Operating as a Sole Proprietorship or a Separate Legal Entity – What is Best? by Scott Letourneau

Scott LetourneauThe major challenge is, where are you receiving your advice on your business? Networking distributors start off their business typically as a sole proprietorship or a separate legal entity. Most may not even know what type of business structure they have at all. Most, by default, start the business in their own name and later determine if a separate legal entity may be worthwhile. That is a COSTLY APPROACH. The major challenge is, where are you receiving your advice on your business? If you are speaking to your accountant (most common) they will only give you tax advice. If you are speaking with your attorney, they will only give you legal advice (unless a tax attorney), a banker will give you banking advice and online…who knows what you will receive. You will receive a different niche of advice depending upon who you are speaking with. NULL

A common pattern for those in network marketing is to go to your accountant or tax professional to determine if you should operate as a sole proprietorship or a separate legal entity. The benchmark question the accountant will have for you is, “Do you expect to have a NET profit of $40,000 or more the first year in business?” When the answer is, “I am not sure”…the advice typically is to “keep it simple” and be a sole proprietorship and file a schedule C which will be part of your 1040 personal tax return. The reason the accountant will need to determine the first year profitability is to determine if a separate entity such as an S corporation would be most beneficial. An S corporation will help save on employment taxes on distributions (again when the business has enough profits to warrant this approach). From a tax point of view this was the correct advice. But from a business credit, financing, marketing, audit and legal point of view this was the WRONG advice. This rarely comes up because if you only have one professional in your life with one perspective you will NOT get the best approach for your business. Here is the best approach to get your networking marketing business off to a fast start for 2012 and beyond. Keep the IRS Off Your Back! First let’s address the elephant in the room, the IRS. The IRS is very concerned if you are running your business as a real business or as a hobby. If you are deemed to be running your business as a hobby and you have losses at the end of the year you can not use those losses to offset earned income. I know you may think you are running a business, but what is most important is what the IRS thinks about it. The number one reason they go after distributors is failure to use financial records analytically. That means running a business and the only financial barometer is your online business checking account balance. That is how most of us run our personal lives. That does not cut the mustard in the eyes of the IRS when you run your business. Think of it from their perspective. If you start a “business” spend money, travel, spend more…and you do not have any type of accounting software like QuickBooks® to give you financial feedback on a monthly basis as to your profit and loss, the IRS may very well feel, “Well, if you were not tracking your financial numbers, you must not have been very serious about your business…so you must be a hobby! In other words, the message is that you are not serious about what you are doing. The key is simple. Start your business month one with some type of accounting software like QuickBooks® and track your numbers for your business, plus personal. Now the IRS expects a five year business plan for your networking business. That was not a typo. You as the networker will require a five year business plan based upon a recent IRS court case. Think about it logically, if a business has no business plan, is that a real business? How could that business really be serious about making profits in the future without any business plan? The IRS feels the same way, looks like a hobby, sounds like a hobby and acts like a hobby, probably a hobby! If your business is deemed a hobby that means you can only write off losses against income you have earned for the year from that business. But if you were deemed a business and you have losses exceeding your income (very common this time of year for a new network marketer) you can take the ENTIRE LOSS and offset that against any other type of income, including wages, rents and dividends! Another major advantage of having a financial system like QuickBooks® is that you will be in a much better position to manage your overall numbers and to be more likely running your business like a business and keep the IRS off your back! It is recommended to take advantage of CPA/Attorney Sandy Botkin’s tax strategies course that will help you maximize your meals, travel and entertainment expenses plus how to properly document your expenses so in case of an audit you are also protected. You can listen to an interview with Sandy Botkin on how to put more money in your pocket and make your life less taxing at http://www.nvinc.com/sandybotkinoffer/index.htm. Incorporate Your Business! If you’re operating your business as a sole proprietorship you encounter a few problems. First, the IRS has a $300 Billion tax gap and 70% of that comes from small business owners of which 1/3 is from sole proprietorships. This means the IRS is $300 Billion short each year and a big part of that comes from business owners that file a schedule C (if you just have a DBA (doing business as) or a fictitious firm name you would be filing a Schedule C. The bottom line is that if you are operating as a sole proprietorship you may be risking an IRS audit. The reason being is that sole proprietorships are more likely to exaggerate expenses and underreport income. The best solution is not to file a Schedule C and to incorporate or form an LLC for your business. For network marketers a better approach in most cases is a flow through entity that will help you keep your profits off Schedule C, plus save on Self Employment taxes which is 15.3% on earned income up to $110,000 of earned income in 2012. The best combination is an LLC taxed as an S corporation. Nevada Corporate Planners, Inc, for the past 14 years has helped network marketer’s worldwide get their businesses off to a fast start with the proper foundation. We have a turnkey process to help set up your LLC taxed as an S corporation and other support services for tax and bookkeeping support and to help your company develop business credit. The key part when we do this for you is to first find out if you should be a single member LLC taxed an S corporation or a multimember LLC taxed as an S corporation. Plus it is important to have the proper operating agreement with the correct language to match the S election, which none of the online incorporating companies do by the way. In order to make this process easy for you, we have online videos and audios on every section of the LLC record book plus multiple resources to make your experience turnkey and many special bonuses to help your business get off to a fast start to profits™! Extra Bonus Strategy: This is the time of the year when we see financial stress multiplied, and it can be avoided. If you are looking to form an LLC (most popular) or corporation in the month of December or by the start of the year (a big mistake to start at that time), keep the following points in mind:

• If you wait until 2012, by the time the entity is filed and everything is in place, more than likely you will be operating as a schedule C for two to three weeks the beginning of the year. You are risking an audit! There is a $300 Billion Tax Gap and the #1 culprit is sole proprietors that file a schedule C! • Even if online companies tell you that your articles will be filed within 24 hours, you will NOT be ready to start business at that time! Bottom line; if they telling you the full story! Starting your business is
NOT the same as having articles filed! • Secretary of State’s around the U.S. are becoming more and more overloaded with filings (mostly due to budget cuts)! This means, even if filing expedited, it can take much longer for your entity to get in place and for you to set up a bank account for any end of the year transactions.

Here is some GOOD NEWS!! There are solutions to all these problems but only if we hear from you ASAP! Plus there are Immediate Tax Savings! Sec. 195 of the IRC states that capitalization of start-up expenses (up to $5,000) may now be immediately written off against personal income (S corp and LLC taxed as a flow through). The old rule (a few years ago) said these costs had to be capitalized and written off over at least 60 months. The entity MUST be formed in 2011 to take advantage of this write-off in 2011! NCP forms corporation and LLCs in all 50 states, helps you build business credit and keep the IRS off your back! Most importantly we have the tools and systems to help your business get off to a fast start to profits™! All Network Marketing Magazine readers will receive a special bonus offer when you call Nevada Corporate Planners and when you incorporate in the month of December! When you call let us know you are a Network Marketing Magazine online subscriber so you can take advantage of the special offer! Plus you will receive a free consultation, a $200 value (plus a free estate planning evaluation and book), when you call Nevada Corporate Planners, Inc. at 1-888-627-7007. When you call we’ll discuss your situation and which state is the best to form your LLC. Nevada Corporate Planners incorporates in all 50 states. ©2010 Nevada Corporate Planners, Inc. All Rights Reserved.

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