Tax Entities and Why Being Incorporated Is So Critical

Dec 28, 2017

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Being supported by the right team is so important when it comes to getting the most your of your money. You need specialized experts in all of the financial areas. Weldon Wulstein is my CFO and an extraordinary tax strategist. This year my clients have gotten back over 2 million dollars with the tax strategies that Weldon has introduced to them.

Weldon is here today to talk about entities and why getting incorporated is so critical. The simplest way of explaining this is companies make money, and individuals get taxed. We will be talking about why to get incorporated. We will talk about some of the myths like you don’t make enough to incorporate. We will touch a little on the new tax laws, but most of that will be in an upcoming episode. Today is really about how critical it is to understand and have a plan for a tax entity.

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Show Notes

[02:12] Weldon has been working in accounting since he was a bookkeeper for his parents. He started a CPA firm in 1989.
[02:38] He has been creating tax strategies for oil and gas and creating entities and getting more involved with more complex tax strategies.
[02:44] He owns companies and he is an entrepreneur. Weldon uses his own strategies within his own businesses.
[03:19] You want your wealth team to walk the walk not just talk the talk.
[03:43] Converting an S corp from an LLC. Why doesn't your current accountant suggest these money saving techniques.
[04:36] Revenue versus intention. Getting a business on the side.
[05:11] Sole proprietorship. You file schedule C on your personal return. You have revenues, expenses, and net income.
[06:01] The net income is taxed for income and social security and medicare. That is an additional 15.3%.
[06:40] Corporations and LLCs
[06:56] Limited Liability Company or LLC. The reason these are set up are liability protection.
[07:38] Options within an LLC. For tax purposes it can be a disregarded entity. This means it's treated the same as a sole proprietorship and everything is filed on your schedule C tax return.
[08:43] If you have a partner, you can create an LLC partnership. Treated as a partnership and filing a 1065 partnership return. Gross revenue, expenses, and split income between partners. It's distributed on a K1 which is similar to a 1099. You report this on your personal return and you still have to pay that 15.3%.
[10:05] You could treat the LLC as an S corp. You file an 1120F. You have to pay yourself a wage. A reasonable wage. The 15.3% social security and medicare tax is paid on that reasonable wage. Let's say you make $100,000 and pay yourself $50,000 in a wage and pull out the other $50,000 as a distribution.
[11:58] Making the one election to be an S corp can save you half or more on self-employment taxes.
[12:20] There is paperwork and a tax return, but most people should have a bookkeeper on their team anyway.
[12:57] The importance of hiring a bookkeeper. Don't do the bookkeeping yourself at the end of the year. Getting it off of your plate is good.
[14:00] You want a bookkeeping firm that understands analysis and looks at the P&L statement and reaches out to the client. This isn't typical, but being informed can help you make the right decisions.
[16:14] Ask your tax preparer what their biggest client is and how many entities they have. This is to see if your tax preparer actually looks at these things.
[17:05] Treat your LLC as an association or a C corp. Create a business corporation in Nevada. Treat it as an association that is taxed as a C corp. Revenue and profits get taxed for federal purposes, but there is no state tax.
[18:07] This strategy can even be done in different countries.
[18:32] Partnerships are a loose association between two people. Form 1065 have an agreement or file as a partnership.
[19:07] General partnerships are taxed like a sole-proprietorship with revenue split between the owners. It will be taxed at the individual level and pay social security and medicare tax. There is no liability protection. You can also be liable for your partners trouble.
[19:57] Limited Liability Partnerships. A general partner with a small percentage and that is where the liability lies and then there are investors with limited liability.
[20:59] Family partnership. Transfers wealth to the kids without transferring control. Kids get a small interest. Which transfers the value to the heirs.
[21:54] Corporations. A completely separate entity than an LLC. Corporations are proven if you follow the rules. You can be the owner, but someone else can be the director.
[22:49] With the new tax law the corporate tax rate is going down from 35% to 21%.
[23:12] As a C corp the C corp pays its own tax. You do pay tax on dividends. Corporations can give fringe benefits such as college expenses. Vehicles, etc. There are other ways to get funds out such as borrowing with promissory notes. There is more of an administrative requirement.
[24:38] Income leveling spreading money out over different entities.
[25:27] There are international restrictions. People want to invest in the US. Create and fund a C corp. The money is in the C corp and pays US tax and is in the US.

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