Читать книгу Run Your Own Corporation - Garrett Sutton - Страница 47

After their horrendous experience with Steve and the Righteous Rock Quarry case, Tom and Nancy Green were ready to move forward. The attorney who helped them through the engineering malpractice case mentioned an associate in the firm named Katherine could help them set up the right entity.

So Tom and Nancy met with Katherine in her office. They had brought Dooger and left him on a leash tied to a pine tree in front of the law office. All the secretaries and paralegals went outside to pet the loveable Great Dane. Everyone around town was fond of Dooger.

Tom, Nancy and Katherine reviewed the pros and cons of the various entities and the three of them kept coming back to a unique one of them – the professional corporation.

A PC, as they were known, was available to licensed professionals such as doctors and lawyers. Each state had their subtle variations but typically shareholders could only be professionals licensed to do business in one or more states by a state licensing agency. In some states the only way to do business through an entity was with a PC. Since Tom and Nancy were both licensed engineers they would both qualify to be shareholders of a PC.

Katherine discussed using a Professional LLC (or PLLC) for their consulting business. She said the law surrounding professional limited liability companies for professional activities was unsettled. California had just started to allow them and other states still did not permit their use. If they would ever engage in a long-term consulting business in another state (over 30 days, generally) they would have to qualify to do business in that state. Because every state allowed PCs and not every state allowed PLLCs it made sense to use a professional corporation. (In some states PCs are known as a Professional Association [PA] or a Service Corporation [SC]).

Katherine noted that forming a PC was very much like forming a regular corporation. The one additional step involved obtaining and filing a certificate of good standing from the state licensing division. She indicated that the specific division for engineer licensing was usually very cooperative with this.

Katherine then explained an important feature of the PC (which also applied to a PLLC). The entity did not provide protection from a claim of professional negligence. If a client like Steve at the quarry sued again on a malpractice claim they would have to rely on insurance. She suggested that Tom and Nancy have a $5 million E & O (errors and omissions) policy to cover any future claims. She also suggested putting all of their other personal assets in other protected entities in the event a claimant wanted more than the insurance coverage, or in the event their insurance company found a reason not to cover them.

Tom mentioned that they owned a fourplex in their individual names. Katherine explained that this asset needed to be protected for two reasons. First, if they left the property in their individual names and were ever sued by a tenant, the tenant could reach not only the fourplex but all of their other assets. Conversely, in a case like the Righteous Rock matter, if the claimant ever obtained a judgment against them, assets in their individual names could be easily reached. They should put the fourplex into a separate LLC formed in their home state, and then have the home state LLC owned by a Wyoming LLC for maximum asset protection. (This strategy is discussed in Chapter 3 of Start Your Own Corporation.) Tom and Nancy agreed to this strategy for the fourplex.

Moving back to their engineering business, Katherine noted that the PC would protect them from other business claims, such as a trip and fall at their office or a claim from a vendor. In those cases, the PC limited their liability. But, she said, to be clear, on a claim of personal negligence they were personally responsible no matter what entity they used. And so insurance was a must.

Nancy asked how the PC would be taxed. Katherine indicated they could choose between S corporation or C corporation taxation. She reminded Tom and Nancy that there was double tax with a C corporation – once on corporate income and then again on dividend distributions. She further noted that if all of the activities of the company were for professional services (i.e. law, health, accounting or engineering) they would be treated as a Personal Service Company and taxed at a flat 35% rate, without a graduation of tax rates as in a regular corporation. On the other hand, with an S corporation the profits flowed through the PC and were only paid at the shareholder level.

Nancy asked about health insurance. She had some medical issues and wanted to be sure she was covered. Katherine said that there was a small advantage with a C corporation. A C corporation could deduct health insurance premiums as a business expense. With an S corporation it was also an expense to the business but for those shareholders owning 2% or more of the shares (which would include Tom and Nancy at 50% each) the premium payments would be counted as personal income to them. So, for example, if their health premiums were $5400 a year in a C corporation that amount could be written off as a straight business expense and thus reduce the corporation’s profit. In an S corporation the business could pay for it and write it off but the $5400 would show up as income on the Green’s personal return. At a 35% tax rate they would pay $1890 in extra taxes.

But Katherine then showed how much they would save by only being taxed once in an S corporation instead of twice in a C corporation. Assuming a 5% state tax and the highest federal income tax rate of 35%, on net income of $200,000 the following is how C vs. S corporation taxation plays out:

The example drove home the point for Tom and Nancy. While they may lose almost $2,000 by being taxed on health benefits in an S corporation they would save almost $20,000 a year by being taxed as an S corporation instead of as a C corporation.

The choice for them was easy. They instructed Katherine to form a professional corporation taxed as an S corporation under the name Green Engineers, P.C. They also had her form a Wyoming LLC to own a newly formed home state LLC to hold the fourplex for maximum protection.