PDF Summary:Start Your Own Corporation, by Garrett Sutton

Selecting the right legal structure for your business is crucial for protecting your assets and minimizing tax liabilities. In Start Your Own Corporation, author Garrett Sutton guides you through the advantages and drawbacks of different business entities like corporations, LLCs, and limited partnerships. He discusses strategies for safeguarding assets by employing multiple entities across different states and leveraging the legal frameworks of Nevada and Wyoming.

Sutton also explores ways to maximize tax advantages and ensure compliance when structuring employee benefits, compensations plans, and funneling business income. With practical advice and case studies, this guide aims to help you make informed decisions about your business's legal and financial structuring to secure long-term success.

(continued)...

• Develop a role-playing game with friends or family where each person acts as a different asset in your portfolio. This game will help you understand the vulnerabilities of each asset. Assign roles such as "Rental Property," "Stock Portfolio," or "Patent." Through the game, simulate various legal and financial challenges that could threaten these assets. This exercise can provide insights into how separate legal entities could provide a shield for each asset.
• Start a 'one in, one out' rule for future purchases to prevent asset accumulation. Whenever you buy a new item, sell or give away an old one. This habit ensures you only keep items that are truly valuable to you. For instance, if you purchase a new coffee maker, find a new home for your old one instead of storing it away.
• Implement a regular review process for your business's asset protection strategy. Set a bi-annual reminder to assess your business's asset structure and make adjustments as needed. This proactive approach ensures that as your business grows and the regulatory environment changes, your asset protection measures remain robust and effective. During these reviews, you might discover that recent changes in legislation affect your sector, prompting you to create a new entity or restructure existing ones.

Utilizing the asset protection features inherent in the frameworks of Limited Liability Companies and Limited Partnerships.

The author emphasizes the significant advantages of utilizing the safeguards offered by Limited Liability Companies and Limited Partnerships, particularly in states like Nevada and Wyoming, which have a reputation for their strong legal frameworks regarding these entities. Garrett Sutton explains that a creditor's legal recourse is limited to the distributions made to the company's owner, rather than having the power to seize the company's assets themselves.

Sutton delves into the complexities and hurdles associated with obtaining a charging order, highlighting the challenges creditors face in their efforts to recover debts via this avenue. Garrett Sutton explains that in jurisdictions like Nevada and Wyoming, the challenges often deter creditors from pursuing assets safeguarded by LLCs and LPs, particularly when it comes to single-member LLCs. Garrett Sutton narrates how Joe, an entrepreneur, effectively protected his assets from a creditor who had obtained a judgment, by employing a charging order connected to his thriving forklift business, even though the creditor attempted to pursue repayment for liabilities from a separate business venture.

Other Perspectives

• Creditors may still find ways to reach the assets of an LLC or LP through personal guarantees or by proving that the entity was not operated as a separate legal entity (i.e., commingling of assets).
• The legal frameworks of Nevada and Wyoming, while strong, are not immune to changes in legislation that could alter the level of asset protection in the future, potentially affecting businesses that have chosen to incorporate there based on current laws.
• In some cases, the complexity of obtaining a charging order can be mitigated by experienced legal counsel, suggesting that the process may not be as daunting for creditors with the right expertise.
• Creditors may employ alternative legal strategies, such as fraudulent transfer claims, to challenge the protection of assets in these jurisdictions.
• Single-member LLCs may not provide the same level of asset protection as multi-member LLCs because some courts have pierced the corporate veil when they perceive the entity to be an alter ego of the owner.
• There could be ethical considerations if the use of charging orders to protect assets is perceived as a means to unjustly evade legitimate debts, which could reflect poorly on the moral standing of the business or individual employing this strategy.

Establishing entities within the jurisdictions of Nevada and Wyoming can be advantageous.

Sutton highlights the unique advantages of forming entities in Nevada and Wyoming, noting their favorable tax regulations and strong legal protections for assets. He details approaches for entrepreneurs to leverage these benefits in compliance with the regulations of their own state.

Nevada offers benefits to business owners because it does not levy a state income tax and provides strong protection through the use of charging orders.

Sutton emphasizes the economic advantages derived from Nevada and Wyoming not imposing a state income tax. He explains that businesses and individuals can benefit from this tax-free status without incurring additional state tax liabilities, only needing to pay a minimal annual fee to maintain their entity in these states. Nevada and Wyoming are distinguished by their strong charging order statutes that bolster the protection of property.

Sutton emphasizes the strategic advantage of leveraging Nevada and Wyoming's specific charging order regulations to provide exceptional security for Limited Liability Companies and Limited Partnerships. He explains that the lengthy and costly process of obtaining and carrying out a charging order serves as a discouragement to creditors. He emphasizes that creditors are limited to a passive role through charging orders, merely anticipating possible payouts, which hinders their ability to seize and liquidate the business's holdings, often leading to settlements for amounts much less than the original court verdict.

Other Perspectives

• While Nevada and Wyoming do not impose a state income tax, this could lead to higher sales or property taxes to compensate for the lack of state income revenue, which might affect businesses and individuals differently.
• The term "minimal" is subjective and the actual cost of the annual fee may be considered significant by some small businesses or startups operating on a tight budget.
• The effectiveness of charging order protections can vary depending on the specific circumstances of a case and the interpretation of statutes by courts, which means that the level of protection is not absolute.
• Some creditors may have the financial resources and patience to wait out the process, especially if the potential payout from the debtor's distributions is significant.
• The emphasis on the passive role of creditors might overlook the fact that charging orders can still result in financial strain for a business, as distributions that would normally be reinvested in the business may have to be directed to satisfy the charging order.
• The notion that creditors often settle for less may not account for the evolving legal landscape, where new precedents or statutes could diminish the protective strength of charging orders over time.

Establishing a presence across multiple states to optimize safeguarding.

Sutton recommends that companies and investors establish entities in different states to leverage the unique legal landscapes, thereby strengthening their asset protection. He outlines a strategy for asset protection that involves forming businesses in Nevada and Wyoming before securing the necessary permissions to conduct operations across other states. This strategy involves setting up main entities in Nevada or Wyoming, which then possess subsidiary companies across different states, leveraging the strong protective features for assets inherent to these areas while complying with the distinct legal mandates of the states where the subsidiaries operate.

Sutton illustrates the benefits of employing strategies across various states through case studies and examples, which is particularly beneficial for acquiring property and business expansion. He underscores the importance of consulting with legal professionals to ensure compliance with relevant state statutes and rules, thus avoiding potential legal complications and unexpected consequences.

Practical Tips

• You can create a map of asset protection attributes for each state to visually compare and identify the best options for your needs. Start by researching the basic asset protection laws in various states, such as exemptions for personal residences or retirement accounts. Then, use a color-coding system on a US map to represent different levels of protection. This visual aid can help you quickly see which states offer stronger protections that align with your assets.
• Engage in a virtual mailbox service based in Nevada or Wyoming to establish a presence in either state. This can be a first step in creating a business footprint there without the need for physical relocation. A virtual mailbox can receive correspondence and legal documents, ensuring you maintain compliance with state requirements for having a registered agent and a mailing address in the state where your business is formed.
• Consider creating a detailed business plan that includes a subsidiary structure, even if you're just starting out. This can help you visualize the potential growth and expansion of your business across different states. For instance, if you're a freelance graphic designer, you could plan for future incorporation and how you might eventually manage subsidiary entities in various states where you have clients.
• Create a virtual network with entrepreneurs and investors in different states to explore collaborative opportunities. Use social media platforms, online forums, and business networking sites to connect with like-minded individuals who are interested in property acquisition and business expansion. This can lead to partnerships, joint ventures, or even just valuable advice on different markets.
• Participate in community legal clinics or workshops that offer free or low-cost legal advice. Many local bar associations and law schools host events where you can get preliminary legal guidance on various topics. Attending these events can give you a better understanding of when and why you might need to consult with a legal professional.
• Develop a habit of conducting mini "risk assessments" for new activities or projects by asking yourself what could go wrong and how it could affect you legally. For instance, if you're planning to rent out a room in your home, consider potential legal issues like zoning laws, tenant rights, and your liability as a landlord. Write down these considerations and research or seek advice on how to address them before proceeding.

Avoiding common pitfalls and strategies related to safeguarding assets.

This section of the book serves as a caution, urging readers to remain vigilant against misleading tactics and common legal pitfalls that could jeopardize their asset protection measures.

Ensure you do not participate in tactics that offer disproportionate benefits or violate rules related to securities trading.

Sutton cautions his audience against schemes that purport to rapidly accumulate wealth, which may offer overstated rewards or contravene regulations governing financial investments. He explains that con artists often target budding business owners and investors, using intricate schemes and misleading tactics to exploit their limited knowledge of legal matters. Sutton provides an in-depth analysis of numerous misleading strategies that are promoted under the guise of safeguarding assets, including those that claim to offer invincible wealth protection methods, hidden overseas accounts, and secret trusts designed to shield a person's assets from creditors and tax agencies.

Sutton narrates the story of Pamela, a prosperous entrepreneur who was unfortunately deceived by a scheme that promised to safeguard her assets. He explains that Pamela was pressured into taking on a multitude of unnecessary entities, resulting in significant financial losses and complicating her situation with legal troubles. He emphasizes the importance of seeking advice from reputable professionals with a proven history of protecting assets, cautioning against strategies that seem too good to be true or assure outcomes without any work.

Practical Tips

• Engage in a monthly financial literacy book club with friends or community members where you discuss different aspects of responsible investing and the importance of compliance with trading laws. This social accountability can reinforce your commitment to avoiding high-risk schemes and encourage a culture of informed and ethical investing within your circle.
• Use role-playing exercises with a trusted friend or mentor to practice identifying and responding to potentially fraudulent scenarios. By simulating interactions with con artists, you can become more comfortable with questioning suspicious claims and learning to say no. You might role-play a situation where someone offers an investment opportunity that seems too good to be true, and practice probing for more information or declining the offer assertively.
• Use social media to join peer groups focused on asset protection and observe the discussions about professional advisors. Look for patterns in recommendations and warnings about certain practices, which can serve as a crowdsourced vetting process to complement your own research.
• Develop a personal "effort vs. outcome" journal to track the actual work you put into tasks and the results you achieve. By documenting your daily efforts and the outcomes, you'll create a realistic picture of what it takes to reach your goals. For example, if you're trying to learn a new language, note down the time spent studying and the progress made, which will help you see the correlation between effort and fluency over time.

Maintaining the required corporate formalities is crucial for sustaining the shield that guards against legal responsibilities.

Sutton emphasizes the necessity of following corporate formalities to preserve the shield that entities like corporations, limited liability companies, and limited partnerships offer for liability protection. Garrett Sutton emphasizes the necessity of adhering to specific procedures, such as keeping separate bank accounts, recording meetings, and filing annual reports, to prevent legal disputes that might result in shareholders or members being held personally liable for the company's debts and exposed to lawsuits, a situation referred to as "piercing the corporate veil."

Sutton illustrates through the narrative of Roger and Donny, two entrepreneurs, the risks they faced to both their business and individual finances by overlooking essential corporate formalities. He offers an extensive checklist of essential corporate practices, highlighting their role as a protective barrier to prevent possible legal disputes. He concludes this section by recommending that readers consult with legal professionals to ensure compliance with all relevant regulations and to minimize the risk of losing their crucial protection of assets.

Practical Tips

• Schedule a consultation with a business attorney to review your company's operational procedures and identify any potential risks to the corporate veil. Even if you're not an expert in legal matters, getting professional advice can pinpoint areas where you might need to tighten up practices to protect yourself from personal liability.
• Schedule a quarterly review with a financial advisor or accountant who specializes in small businesses. Use these sessions to go over your business's financial health and ensure that your personal finances are not becoming entangled with your business's finances. They can help you spot any red flags and suggest corrective actions to keep both sets of finances healthy and distinct.
• Develop a habit of documenting agreements and conversations with a simple follow-up email. After any significant verbal agreement or discussion, send a recap email to all parties involved outlining the key points and any actions agreed upon. This creates a written record that can be invaluable if disputes arise.
• Use a legal document drafting service to create standard contracts for any transactions or agreements you're involved in. These services provide templates that are customizable to your needs, ensuring you have legally sound documents without the need for a lawyer for every situation.

Strategic oversight and structuring with a focus on fiscal implications.

Utilize a range of strategies to skillfully work through the tax code, thereby minimizing their tax burden and improving their economic benefits. Sutton emphasizes the necessity of collaborating with proficient accountants capable of devising efficient financial management tactics and ensuring readiness for fiscal responsibilities.

Ensuring your business takes full advantage of permissible tax deductions.

Sutton provides strategies for business owners to maximize their use of the tax code by recognizing and deducting legitimate business expenditures, thereby reducing their overall tax liability. He emphasizes the significant distinction in tax treatment between business owners and employees, highlighting that businesses have access to numerous tax deductions that are not available to employees.

Deducting initial costs of starting a business, continuous expenses for operations, acquisitions of inventory, and investments in long-term assets.

Sutton provides a thorough analysis of the various expenses that businesses can write off, including the costs of initial establishment, regular operating expenses, purchases of inventory, and capital investments. He provides detailed advice on the rules surrounding different expense deductions, highlighting strategies to maximize deductible amounts. Garrett Sutton explains the process by which companies can utilize the provisions of Section 179 to immediately write off the entire cost of qualifying equipment and assets in the year they are purchased, instead of allocating the cost over multiple years through depreciation. He recommends that individuals work closely with their tax advisors to identify all allowable tax deductions in accordance with IRS regulations, which can help to minimize potential tax liabilities.

Practical Tips

• Schedule a consultation with a tax professional to discuss your specific startup expenses and how they can be deducted. This step ensures you understand the nuances of tax deductions for your business type and don't miss out on any potential savings. You might find out that certain costs you hadn't considered, like market research or travel for business planning, could also be deductible.
• Consider implementing a first-in-first-out (FIFO) inventory management system to maximize the potential tax benefits of your inventory deductions. By selling the oldest stock first, you may be able to reduce the value of your remaining inventory, which can lower your taxable income. For instance, if you run a bookstore, sell the books you acquired first before the newer ones, which could also help in managing the relevance of your stock in relation to current trends.
• Consider purchasing a rental property to take advantage of capital cost allowances. This strategy involves buying a property that you can rent out to tenants. The cost of the property, along with any improvements you make, can often be deducted over time through depreciation. This not only provides you with additional income but also helps reduce your tax liability.
• Create a strategic investment timeline for your business that aligns with the fiscal year and Section 179 provisions. This means planning major purchases of equipment or assets to occur in a way that maximizes the immediate tax write-off benefits, rather than spreading the cost over several years.
• Develop a simple "tax health" checklist that you review quarterly, including actions like checking for changes in tax laws, confirming your expense tracking is up-to-date, and setting reminders for tax-related deadlines. Regularly maintaining your tax health can prevent last-minute rushes and ensure you're well-prepared for meetings with your tax advisor.
• Use a personal finance app that allows you to tag transactions as tax-deductible when they occur. Many apps offer features where you can swipe or mark a transaction as deductible, which can then be compiled into a report at the end of the year. This is especially useful for tracking smaller, easily forgotten deductions like mileage or out-of-pocket charitable expenses.

Establishing retirement plans and employee benefits that provide financial advantages.

Sutton explores how corporations can bolster retirement plans by leveraging their tax benefits and additional incentives. He provides detailed insights into the benefits of retirement schemes like defined contribution and those with assured payouts, emphasizing their tax deferral capabilities. He also delves into the additional benefits available to C corporations, such as the ability to offer tax-free medical benefits and provide group term life insurance for their workforce, expenses that the company can deduct as business costs.

Sutton emphasizes the importance of choosing a retirement plan that is specifically designed to meet the distinct needs and growth stage of the business. Garrett Sutton cautions that when planning for retirement, sole proprietorships fall short because they do not provide adequate safeguards for one's assets and can significantly deplete retirement funds through taxes on self-employment. Sutton underscores the necessity of engaging with professionals to ensure that the chosen strategy adheres to all legal requirements and optimizes fiscal benefits.

Practical Tips

• Consider volunteering for a financial literacy program to learn more about retirement planning and tax incentives. By teaching others, you reinforce your own understanding and are more likely to apply these principles to your retirement strategy. Look for local non-profits or online platforms that offer volunteer opportunities to educate the community on financial wellness.
• Consider diversifying your retirement portfolio with investments in sectors known for stability or growth, such as healthcare or technology. Diversification can help manage risk and potentially increase returns over the long term, which can be particularly beneficial in a defined contribution plan where payouts are not assured.
• If you're an employee, negotiate for inclusion of tax-free medical benefits in your compensation package. You can research the benefits that C corporations can offer and present this information to your employer, highlighting how it can be a tax-efficient way to increase your total compensation without increasing your taxable income.
• Consider conducting informal focus groups with your employees to gauge their retirement needs and preferences. Gather a diverse group of employees and facilitate a discussion about what they value in a retirement plan. This can provide insights into which plans might be most appreciated and utilized, ensuring that the chosen plan supports employee retention and satisfaction.
• Engage in a 'mock audit' exercise with a trusted peer or mentor where you review each other's business practices for legal and fiscal soundness. This peer review process can provide a fresh perspective and help identify areas of improvement that you might have missed.

Choosing to structure a business as an S corporation can lead to lower obligations for payroll taxes.

This section of the book delves into strategies for utilizing S corporation structures to minimize the payroll taxes that businesses incur. Sutton provides guidance to entrepreneurs on how to structure their compensation to minimize their overall tax liability.

Remuneration consists of a set salary in addition to a distribution of the company's profits.

Sutton recommends the S corporation structure because it allows for the division of compensation into a salary that is subject to payroll taxes at a fair market value, with the remainder of income being distributed as dividends that are exempt from payroll taxes. He demonstrates how to consistently realize significant tax reductions annually. He underscores the importance of complying with the Internal Revenue Service's guidelines on "reasonable compensation" to avoid potential legal complications and penalties.

Other Perspectives

• The link between individual performance and profit distribution can be tenuous, potentially leading to demotivation if employees do not see a clear correlation between their efforts and the profits they receive.
• The focus on tax reduction through dividend distribution could potentially overlook the benefits of reinvesting profits back into the company, which might be a more strategic move for long-term growth.
• The strategy may not align with the long-term interests of the company if it results in a perception of tax avoidance, which could damage the company's reputation among customers, employees, and the public.

Leveraging the tax treatment of business debts.

Sutton highlights the tax advantages of LLCs over S corporations regarding business debt. He explains that LLC members can benefit from business debt, regardless of personal guarantees, as the debt increases their tax basis, allowing for greater tax-free distributions. Tax advantages for S corporation shareholders are contingent upon their personal assumption of debt responsibility, increasing their risk of personal financial liability.

Practical Tips

• Experiment with debt restructuring to maximize tax advantages under an LLC. If you currently have business debt, investigate refinancing options or negotiate with lenders for more favorable terms that could enhance the tax benefits associated with an LLC. Document the changes in interest rates, payment schedules, and tax outcomes to assess the financial impact.
• Consider forming an investment group with fellow S corporation shareholders to collectively assume debt for larger investments. This strategy can distribute the risk and potentially increase the tax advantages for each member. For instance, if your S corporation is looking to purchase a new property, pooling resources can make it more feasible and spread the debt responsibility among shareholders.
• Develop a clear exit strategy for your involvement in the S corporation. Outline conditions under which you would reduce your stake or leave the corporation altogether, such as reaching a certain level of debt or changes in the business's financial health. Regularly review and update this strategy to reflect the current financial status and risks associated with the corporation.

Strategies to avoid or delay taxation being applied twice to the same income.

This section of the text explores strategies to delay or avoid the commonly faced issue of C corporations being taxed twice.

Channeling earnings back into the company to stimulate its expansion.

Sutton advises business owners to strategically retain earnings within the C corporation for future growth and expansion, thereby delaying the tax liability on shareholder dividends. He emphasizes the importance of documenting the reasons for retaining earnings in the business to avoid conflicts with tax authorities, who may view the retention of profits as a tactic to avoid the individual tax obligations of the shareholders.

Practical Tips

• Develop a "future opportunities" fund within your company's accounts. Allocate a portion of your profits to this fund regularly, earmarking it for specific growth opportunities like new product development or market expansion. This dedicated fund ensures you have the capital ready when the right opportunity arises.
• Set up monthly reminders to review and document retained earnings. Consistency in documentation can prevent oversight and ensure that all reasons for retaining earnings are current and well-documented. Use a calendar app to set these reminders, and during each review, update your digital journal with any new decisions or changes to the use of retained earnings.

Benefiting from the tax benefits that come with the flow-through nature of Limited Liability Companies and Limited Partnerships.

Sutton recommends utilizing Limited Liability Companies and Limited Partnerships due to their advantage of allowing profits to flow through to the owners while avoiding the imposition of double taxation. He explains that this structure allows for profits and losses to be reported on the individual tax returns of the owners, thus avoiding the need for taxation at the corporate level. However, he warns that although this approach avoids double taxation, it might not always be the most advantageous financially, especially when considering the impact of taxes on earnings for LLC members who are actively involved in the business. He recommends that individuals consult with tax professionals to determine the tax structure that best suits their specific needs and goals.

Practical Tips

• Invest in dividend-paying stocks within a Roth IRA to receive profits without immediate tax implications. Since Roth IRAs fund with after-tax dollars, qualified withdrawals, including dividends, are tax-free. This means you can benefit from company profits without facing double taxation. Research dividend-paying stocks and consider how they might fit into your retirement planning.
• Create a detailed record-keeping system that categorizes all business transactions as either profits or losses. Use a simple spreadsheet or a basic accounting app designed for small business owners. This habit will help you maintain a clear financial picture throughout the year, making it easier to report on your tax return and identify areas for financial improvement.
• Use a tax simulation tool online to play out different tax scenarios based on your current financial situation. By inputting your data, you can see how various tax structures might impact your finances. This proactive step can provide a foundation for discussions with a tax professional and help you ask more informed questions.