December is always my busiest month of the year. My clients are looking for final tweaks to their year-end tax planning, and prospective clients call us looking for solutions before the final bell sounds for the end of the year.
At the last minute, we had someone contact us who had a Schedule C business that had had a sudden increase in income.
There are four reasons why I’m not a fan of Schedule C businesses:
- Schedule C business structures put everything you own at risk. If you have a business that little risk, then this isn’t a problem. But the problem is that most businesses do have risk. There are employees who could run into someone while performing duties for the company. There are products that might harm someone. There are services you or others might perform that don’t have the right results. And if you have the misfortune to have an error with someone who like to sue – look out! You can lose your house, your savings, your kid’s college fund….everything you have. A corporation or an LLC will protect your personal assets.
- Schedule C business structures cost you more in taxes. There is no disputing this one. You’ll pay 15.3% extra in self-employment tax if you have a Schedule C. (The temporary payroll tax cut reduces this somewhat, but remember that payroll tax cut IS temporary.) You don’t pay self-employment tax with a corporation.
- Schedule C business structures have a 1 in 3 chance of being audited. Compare that to a corporation that has a 1 in 100 chance (small business) to 1 in 50 chance (larger business).
- Schedule C businesses can’t get business credit. The credit cards you get in the business names are just disguised personal credit cards. You aren’t building business credit.
In this case, the wrong business structure, coupled with no pension plan in place by the end of the year, meant an extra $20,000+ in taxes. We could have fixed it, if the prospective new client had called our office one day earlier.
As it was for this new prospect, we can make sure 2012 is a whole lot better for him.
Moral of the story: Tax planning is a year-round activity. If you wait too long, it’ll cost you.