Starting a new business is exciting and thrilling. Over these past few years, these young entrepreneurs have had a nice ride with the tenth year of the recovery from the Great Recession.
The Best Business and Tax Structure is carefully built with an attorney and a tax CPA.
They are just as happy as the “three little pigs, “ and I guess this makes me the pigs’ “mother.”
Mom warned her children (the pigs for those of you who are not Americans) to watch out for and prepare for the Big Bad Wolf.
No, the Wolf is not the IRS. The IRS only wants a share of your profit.
The Wolf is life as a business owner. The Wolf may be an employee out for an errand that gets into a car accident, or your new lease for bigger space or a disgruntled customer or supervisor that sexually harasses another employee.
Alan called me the other day. As you know, I offer free brainstorming. He called before, and he is a pleasure to talk to. He is expanding to the U.K. and wants to know the best “tax structure.”
He got a name from Amazon of a firm in the U.K. that would incorporate his business, set him up for VAT in the U.K. and Europe and help him with VAT tax planning. The fee $1,200.
I little reckless, I said. It is almost as dangerous as using Legal Zoom to start your U.S. business. “Oh, Oh”, Alan said. He did use legal zoom to form his corporation (I like legal zoom, but you still need an attorney).
If you don’t know about the three little pigs, the mother warned them about a new big bad wolf on the prowl.
The pigs were millennials moving out of their parent’s home. One pig built his home out of straw and had plenty of time to play. The other used twigs. This took a little longer, but not much, and he too played.
But the last pig worked for days, spend money, purchased bricks, concrete, and built a house out of reinforced bricks.
The Big Bad Wolf eventually found the three pigs playing. Each little pig ran to his home. The Wolf easily blew down the first two homes. The two little pigs ran to their brothers brick home. The Wolf huffed and puffed but could not blow the house down.
A Corporation Maybe the Best Startup and International Business and Tax Structure, but only if it is made out of bricks.
Wolfs, creditors, employees and other unknown adversaries can pierce your corporation or LLC if it is not formed and maintained. This means that the shareholder or member (of the LLC) is personally responsible for the debts of the corporation or LLC.
You see, Alan did not know corporations primary reason for existing is to protect him from creditors. The IRS really does not care if you have an LLC, an S-corporation or a C-corporation.
Alan and his partner each put $750 into the corporation. They transfer money in and out as if it was not a separate legal person. They had no corporate minutes and no corporate resolution. Alan was in the same place as if he had no corporation; only now he and his partner must file one more tax return.
So, please, build a strong foundation for your business. Pay money to an attorney. Adequately capitalize the corporation, if you make a loan, then have corporate minutes and a loan agreement. The same goes to the LLC. While it may not exist for tax law, you want to have it exist for legal protection.
If you act as if your LLC does not exist, that is exactly what a Jury will see and believe.
Plan to meet with your attorney at least once a year and have he or she do your minutes, promissory notes and contracts. Don’t be penny wise but dollar foolish.