Crippled CEO Blog #054:
Everyone, including you, should own a corporation.
I don’t mean this metaphorically, like everybody should be the boss of their lives, and I’m not saying everyone should quit their jobs and become full-time entrepreneurs — that’s a path not suited to most people.
I’m saying that you and your family should own the legal entity that is an LLC or an S-Corporation.
Don’t leave yet!
I know. If you are a regular mom or dad or genius who didn’t have kids with a job you like enough, you think this isn’t for you, and it also sounds kind of boring or complicated.
But you are the exact person I’m writing this for.
In 2019, 34 giant companies in the S&P 500 stock index paid ZERO DOLLARS in taxes.
Did you pay more than zero dollars?
The difference between them and you is that you don’t have a corporation.
This country and its tax code were designed with the idea that most people would work for themselves — farmers, tailors, carpenters, barbers, doctors; in early America, most people worked had a skill and offered it to people directly. That means that if you don’t on a business, you are missing out on lots of benefits available to you.
Does anyone in your family do anything to earn extra money? Do any of your children mow lawns or babysit? Do you ever do any kind of side work? Do your kids do work to earn an allowance?
Chances are, one of these things are true. And if they’re not, they should be. Besides the tax benefits that I’m about to get into, especially if you have children, this process teaches great lessons about money, hard work, and independence. The only difference between mowing lawns on the side for extra cash and owning a lawn care business is a mindset and some paperwork, but that change in perspective for your kid could be huge.
So, if you have any of the income sources I mentioned above, you can form either an LLC or an S-Corporation. I’m not going to get into the differences between those, but essentially you’ll have a company owned by shareholders, and those shareholders will be you and your family.
Once this is set up, any money that comes in through the lawn mowing, babysitting, cleaning houses, teaching old people how to use an iPhone, or whatever, becomes revenue for your business.
And any expenses this business incurs are write offs that drive down your taxable income.
People are taxed by how much they make. If I make $50,000 a year at my job, regardless of what I spend, I pay taxes on that $50k.
Businesses are taxed after expenses. If a business makes $50k a year, but spends $20,000 on things it needs, it’s only taxed on the remaining $30,000.
If you have a corporation, the cell phone you use to schedule appointments is a business expense. The gas you use is a business expense. Part of your home can be considered a home office and count as a business expense. The Internet at your house can be a business expense. To keep using the lawn mowing analogy, when the company pays your daughter her wage for that lawn she mowed, that is also a company expense, she receives it at a 0% tax rate, and that money can be put into a Roth IRA, where it can grow, also tax free, on her behalf.
If you own a corporation, you get to pay taxes on how much money you have left, instead of how much money you made total.
Getting it all set up isn’t hard. You can pay a lawyer to help you do it for a few hundred dollars, or you can do it yourself through LegalZoom or Rocket Lawyer for a lot less.
You are going to pay for these things anyway, why not make them tax write offs? And this is all totally legal. The government wants people starting small businesses because they contribute to society.
And the benefit of getting your child involved in this starting at an early age, making them part of the process, bringing them along as you set up this business that they own a part of, these are life lessons that are worth much more than the money you save on taxes.
But, y’know, save the money, too.
(Do you know somebody that can use this? Please share it with them. And maybe also consider guaranteeing that you never miss my next post by sending a text message to the phone number 484848 with the word CRIP as the message.)