Tag: corporation

7 Important Reasons to Form a Corporation or LLC for Your Business.

Are you operating your business as a real business or as a hobby? It’s time to make your business OFFICIAL before the summer push for business!
Let me ask you two important questions:

  1. Are you operating your business under your own name, a DBA or fictitious firm name, basically as a sole proprietorship or maybe as a general partnership? AND/OR
  2. Are you or your family at risk because of business or personal assets that are unprotected from unexpected losses or legal issues?

Sole Props Are Rolling the DiceIf you answered YES to either question, please read on for important news about why NOW is the time to form a corporation or LLC for your business.

  1. Make it Official. Operating as a sole proprietorship or general partnership sends a message that you are still “testing” your business or that you’re not sure you’ll really make it.

    Perhaps your accountant told you that incorporating is an unnecessary expense or that it won’t help you save on taxes due to an expectation of low profits.

    This is the WORST marketing message you can send when you want to attract new clients and partners to your business, who want assurance that you’re about your business and here to stay.

  2. The Law of Attraction. You get what you focus on. Testing, hoping, and “seeing if things work out or not” BEFORE you decide to step-up and make your business official by incorporating broadcasts a clear message to the universe that you’re not really serious about your business or committed to a positive outcome.

    The Law of Attraction states that the universe returns not what you wish for but what you program into your deepest belief system through your dominant thoughts, actions, and feelings. Making your business official and really stepping up says, “I am ready to receive!”.

  3. Limited Personal Liability. You may be thinking, “I already lost everything during COVID” and still recovering.

    If you’re one of the few that managed to survive and grow your assets since then but are still holding them in your own name, you’re playing a VERY RISKY game (similar to those with assets in unstable European banks).

    Even if you don’t have any assets right now, a lawsuit or judgment will destroy any credit you are looking to build in the future PLUS. You may be looking over your shoulder for years, waiting for someone to come after you when you finally do start to turn things around. That’s no way to live your life.

    One lawsuit from an unprotected business can ruin your chances of getting a personal auto loan or refinancing your home.

    Good people who “play by the rules” can still be sued for the most unexpected reasons. You may be thinking, “my business insurance will help me out,” but are you really covered?

    Even if your business is never sued, what if you’re unable to pay a vendor, and they come after you? Do you want to be personally liable? Put a halt to greedy people looking to take what you have worked for!

    This is the best time to form an LLC or corporation to limit your personal liability.

  4. Reduce Your Taxes. The bottom line is that operating as a sole proprietorship will cost you the most in employment taxes (up to 15.3% on earned income up to $137,700 in 2020).

    That means that your income will be taxed as the HIGHEST possible TAX RATE as a sole proprietorship.

    By the way, filing a Schedule C (the form filed for earned income from a sole proprietorship) also means that your business is among those MOST LIKELY TO BE AUDITED.

    Why? The IRS has a $300 BILLION tax gap, and they believe the biggest tax cheats are the little business owner like you. Why?

    Their stats show them that sole proprietorship is MOST likely to UNDER report their income and OVER report their expenses (two big no-nos with the IRS).

    Operating as an S corporation or LLC taxed as an S corporation in many situations is a much better approach for two reasons.

    You will have part of your profits as distributions which are NOT subject to the 15.3% employment taxes AND move that profit to schedule E, not schedule C, which is more likely to be audited!

  5. Access More Funding Options. Operating as a sole proprietorship or general partnership limits you when it comes to funding options.

    You are also DAMAGING YOUR PERSONAL CREDIT SCORE by operating this way. How do you finance your business as a sole proprietorship? You use your PERSONAL CREDIT cards, which will drive up your revolving debt, which will drive your personal credit score!

    When you form a corporation or an LLC, you will SEPARATE your PERSONAL and BUSINESS CREDIT. Yes, any cash funding with a personal guarantee will come into play, but that DEBT does NOT show up in the personal credit bureau, which is HUGE for future funding!

    As you form a new LLC or corporation, NCP will help (if you choose) to build your business credit scores quickly and get your business in a position to secure funding to grow. But the first step is to form a separate legal entity.

  6. Simply Your Life. Yes, in fact, operating as a sole proprietorship will complicate your life, not the opposite.

    Separating your business and personal life will make it much easier for you to navigate both from a financial and legal perspective.

    Now you will have each in its own compartment where it belongs to protect your overall success.

  7. Asset Protection. Forming an LLC for your safe assets like investments (those outside a retirement plan) will help you sleep better at night knowing you don’t have all your “eggs” in one basket.

    If you are using a LIVING TRUST to protect your assets, that will NOT work, and everything in your trust may be vulnerable. Do you own other businesses that really should be operating through a separate bank account in a separate entity?

    Do you own real estate in your own name that may be sending a message that you are rich and have assets worth taking? Have you been in business for years, or are you operating more than one business in one entity?

    Are you doing some business with a new partner and making the big mistake of running that revenue through your current business? Avoid these costly mistakes and form a separate company for that separate business.

Do you need support in forming a corporation or LLC? Not sure what entity or state is best?

Call Nevada Corporate Planners, Inc. at 1-367-7373,  the company I founded. We incorporate in all 50 states and have amazing support and turnkey packages to help you build business credit and help keep the IRS off your back!

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Your LLC and Corporate Responsibilities as a Manager or Officer

Managers of an LLC and officers of a corporation have important responsibilities to execute properly to give them personal liability protection.

Forming a separate legal entity is a huge step in separating your personal and business liability. You obtain liability protection with a separate legal entity the day you file the LLC or Corporation.
Most people do not realize that after day 1 and beyond, you are not protected unless you operate the entity as a separate legal entity.

That involves avoiding commingling of funds, proper capitalization, and proper minutes and resolutions in your role as the director, officer, shareholder or manager, member, or member of an entity.

Typically, as a director of a corporation or an LLC manager, your liability is limited personally. As long as you operate within your role as the manager of an LLC or director of a corporation, Nevada will protect you as long as you do not commit fraud. Other states have a minimum fiduciary duty or duty of care.

Your LLC and Corporate Responsibilities are Vital for Compliance and Protection.

Let me cover the biggest mistakes we have seen over the years, which have caused unnecessary liability to directors, officers, and managers:

  • Not using your corporate or LLC title when signing contracts, checks, documents, licenses…followed by the entity’s name. Signing your name without any title or reference to your company may mean that you represent yourself personally, which brings personal liability to you. You presented yourself as an individual vs. the manager of an LLC. That is a huge mistake.
  • Continuing to operate as a sole proprietorship, even though you have formed a separate legal entity. This is a big one. This means you are operating a business in your own name for a month or several months before forming the LLC or Corporation. Perhaps you filed a DBA (doing business as) name, like Marketing Solutions, and the new LLC is Marketing Solutions, LLC.

    However, you are still doing business under Marketing Solutions with the bank account in that name, under your SSN. That is a huge mistake! Reconnect that DBA name to the new LLC or Corporation. You do that by dissolving the DBA linked to you as the applicant and re-file that same day with a new application listing the LLC as the applicant.
    Now the DBA name is connected to the LLC or Corporation for liability and tax purposes.

  • Binding the Corporation or LLC with more debt when you did not have the authority or permission. Make sure you read the operating agreement of the LLC or bylaws of the corporation to know the roles and responsibilities. It may require a majority vote of the entity’s owners to bind the entity with more debt.

    Don’t assume that you can do anything you want since you are the president of the corporation.

  • Commingling business funds for personal expenses. If you have an LLC taxed as an S corporation, all profits will flow through to the owners. That doesn’t mean you should take a check from the LLC bank account and write it directly for personal use items, like groceries. You can write a check from the LLC to your personal bank account first (as a distribution) then use your personal account to pay for personal items.

    That is a two-step process vs. the big mistake of taking one step and writing the check from the LLC account directly for personal items.

  • Dissolve the company and understand the ramifications of that decision. Most people want to dissolve a corporation or LLC because it has financial problems, and they want to have the problems go away. Their solution is to dissolve or “shut down” the LLC or Corporation to eliminate the “financial problems.”

    It is not that easy. In Nevada, after you dissolve a corporation, you are personally liable for any suits that arise for up to two years after the corporation is dissolved! Check out the statute at (NRS 78-585) https://www.leg.state.nv.us/NRS/NRS-078.html.

  • The other major area that will help you protect yourself personally is to understand a corporation or LLC’s roles and responsibilities.

    You may be a one-person corporation or LLC, and you may wear many “hats,” but you must be consistent with the proper “hat” you are wearing and your authority at the time. Just because you are a one-person corporation does not mean you do not have to have a meeting with “yourself.” Yes, you do.

    Again, remember, you are not the same as the LLC or Corporation. It is a SEPARATE legal entity.

  • The shareholders of a corporation are the investors who receive ownership in the corporation in return for money or assets. The shareholders elect a Board of Directors, which has overall responsibility for the business.

    In turn, the board elects the officers of the corporation, typically a Chief Operating Officer or President, Vice President, Secretary, and Chief Financial Officer, to handle the day-to-day affairs of the corporation.

  • The Board of Directors has the overall responsibility for the corporation. The directors must act in accordance with the best interests of the corporation and its shareholders.

    They have a fiduciary relationship with the corporation, which is founded on trust and confidence. The Board is required to hold annual meetings but usually meets more often than that.

The Board initially:

  • Adopts Bylaws
  • Designates the principal business office
  • Elects officers
  • Selects the fiscal year
  • Designates the corporation’s bank or banks
  • Issues initial stock to shareholders
  • Pays organizational expenses
  • Authorizes initial agreements

On an ongoing basis, the Board will:

  • Issue securities
  • Adopt a Stock Option Plan
  • Amend Articles of Incorporation or bylaws, as necessary
  • Enter into major contracts, leases, or other obligations
  • Declare distributions, dividends, or stock splits
  • Borrow significant sums of money
  • Enter into employment agreements with key employees
  • Elect officers of the company
  • Adopt or amend employee benefit plans
  • Call shareholders’ meetings.
  • Buy or sell significant assets.
  • Adopt company policies.

The officers, who are elected by the Board of Directors, handle the corporation’s day-to-day management, along with the employees of the corporation.

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