IT’S A NEW YEAR AND TIME TO PROTECT YOURSELF
At the end of every year, there is a flurry of activity as individuals and companies seek to find last minute “tax write-offs” and to “protect their assets.” Unfortunately, while there are some very legitimate and proper ways to accomplish some last minute tax and asset protection, individuals and companies fail to use foresight and take advantage of year long tax planning and asset protection programs.
As the New Year begins, each individual business operator who has not taken the proper steps necessary to protect their assets, should immediately be in contact with an attorney to discuss the establishment of a corporation or some other entity, which would assist in protecting personal assets from liability in the event of a lawsuit or a down turn in their business.
Unfortunately, at this time in our economy, no one can be certain as to the strength of any business. Each business operator must understand that, at any given time, the economy can change and a profitable business can suffer a down-turn.
Individuals who continue to operate their businesses as a “sole proprietor” or through a “partnership,” are placing themselves at great personal risk of losing all their assets which they may have built up over the years as there is no shield that protects them. By incorporating (or using some other entity that limits liability), the owner of a business can transfer most of the risk of losses due to an economic downturn, to a corporate entity and, except for items of personal liability (such as a personal guarantee), can also separate the business operator’s personal assets from those of the business. Specifically, a sole proprietor gets sued for something that arises at their business (from a vendor, employee, or customer), it is not the business that is being sued but the individual. A judgment against a sole proprietor or a partnership is a judgment against the individual and all of the individuals assets could be liquidated in order to pay the judgment.
Through incorporation, the business operator establishes a “separate” entity which, under the law, is a separate person. So long as formal proceedings are utilized, litigation undertaken against a corporation is not litigation against the individual. In the event that the corporation has a judgment taken against it, the individual’s assets (home, bank account, stock, cars, etc.) cannot be used to satisfy a judgment.
In order to enjoy the benefits of a corporation, as it relates to the asset protection, it must be established before any problem arises. Liabilities incurred prior to incorporation will still remain the responsibility of the individual.
Using a corporation also affords great benefits as it relates to income tax planning. By making proper use of deductions and tax brackets as set forth in the Internal Revenue Code, great savings can be achieved through the use of a corporation. Certain expenses which may be subject to certain limitations on an individual return, may be fully deductible though a corporation as well as the fact that a corporation can enjoy a different tax bracket than an individual. It is important to have full utilization of these tax benefits to start your planning at the beginning of the year and not wait until the end. A tax plan is only as good as the time given to implement it.
Each business operator should seek the advice of a qualified business attorney that has knowledge of income tax law, to fully plan for protecting assets and taking advantage of the income tax laws. An attorney should be willing to meet with you for an initial consultation, at no charge, and discuss the potential benefits that are available to you.