The Structure Of Your Business

WHAT YOU OUGHT TO KNOW ABOUT THE STRUCTURE OF YOUR BUSINESS Discover the Advantages and Disadvantages of running your company as a Sole Proprietor, General Partnership, Corporation or Limited Liability Company

Sage

International, Inc. ©2005 Sage International, Inc.

One of the biggest decisions you can make is to go into business for yourself. Whether you are opening an ice cream parlor, starting an internet based business, selling insurance, forming a down line, or investing in real estate, bottom line – you are a business owner. Having a properly formed entity to serve as the foundation of your wealth building enterprise is essential. Without it, you will pay more in taxes and expose your hard-earned assets to creditor attacks, the courts, the IRS, realistically anyone bent on serving you with a frivolous lawsuit. Through time and experience what most people come to know, is that they were always the one working so much harder to achieve their wealth building goals or worse they never reached them at all. The truth is it doesn’t have to be that way. So what stops a lot of people from moving forward in the most tax-efficient, lawsuit-preventative, financially tested, safe and secure way? Confusion! Should I form a corporation or an LLC? How about an S corp? How many entities should I form? That’s why after so many years, working with so many clients, we have discovered the true advantages and disadvantages of each form of business ownership. We also know the importance of sharing this information with you today. Of course, this still does not answer the question about which entity would work best for your particular situation. There is no silver bullet, no one perfect strategy that works for everyone. There is not one tool, one solution, one program that solves it all. Anyone telling you there is by selling “it” to you, is misleading and would appear to have only their best interest at heart – instead of yours. In fact, the only way anyone can help you find the fastest path you can take to achieve your own personal financial freedom is by listening to you. Finding out what it is you are trying to accomplish? What business are you in? What state are you doing it in? Do you have partners? And so on. Only then can specific action steps be developed. Now you could certainly take this gift of information we have provided and decide to set up your own entity because you think it’s going to cost you less. Of course, it won’t. You won’t have a clear idea of how this entity will work for you. You won’t have a thorough understanding of everything you need to do to take advantage of all the tax benefits and asset protection strategies we use. You will have no support to help you keep your company in good standing. You will lose the benefit of working with a knowledgeable team of individuals who continually seek out new alliances, products, services, information and untapped resources across the nation. The fact is you can build up a nice set of assets or build a business quickly, but the mindset and efforts to build and acquire is totally different than the mindset and efforts to keep, maintain and protect your assets from The Flaming Arrows of Challenge. Let me ask you. Who are you going to call to get your questions answered? Your Lawyer? Your CPA? Both of which charge you by the hour. Who in your circle is going to teach you, “What you don’t know you need to know?” Sure you may think it will cost less initially, but in the long run, it will probably cost you everything you have worked so hard to achieve. Remember, this is your foundation! Everything else will build upon this along with the expectation that it will withstand the challenges every business owner must face. And I’m going to say this bluntly. This is not where you need to be cheap. This is an absolute investment in your future, your family’s future. Do it right – with the right people - right from the start! Have you ever heard of The Prosperity Principle? You are prospered to the extent that, And in the fashion that, You prosper others. Sage International, Inc. Believes it, Teaches it, and Demonstrates it every day with our clients. We have a proven track record of turning budding entrepreneurs into savvy, successful business owners. In fact, the relationship you develop with Sage is an opportunity to work with a team of very talented and educated individuals who will literally hold your hand through the entire process – before, during and after your entity is formed. Through a shared vision of results we look forward to traveling into the future with you, making sense of this epic journey you are about to undertake. Enjoy and Prosper!

Sole Proprietorship The term “sole proprietorship” means that the business is the same as its owner. The assets and liabilities of the business are one and the same as the owner. No entity is created; the business is destined to the same financial fate as the owner since they are one and the same. Advantages · No entity filing requirements – business starts when the owner exercises initiative. · Simple to operate since the owner makes all of the decisions. · May register a trade name to promote its products and services. · Files one tax return – the owner reports and pays all taxes personally. Disadvantages · Unlimited Liability – The owner is personally responsible for all business losses and must bear them to the full extent of available personal resources. The proprietor is personally liable for all business debts. · No continuity of life – if the owner dies the business transfers to the heirs for continuation, restructuring or closure. There may also be estate tax and probate consequences depending on how large the estate is. · Limited financing – personal contributions by the owner, bank loans (usually with personal assets pledged as collateral) or other private sources. · IRS Audits - sole proprietors tend to have the poorest record keeping habits, often mixing business and personal finances, which makes them a prime target for the IRS. · Converting to Corp or LLC – since the new entity will have a new taxpayer identification number (EIN) you get to set up your business all over again. Licenses, permits, bank accounts, accounting, payroll, vendor accounts, invoices etc. all need to be established under the new EIN and all documents, stationary, business cards, advertising, marketing, and logo must designate your new identifier which may be Inc. or LLC after the company name. Tax Implications · Business income and expenses are reported on a separate “schedule” attached to the sole proprietor’s annual Form 1040 individual tax return. · All of a sole proprietor’s net profits are subject to “self-employment” tax (15.3% for Social Security and Medicare). This is equivalent to the payroll tax for employees. · Required to make income tax payments, called “estimated taxes,” four times a year.

“The trick is to stop thinking of it as your money.” - IRS Auditor

General Partnership Whenever two or more people agree to share ownership, management, profits and liabilities, whether or not an agreement has been signed, under state law a partnership is formed. Advantages · Simple and inexpensive to form – no state, federal or local filings are required to form a partnership. · All partners have equal rights in the management of the partnership business. · Statement of partnership authority can be filed with the Secretary of State to record the partnership agreement and to identify the partners. Disadvantages · General partners are jointly and severally liable for any debts, damages or obligations incurred by all the other partners. · Unlimited liability for each partner. If the assets of the partnership are inadequate to pay partnership creditors, the personal assets of the individual partners may be reached to satisfy these obligations. · No continuity of life – if any partner dies, retires, or is otherwise disassociated from the business the partnership expires unless the partnership agreement provides otherwise. · Limited financing – may only borrow money or use partners’ savings. Must be dissolved and reformed to admit additional partners wishing to invest. · Deadlock – partners do not always agree! Tax Implications · Partnership files IRS Form 1065. · Individual partners pay tax – each partner receives a K-1 showing the distributive share of partnership income to be declared on the partner’s individual tax return. · Estimated tax payments – partners may be subject to quarterly tax payments. · Social Security – partners may subject to self-employment taxes.

Your house and your life savings can be lost through the actions of your partner. While you may have had nothing to do with the decision that was made and you may have been two thousand miles away when it was made and you may have voiced your opposition to it when you found out it was made, as a general partner you are still personally responsible for the decision.

Corporation A legal entity governed by state law, that exists separate and apart from those individuals who created it. It is an invaluable asset protection tool because it shields all of its participants from liability for the debts of the business. Properly structured, a corporation can provide the maximum protection against liability from third parties while offering the most attractive tax benefits to the owners of the business. Advantages · Limited liability – investors risk only the amount of their investment and are not individually responsible for corporate obligations. Similarly, directors, officers and employees are not personally liable for corporate obligations unless in violation of law. · Separate legal existence – a corporation is a legal entity separate from the people who manage and work for it, or participate in its activities-a legal “person,” capable of entering into contracts, incurring debts, receiving and maintaining funds, and, generally, doing anything a real person can do. · Centralized management – business is managed by a board of directors and by elected officers. The owners of the business are the shareholders, who contribute cash, property, or services in exchange for their ownership rights, evidenced by share certificates. · Continuity of life – a corporation has the power to exist forever and, therefore, is unaffected by the death of an owner or manager or by the transfer of ownership interests. · Capital generation – may sell common or preferred stock, issue bonds, and borrow money, mortgage assets, or contract for many types of financing. · More tax deductions and tax planning benefits available than to the unincorporated business. Has the ability to use a different fiscal year end other than December 31, which can create awesome tax advantages. • Fewer IRS Audits. · A business can offer its owners and employees a variety of fringe benefits, which may be wholly or partially taxfree or tax-deferred. · Build a business credit profile separate from the owner (even if your personal credit is bad). · Own a business, not a job. It allows you to build a company identity separate from the owners. · Exit Strategy – Easier to sell. You are developing something that has value “The Business.” Disadvantages · Double taxation. Income received by the corporation is taxed at the corporate level according to the corporate rates then in effect. The profit remaining after taxes is available for distribution to shareholders as dividends; and if dividends are distributed, the distribution is taxed again as personal income to the shareholder. (In the real world, small C corporations can easily avoid income taxes. All or almost all of the earnings are typically paid out to its employees as wages and fringe benefits. After everyone and everything is paid, there is usually no income for the corporation to owe tax upon.) · Securities regulation – sales of bonds, notes, stock, investment contracts, etc. to raise money requires securities registration if offered to the public and advertising or solicitation is used to attract investors. · Required to hold and document board of director and shareholder meetings. Tax Implications · Corporations file a separate tax return (IRS Form 1120) and report earnings and taxable profit. · Will be liable for employment taxes. · To take advantage of tax-free fringe benefits the following requirements must be met: -The tax code must specifically allow it -It needs to be in writing (plan documents, director approval thru minutes/resolutions) -It must have an indefinite life (can’t expire next year or based on age of employee)

S Corporation All corporations begin as a C corporation, but may elect S status with the IRS. C and S corporations are distinguished by how their income is reported. Advantages · Combines the limited liability with pass-through tax treatment-allowing business income and loss benefits to flow directly to shareholders, which eliminates the possibility of double taxation on business profits. Disadvantages · Must meet certain eligibility requirements such as - It is a U.S. corporation with no more than 100 shareholders. This eliminates public corporations. (A husband and wife are considered one shareholder if they own their stock jointly.) - All shareholders are individual U.S. citizens or resident aliens. - Corporation has only one “class” of stock. There can’t be any preferred or other types of shares that give special privilege to some shareholders-for example, one class of stock with voting rights and another without. - Cannot own 80% or more of the shares of stock in another corporation. - All shareholders must consent in writing to S corporation status by signing Form 2553, which is filed with the IRS. · No Retained Earnings allowed. · Limited employee fringe benefits. · Tax issues when converting from a C corporation to an S. Tax Implications · Files U.S. Corporation Income Tax Form 1120-S for every year of its operation whether or not it has any income. Typically, the tax year is the calendar year, so the return is due on March 15. · Individual S corporation shareholders report the business’s income (or loss) on their individual tax return.

“Anyone may arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” - Judge Learned Hand, in Helvering v. Gregory

Limited Liability Company Combines the operational flexibility and favorable tax treatment of partnerships with the limited liability feature of a corporation. Advantages · Limited liability – a creditor may not seek satisfaction of any limited liability company debt against the personal assets of any member. · Tax advantage – the members each pay their share of tax on their share of profits avoiding double taxation of LLC profits. · Number and type of investors – unlimited, not restricted like an S corp. · Non-transferable interest – a member may not transfer his voting interest without concurrence of all remaining members. · Management – The management of the business and affairs of an LLC may be conducted by the members or, if the members agree, may be vested in a manager or managers. · Continuity of life – the term of existence must be stated in the articles of organization. In some states perpetual duration is accepted. · Contributions – members contribute in the form of cash, property, services, or promises to contribute cash or property or to perform services. Disadvantages · Relatively new form of business entity, and some tax and legal issues are not yet resolved. · Your state may impose income taxes on LLCs even though the IRS doesn’t. · Converting an S or C Corporation to an LLC may carry too heavy a tax price. · Unclear by most if you are required to hold and document manager/member meetings. Tax Implications · Taxed by the IRS like general partnerships; the LLC does not pay taxes, but instead passes its profits and losses through to its individual owners. However, an LLC may choose to be taxed like a corporation*. · The LLC must file Form 1065, U.S. Partnership Return of Income, unless the LLC elects to be taxed as a corporation*. · The LLC must also annually issue members IRS Form K-1, showing their share of the business’s profit or loss. · Single-member LLCs are treated like sole proprietorships and must report income on Schedule C unless the LLC elects to be taxed as a corporation*. *The IRS has made it possible for LLCs to be taxed as corporations so that they can retain, instead of distribute, profits to meet future business needs. The advantage of this is that members can now pay individual income taxes on only the profits actually paid to them. The business then pays taxes on any retained profits at the reduced corporate tax rates. I highly recommend you talk with your CPA before filing such an election because once the election is made you cannot return to flow-through taxation for a period of five years. In addition, you will in essence become corporate employees subject to federal and state withholdings on your wages.

“Our singular purpose is to provide YOU with the information, tools, resources and ongoing support services that will help You build a solid foundation from which You can obtain FREEDOM, whether You choose that to mean Financial, Spiritual or Personal for Yourself and your Family.” Free Roadmap to Freedom Action Plan. We form Corporations, Limited Liability Companies, Limited Partnerships and Trusts in all 50 states. The only way we can serve you and formulate a logical business strategy, is by knowing what is important to you. Since no two individuals share identical financial situations, family relationships, potential hazards or future goals we must develop a personalized action plan that responds to each of these considerations. When you share this important information with your Business Strategist during your Free Consultation, it will give them the insight to facilitate a timely evaluation of your current position. By working together we can determine a step-by-step game plan that will accelerate starting your business, put more money in your pocket each and every year so you achieve your personal wealth building goals! SageAdvisers® Teleseminar Series. In talking with so many of our clients, we have identified one more way we can contribute to your ongoing growth and prosperity. Just like you, Sage International, Inc. faced many challenges and triumphs in the process of building a business from scratch! Where did we go for information? What resources did we use? Who were our mentors that helped us understand the many phases; I mean the real ups and downs of building and running a company? The relationships and resources developed by Sage over the past twelve years inspired us to share with you the many talents, insights and tremendous knowledge of our core prosperity team. We are very excited about furthering our commitment to nurture and champion the well being of our clients across America. Join Cheri S. Hill, President & CEO on the 3rd Wednesday of each month from 12:00-1:00 p.m. PST, as she hosts the highly acclaimed SageAdvisers® Teleseminar Series. She is confident she can help you because she has personally researched and fielded thousands of questions, asked many of the same questions that you ask everyday, and continually searches for new alliances, products, services, information and untapped resources across the nation. After the “Inc.” Dries…® Corporate Strategies Workshop. We’re going to teach you step-by-step how to accumulate wealth (by building multiple streams of income), how to protect your hard-earned assets from outside attack (The Three Flaming Arrows of Challenge) legally, ethically so you can sleep at night. And then, how to leverage your wealth so you gain the extreme advantage of knowing what you can do right now to create your own success formula. The clarity of FINALLY knowing precisely what you’re going to do, how you really are going to be doing it –and why you really want to be doing it, is probably the most liberating strategic distinction you’ll get from all this. Here’s Your One Opportunity to Get That Quantum Leap Forward in Getting Out of the Rat Race…For Yourself…And Your Business…Guaranteed!

Call 1-800-254-5779 to schedule your Free Consultation today!

Sage

International, Inc. 1135 Terminal Way, Suite 209 • Reno, NV 89502 800.254.5779 • www.sageintl.com Fax: 775-786-0339 • [email protected]

©2005 Sage International, Inc.