Business Entity

Hope for the best but plan for the worst is a motto that has been handed down form generation to generation. This applies to all aspects of one's life and in today's litigious society rings true more than ever. As one goes into any business venture unfortunately one of the main questions is, "Where is my liability and how can I protect myself in case I get sued". Hand and hand with this question is, "What business entity gives me the largest tax break as I report my income". Unfortunately the answer to these questions are often and different since no one business entity provides the best of both worlds. If this was the case, only one entity would exist and all of the others would go extinct like the dodo.

My intent is not to give a lecture on the various types of business entities and what their pluses and minuses are. That is indeed a subject that one needs to obtain a base of knowledge about, but that would be a several page report giving only bullet points on these issues. If you want to learn further about these issues I suggest reading Asset Protection 101 from the Trump University. Don't worry the book is not written by Donald Trump it simply uses his name as an attention grabber so you take notice of the book. The book delves into several topics involving some tax and law suit protection issues. The book is as titled "101" meaning these are but the basic information about asset protection, but believe me the complex stuff is probably way above the layman's head. That's why lawyers and CPA's go to school for many years to grasp the intricacies of the topics.

I will basically say this when it comes to picking a business entity. Never ever do a sole proprietorship. It has no liability protection meaning creditors and lawyers can easily gain access to your own personal assets and it offers no tax benefits. S corporations offer some good benefits and appear to work out well if you are going to have actual paid employees. Since it is a corporation though it does have all of the requirements of filing income statements once a year. I chose a Limited Liability Company (LLC). This gives you the asset protection that is needed, but it is a pass through tax entity which means you simply take your income from that business and add it to your own individual taxes. You still have to register the company once a year, but that is simply paying the state registration fee and giving them the basic demographics of the business (name / address / registered agent). One word of caution about setting up a LLC with a single member. LLC's are a state created entity and are not controlled by the federal government. Since LLC's are relatively new, the Fed still recognizes any that are controlled by a single person as a sole proprietorship. While initially this may not be a big deal, the author of Asset Protection 101 did mention this could create a loop hole the creditors and lawyers can exploit to show your LLC is in fact a sole proprietorship.

Regardless of which entity you choose (remember never choose a sole proprietorship) you have to ensure that you establish the business accordingly so that creditors and lawyers cannot pierce the corporate veil. This simply means that they can show that your business is simply a hollow shell that you use as a front to conduct business in your own interest.

One of the ways they do this is by showing a co-mingling of funds. This means that you have to open a separate banking account for the business and document why and how you distribute funds to yourself from this account. I chose to open a small business checking account with Wachovia Bank. This account is free which is good feature and has several benefits. See the list below which I have copied from their website.

Benefits of Business Checking
No monthly maintenance fee with minimum or average balance requirement
Up to 150 no-charge transactions per month, including checks paid, deposits, deposited items and ACH debits and credits
No charge for up to $5,000 in cash deposits per month
Free Wachovia Business Online, including Online BillPay, Online Statements, and Balance Alerts
Free Bad Check Recovery
Free Visa Business Check Card with Wachovia Possibilities RewardsSM
All Business Check Card transactions are free with no monthly limit
Check Safekeeping Statement or Check Image Statement at no charge
Unlimited use of Wachovia ATMs
Overdraft protection available
Funds in Business Checking are combined with other accounts of the same entity and insured by the FDIC up to $100,000

The one possible draw back for this account is the $5,000 maximum monthly deposit allowance. I'll see if that is an issue and look at other possibilities accordingly. I am also opening a business savings account with ING Direct. They offer one of the best APY in the business (currently 3.4%) and I have been very pleased with the personal accounts that I already have with them.

With these accounts in place and my LLC certificate in hand I am looking forward to starting my business venture with a solid foundation of asset protection.