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Legal & Earnings Disclaimer The information contained in or made available by the Promoter, Mel Abraham, or any third-party through the this eBook, seminar or their websites or services cannot replace or substitute for the services of trained professionals in any field, including, but not limited to, mental, financial, tax, investment, medical, psychological, or legal fields. Promoter does not offer any professional personal, medical, financial, tax, investment or legal advice and none of the information contained herein or in his programs should be confused as such advice. Neither Promoter, Mel Abraham nor their assigns, sponsors, speakers, partners, contractors or any of their affiliates will be liable for any direct, indirect, consequential, special, exemplary or other damages to you or your business, including economic loss, that may result from information herein or participation in any Seminar or from the use of, or the inability to use, the materials, information, or strategies communicated through the Seminar or any products or services provided pursuant to the Seminar, even if advised of the possibility of such damages. Under no circumstances, including but not limited to negligence, will Promoter or Mel Abraham be liable for any special or consequential damages that result from your use of the information or participation in the Seminar. To be clear: You, alone are responsible and accountable for your decisions, actions and results in life, and by your participation in our Seminar, you agree not to attempt to hold us, the Promoter or Mel Abraham, liable for any decisions, actions or results that you make or experience in business or in life due to your participation in this Seminar at any time, under any circumstance. YOU should seek specific professional counsel (legal, tax, financial and investment) that considers their specific facts and circumstances any advice or discussions provided during the seminar and or on the website or other communications are SOLELY for illustrative purposes and do not necessarily consider all elements of an individuals situation especially because of the limited information available to Mel Abraham during the program. Additionally, there are no guarantees of results or other assurances of any of the advice given by Mel Abraham or any of his staff or agents. YOU understand that it is their sole responsibility to perform the appropriate due diligence and independent investigation of any and all decisions to be made with respect to their business, business structure, investments, legal and tax decisions. We've taken every effort to ensure we accurately represent our information and it's potential to help you grow your business. However, there is no guarantee that you will earn any money using the techniques displayed here, and we do not purport this as a "get rich scheme." Nothing here is a promise or guarantee of earnings. Your level of success in attaining similar results is dependent upon a number of factors including your skill, knowledge, ability, dedication, business savvy, and financial situation. Because these factors differ according to individuals, we cannot guarantee your success, income level, or ability to earn revenue. You alone are responsible for your actions and results in life and business. Any forward-looking statements outlined here are simply our expectations or forecasts for future potential, and thus are not guarantees or promises for actual performance. These statements are simply our opinion. No guarantees are made that you will achieve any results from our ideas or models presented at the event, and we offer no professional legal or financial advice. This workbook contains proprietary content and may not be duplicated or distributed without written permission. No portion of this material may be shared or reproduced in any manner under any circumstance whatsoever without advance written permission from Thought Leaders IP, Inc. For permission requests, contact: Thought Leaders IP, Inc. 543 Country Club Drive, Suite B Simi Valley, CA 93065 P: 866.416.2783 F: 805.293.8950 Copyright Š 2014 Thought Leaders IP, Inc.
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You’ve finally made the big decision to start your own business. You are both excited and nervous about making this dream become reality. Yet, you also know this is the right decision to make and the right time to plunge right into it. During the initial planning stage, you will be extremely busy. You will be making lots of decisions regarding how the new company will operate, where it will be located and how you will reach your target customers. Every day, you will be check-marking items off your to-do list – each one will get you one step closer to opening your doors. One of those important decisions you must make is to choose the correct business entity structure for your new company. The choice of entity structure will determine a number of things in your business and life including: •
Tax minimization strategies
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Business credit accessibility
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Liability protection strategies
When it comes to liability strategies, too many new business owners believe that if they are just careful enough, they will be safe. Although you may be extremely careful in your day-today operations, many business threats will be out of your control and you need to be able to protect yourself effectively. These threats could come from a multitude of places including: •
Environmental Issues
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Reckless employees, contractors, or tenants
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Banks or taxing authorities
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Uninsured claims
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Actions of your children
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Contract litigation
The idea behind proper entity structuring is to make sure that any potential threat remains isolated and contained so it does not infect any other asset or part of your life. It is what I call the starfish strategy. If any part of your life is threatened you can simply release that part while everything else is left to continue to operate, grow and build. Unfortunately in today’s Page |3
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litigious society you need to prepare with a starfish strategy versus a domino strategy, used by most today, whereby one threat affects all assets. Your first step in this process is to detail and categorize where potential threats could come from and which assets are related to those threats. You want to group your assets by one of at least four threat levels: •
Personal - those assets which are owned by you, such as a house or a car
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Business – those assets which are used by the business, such as computer desks and telephones.
•
Safe – These types of assets have a very low liability risk. These could include stocks or bonds, as the mere fact you own the financial asset doesn’t usually mean you could end up being sued.
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Dangerous – these assets have a high liability risk. These could include such assets as rental property or construction equipment, whereby if someone gets hurt, you could easily face a civil lawsuit.
The key is to make sure that your safe assets are separate from your dangerous assets and your dangerous assets are separate from you. Also, it is helpful to separate the business assets from the other assets and even the business activity. Once you have grouped your assets and threats and fully understand how you want to protect yourself and your family, you will be better prepared to consider which entity and business structure option works for you. Your options include:
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•
Sole proprietorship
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General Partnership
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Limited Partnership
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C-Corporations
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S-Corporation
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LLC Corporations
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Let’s look at some basic information about each type of business structure. Sole Proprietorship This type of business is the easiest and simplest business to start. Basically, the sole proprietorship is an individual who starts his own business. For taxing purposes, the individual reports the income and expenses from a business on his own personal tax return because the individual and the business are considered one and the same. The sole proprietor has complete control over the business. One downside to a sole proprietorship is that the business is financed entirely by the owner. Although he can take out loans, his personal assets may be required to secure the loan. There are very few tax minimization strategies that a sole proprietorship can employ. Another downside to this type of business is that if there is a lawsuit, the personal assets of the owner can be sought even if that asset had never been used to operate the business. On the flip side of that equation, the business assets can be attached should the owner be found personally liable in any way. Although some states provide limited exceptions, there really is no asset or liability containment in a sole proprietorship. General Partnership A general partnership is similar to a sole proprietorship; however there is more than one owner. Each person in the partnership shares in the income, expense and the work required for the business. The upside to this type of business is that it is relatively simple to create and manage and with more than one owner, the start-up costs are shared. Income from the business is usually allocated based upon the allocation of the investments or work effort. For example, if one partner put up ¾ of the initial investment and does ¾ of the work, then ¾ of the income should go to that partner. One single partner does not have full control over all the business decisions. The responsibility for making business decisions are shared by all partners based upon a partnership agreement. This type of business has several downsides though – one is that personal property of either partner is open to liability should the company get sued. This also means that one partner Page |5
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could be held liable for all debts of the business no matter how many partners existed. Like sole partnerships, there are very few tax minimization strategies that general partnerships can employ. Another downside is that unless specific details relating to how the partnership will work are decided ahead of time, the partnership can easily dissolve over management disagreements and power struggles. The best partnerships have a contract that not only spells out issues such as management decision-making, capital investment, and debt liability, but also spells out the process for resolving conflicts. Limited Partnership A limited partnership has at least one partner that contributes to the start-up or operating funds, receives income from the partnership, but does not have any rights regarding the day-today operation of the company. This kind of partnership is great when owners need to have an influx of capital investment from outside the firm but do not want additional operating or general partners. Each partner records his share of the income and expenses on their personal tax returns. The limited partner’s liabilities for the debts of the business end when his investment level is reached. The general partners could be held personally liable for debts of the business. Therefore, the limited partner is the only one that has a defined debt and liability containment strategy in place. C-Corporation A corporation is its own business entity. Unlike any other business options, the corporation actually reports income on behalf of itself. That income is taxed at both a state and federal level. When shareholders are paid dividends based upon the C-Corporation’s income, the shareholders must also pay income taxes. This is called double-taxation. Setting up a C-Corporation is not easy. There are many state and IRS regulations that must be followed for this type of entity to be legal. However, when it comes to personal liability, the
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shareholders, officers and directors of the corporation are extremely limited and protected from lawsuits and debt-collection activities. Outside of full liability containment, there are several other upsides to the creation of a corporation. These include better debt management, the ability to more effectively manage finances in order to reduce taxes and easier ways to entice new investment dollars or bank loans. S-Corporations An S-Corporation is a special type of entity created to help limit liability for the owners, but provides the single-taxed income reporting benefit of a partnership or sole proprietorship. This type of entity has shareholders, board of directors and officers. Because it is a legal entity apart from its owners, it must be set up in the state in which the company will operate and paperwork must be filed with the IRS. An S-Corporation can list no more than 100 people as shareholders - these are usually the investors into the business. On an annual basis, net income from the business is distributed equitably to all shareholders. Business owners can work for the company and receive a salary. The S-Corporation, as its own entity, does not pay separate income taxes. However, some states such as California do assess some level of tax on this type of entity. The downside to this type of corporation is that it is not very easy to set up this type of business as it must follow all state required incorporation rules. Secondly, there are some very strict IRS restrictions regarding setting up and operating an S-Corporation. Should they not be followed, the S-Corporation can be dissolved and the company treated as a C-Corporation. Limited Liability Company– LLC An LLC is a hybrid type of corporation that provides the best of a partnership and sole proprietorship along with the best of a corporation. The owners have limited liability, yet they also have the single-tax advantage of a smaller business. They have the flexibility of a sole proprietorship or partnership and don’t have to follow the corporation rules related to board of director meetings and stock ownership.
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Several downsides exist. LLC’s can be as difficult and costly to set up as a C-Corporation. Although liability is limited, there situations when tax liabilities can pass to the members, even if the members have not yet seen a profit. Also, a single-owner LLC must be very cautious. The LLC is a separate entity, but should the owner start to mix his personal accounts in with the accounts of the LLC, a court may find that he must also open himself up to personal liability. To help you determine what type is best, please review the recap below. Sole Proprietorship
General Partnership
Limited Partnership
SCorporation
CCorporation
LLC
Liability
Full, personal liability
Full personal liability
Full, personal liability only for general partners. Limited liability for limited partners
No personal liability
No Personal Liability
No Personal Liability
Taxation Status
Single-tax at owner’s level
Single-tax at partner’s level
Single-tax at partner’s level
Single-tax at shareholder’s level
Double-taxed – once at entity level and once at shareholder level
Single-tax at member’s level
Ease of Startup
Easy to set up
Easy to set up
Moderate to Difficult to set up
Moderate to difficult to set up
Moderate to difficult to set up
Moderate to difficult to set up
Start Up Funds
Solely dependent upon owner
Can be split between partners
Can be split between partners
Can be split among up to 100 shareholders
Can be split among multiple shareholders
Can be split between members
Operation Status
Operated by owner
Operated by partners
Operated by general partners only.
Operated by hired employees, who receive salary
Operated by hired employees, who receive salary
Operated by either hired employees or owners/partners
Reporting Requirements
Minimal reporting requirements for IRS
Extensive reporting requirements to IRS and partners
Extensive reporting requirements to IRS and partners
Extensive IRS reporting requirements
Extensive IRS reporting requirements
Extensive reporting requirements to IRS and members
SelfEmployment Tax?
Yes – must pay
Yes – must pay
Possibly
No
No
Possibly
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Final Thoughts Before Making Any Choices Prior to making the decision as to which type of business entity your new business should be, you must consider several other factors. 1.
State rules: Each state has its own rules and regulations related to setting up and operating each type of business. You must research the rules in your state to make sure that understand the specific nuances that apply to you.
2. Growth Plans: If you have a great idea, but know that you wish to turn management of the business over to hired experts in the future, you may wish to start off with a more structured entity to begin with. This allows you to easily transition management personnel as planned growth is achieved. 3. Management Preferences: You must consider that certain types of business have very little flexibility in terms of management of the organization. A business owner who creates a C-Corporation and sets himself up as CEO may find himself ousted as CEO at a later date by the shareholders of the company. If you always want to retain control, an LLC or sole proprietorship might be best. 4. Cost: This could include cost of set up from a legal or tax perspective. Corporations are always costly to start, while in some cases the sole proprietorships may only require filing the company name with the state. 5. Capital required: should a prospective business owner know that he will need substantial capital in the future, he should be aware that banks are more willing to lend to structured business entities, such as an LLC than a sole proprietorship. However, if you’re looking for venture capital, some type of corporation is best as the venture capitalists usually like to hold shares in the company. 6. Venture Risk: If you’re opening a business that you know contains more inherent risk than others, you will want to start the business by sheltering your personal assets. These types of business could include skydiving or zip-lining. One final note: even if you think an LLC or an S-Corporation might be the best option for you, you don’t have to start that way. For example, you can start as a sole proprietorship or
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partnership in order to get the business formed and the sales start and change to a different entity while you’re operating your business.
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About Mel H. Abraham
MEL ABRAHAM is a CPA by education but an entrepreneur by exhilaration and a true believer in the entrepreneurial way of life. It is through entrepreneurship that we create community, support society and live our dreams. It is where possibility meets reality again and we can bring our dreams out of the darkness and breath life into them again. Mel has built, bought and sold successful businesses for decades and is currently a strategic mentor and board member for many businesses. As Founder of Business Breakthrough Academy, Thoughtpreneur Academy he’s a committed advocate for the entrepreneurial way and provides real education, to real entrepreneurs for creating a real life! He believes that it isn’t business for business sake; rather it is business for life’s sake! He brings his entrepreneurial strategies and proven principles to life in his programs and in his soon to be released book The Entrepreneur’s Solution: Think Like a Modern Millionaire, Design your Business & Live your Dreams, as well as his 9 Ideals of Legacy Framework to allow entrepreneurs and business owners to create a legacy business and a legacy life. Part advisor, part analyst and part entrepreneur, Mel understands the elements of minimizing the downside of business while maximizing the upside of a business. But more importantly, Mel works to focus on the meaning of business because that is more powerful than the pure mechanics of business. Mel has helped entrepreneurs, businesses and management teams across the country create meaningful, fulfilling careers/ventures while accomplishing their mission. As an inspiring leader and in-demand speaker, trainer and mentor, Mel has worked with numerous leaders, entrepreneurs and organizations. He has assisted them to combine the practical elements of business tactics and strategies with the psychological essentials of the entrepreneurial mind to more effectively execute their vision and establish a meaningful legacy. Mel is a Certified Public Accountant with over two decades of experience as a financial expert, valuation expert and business and success strategist. Mel is regularly sought after for consulting and valuation engagements around the country. He (a two-time inductee into the United States Martial Arts Hall of Fame) is the Founder and President of The SAVE Foundation, a non profit charitable organization that provides programs and funding to assist those that have been or may be victims of abuse and violence as well as raise the public awareness to the problem and educate them in prevention.
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