Should You Form a Corporation or an LLC?
by Scott Burnett, Esq.
Whether you are full-time or only a part-time network marketer, everyone in our business can benefit from forming a Corporation or an LLC. There are two basic reasons why I say this: taxes and growth.
First, no matter what your level of involvement is in network marketing, you are going to make income. Your goal, as a business owner, is to have that money taxed at the lowest rate allowed by law. If you are doing this business as a sole proprietor, you are going to pay more in taxes. Period.
Second, every business owner wants their business to grow and become more successful. If you are a sole proprietor, the business cannot financially grow to its full potential if it is tied to you.
TAXES AND THE SOLE PROPRIETOR
If you are doing your business as a sole proprietor, you will probably receive a 1099 at the end of the year that shows your gross income. You will claim all expenses that you are eligible for, and the remainder will be your net income. All the remaining income is now subject to self-employment tax. This is because there is only 4 ways income can come to the owner of a sole proprietorship; 1.) Cash, 2.) Fringe benefits, 3.) Rent, and 4.) Royalties. Therefore, almost every dollar taken is taxed at the possible tax rate.
TAXES AND THE CORPORATION/ LLC
Now if your marketing business was run out of a Corporation or an LLC, even though you would make the same amount of income, the end result could be very different. Corporation/LLCíS taxed appropriately, have additional income reduction tools available to the owner. Here you can take income out of the business in 6 different ways. They are; 1.) Wages, 2.) Fringe benefits, 3.) Dividends/Distributions, 4.) Loans, 5.) Rent, and 6.) Royalties. Letís look at some of the main differences.
Wages is the income that you take out of your business for your efforts. Wages are basically taxed at the same rates as our sole proprietor example. So initially, there is no real difference here. However, the corporation owner has the ability to regulate this income. Here the Corporate/LLC owner could take the remainder income out as wages, or they could use the other categories to get the income taxed at a lower rate. That is what it means to regulate income. The owner has the ability to change the character of money. This is tax reduction power! The sole proprietor has no other option.
Fringe benefits are legislative tax rules that benefit business. They allow businesses to write off non- traditional business expenses. Examples may include health insurance, retirement plans, etc. Corporations and LLC owners can claim these fringe benefits for themselves, and the business can write it off. If a sole proprietor were to claim a fringe benefit, almost every time, it will be characterized as income to them.
A dividend or distribution is considered the profit of the business. It can be given to an owner throughout the year, or at the end of the year. The key with this type of income is the classification. Since it is not classified as wages, it is not subject to employment tax. Therefore, every dollar that is not classified as wages saves the owner 15.3% in taxes. Who makes this classification? Whoever is writing the checks of the company!
A Corporation/LLC is considered a separate legal person. So even though you are the owner of it, you can still interact with it like a separate person. Therefore, you can borrow money from your Corporation/LLC. The obvious benefit is that any money that is borrowed is not considered taxable income. The sole proprietor does not get this benefit because they are not considered separate from their business.
There are just more opportunities to lower taxes for a Corporation/LLC. That is just the reality of business taxation, and its good business to learn and take advantage of these rules. The sole proprietor just cannot compete, and the owner will always pay more in personal taxes. There is really no comparison.
GROWTH OF YOUR BUSINESS
We all want our businesses to grow and become more successful. However, growth and success can be different. Success can be making more money. But as we learned above, we can make the exact same amount of money as we made last year, but end up paying less in taxes. Therefore, we could be more successful simply by keeping more of the money we make. But growth is about expansion of the business. We want our business to grow independent of us. Let me explain.
Because your Corporation/LLC is a separate legal person in the eyes of the law, it has the ability to grow independent of you. Therefore, it can expand and develop its own financial identity. It can establish credit for itself, which is independent of the owner. That means your business has the ability to have unlimited growth potential. The sole proprietor and their business are the same. Therefore, the business cannot create its own independence and cannot grow.
Another interesting aspect of this separation concept is that any credit that you have, as an individual, is considered a debt. Any credit that the business establishes for itself is an asset. If the business was ever sold, any credit it established would be added to the value of the business. This is just not available to the sole proprietor.
If your desire is to make extra money and to become more successful, you would be better off doing the business as a Corporation/LLC. Remember, part-time or full-time this is a business. No matter how much time you spend in it, you always want to make good business decisions.
Do you like what you've read?
Subscribe to Networking Times and receive a whole professional journal packed with
similar insightful and motivational articles. A subscription to Networking Times
includes the following benefits:
- a perfect-bound issue of Networking Times in the mail
- a FREE E-subscription: access to the latest online issue
- online access to the entire library of back issues since 2002