What Your Parents Didn’t Tell You Before You Started Your Own Business

Legalitas-Berbisnisby Jim Cover

Like many of my clients, you might be self-employed and facing something similar to the stories below: high taxes, little to no retirement, and exposure to unnecessary risks.  You are operating a small company out of your home or garage; perhaps you sell Real Estate, are a consultant, or are building an affiliate/network marketing business.  You are successful, yet no one, not even your parents, told you that there was a better way to structure your business – a way to save you a fortune in taxes, increase your available cash, fund your retirement, and protect what you’ve earned from loss. Regardless of where you are on your entrepreneurial path, the beginning, near the end, or somewhere in between, your small businesses or profession can benefit from a customized business structure.

The Young Gun
I had a young client recently say, “my parents never told me tell me about any of this stuff,” in response to my analysis of his business and explanation that without proper guidance, he, like many other self-employed people in this country, will pay the highest tax rates.  He was making over $10,000 per month, facing a substantial tax bill at the end of the year, and, apart from what he might be able to draw from Social Security when he reaches age 70, had no retirement plans.

By restructuring his business and establishing a corporate retirement plan, CoverLaw saved him thousands in taxes, and enabled him to fund his retirement with money that he would not have had otherwise. By the time he is in his 60’s he will have accumulated an estimated $5 million for retirement. At the same time, this new structure gives him access to additional benefits that were not available to him as a sole proprietor, lowers his tax bracket, and increases his available cash.

His parents hadn’t told him about these business strategies because they did not know about them.  His father, also self-employed but in a different line of work, has overpaid his taxes in the hundreds of thousands of dollars over the years, has no retirement savings, and has been unnecessarily exposed to personal liability.  If something disastrous happens on one of his job sites, involving one of his customers or employees, he could lose everything.

The father needs to restructure his business.  However, it’s not enough to simply establish a corporate shell.  The magic is in the structure and organization of the client’s business.  Every situation is different and may call for a different solution.  The type of business entity, or entities, will also vary depending on the circumstances of each unique business. Where an S-Corporation may work well for one person’s business, a C-Corporation, limited liability company or partnership is the right approach for another.  While some clients require just one new entity, others need multiple entities to separate profits and further reduce taxes.

Nearing Retirement
A gentleman at the end of his career path was under levy by the IRS for unpaid tax assessments, and was being crushed.  He was in his mid-sixties, self-employed, and making over $100,000. Yet, he was barely making ends meet due to daily expenses, medical bills, and taxes. We restructured his business, saving him nearly $15,000 annually in taxes, and negotiated an affordable six-year repayment plan with the IRS for the back-taxes. Additionally, we setup a pre-tax medical expense account, and assisted him in drawing Social Security while still allowing him to manage his business. His available cash increased by over $3,500 per month.

Service Business
Many small businesses don’t know when they are required to pay someone as a W-2 Employee through payroll, versus a 1099 Independent Contractor where taxes are not withheld. When the option is available, they often manage it incorrectly. This can result in an audit by the state or IRS and cost the business a fortune in taxes and penalties.

One such client with a small landscape business sought the help of CoverLaw. We completely restructured his business. We converted two of his workers to W-2 Employees, and perfected the 1099 Independent Contractor-status of the others by drafting contracts to protect him.  The new structure is saving him thousands in taxes each year. His cash flow has increased by over $1,000 per month, and he is now saving money for retirement.

Homemaker Turned Entrepreneur
One rewarding area in which I am able to help folks is where one spouse is the income earner, and the other a homemaker-turned-entrepreneur starting a network-marketing-business or other home-based enterprise, which takes time to develop.  As a sole proprietor, the home-based business is limited in its ability to reduce tax-liability for the household;  properly structured however, that home-based business can make an immense impact on the couples taxes, and overall available cash.

The money you should spend on proper business formation and restructuring can have a very high return on investment.  The best legal counsel is one that will not only  analyze and advise from a legal perspective, but also from a business and quality-of-life perspective, think creatively “outside of the box,” and give your business individual custom service.

With a devoted team, CoverLaw assists clients throughout Southern California with a plethora of legal matters. The firm’s services include part-time general counsel services, independent director services, strategic business consulting, business formation and organization for-profit, charitable and non-profit organizations, finance, tax planning and tax resolution, immigration, employment matters, business litigation, debtor/creditor matters, including debtor defense, foreclosure, bankruptcy, business reorganization, credit restoration, and personal injury and wrongful death.

Jim Cover is the founder of CoverLaw PC, headquartered in San Clemente, California. He can be reached by calling (877) 214-4935 or via email atinfo@coverlaw.com

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