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PROTECT YOUR ASSETS, SAVE MONEY, & SAVE ON
TAXES!
FORM A CORPORATION!
Do you own a business? Are you operating under a Fictitious
Business Name (otherwise known as a DBA)? Did you know that if you get sued for
something you did while conducting business under that DBA, a creditor can
receive a court judgment and seize your personal assets?
That’s right! Operating a business under a DBA, whether it is
a new business or an on-going business, is not the right solution – especially
if you own assets, such as a home.
Sole Proprietorship
A sole proprietorship
is one that operates a business under their own name or under a DBA and has not
registered with the state as Corporation or LLC. The owner of the business
reports business income and losses on their personal income tax return. Although
operating under a DBA is the easiest way to operate a business, it leaves you at
risk because you and your company are one and the same. You are personally
liable for any losses, debts, and court judgments of the business.
Partnership
A partnership is no
better. A partnership is similar to a sole proprietorship, in that the owners
haven’t filed paperwork to become a corporation or LLC, and the business is
owned by two or more individuals. Again, the company and the people behind it
are one and the same. The partnership begins as soon as you start business with
another person.
Working with a partner makes matters worse because not only
are you responsible for your own actions, you are now responsible for your
partners actions. For example, if you were in a partnership, and your
partner obtained a business loan, you are also personally responsible for this
debt mainly because you are part of “the partnership.” That means, if your
partner filed for bankruptcy, the creditor can come directly after you, file a
law suit, obtain a court judgment, and place a lien on your personal assets,
i.e., your home.
Operating a business as a sole proprietor or partnership is
not recommended. The correct way to transact business is under a separate legal
entity, such as a Corporation or Limited Liability Company (LLC). One of the
biggest advantages that both of these entities offer is this limited liability
protection. In essence, you are not personally liable for your business debts.
If you operate your business under a Corporation or LLC, only business assets
are liable for debts and court judgments. Your personal property continues to
remain safe from business creditors.
Corporations
There are many
additional benefits to forming a corporation other than the limited liability
protection you receive. Undoubtedly, if you operate as a sole proprietor, or
under a partnership, you are paying 15.3% in self-employment tax (SE Tax). This
tax is in addition to income tax you pay. You can minimize the amount you pay in
SE tax merely by forming and properly operating a corporation. SE tax is
assessed by the amount of salary you as an individual receive. If the
corporation paid you partially through salary and partially as a draw (not
subject to payroll tax), SE tax would be based on your salary only. For example,
if the corporation made $100,000 in a given year, the corporation can pay you
$50,000 in salary and the remaining $50,000 could be taken as draws not subject
to payroll tax. SE tax will be based on the $50,000 you receive in salary – not
on the draw. However, if you operated as a sole proprietor or partnership, it
would be based on the $100,000 personal return. Additional benefits of forming a
corporation include fully deductible health, life and disability insurance.
Retirement funds and qualified retirement plans, such as 401(k), may also be
established more easily.
However, with these benefits comes responsibility. You must
treat the corporation as a separate legal entity. That means, you cannot
commingle your personal assets with your business assets. You have to treat your
personal life and your business life separate. If you have a corporate credit
card, you cannot use it to purchase clothing or groceries, unless it is a true
business expense. Once you use your corporate card as your personal charge card,
you lose your limited liability protection the corporation offered you. This is
known as piercing the corporate veil. Since you are not treating the business as
a business, a creditor that obtains a court judgment against you, can look past
the corporation status and attach assets you personally own, such as your house.
Limited Liability
Company (LLC)
An LLC is a bit like a
corporation because it provides limited liability protection for business debts
and claims. However, when it comes to taxation, LLC’s are more like partnerships
– the owners of the LLC pay their share of the business income on their personal
tax returns. An LLC might be more preferable than a corporation because there
are fewer corporate formalities. Corporations must hold regular meetings of the
board of directors and shareholders, keep written corporate minutes and file
annual reports with the state. On the other hand, the members and managers of an
LLC need not hold regular meetings, which reduces complications and paperwork.
The primary reason people incorporate their business or form
an LLC is to protect their personal assets from the claims of the business'
creditors. A corporation or an LLC by their very nature, have "limited
liability". As a sole proprietor or partner, you have "unlimited liability" to
your creditors and, therefore, all of your personal assets are at risk if the
business fails, is sued or is unable to pay its debts.
Many individuals today are self employed. As a business grows
and prospers, the risk of liability to third parties also grow. Business
customers, employees and creditors may bring suits against you personally. Your
Fictitious Business Name will not protect your personal assets (i.e., home, car,
savings accounts). The moral of the story…if you own a business, incorporate!
Protect your yourself and family from personal liability.
Alon Darvish, Attorney at Law
We invite you to discuss your business
with us. We can help protect you and your family! Call now for
a free consultation. You may reach our office at (310)205-5529.
Remember...Failing to
Plan is Planning to Fail!
LAW OFFICES OF ALON DARVISH
9454 Wilshire Boulevard, Penthouse
Beverly Hills, CA 90212
Tel: (310)205-5529
SERVING LOS ANGELES COUNTY
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