether or
not you plan to have a board of directors or offer shares.

Pros

Tax liability and legal liability are two of the major offerings of this
type of structure, regardless of the type of corporation it is. The debt
is considered the sole responsibility of the corporation, itself, not the
CEO, owner, shareholders, etc… Your personal assets are never at
risk. Corporations can also hold on to some of its income and the
owner doesn’t have to pay taxes on that. Corporations can also raise
money by selling stock, and unlike other types of business structures,
when the main shareholder (owner) of the company dies, the
company can continue on indefinitely.

Cons

Like most other types of structures, there is a downside (didn’t think
you were going to get out of it this time did you?). One of the chief
drawbacks is the money up front that is needed. Most states have
their own set of laws and regulations and most who consider setting
up a corporation use the services of a tax planner or even a business
attorney. This is because each i and t must be dotted and crossed a
certain way. Taxes and accounting processes MUST be compliant
and accurate or you could really have a very, very bad situation down
the road.

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You will pay double taxes. Here’s why. Corporations have income tax
on both federal and state levels (if your state has income taxes), and
earnings that are distributed to shareholders are also taxed for each
individual on their own tax returns. To avoid this, I usually have my
clients pay themselves a salary, and then the corporation is not
required to pay any taxes on money that is paid out as reasonable
compensation. Plus that ends up being a very good business
deduction. There are rules governing what is considered reasonable
compensation and these rules seem to shift all of the time. This is
one of those times that you should not opt for cheap legal or
financial advice. You will get what you pay for.

What’s Involved with Becoming a Corporation?

Each state is a bit different, but all of them have some of the same
components. First, you will most likely need to go to your state’s
government website and go to the labor department. They will have a
whole section on starting or running a business in the state. Your
business will need to be registered and there will be a fee to pay for
submitting the registration. There are very specific forms that will
need to be filled out and then sent in to be kept on file. Most at this
level use an attorney or certified tax coach to help them navigate
through these waters.

One of the large stacks of forms that will need to be filed is called the
Articles of Incorporation. These basically lay out the bare bones of
the business: the name, what type of business it is, the names and
addresses of the primary parties involved, the location of the offices,

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and a set of by-laws which stipulate how the company will be run,
who the officers are, and other details pertaining to the actual
business. This is submitted and kept on file with the Secretary of
State’s office, or Corporation Commission, for your state. You are
sent a letter/certificate of incorporation. If you don’t follow the rules
set down by the government in regards to corporations, then courts
have the recourse to actually overrule the personal liability rules and
directly hold you and the other owners responsible for the business’s
debts. Each year you will be required to file your annual report and to
keep all information up to date.

The S Corporation

Pros

An S-Corporation, which I’ve already mentioned briefly in previous
chapters, is one of the most preferred of corporate structures for
small business owners. Income and losses are passed through to the
owner and they are taxed as individuals on those returns. So, there’s
just one federal tax to be paid.

What’s particularly nice about S-Corps is that if your particular type
of business doesn’t have a lot of products, but is more of a service
oriented business, then you are perfectly okay to use a cash method
for your accounting. With this method your income is taxed when it
is received, and expenses are deductible when they are paid to
vendors. Additionally, S-Corporations can have up to 75
shareholders, which leave much room for expansion and growth.

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