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20 Replies Last post: Feb 7, 2008 12:19 AM by Manoj Gupta

What is the most inexpensive, tax-friendly, and litigation-proof, business structure?

Aug 10, 2007 5:45 PM

score81 76 posts since
Aug 6, 2007

Client Request: I would like to know what is the most inexpensive, tax-friendly, and litigation-proof, business structure I can use as a Coaching Business? I expect most of my customers to be within the U.S., but I may have international clients. Most of my coaching will be conducted over the telephone from my home and I expect to receive payment through my website which is currently being created.
Any suggestion highly appreciated?

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SCORE85 2 posts since
Aug 11, 2007

1. Re: What is the most inexpensive, tax-friendly, and litigation-proof, business structure? Aug 11, 2007 12:50 PM

My vote is for a sole proprietorship. If you expect to need other investors, or if you anticipate being sued, you should consider a corporation or LLC to share ownership and protect your assets. But in the absence of those needs, you should be fine with the simplest of all business forms, the sole proprietorship.

However, you might consider having clients sign a waiver of liability, holding you harmless for the consequences of advice you give as a coach. You'll find generic release forms on the Internet, or you could have an attorney draw one up for you that is specific to the type of coaching you do.

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SCORE70 9 posts since
Aug 7, 2007

2. Re: What is the most inexpensive, tax-friendly, and litigation-proof, business structure? Aug 13, 2007 5:44 PM

in response to: SCORE85

I would concur with the sole proprietorship as long as you are the one doing the coaching. If you hire employees who will also give advice, then I would probably form an LLC to give myself some liability protection against negligent advice given by an employee. You are always liable for your own negligence, so if you are the only one doing the coaching, the LLC entity form will give you little practical protection.

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GasisaRipoff 18 posts since
Oct 10, 2007

3. Re: What is the most inexpensive, tax-friendly, and litigation-proof, business structure? Oct 10, 2007 7:41 PM

That is an easy one. An S-Corp is the best one. LLC is not bad. S-Corps pass the losses directly to you. It is the best until you start to make a profit. You should then switch to a regular corporation. S-Corps have the lowest audit rate by far. Read the book "What the IRS Doesn't Want You To Know" for a full explanation. I recommend organizing in Delaware or Nevada. The Chancery Courts in Delaware are very Corporation friendly.

James J Moore, AIC, MBA, ChFC, ARM
http://www.cutcompcosts.com

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LUCKIEST 7,926 posts since
Aug 6, 2007

4. Re: What is the most inexpensive, tax-friendly, and litigation-proof, business structure? Oct 10, 2007 8:01 PM

I agree with SCORE 81. One person operating a business as an individual is a sole proprietorship.
The sole prop is the most common form of business organization.
Profits are taxed as income to the owner personally. The tax rate is usually lower than the corp tax rates.
Corporate earnings are subject to "double taxation" and the corp form is much more complex.
The owner has complete control of the business.
The sole prop should have a business name, a business checking account and should
apply for a Federal I D Number.
Good luck, LUCKIEST

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krhtax 4 posts since
Oct 11, 2007

5. Re: What is the most inexpensive, tax-friendly, and litigation-proof, business structure? Oct 11, 2007 7:42 AM

in response to: GasisaRipoff

I agree and disagree in part. If you incorporate n NV or DE, you will still have to register as a foreign corporation in your home state.

Incorporating as a single member LLC, SMLLC, may not be a good choice depending on your state.

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krhtax 4 posts since
Oct 11, 2007

6. Re: What is the most inexpensive, tax-friendly, and litigation-proof, business structure? Oct 11, 2007 7:46 AM

This is not an easy question to answer. To aviod litigation don't go in business.

Unless incorporation is needed for tax or regulation purposes, "in general" a SP is best.

I would recommend that your client sit with a complent attorney and tax account and ask these questions.

If your client thinks he/she may be doing business across several states, he/she may have to register in each of theose states.

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GasisaRipoff 18 posts since
Oct 10, 2007

7. Re: What is the most inexpensive, tax-friendly, and litigation-proof, business structure? Oct 11, 2007 10:01 AM

in response to: LUCKIEST

The most worrisome part of filing as a Sole Proprietor is filing Schedule C at tax time. That is one of the most audited forms by the IRS. The home office deduction is looked at individually.

Also, if you get sued, your are putting personal assets on the line, but not with a Corp of any type. I recommend spending the $ or checking the book out at the library that I mentioned previously. Those questions are answered in the book by a CPA and former IRS agents.

I set up 2 S-Corps in about two hours using the book. After reading it, you can make an informed decision. It is on Amazon.com for 3.43 + shipping.

James J Moore, AIC, MBA, ChFC, ARM
http://www.cutcompcosts.com

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SCORE70 9 posts since
Aug 7, 2007

8. Re: What is the most inexpensive, tax-friendly, and litigation-proof, business structure? Oct 11, 2007 10:53 AM

in response to: GasisaRipoff

I beg to differ. So filing an 1120S is less worrysome than filing a Schedule C? It's somehow better to fill out the more complex 1120S than it is a Schedule C. Then transfer the information from the 1120S to the individual tax return in various shedules and forms? I don't think so.

Maybe you can go through the mechanics of seting up S-Corps quickly, but in order to retain the the liability protection, you have to maintain the corporation as a separate entity, going through all of the formalities associated with corporate existence. If you fail to do that, creditors can easily pierce the corporate veil. If you don't know all of the pitfalls, you will need the continuing guidance of a lawyer, which isn't inexpensive.

Remember the question related to an individual who was acting as a consultant. Consultants are always liable for their personal negligence, so if the individual is essentially a one-person show, and he negligently causes me harm, the corporate veil may protect him from liability through the corporation, but I can sue him individually as well. So for an individual consultant who has no employees, the corporate form offers little practical liability protection.

I'd be skeptical about taking advice from a $3 book.

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WEBillions 154 posts since
Oct 10, 2007

9. Re: What is the most inexpensive, tax-friendly, and litigation-proof, business structure? Oct 11, 2007 11:45 AM

If you don't want to pay the taxes associated with a LLC, I would suggest you highly consider insurance with a lawyer. They will also be able to give you a better informed opinion about what kind of business structure you should get, which may depend on what state you are in.

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krhtax 4 posts since
Oct 11, 2007

10. Re: What is the most inexpensive, tax-friendly, and litigation-proof, business structure? Oct 11, 2007 1:47 PM

in response to: GasisaRipoff

"Also, if you get sued, your are putting personal assets on the line, but not with a Corp of any type."

This is wholly inaccurate. Just because a business is incorporated does not me that owners personal assets cannot be attached.

If I am sued for malpractice and lose, my personal asetes may be attached.

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GasisaRipoff 18 posts since
Oct 10, 2007

11. Re: What is the most inexpensive, tax-friendly, and litigation-proof, business structure? Oct 11, 2007 3:48 PM

in response to: krhtax

If you have insurance your personal assets will not be attached. After handling hundreds of corp/malpractice/D&O liability files for various insurance carriers, I would have to say not to not one was sued personally. The idea of a corp is to be an insurable entity. With all of the litigation, one would be "rolling-the-dice" not to have some type of liability coverage.

James J Moore, AIC, MBA, ChFC, ARM
http://www.cutcompcosts.com

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GasisaRipoff 18 posts since
Oct 10, 2007

12. Re: What is the most inexpensive, tax-friendly, and litigation-proof, business structure? Oct 11, 2007 4:04 PM

in response to: SCORE70

It is the same expense and income data whether you file a C or 1120S. I was mainly speaking as to the audit rates. If you use an accounting program and the associated tax program (i.e. Turbotax and Quickbooks) it is a simple matter.

I have handled hundreds of files for insurance carriers that had business liability insurance cases. Not one had their operate veils if they had insurance. The book for $3.35 is used, but the new one is $29.95, written by Martin S Kaplan, CPA. It has been a best seller for years. Everything I have posted is in that book. It is worth the read.

The bottom line that is that one would have to weigh out expense vs. tax-friendly vs. litigation-proof.

James J Moore, AIC, MBA, ChFC, ARM
http://www.cutcompcosts.com

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SCORE70 9 posts since
Aug 7, 2007

13. Re: What is the most inexpensive, tax-friendly, and litigation-proof, business structure? Oct 12, 2007 1:52 AM

in response to: GasisaRipoff

Bingo. It's the same
data, but reported a little differently, so there's clearly no benefit to the
added complexity of adding a layer of corporate accounting and corporate tax filings
on top of the Schedule C. The added
layer of accounting and tax filings add cost.

Where I come from, any legitimate business organization can
get insurance. So no need to incorporate
to become an "insurable entity." Sole proprietors, LLCs, and corporations can
all buy business insurance. And I never
would argue against insurance. In fact,
as I pointed out in my earlier post, legal insulation is often not as effective
as people hope it would be, so they should always be adequately insured. But in all of my experience in entity
selection, I never once had insurance be suggested as a significant
consideration in choosing the best entity form.

Laws in each state differ.
What might be the right answer in a state where the LLC law is based on
partnership law might be much different from the answer in a state where the
LLC law is derived from corporation law.

Accountants frequently favor S-Corps because there are some
circumstances under which that business structure offers some tax advantages. But this preference can be self-serving: the added accounting cost associated with
S-Corps can benefit the accountant’s income.
I don’t mean to disparage accountants, but that can be a real
consideration in some cases. That may
explain the Kaplan bias toward S-Corps. In your recommendation, you seem to
have conveniently ignored the LLC alternative.

The original question, as I understood it, was: what is the
most inexpensive, tax-friendly, and litigation-proof, business structure that
can be used for a consulting business.
Balancing those criteria, recognizing that local jurisdictional issues
might affect the recommendation, I still content that, based on the assumptions
presented, the best alternative is a sole proprietorship, followed closely by
an LLC. There seems to be little that
argues for a corporate form.

This whole thread substantiates krhtax’s earlier
comments: this is not an easy question
to answer, and that the client should consult with competent accounting and
legal advisors who are familiar with the laws and regulations of the state in
which they are operating to come up with a solution that is right for them.

H. D. Kopicko, J.D,, M.B.A., B.S.E.(M.E.)

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jamis0n 3 posts since
Oct 12, 2007

14. Re: What is the most inexpensive, tax-friendly, and litigation-proof, business structure? Oct 12, 2007 6:45 PM

in response to: SCORE70

if/when you decide to start looking at insurance MAKE SURE IT HAS WORLD WIDE COVERAGE... most US carriers cover only US incedents...

my .02

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