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    20 Replies Latest reply on Feb 7, 2008 12:19 AM by Manoj Gupta

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

    score81 Adventurer
      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?
        • Re: What is the most inexpensive, tax-friendly, and litigation-proof, business structure?
          SCORE85 Newbie
          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.
          1 of 1 people found this helpful
          • Re: What is the most inexpensive, tax-friendly, and litigation-proof, business structure?
            GasisaRipoff Newbie
            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
            • Re: What is the most inexpensive, tax-friendly, and litigation-proof, business structure?
              LUCKIEST Guide
              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
                • Re: What is the most inexpensive, tax-friendly, and litigation-proof, business structure?
                  GasisaRipoff Newbie
                  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
                    • Re: What is the most inexpensive, tax-friendly, and litigation-proof, business structure?
                      SCORE70 Newbie
                      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.

                       

                        • Re: What is the most inexpensive, tax-friendly, and litigation-proof, business structure?
                          GasisaRipoff Newbie

                          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
                        • Re: What is the most inexpensive, tax-friendly, and litigation-proof, business structure?
                          krhtax Newbie
                          "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.
                            • Re: What is the most inexpensive, tax-friendly, and litigation-proof, business structure?
                              GasisaRipoff Newbie
                              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
                                • Re: What is the most inexpensive, tax-friendly, and litigation-proof, business structure?
                                  SCORE70 Newbie

                                  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.)

                          • Re: What is the most inexpensive, tax-friendly, and litigation-proof, business structure?
                            krhtax Newbie
                            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.
                            • Re: What is the most inexpensive, tax-friendly, and litigation-proof, business structure?
                              WEBillions Adventurer
                              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.
                              • Re: What is the most inexpensive, tax-friendly, and litigation-proof, business structure?
                                Perrottalaw Newbie

                                I am not a fan at all of the SP format. You have unlimited liability, and you will pay the full amount of self-employment tax. Please go see an accountant and find out the best structure for you depending upon your state. Often, an S-corp structure is best as it will provide your accountant with some flexibility. In some states, such as Georgia, and LLC taxed as an S-Corp might be better as LLCs here have less requirements. I think it is worth spending a little time with some professionals on this.
                                • Re: What is the most inexpensive, tax-friendly, and litigation-proof, business structure?
                                  Perrottalaw Newbie
                                  Well, for one this partly has to be done by an accountant, which I am not, in order to make sure the amount of dividends are proper. Secondly, this is not a do-it-yourself area, as you don't want to invite IRS scrutiny by doing it wrong.

                                  I do have a tax background but, as an attorney, I still use accountants becuse they work day to day with the best ways to structure everything. I would call an accountant who is very familiar with S Corp taxation and they should be able to explain this to you. A good accountant should be able to save you more than they cost to use...