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Archive for the 'tax advice' Category

Choosing the Wrong Corporate Entity

June 11th, 2008

By The XBanker

Corporate entities come in three categories: the good, the bad, and the ugly. But even among the good, one size does not fit all. Choosing the wrong corporate entity can cost you time, money, and your personal assets.

The “bad” entity is the Sole Proprietorship, where the owner is personally liable for all claims against the business. If the business gets sued, as owner, you could lose more than just the company; you could lose your car, your house, everything. Though the paperwork required for a Sole Proprietorship is minimal and it is the cheapest entity to form, it is almost never worth the risk in today’s litigious society.

The “ugly” entity is the General Partnership, where each partner is responsible for the actions of the other. Any partner can obligate the partnership, even if one (or more) partner(s) protests a decision. And, as with a Sole Proprietorship, personal assets may be on the line. It is also important to understand that General Partnerships can be innocently formed. There is no filing requirement. A handshake or simple business arrangement – anytime you are sharing profits and splitting losses – could be seen by the courts as a General Partnership, regardless of the intent of the parties involved. Remember, with a General Partnership you have liabilities times two. You are responsible for your own mistakes as well as your partners’ mistakes. Not a good way to do business.

The “good” entities are the C Corporation, the S Corporation, the Limited Partnership (”LP”), and the Limited Liability Company (”LLC”). A corporation, LLC or LP is a separate legal entity with its own name, business purpose, and tax identity with the IRS. The corporation is responsible for the actions of the corporation, not individual owners or shareholders. As an owner or shareholder, your personal assets are protected. You are only liable for the money you put in to start the company, thus each corporation offers limited liability.

Simply filing as a corporation is not enough to protect personal assets, however. Certain corporate formalities must be followed (the same applies for LLCs and LPs) or a creditor will be able to claim that the business is a corporation in name only. In this case, the corporate veil may be pierced and personal assets claimed.

Choosing a corporate entity is a detailed, complicated process. Work with your XBanker account representative to properly set it all up. They will make sure you choose the right entity, thus avoiding a big mistake many business owners make.

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Your Annual Tax Increase

February 20th, 2008

By The XBanker

If someone tries to tell you federal taxes haven’t increased for the last few years please set them straight.

Federal taxes increase every year.

Although the individual, capital gains and corporate tax rates may not have changed, the most insidious of all taxes continues its skyward march.

Payroll taxes. The money deducted for Social Security and Medicare. The money that is supposed to be set aside in a trust fund for future retirees. The money that actually gets spent by the government the minute they get it.

Payroll taxes are imposed at the rate of 7.65% on the employer and employee alike. So on a $1,000 paycheck the employee loses $76.50 and only receives $923.50. And the employer has to pay $76.50 on top of the $1,000 to the employee (and the government).

But what if you own the business and are the only employee? Then you are paying 15.3% on everything you pull out in salary. So don’t believe the apologists who say it is only 7.65%. When you own the business it is double that: a hefty 15.3% on all the salary you take up to the yearly wage base. Which is why you may want to use an S corporation to minimize your payroll taxes by taking some money out as a dividend distribution, which isn’t subject to the 15.3% tax. But that’s another post.

The point is that these payroll taxes keep going up every year because the government keeps raising the wage base. This year the 15.3% rate applies to all income up to $102,000, resulting in a tax of $15,606 per employee. On salary above $102,000 wage base, the Medicare tax of 2.65% continues to apply.

In 2009, the wage base is expected to be $106,800, up to $4,800 from this year. Or, for the owner of the business another $734.40 in extra payroll taxes. On just one employee!

The government is already estimating a wage base of $111,600 for 2010, $116,100 for 2011, and $121,500 for 2012. So in 2012, your payroll tax will be $18,589.50, up almost $3,000 in four year’s time.

Remember, these taxes are insidious because they get paid throughout the year by your bookkeeper or payroll service. You may not notice them.

But they are very real and you and your team must plan for them.

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