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!
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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