[Dec/2022-Archive-Feb/2022 | Business] Start Your Own Corporation



  • Own nothing and control everything

Chap 1 – Entity Menu

  • Six choices: C-corp, S-corp, LLC, LP, GP, sole prorprietorship
  • What is considered
    • Protection of family assets
    • Management Ctrl
    • Avoid family dispute
    • Flex of decision making
    • Succession / Estate Planning
    • Nature of business operated, assets held
    • Number of owners
    • Funding / Raise Capital
    • Tax
    • Privacy of ownership
  • Sole Proprietorships & General Partnerships no asset protection
  • General Partnership is worse than sole proprietorship because you are also responsible for your partner’s acts 
    • Whenever two or more persons agree to share profits and losses a partnership has been formed. Even if you never sign a partnership agreement, state law provides that under such circumstances you have formed a general partnership.
    • Only handshake needed!
    • State by state interpretation of profit sharing, not case specific, 50-50 instead of 75-25 for example
    • Never become GP of business without day-to-day control
    • GP has self-employment tax

Chap 2 – Good Entities

  • Form corp – creating a independent legal entity with life of its own
  • C-corp could be taxed twice
    • To avoid double tax, most C-corp use write off to reduce profit to zero in net income
    • S-corp can flow-thru
    • S-corp owner < 100 owners, must be US citizen/resident aliens, Corp/LP/Multi-member LLC may not be resident alien
    • Go public need a C-corp
  • LLC
    • Flexible allocation of PnL – beyond shares of ownership
      • Special Alloc – need a “substantial economic effect” to be accepted by IRS
      • Include special language in LLC’s Operating Agreement to ensure future special alloc has substantial econ effect
        • Something about capital account / liquidation of it / negative capital account payback
    • Can be personal liable if you sign personal guarantee
      • Example: office lease / loans from SBA
      • By signing an agreement “Joe Doe” without adding “Manager, XYZ, LLC” you can become personally liable.
    • Flexible management structure
    • Prepare annual minutes (notes of annual meeting) to avoid piercing thru corp veil
    • Canada – only two province have LLC, most people with LP
    • Pass-thru tax entity
    • LLC itself is a relatively new entity, not as much court rulings as corp
    • Be careful when using LLC in California! LOL – big cost when establishing LLC in California + gross receipt based tax
  • LP
    • Limited Partnership has “GP + LP”
      • GP similar to General Partnership, but can use Corp/LLC as GP
    • Retained Management – GP determines how things are run, LP receive the benefit
      • Estate Planning Application – give interest in LP gradually each year tax free to children
    • Restrictions on Transfer
      • Some rules of limited free transferability can be constructed
    • Charging order on LP
      • Charging order are not favored by creditors because it forces them to wait to be paid (Lawyers on Contingency don’t like to wait for $$)
      • State of Nevada / Wyoming offer best charging order protections, California offers weakest protection
        • Strategy – form LP/LLC in Nevada/Wyoming then qualifying it in California. (if you want to do business in California)
    • Family wealth transfer
      • Discount for LP interest is allowed (because LP cannot manage the Limited Partnership)
        • Which means more can be gifted after using discount tech
        • Author doesn’t advise clients to discount more than 33%
    • Flow-thru tax
    • Family limited partnership – scam
      • There’s people selling it, frame it as “bullet proof, super secretive” lol – maybe good idea

Chap 3 Corp or LLC?

  • LP requires a LLC/Corp as GP for maintainence
  • Pros/Cons of each entity
    • S-corp : Charging order protection for corp shareholders (S&C) with Nevada
  • Operate business
    • Payroll tax – FICA & Medicare
      • C-corp high salary to avoid double-taxation
      • LLC – subject to payroll tax for LLC members active in business
      • S-corp: salary has payroll tax, profit doesn’t
    • Business Debts
    • Fringe benefits
      • C-corp can write off employee’s Health Insurance Premiums and group term life insurance / medical reimbursement plans – S-corp cannot
    • Owner Flexibility
      • S-corp is not flexible
        • No foreign owners
        • No trust
        • No multiple classes of shares
  • Hold assets – generally better protected using LLC instead of corp
    • Example using a LLC vs. Corp to hold fourplex, there’s a car accident and creditor want personal assets
      • Corp (unless nevada), creditor get 100% share of the corp, can sell the house
      • LLC (especially nevada / wyoming), creditor can receive money distributions but can’t take membership interests & force sale.
        • If LLC doesn’t make distribution, nothing reaches creditor
        • Additionally, creditor will pay tax, if nothing is distributed, creditor has phantom income and need to pay tax on money he hasn’t received
        • Some States (CA/CO/FL/ID) no charging order protection for single-member LLCs
    • Separation of assets into diff compartments
      • You don’t want a lot of assets in a corp that deals with public and is subject to be sued
    • Series LLC – doesn’t make sense per author
      • Promoted as state-fee-saving device
      • California is taxing each cell of series-LLC LOL
    • Tax
      • Transfer asset in/out of the entity
      • LLC is preferred here


Chap 4 – Using Neveda / Wyoming Entities!

  • Nevada/Wyoming no state income / corp tax
  • Strategy 1: Doing business in your state
    • Nevada Corp Laws
      • No sharing Corp Info with IRS
      • Privacy: used to be completely confidential – now somewhat comprimised
        • Note: 
          • 1. Ownership is confidential until there’s trouble
          • 2. Trouble has to be big
        • People greatly concerned about privacy may want to use Wyoming entities
  • Strategy 2: Doing business in your state and in Wyoming
    • Save state tax
      • Save state tax by having Wyoming Corporation do the service
    • Asset Protection
      • Local State LLC do the day-to-day, while all the money in Wyoming LLC
    • Lower Corp Tax – controlled group rule
      • Profit engineering in each entity to minimize corp tax
      • Controlled group status – some loopholes can avoid the controlled group status (dynamic though)
  • Strategy 3: Doing business in your state, borrowing money from Nevada, Inc
    • Encumber the assets in borrower, more safe from creditor
  • Concerns when transfer assets
    • Fraudulent Conveyance
    • Bearer Shares – privacy of owner of share – outlawed in Nevada / Wyoming
    • Money Laundering 

Chap 5 Charging Order

  • Charging Order / LLC or LP
    • Not make distribution as protection
    • Phantom income to make creditor pay tax on gain

Chap 6 Cross State Line

  • Stealth vs. Structure
    • Land trust not recommended
  • When need to qualify business for state

Chap 7 Professional Corps

  • Professional corporation protection is limited
    • Usually licensed profession : i.e. doctors
    • Not protect against negligience / malpractice -> Personally liable

Chap 8 Organizational steps for forming Corp/LLC/LP – skipped

Chap 9 Importance of Corp Formalities

  • Don’t see corp assets as your own, don’t co-mingle, annual meeting important

Chap 10 Business Tax Deductions

Chap 11 Building Corp Credit

  • Business Credit Vendor
    • D&B, Experian, SBFE/Equifax
  • Level-1 : Whatever it takes
    • Personal Guarantee
  • Level-2 : Wising Up
    • Business Credit Card
    • Not on personal credit report unless default, may have to personally guarantee
  • Level-3 : Established Business Credit

Chap 12 Insurance

  • Real Estate Insurance
    • Replacement cost vs. current value – replacement cost might be better
    • Liability Insurance
      • Many liability protection also gives insurance’s legal team on your side
    • Director and Officer Liability Coverage
  • Read the fine print

Chap 13 JV

Chap 14 Raise Money!

  • Sell share of company – SEC
    • Some states not only require federal disclosure but also require merit review
  • Rule 506 / Reg-D offering for private-placement
  • When non-accredited investor being solicited, the disclosure required is more

Chap 15 Voting Trusts – to maintain control

Chap 16 Know Director & Officers

Chap 17 Buy-sell agreement

Chap 18 Protect from Scam

  • Avoid asset protection scams

Chap 19

Chap 20 More Misc Traps

  • Accumulated earnings – more than 250K is tricky

Chap 21

  • Reliable resident agent – to know you’re sued and have a chance to defend yourself

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