Be an Ethical Entrepreneur, Marketer, and Business Builder

Owning a business MUST be part of your wealth generation strategy

The reason for this is actually extremely simple and direct: Taxes

If you could consistently make 20% MONTHLY returns in the stock market you’d still benefit from a small business. Realistically, I can’t think of a single reason not to own a small business. Even if the business only employs you, there are tax advantages though there are certain advantages, such as healthcare, that are only possible with people working with you.

Keeping in mind that less than 12% of millionaires, according to The Millionaire Mind, are professionals (i.e. doctors, lawyers, engineers, etc.) and the vast majority create their riches through building a business, that’s actually beside the point. My point in this blog is simply that owning a brick and mortar business has many advantages that even your 1-man-show-no-employees-to-deal-with internet business can’t match. Let’s look at a few:

  1. Taxes
  2. Room to cutback
  3. Health Insurance
  4. Retirement Accounts

The quantity of tax advantages possible with a small business are for more numerous than a short blog can cover so I’ll touch on a few highlights:

  1. Pre-tax Expenses – Your gross pay is meaningless. Your net pay is all that matters and when your phone, internet, car, car insurance, business meals, and travel are all paid for by your business the savings are huge. As an example, if all of those pre-tax expenses add up to only $10,000 per year and you are in the 30% Federal Income bracket, have 5% state income tax and have to pay 15.3% in FICA (7.65% from the employee and 7.65% from the empoyer) you’d have to pay yourself over $20,000 in salary to afford the same expenses. If you own a business and those expenses only amount to $10,000/year you probably need a better accountant. Keep in mind you have to be honest about the use of those items. For instance, my company doesn’t pay for my entire cell phone bill because obviously I use the cell phone personally a portion of the time. The same is true for my vehicle allowance.
  2. Distributions – When you have a pass-thru entity you have to pay yourself a “reasonable” salary and the rest of the profit you can take as a distribution without paying any FICA tax (a savings of 15.3%).
  3. Racing This is probably my favorite! In essence, if you like racing cars, motorcycles, airplanes, bicycles or have some other hobby and you don’t mind plastering your race vehicle with your business’ logo, then your vehicle and most of the expenses related to racing can be paid for pre-tax as a marketing expense for your business.
  4. Real Estate – If your business requires a building and you own the building in a separate entity (most likely an LLC), your business can rent the building from your other entity and the rent is passive income that isn’t subject to FICA (again saving you 15.3% over a salary). Obviously the rent has to be reasonable.

As you can see, just these few items can quickly add up to tens of thousands of dollars in tax savings even with a business grossing less than $500,000 per year. Obviously, the larger the business, the greater the savings.

By room to cutback, I simply mean that if you have a business that employs just you and sales drop, guess who the first one to get fired is? On the other hand, if you have a business with just a dozen employees and sales start dropping now you have a lot more room to cut payroll before you’re out of a job or taking a pay cut. As a small business owner, I know personally that cutting others before you cut your own pay is extremely difficult to do, but you can’t deny that, if necessary, you and your family have a bit of extra security.

As for health insurance, if you have a few employees (at least prior to the new Healthcare Reform Bill) there were health insurance advantages to being on a group plan such as your rate is primarily based on your age and not pre-existing conditions. I learned this first-hand as I couldn’t get insurance as an individual but had no problem getting on my business’ plan.

Since it’s your business, you get to structure your SEP-IRA or other retirement vehicles in any way that you want. Of course you have to make the accounts available to everyone on your team, however you have the ability to structure the accounts to best benefit you. This power can have a major impact on your overall tax bill today and into retirement, so don’t overlook it.

Finally, if you’re looking for what type of entity to create, I highly recommend an LLC filing as an S-corp. Also, make sure you have a GREAT accountant to take care of all of the details of these tax advantages and to make sure you’re doing everything legally and ethically.

To your tax-saving success, Bryan

Your business should be an LLC filing as an S-corp

*DISCLAIMER: I am a mechanical engineer. (Do I really need to say anything else to emphatically point out that I am not a lawyer or accountant advising you on legal or tax matters?)

So here’s the plan:

Buy the assets of a business, create an LLC that files taxes as an S-corp, and sell the LLC.

First a little background. You have a few options when forming a business entity:

  1. Sole-proprietorship – single owner as disregarded (pass-thru) entity
  2. Partnership – multiple owners as disregarded entity
  3. Sub-S C-corporation – up to 75 shareholders as disregarded entity
  4. C-corporation – unlimited shareholders with corporate tax on profits and capital gains on distributions
  5. LLC – unlimited members

However when filing your taxes you have to choose one of the top 4 OR an LLC (for legal purposes) filing as one of the top 4 (for tax purposes). So not including all of the types of partnerships (Limited, Family Limited, Master Limited etc. etc. etc.) or Trusts you have about 8 options when forming your business entity. Of those 8 basic options, the LLC filing as a Sub-S seems to be the best for our buy, build, and sell purposes.

Reasons why you want an LLC filing as an S-corporation:

  1. An LLC is the simplest legal entity requiring the least amount of corporate formalities.
  2. An S-corp is a pass-thru (disregarded) entity so all distributions pass-thru to the owner on his personal tax return and are only taxed on state and federal income (and in several states such as Texas, Tennessee, Nevada, and Wyoming there are no state income taxes).
  3. You only pay tax on your Net Profit in your P&L – not on the actual cash distributions.
  4. With Amortization, Depreciation, Interest on the loan you used to buy the business, and a Section 179 of your equipment expenses, you can have quite a lot of cash distributions with no paper income.

Taxes you won’t have to pay with your LLC filing as an S-corp:

  1. FICA – you only pay that on your “reasonable” salary, not on your distributions
  2. Self-Employment Tax – this is only necessary with a sole-proprietorship or a partnership
  3. Corporate Tax – currently around 34% on the profits of a C-corp plus another 15% capital gains on your distributions (is there any reason a small closely held business would be a C-corp???)

The reason you buy only the assets of a business is your depreciation and amortization schedules start all over again and with the numerous business valuation methods you can always come up with some “goodwill” to amortize. Keep in mind, that amortization is your best friend. It’s a non-cash accounting expense that can save you thousands in taxes. For a more in-depth analysis of Amortization and Depreciation check out my Business Valuation 2 – EBITDA can eat my shorts blog.

The reason you sell the shares of the S-corp is that you can provide vendor financing to the new owner and only pay capital gains little-by-little every month as the payments come in. However if you sell the assets out of the S-corp, you have to pay the entire capital gains up-front EVEN if you’re carrying a note for the new owner. This obviously is the worst part about an S-corp. I believe the only way around paying all of the capital gains up-front on an asset sale would be a Like-Kind exchange. This could be very tough if you’re selling a business to buy another one because it would have to be an extremely similar business and you’d have to meet all the strict deadlines for the transfer (usually less than 90 days). And of course if you’re carrying a note then you may not have the cash to buy that other business. Is there a better way?


  1. If you’re never going to have any income (such as with a rental property or if you have a great accountant) you might as well file your LLC as a partnership or sole-proprietorship. Without income you won’t have to worry about taxes and when you go to sell, you can sell the assets, carry a note and still not have to worry about immediately paying for all of the capital gains. In other words it gives you a bit more flexibility when you go to sell.
  2. If you have multiple owners/shareholders and you don’t want the distributions to be evenly split along ownership percentage lines you can’t use an S-corp.
  3. If you’re going to buy, build, and sell very quickly (i.e. less than a year) you’re probably better off filing as an LLC sole-proprietor or partnership. I say this because if you can flip a business that quickly you’re probably able to grow it extremely rapidly and your biggest tax concern would be the capital gains on the sale. With the sole-proprietor or partnership you could be flexible and either sell the assets or LLC with vendor financing and not have to pay all of the capital gains up-front.

Unfortunately, I can’t claim that I learned all of this from a single book. As a matter of fact, it took about an hour with my accountant which will cost me about $55. Money well spent! 😉

To your success, Bryan