A drywall contractor recently discussed how he changed his sole proprietership to a limited liability company on the W&C bulletin board and it got me wondering: Does every contractor out there take advantage of the benefits such a business structure can offer?

Brent Smith has been in the residential drywall business since 2000 and utilizes a three-man hanging crew, himself and one helper. He decided to incorporate for several reasons.

"I decided to incorporate so I wouldn't have to put all of my assets on the table every morning when I go to work," Smith explains. "I also like the aspects of not suffering double taxation with the LLC (as opposed to other corporate structures). I did think about the S corporation but my lawyer advised the LLC. I want to be able to pay myself wages along with the crew and deduct that as well, making the company earn less."

Business owners hire employees who in turn pay the government taxes, and this is why businesses are offered tax breaks: because they are in the business of creating more taxpayers. The better the business does, the more employees it can afford to hire and the more it can pay those employees, meaning more revenue for the government.

For business owners, this is good news. I've found a lot of guilt among people who are reluctant to take the tax breaks offered by the government at tax time. They're worried they might get "in trouble" or audited if they write off things they never have before. But the reality is that those tax breaks were put there by the government to be utilized in the first place!

The word "loophole" is quite common when it comes to what many perceive as avoiding or evading taxes. But remember one of the lessons from the "Rich Dad, Poor Dad" books: "Don't think of them as tax loopholes, think of them as government incentives." Is there anyone out there who would refuse a deduction, regardless of the connotation of the word "loophole"?

To ensure that as a business owner you are getting all the tax breaks you can, you need two things: a business structure that suits your business best and a good accountant. The latter can help with the former but make sure your accountant really knows what he's talking about. Everyone thinks he's an expert but when it comes down to it, there are very few true experts. Make sure the accountant knows the specifics of business loopholes, so owners can make the maximum amount of money that enables their businesses to succeed.

In Brent's case, his attorney was familiar with his type of company and felt the LLC was the way to go. Whether an LLC, S or C, a corporation helps shield its owners/investors from personal liability, debts of the business and indemnification against corporate acts. The only risk to the owner/shareholder is the money invested in the business.

The LLC structure combines the corporation characteristics of an S or C with the elements of a traditional partnership. It offers a flexible management structure that can be managed by the owners themselves or by managers who may or may not be owners. An LLC allows outside investors who can share in the profits and tax deductions of the company in addition to giving the company more cash. The LLC is usually taxed as a partnership, however, meaning the profits and losses pass directly to the each owner/investor, and they are only taxed at the individual level. Other corporate structures risk a double taxation-taxed on personal gain and tax on the company itself.

LLCs are subject to more paperwork than a sole proprietorship but less than an S or C corporation. Likewise, they are more subject to state regulations. Check with your accountant or attorney to find out what will work best for you to take advantage of tax benefits offered to business owners.

"I expect to not worry as much about liability associated with the high risk in the construction industry now that my personal assets are protected," Smith adds. "I expect to find a good accountant and pay less taxes. I expect to have a more clear definition between personal assets and company assets with all the cash running through the LLC account first. These and the above are the main reasons I chose to incorporate at this time. There is also always a little more credibility with some prospective clients when you look more professional and/or stable as a corporation." W&C

References:

Loopholes of the Rich: How the Rich

Legally Make More Money and Pay Less Tax

by Diane Kennedy;

Inc. & Grow Rich!

By C.W. Allen, Cheri Hill, Diane Kennedy and Garrett Sutton;

Small Business Start-Up Kit LLC, by Daniel Sitarz