Elect to be Taxed as an S-Corporation

Starting your own business is an exciting proposition: you’re the boss, and you get to do things your way. There are also many tax advantages to running a company. Entertainment expenses, for example, are generally tax-deductible at 50% of the cost. So if you take a potential client out for a meal, you can probably deduct 50% of the bill (which means that you aren’t taxed on that money).

 

Self-employment tax

 

There is, however, a pretty big tax hit that you take as a business owner: self-employment tax. Any income you make while self-employed—which includes income you make from your business—is taxed at a hefty 15.3%. This is in addition to regular income taxes.

 

LLCs vs. S-Corporations

 

Is there any way around this tax? Possibly. For small businesses, I generally recommend creating a Limited Liability Company (“LLC”). LLCs do a number of things for your business, but the big benefit is the liability shield. So long as you operate in a way that keeps you and the LLC distinct, your personal assets will not be at risk. An S-Corporation is another viable option for small businesses, but S-Corporations tend to require more formalities (e.g. annual meetings and minute books) than LLCs. S-Corporations do, however, have a potential tax benefit. In an S-Corporation, you may pay yourself a “reasonable” salary, and any excess funds can be distributed to you as dividends. Dividends are not subject to the 15.3% self-employment tax.

 

An example

 

Imagine that your business makes $80,000. Without an S-Corporation, you pay $12,240 in self-employment tax. With an S-Corporation, you pay yourself $50,000 and take $30,000 as dividends. You just reduced your tax liability by $4,590! But wait. I said, “I generally recommend creating an LLC.” Why not an S-Corporation? Because you can have the best of both worlds. The IRS allows your LLC to elect to be taxed as an S-Corporation (by, among other things, filling out and submitting IRS Form 2553). Then, you have less formalities as an LLC, but you also have the ability to avoid self-employment tax.

 

You and John Edwards

 

If you’re afraid that something like this isn’t legal, just look at what John Edwards did from 1995 to 1999. In 1997 alone, Edwards made more than $26 million as an attorney (I’m apparently practicing the wrong kind of law). Yet he paid himself $360,000 in salary and took the rest as distributions. Over those years, Edwards saved approximately $600,000 in taxes! His tax returns were in the public eye in 2004, and no one—most importantly, not even the IRS—batted an eye at the legality of what he had done.

 

Use me to help you become the next John Edwards. Well, perhaps you’d prefer to use me to help you make as much money as John Edwards. Either way, I’m here and waiting for your call (574.514.3566).

 

–Joel Dendiu

Estate Planning: Leave Her $1

$1

 

You may have a desire to leave a family member out of a will (e.g. a son or daughter). The law generally allows you to do so. You may have this desire for various reasons. Perhaps the individual is already well set financially. Or perhaps you have a rift in your relationship with this individual. Whatever the case may be, if you want to leave someone out of your will, do not name the person as an heir and leave her $1.

 

A troublesome heir

 

There are a couple of problems with this approach. First, going this route has a greater chance of upsetting the individual than simply leaving her out of your will. But perhaps that’s your goal. Perhaps you do want to upset the individual. You should, nevertheless, still not take this approach because as soon as you name the person as an heir, she can create all sorts of havoc. In either circumstance, the individual can contest the validity of your will, but such contests are very difficult to prove and usually fail. As a named heir, however, she has the power to do other things, like challenge the final accounting of the estate, challenge the validity of executor fees, etc.

 

Leave spite out

 

While spite may be in your motives, keep it out of your estate planning. Otherwise, you can create a recipe for disaster.

 

–Joel Dendiu

Quiet Title Complaint in Indiana

Where’d that come from?

You’re all set to sell your home: you’ve hired a great realtor; you’ve staged the house nicely; you’ve put on a fresh coat of paint. Things go exactly as planned, and an offer comes in. The process gets started, and the Title Company runs a Title Search on the property. Lo and behold, a judgment lien shows up on the Title Search! This is news to you. You thought you owned the property free and clear. What are you to do? The seller wants a warranty deed from you, not a quit-claim deed. For today’s purposes, all you need to know is that you cannot provide said warranty deed without clear title, which you don’t currently have as a result of the judgment lien.

Not playing ball

You contact the party with the judgment lien, but she isn’t willing to play ball. She declares that the lien is valid and that you have to pay up before she is willing to release the lien. You disagree; you think the lien is bogus. One of your options is to file a Quiet Title Complaint. You name the party with the judgment lien as a defendant, declare to the court that this party does not have an interest in your property, and ask the court to rule as such. The other party is served with your lawsuit, has her day in court, and hopefully (for your sake) loses. Now you can sell the property via warranty deed.

Drape color

There’s, of course, a lot more to it than that—for example, you may not even be able to locate the party with the alleged interest in your property, which means you would have to submit a request to the court to provide service by publication—but that’s the basic idea. I’m experienced with these sorts of situations and can take this burden off of your shoulders so that you can concentrate on the things you want to be concentrating on…like what color drapes to have in your new house! As always, I’ll provide you with an upfront, flat-fee quote so that you can pay and be done. I look forward to your call!

–Joel Dendiu