Protect Your Assets or Pay Less Tax? Now You Can Do Both!

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The one thing I love about tax strategy planning is that it never gets boring. This year, 2007, looks to be a very interesting year. That’s because you can throw almost all of your old tax plans out the window if you’re subject to AMT (alternative minimum tax). If your income is over $50,000 for 2007, don’t ignore AMT — you might be subject to it this year.

The best sure-fire way to avoid or minimize AMT is to have a business. And that’s why tens of thousand of people are rushing to start a business before year end. Of course, you have to do it legally — and that’s why I’m featuring what it takes to have a business in the eyes of the IRS so you get all those deductions in this month’s First Class Lounge. There is one more wrinkle to having a business — how do you protect your assets and pay less tax at the same time?

You protect your assets best with business structures. When it comes to protecting assets there are a number of good business structures:

  • S Corporation
  • C Corporation
  • Limited Liability Company (LLC)
  • Limited Partnership (LP)

These are structures that protect your personal assets from things that might happen within the business that cause you personal liability.

A Sole Proprietorship (Schedule C) costs you more in tax (15.3% self-employment tax), puts everything you own at risk and is 10 times more likely to create an IRS audit.

A General Partnership (or Joint Venture) is even worse! In this case, you’re liable for everything crazy you might do and you’re also liable for everything crazy your partner might do.

A Corporation (provided it is set up correctly) will protect your personal assets against a lawsuit that comes from the business. But, if something happens personally and you get a judgment, the stock you hold in the corporation could be considered an asset. That means that your personal assets are safe from the business, but your business assets are not safe from you.

An LLC will protect both ways, but the tax benefits aren’t as good. The default tax treatment for an LLC is either Sole Proprietorship or Partnership, which means your earned income from your business is subject to 15.3% self-employment tax.

So, which do you choose: asset protection from an LLC or better tax treatment in a corporation?

Here’s the good news. You don’t need to choose. You can have an LLC that elects to be treated as a corporation — giving you the best of asset protection and tax treatment.

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