Which entity type gives you the BEST protection for your business and personal assets? Which one helps you pay the lowest legal taxes now and later?
Here are the most common options:
1. Sole Proprietorship
2. C Corporation
3. S Corporation
4. Limited Partnership
5. LLC Taxed as a disregarded entity
6. LLC Taxed as an S corporation
7. LLC Taxed as a C Corporation
8. LLC Taxed as a Partnership
With a minimum of 8 options, there’s at least an 87.5% chance the one you choose is wrong for your business.
That can lead to costly and time-consuming problems that can threaten the survival of your business. Why guess when it comes to protecting everything you’ve worked for?
The conflicting answers you get from paid professionals like attorneys, accountants, or tax planners can often be as misleading as guesswork. Good legal advice might have adverse tax implications.
Choosing your tax position alone might leave your intellectual property at risk. You may be as frustrated as I was trying to get a clear answer that considers your whole business and addresses the big picture.
Unfortunately, most entrepreneurs don’t find out that they’ve made the wrong choice until AFTER they lose assets in a business or personal lawsuit or get decimated by the IRS in an audit.
The exposure is just as risky whether you’re just starting or worth $25 million or more. I’ve consulted with thousands over the years and seen virtually every mistake in the book.
Yes, some do get lucky and get away with the wrong structure, but even if they escape an expensive lawsuit, most have no clue how much they’ve wasted over the years in overpaid taxes.
If your business’s future matters to you, it’s time to STOP guessing and educate yourself with my authoritative and field-tested training. It’s called “Discovering which Entity and State are Best to Protect You and Your Business,” and I’m making it available to you absolutely free… not because this course doesn’t offer measurable value…
(Frankly, my consulting clients gladly pay hundreds of dollars for this kind of information… heck… many professionals prizes this incorporation road map simply because it boosts their confidence and credibility in front of their own clients.)
I love helping people sleep better at night, knowing that their assets are safe and their families are protected. Many times all it takes is one or two little shifts to make all the difference between keeping your wealth or losing all of it.
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)
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:
Designates the principal business office
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:
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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