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:
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
Are you or your family at risk because of business or personal assets that are unprotected from unexpected losses or legal issues?
If 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.
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.
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!”.
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.
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!
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.
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.
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.
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!
Have you updated your goals going into the fall for this year? If the outcomes you’re looking forward to this year include making more money, gaining more clients, boosting your profits, cutting your taxes, or attracting lucrative joint venture partnerships…
…the FIRST STEP is to STOP operating as a sole proprietorship!
This is the time to make the shift, not waiting another 5 months until January.
You want to escape the sole proprietorship trap for many important reasons: 1. Highest Audit Rate. Filing a Schedule C means you are 300% more likely to be audited by the IRS. Why? The IRS is a $300 BILLION tax collection gap each year, and a large percentage comes from small business owners who file a schedule C – not large corporations.
In the IRS’s eyes, small business owners are more likely to under-report income and exaggerate expenses. Now, I’m not saying that you’re making these big mistakes yourself, but the IRS will ASSUME that you are, simply because so many other sole proprietors do. That makes you an easy audit target.
2. Highest Taxes. Sole proprietorships pay the highest business tax rates. Not only will you pay the 15.3% employment taxes up to $137,500 in 2020, plus 2.9% for Medicare, you may also be required to pay a number of other state and federal taxes.
Of course, as a business, you may be able to offset some of that with business expenses or home office deductions (assuming they’re all properly set up and documented), but referring back to point #1, you’re setting yourself up for a potential audit.
3. Highest Liability. Here’s the bottom line for sole proprietorships – when you do business in or own name, or under a DBA, you have UNLIMITED PERSONAL LIABILITY for ANY legal issues that come up. Without the protection of a properly structured separate legal entity, you may lose most of your personal assets, including your home’s equity.
Maybe you’ve been operating as a sole proprietorship because you don’t have many assets to protect right now. If you hope to change that in the future and accumulate more wealth, it’s worth considering that you could be sued later for something you’re doing now. If someone gets a judgment against you, they could chase you for years, waiting until you DO have assets to go after.
Sole proprietorships offer no protection – even against frivolous lawsuits which run into hundreds of billions in the U.S. each year. Our research turned up a woman who filed over 700 lawsuits. Her “business” strategy was targeting people with unprotected money, and a person like that will go after anyone.
4. Fewer Funding Options. Operating as a sole proprietorship means you’re self-financing your business – most likely on your personal credit cards! That drives your revolving debt up and your personal credit score down – which can hurt your chances for business credit later on.
Even though it’s vital to keep business and personal credit separate, your personal credit history does affect your ability to qualify for certain kinds of cash funding options – including the amount of money you get and the interest rates you’ll pay.
The key is to STOP using personal credit to finance your business and form a separate legal entity ASAP.
This critical step paves the way for financial credibility – which means more and better opportunities to use other people’s money to grow.
5. A Lousy Marketing Message. If your first-year profit projection is under $50,000, a CPA or tax professional might advise you to “keep it simple” and start as a sole proprietor.
In rare individual cases, that might be good tax advice, but it doesn’t position you for long-term success – there are other essentials to consider if you want a complete business foundation. When potential customers or important suppliers or partners evaluate your business, what MARKETING MESSAGE does your sole proprietorship send?
Sharp business people may take it as a sign that your profit (and longevity) expectations are LOW and take their business elsewhere.
Sadly, they may never tell you the real reason why they chose not to do business with you – would you risk your own money, reputation, or relationships on a company that might not be around tomorrow? You may have already lost revenue and growth opportunities if you’ve been operating as a sole proprietorship.
If so, it’s time to position your company as a winner with the right foundation for success.
Do you get the picture? Operating as a sole proprietorship is NOT the way to go if you’re planning for success. As you set your direction for the remaining part of 2021, it’s time to make your BUSINESS OFFICIAL and step up to the big leagues with a COMPLETE FORMATION.
Here’s the PROBLEM – the internet is loaded with CHEAP ONLINE incorporating services that promise you everything you need for $99 (or less) to form a separate legal entity. Most are selling you a piece of paper with an EIN.
This is like buying a car and realizing after you’re zooming down the highway that BRAKES were OPTIONAL and not included in the purchase price.
Who in their right mind would sell you a car with NO freakin’ brakes?
Granted, that piece of paper and EIN may be enough to open a business checking account. Still, without a COMPLETE FOUNDATION starting with a COMPLETE FORMATION, you have absolutely ZERO PROTECTION!
Why is this so important?
Here’s what my friend, Attorney Lee Philips, said about businesses that rely on online articles of incorporation as their only form of legal protection:
“We slice through those in 15 minutes in court and go after the individual every time. That piece of paper provides NO protection!”
This is a direct quote from a legal expert who has been a counselor to the Supreme Court and tried many cases representing plaintiffs. His courtroom experience has shown him that most business owners have no clue what complete formation entails.
Over the last 23 years, my company, NCP, has helped thousands of entrepreneurs launch with confidence (just like you). Our COMPLETE FORMATION PROCESS ensured that they started with more than just a flimsy piece of paper that provided no protection.
Lee’s comments inspired me to take our training to the next level – we want every entrepreneur to be CLEAR beyond all doubt what it takes to form a complete and secure business foundation.
In today’s uncertain financial climate, is there any way to ensure your assets are fully protected?
Many business owners, and those who may be considering a startup venture, are unaware of hidden risks that can erode or even erase everything they’ve worked for with virtually no warning.
Fortunately, there are simple, practical steps you can take. By having the right protections in place at the right time, you can ensure that your assets and your peace of mind are secure.
Here are the top 6 areas where your assets may be exposed:
Operating your business as a sole proprietorship. In addition to paying higher tax rates in most cases, sole proprietorships are targeted by the IRS for audits more than any other business structure. IRS statistics show that sole proprietorships are more likely to understate income and overstate expenses. This is where many get flagged for writing off hobbies as business expenses. This risk will increase with health care reform and an incoming wave of new IRS agents.
Owning safe assets in your own name. Even though they may have nothing to do with your actual business affairs, any asset held in your own names, such as stocks or precious metals, could be tied up (or lost) in a personal lawsuit. It’s a common myth that living trusts or “dba” operating companies can protect the assets or investments you hold in your own name from liability.
Owning intellectual property in your own name. As with safe assets, holding IP in your own name is also a risky strategy. All the time, materials, and sweat equity you’ve invested in any system, product, or body of work could be taken away from you if it’s exposed to litigation.
Domain names. Many entrepreneurs rely on domain names for a substantial portion of their income streams in today’s internet economy. Even something as random as a liability claim from a car accident could cripple your business if they go after your domain names for recovery. Although it may seem like a simple way to save time and money initially, the worst place to hold domain names is in your own name or the operating name of your business.
The ownership of your current company. Even having a separate entity like an S or C corporation does not guarantee protection for your assets or investments unless you have the proper structural details in place. Many “one price fits all” online incorporation services fail to ask important questions that could mean the difference between security and exposure. Certain high revenue and profit LLCs may be at risk also.
New joint ventures running through your current operating business. There are many reasons why a second or additional entity makes sense as a simple and affordable way to put a firewall around your most important assets and investments. Certain products or services may carry higher liability risks, and there may be separate intellectual property to protect.
Do you see an area where you might be vulnerable? You are most likely on great terms with all your friends and business associates, and you might be thinking that your business is too small to be a target, but consider these sobering statistical realities:
There are nearly 80 million lawsuits filed every year!
Frivolous lawsuits cost the U.S. over $200 BILLION per year!
Internet lawsuits are increasing more than ever before!
As the economy struggles with massive debt, lawsuits will increase to all-time levels coming soon.
Make sure your business is fully protected. The basic incorporation steps required to open a business account with a bank are often not enough to protect your assets from other serious tax and legal risks.
This can be corrected easily and inexpensively in most cases, but the longer you wait, the more the risk goes up.
Go to my company NCP, to learn more about forming a complete formation to ensure your protection.
It’s a safe bet that you started your business to succeed and make money, not add stress to your life and lose money.
To cut to the chase, operating as a sole proprietorship is NOT the fast track to success – in fact, it’s the shortest path to join the 95% of businesses that fail in the first 5 years.
You probably made this choice for one of three logical reasons; (1) you were looking for the easiest and cheapest way to get started, (2) you wanted to test the waters to see if your idea would make money, or (3) your tax advisor told you to keep it simple and go the sole proprietorship route until you earn more than $40K to $50K in profits.
Unfortunately, that decision sends a different message to the rest of the business world:
“I don’t believe in myself, my product or my service, or I don’t expect
to make $40K in profits.”
Forgoing on two decades now, I’ve helped over 6,000 entrepreneurs reverse that message, escape the sole proprietorship trap and make a fast start to profits.
Here are just a few of the strategic insights that woke my clients up to the money they were leaving on the table:
1.Sole proprietors file a schedule C with the 1040 form in April. Schedule C filers are 300% more likely to be audited (the IRS is leaning on small business owners to close a $300 BILLION tax gap). If your business lost money in 2020, you’re especially at risk if you plan to write those losses off against other income.
2. Sole proprietors pay the most in taxes.As the fiscal cliff continues to loom, you already know that your tax bill was going up in 2021. Now is the time to be proactive and help your business save on taxes by forming a separate legal entity.
3. Operating as a sole proprietorship and self-financing your business damages your personal credit score.Sole proprietors frequently turn to self-funding through personal credit cards or cash reserves because their business credit options are limited. The resulting damage to your personal credit score will severely limit your ability to build business credit when you finally get around to forming a separate legal entity.
4. A sole proprietorship sends a negative marketing message.The biggest potential customers, suppliers, and marketing partners all look at your company’s structure before deciding to work with you. Operating this way broadcasts the message that you don’t expect enough profits to incorporate. Why expose yourself to that kind of opportunity cost, especially at a time when you can least afford it.
5. You have unlimited personal liability.A sole proprietorshipdoes not provide you or your family with even a minimal layer of protection in the all-too-frequent event of a lawsuit or other challenges to the assets that you’re working so hard to build.
ESCAPE THE SOLE PROPRIETORSHIP TRAP WITH CONFIDENCE
There’s a way out of ALL of these real-world risks (and others that we don’t even have time to talk about here). NCP has hassle-free solutions in place to quickly and affordably get them all handled – so you can start 2021 with complete confidence.
Go to NCP, my main brand, to help you launch with confidence for 2021. Learn more here.
Forming a separate legal entity is a smart move for developing credibility, lowering your audit risk, and protecting your personal assets.
Most people do not complete the transition and are still operating as a sole proprietorship and part of a new entity.
This creates many problems, as you can imagine, including exposure to your personal assets when you probably thought you were protected.
Below is a checklist that will help you double-check to see if you are on the right track with your business entity.
___1. Form a separate legal entity. The most common choices are either a corporation or an LLC. A corporation may be taxed as a regular corporation or an S corporation. An LLC can be taxed as a disregarded entity, an S or C corporation, or a limited partnership.
All choices have advantages and disadvantages. An LLC has an extra layer of protection called the “charging order” that protects the ownership interest if a partner is sued personally for something unrelated to the operating company.
___2. Obtain a NEW EIN (each separate legal entity requires a new EIN).
___3. Obtain a corporate or LLC record book with the proper bylaws or operating agreement. If an LLC, the operating agreement should match the number of members (owners) and the taxation type. For example,
a two-member LLC taxed as an S corporation has a different operating agreement than a single-member LLC taxed as an S corporation.
___4. Obtain support with completing the corporation or LLC record book with both online support and live office support. When you work with NCP, our staff will schedule a 30-minute record book review with you, and you will have full access to our NCP member’s area.
___5. Open a new bank account in the name of the corporation or LLC (even if you have one with a similar business name as a DBA, you will need a new one under the corporation or LLC and the EIN.
If you have a DBA name now linked to the corporation or LLC (that is key), you may have the new corporation or LLC name and DBA name on the new checking account.
___6. Capitalize the new corporation or LLC. This means you will put money in the new bank account to exchange ownership interest in the corporation or LLC.
This may be $1,000.00 or more of capitalization to get the company started. A husband and wife with a two-member corporation or LLC should each
capitalize the corporation or LLC separately.
___7. Obtain a business debit and credit card. The business debit card will be automatic. The business credit card you will need to apply for.
Ask the banker where they pull your personal credit (which bureau) and
what the minimum your personal credit score has to be.
Ask what your revolving debt level has to be and if you have any major derogatories if those will be an issue before you apply.
___8. Move your merchant account to the name of the corporation or corporation or LLC (if you accept credit cards in your business). Most in network marketing are processing their orders on credit cards to
the main company for processing.
If you accept credit cards directly, make sure you complete a new
merchant application in the corporation or LLC name and point that revenue to the new bank account under the EIN of the corporation or LLC.
___9. Transfer any business assets to the corporation or LLC. This may involve any equipment or tools of your business. Check with your CPA first to determine if any assets have been depreciated or written
off, creating a taxable event moving to the entity.
It may make sense in some cases to leave the business assets in your name. This is a case by case basis that will require more professional help.
___10. Obtain a new business license in the name of the corporation or LLC. You should check on local requirements to determine if you are required to have a business license for a home-based business.
You may live in an area that does not allow home-based businesses, which may force you to hang a business license as an office location (if required).
___11. Establish a 5-year business plan (avoid being classified as a hobby).
___12. Set up the chart of accounts for the new entity with some accounting software.
___13. Use a payroll service when it comes time to start payroll. NCP recommends ADP for payroll nationally, and we have a resource for you.
You may also want to check with your accountant and attorney for legal and tax implications from hiring employees.
___14. After everything is up and running with the new LLC/Corp, close out the bank account to your sole proprietorship and dissolve the DBA name linked to you personally.
A common mistake is to continue operating the sole proprietorship while you are operating the new corporation or LLC.
___15. Update any contracts, agreements, insurance, and licenses in your name personally as to which ones need to be transferred over or redone in the name of the corporation or LLC.
___16. Update your status with your networking company that future commissions be paid to the corporation or LLC under the EIN, not to you personally anymore.
___17. Update all your sources of income with the new Tax ID number of the new entity. Your goal is to avoid receiving unnecessary 1099’s (meaning you want the money, just not to yourself individually anymore) for affiliate or referral fees by the end of next year. Make sure all your affiliates are updated with the new entity information.
___18. Update any insurance to now be in the name of the corporation or LLC. Make sure this does not change your policy or premiums (and coverage).
___19. Get new business cards. Don’t be cheap even if the only difference in the name of your company is “LLC” or “Corporation.”
___20. Check with your attorney or CPA for any steps missed at the state level, involving sales tax, or any other state compliance issues.
___21. A Nevada corporation or LLC, and you live in another state. The corporation or LLC should foreign register to do business in the state where you live and operate your business. If you formed a corporation or LLC in your home state, this step is not necessary.
As you know, there are over 80 million lawsuits filed every year in the United States. Frivolous lawsuits alone are said to cost the United States over $200 BILLION annually.
Even in this current economy, things could turn and go back down. If money gets tighter, will more get desperate? How many entrepreneurs abandon their business, which was their vehicle for financial success, and now look to a much easier approach…like suing you and your business.
Does someone look at you as their retirement plan? For many Americans, their only option for retirement is to win the lottery or sue someone. I know, not very uplifting, but conceivably reality.
This may be the last wake up call to button up your asset protection plan, tax and bookkeeping, and business credit, so you and your family are protected. Unfortunately, one entity is not a catch-all for results.
Let me ask you these important questions to show where you may be very vulnerable:
1. Do you still operate a side business as a sole proprietorship? That is like playing Russian Roulette with your financial future.
2. Do you own real estate in your own name (separate from your residence)? Even if you do not have any equity, to others, you must be rich and a target. That is like walking around with a big sign on your forehead that says, “I own real estate in my own name, check it out online…go ahead and sue me.”
3. Are you relying upon your living trust to protect your assets? They do not protect from liability! Do you have family members or parents that are doing the same? That is an open invitation for someone to take their net worth.
4. Do you own safe assets in your own name (like gold and silver)? Is it enough to protect with a separate legal entity from your operating business? Maybe it is a “small” amount in general.
You have to ask yourself how you would feel if you woke up tomorrow, and your “small” investment was gone?
Now…that may be a different feeling. Losing 100% of your investments, no matter how “small,” maybe a huge deal to you. It is time to protect them before it is too late!
5. Are you operating a business with a partner as a general partnership on the side? That is a double danger because now your partner could cause you to lose all your assets.
Are you waiting to make more money first…remember, you cannot buy homeowners insurance when your house is on fire…and you cannot protect yourself (very well) after you have been sued.
If you have $100K in assets and are sued for $100K, you cannot form an entity and transfer them to protect them (well, you can do anything you want, but…) the judge will call that fraudulent conveyance and undo your transaction if your goal was to protect your $100K because of the $100K lawsuit.
If you had $200K and you did not mind leaving $100K on the table to be taken, that is different…but why be in that position when there is a better way?
This is only one threat your business is up against. The other is the IRS (and they are hurting big time when collecting tax revenues).
Are your records up to date? Do you have any records other than an online checking account balance? That is not a business but a hobby, according to the IRS. Finally, is your business financially naked?
How much revenue are you losing on a daily, weekly, or monthly basis? Read the article on how to position your business to be financially naked and have an opportunity for success.
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