Book summary “Start Your Own Corporation”: summary

Introduction

You face constant financial risks when you build a business without proper legal protection. Operating as a sole proprietor exposes your personal home, savings, and earnings to lawsuits and creditor claims.

Garrett Sutton argues in Start Your Own Corporation that you must separate your personal life from your business activities. You achieve this protection by selecting the right legal entity and strictly following corporate formalities.

The book guides you through the process of shielding your assets. You will learn how to evaluate different legal structures, handle cross-state operations, and minimize your tax burden.

• Which entity offers the best protection for your specific assets?
• How do you maintain corporate formalities to preserve your liability shield?
• What strategies help you separate business credit from personal credit?

1. Choosing the Right Business Entity

An entity is an organization that possesses a legal identity completely separate from its members and owners. The term derives from the Latin word ens, which means an existing or real thing. A proper business entity acts as a distinct legal barrier between business operations and your personal assets.

Operating as a sole proprietorship or general partnership exposes you to absolute personal liability, whereas good entities such as corporations and LLCs create a distinct legal barrier.

Entrepreneurs have six main structural choices when selecting a business entity, each with distinct benefits and drawbacks. The available menu consists of:

• C corporations;
• S corporations;
• Limited Liability Companies (LLC);
• Limited Partnership (LP);
• General Partnership;
• Sole Proprietorship.

Selecting the right business structure requires evaluating a comprehensive checklist of strategic business and personal factors.

The Dangers of Bad Entities

A sole proprietorship is a dangerous structure because it provides absolute zero asset protection and exposes personal wealth to business liabilities. Because a sole proprietorship is not a separate legal thing registered with the state, you face unlimited personal liability for all debts, claims, and employee actions incurred by the business. You can easily become vicariously liable for terrible mistakes.

Johnny, a successful plumber running Johnny's Ace Plumbing as a sole proprietor based on his bookkeeper's advice, hired an ex-convict employee named Damien without a background check. Damien assaulted a customer in her home, resulting in a 10 million dollar jury verdict against Johnny, who lost his house, savings, and family, and had to declare bankruptcy.

Beyond personal liability, sole proprietorships suffer from severe limitations regarding ownership caps, sale difficulty, termination upon death, and high audit risk. Sole proprietorships are restricted to a single owner, are difficult to sell because their value depends on you, terminate immediately upon your death, and face an audit rate five times greater for Schedule C returns compared to corporate tax returns.

A general partnership doubles personal exposure because partners are personally liable not only for their own actions but also for the debts and actions of all other partners. A general partnership is formed automatically by an oral agreement or handshake when two or more people share profits and losses, even without a written contract. State default laws and mutual binding power make this arrangement highly dangerous.

Louise saved $10,000 and formed an oral 50-50 partnership called L&M Gifts with Maxine, who contributed no cash. Without Louise's knowledge, Maxine spent over $10,000 on high lease payments and inventory before abandoning the business, leaving Louise personally liable for all partnership debts to the landlord, contractor, and suppliers.

General partnerships suffer from automatic termination upon life events, difficult transferability, and mandatory self-employment taxes on partner income. The longer you operate as a sole proprietorship or general partnership, the longer you remain personally liable for every negative event in the business.

The Menu of Good Entities

To protect your personal assets and limit liability, you must select from good entities which are truly separate legal structures. Good entities include C corporations, S corporations, limited liability companies, and limited partnerships, which can generally be formed for 800 dollars or less depending on state fees. You should beware of cheap promoters offering incorporation for 99 dollars or less.

Corporations evolved in the 1500s from maritime ventures to limit investor liability to their invested contributions. Historically, maritime investors using general partnerships faced unlimited personal liability if a ship was lost at sea. The English Crown allowed corporations so that investor risk was strictly limited to the amount they contributed, which encouraged economic activity.

In the late 1500s, Master John Fowles invested 250 pounds in a general partnership called the English Flyer, which was lost near the Bermuda Triangle, leaving him personally sued for the entire loss. Meanwhile, Sir Richard Starkey invested 250 pounds in a corporation called the English Rose, limiting his downside risk to his exact investment while gaining unlimited upside advantage.

You must review your current setup to ensure you are not relying on dangerous structures.

• See a professional or visit www.corporatedirect.com about switching to a good entity if you currently operate as a sole proprietorship or general partnership.
• Avoid starting a new business venture using a bad entity.

2. Corporations, LLCs, and Limited Partnerships

Each good entity offers distinct structural advantages for tax treatment, liability shielding, and asset management across corporations, LLCs, and limited partnerships.

Corporations and Formalities

Owners must strictly follow corporate formalities to prevent creditors from piercing the corporate veil and holding individuals personally liable. Failure to do this allows creditors to pierce the corporate veil in almost half of all cases, exposing personal assets.

You must maintain proper records through articles of incorporation, bylaws, and a corporate minute book.

• Hold regularly scheduled meetings
• Conduct banking through a separate corporate bank account
• File a separate corporate tax return
• File corporate papers with the state on a timely basis

Regular C corporations suffer from potential double taxation because earnings are taxed at the corporate level and dividends are taxed again at the shareholder level. To avoid C corporation double taxation, most owners use write-offs to reduce net income so there are no profits at the end of the year.

Subchapter S corporations provide flow-through taxation but come with strict shareholder limits and requirements. An S corporation can have no more than 100 shareholders, all shareholders must be US citizens or resident aliens, and it can only have one class of stock.

• File Form 2553, Election by a Small Business Corporation, by the 15th day of the third month of its tax year

Limited Liability Companies

Limited liability companies offer the liability protection of a corporation alongside the flow-through taxation, flexible management, and special profit allocations of a partnership. They avoid the rigid ownership-percentage distribution rules of S corporations by allowing special allocations of profits and losses.

Thelma, Pepe, and Hans started Millennium Salsa as an LLC. Pepe invested 200,000 dollars, wanted no management role, and required all initial losses and the first 300,000 dollars in profits to go directly to him, a flexible arrangement impossible in an S corporation.

To satisfy the IRS, special allocations in an LLC must have a substantial economic effect backed by specific operating agreement provisions.

• Maintain capital accounts representing investments plus undistributed earnings minus losses and distributions
• Ensure liquidation upon dissolution is made according to positive capital account balances
• Require members with negative capital account balances to return their accounts to a zero balance upon sale, liquidation, or transfer of interest

Limited Partnerships

Limited partnerships combine general partners who manage the business with limited partners who provide capital passively without management control. A general partner can hold as little as 2 percent of the partnership while retaining 100 percent management control, while limited partners own the remaining 98 percent.

Jim placed his five real estate holdings into five separate limited partnerships. This allowed him to maintain 100 percent control via his general partnership interest while gradually gifting limited partnership interests to his three teenage sons without giving them control over the properties.

Limited partnerships allow senior family members to accelerate wealth transfers across generations using IRS-approved valuation discounts. Because limited partnership interests lack management rights and feature transfer restrictions, their fair market value is discounted by the IRS compared to book value.

3. Entity Comparison and Asset Protection

Different legal structures serve different primary purposes. C corporations favor fringe benefits and public offerings. S corporations minimize payroll taxes. LLCs provide superior asset protection and debt flow-through.

LLCs and limited partnerships offer superior asset protection through charging orders, preventing creditors from seizing underlying property.

Comparing Entity Benefits

C corporations offer no limits on stock classes and maximum tax-free fringe benefits. They suffer from double taxation. S corporations allow flow-through tax treatment to minimize payroll taxes on profits. They enforce strict ownership limitations. LLCs offer flexible management and excellent asset protection via charging orders. They allow business debts to increase owners' tax bases. Minimizing payroll taxes in them is more difficult.

Brendan saved 7000 dollars a year in his pool cleaning business by using an S corporation instead of a single-member LLC. He paid himself a 72000 dollar salary out of a 200000 dollar profit.

Charging Orders and Nevada Protection

When an outside claimant targets a debtor who owns corporate shares, the creditor can seize the shares. The creditor can then sell the underlying corporate property. Conversely, an LLC or limited partnership charging order only grants the creditor the right to receive monetary distributions. The manager can choose not to distribute money. This leaves the creditor with uncollectible phantom income.

Teo owned a fourplex in an LLC and Mitch owned his in a corporation. When sued personally in a car wreck, Mitch's corporate shares were seized and sold. Teo's LLC protected the fourplex through charging order rules.

Nevada and Wyoming provide optimal asset protection and tax advantages. They levy no state income or corporate taxes and restrict creditors to charging orders as the exclusive remedy. You can incorporate in Nevada or Wyoming to utilize local laws while qualifying to do business in your home state. Nevada also extends charging order protection to corporations with between one and ninety-nine shareholders.

Ken and Cindy formed a Wyoming C corporation named K&C Advertising, Inc. to capture advertising commissions, accumulate a private fund, and secure a loan with a second deed of trust on a Nevada LLC property.

Asset protection structures must be established long before facing legal disputes. Transferring assets to evade an identified creditor constitutes a fraudulent conveyance subject to judicial reversal. Under the Uniform Fraudulent Transfer Act, courts examine badges of fraud to void transactions made with intent to defraud creditors.

John and Denise safely encumbered the assets of Neesette Crafts, Inc. They executed a promissory note and filed a UCC-1 security agreement in favor of John's Nevada, Inc. at the inception of their business when the seas were calm.

• Set up your asset protection when the seas are calm and no troubles or lawsuits are anticipated.

4. Crossing State Lines and Corporate Formalities

Doing business outside your home state requires official qualification, and maintaining limited liability requires strict adherence to corporate formalities.

When you collect rents or operate in a Business State, you must qualify with that state's secretary of state. Failure to qualify can result in severe financial penalties and closed-door statutes that bar the company from filing lawsuits.

Diane and Eric, California real estate investors, formed a Wyoming LLC for a fourplex in Truckee, California, and had to qualify it in California to legally collect rents.

• Submit out-of-state articles of organization.
• Provide a certificate of good standing from the state of formation.
• Pay the required fee to the Business State's secretary of state's office.

Failure to qualify can result in a penalty of $250 plus $20 per day, totaling over $7,000 per year in California. Promoted stealth strategies like land trusts fail to provide true asset protection in the real world because ownership facts override privacy. Promoters claim land trusts maintain privacy and allow attorneys to assert the attorney-client privilege to hide the real owner. Courts treat real estate ownership as a matter of fact rather than a confidential communication, and asserting the privilege leads to contempt of court.

Expanding a business into a new state creates a physical presence or nexus that triggers local tax obligations and reporting requirements. When you expand physically into another state, you must decide whether to qualify your existing home-state entity or form a separate entity in the new state. States apportion income based on property, sales, and payroll factors often following UDITPA guidelines.

Paul ran an Idaho retail and internet business, Paul's Idaho, Inc., and later expanded by opening a physical store in Spokane, Washington, requiring him to address multi-state taxation and nexus.

• Assess whether activities trigger a physical presence, employees, or construction in the new state.
• Work with a tax advisor to apportion income across states.

California imposes a sales threshold of $500,000 or 25 percent of total sales via an agent or independent contractor, triggering out-of-state entity taxation. Professional corporations protect against commercial debts and business liabilities, but they do not shield licensed professionals from personal malpractice claims. Professionals such as doctors, lawyers, and dentists remain personally liable for their own negligent or wrongful acts and for claims exceeding their professional liability insurance coverage. Outside personal assets must be protected through separate entities.

Denny, a dentist who operated as a sole proprietor and later formed Denny's Dental, Inc., faced a multi-million dollar malpractice judgment exceeding his insurance and lost all his personal assets. Denny paid $199 to a discount paralegal firm for articles of incorporation, held a malpractice insurance coverage limit of $1 million, and faced a jury judgment of $5 million.

• Check with advisors if your profession requires operating as a professional corporation.
• Place outside personal assets such as real estate and brokerage accounts into separate protective entities.

Forming a legal entity requires preparing and filing foundational documents and establishing internal governance rules like bylaws or operating agreements. Corporations require articles of incorporation, bylaws, and a resident agent. LLCs require articles of organization and an operating agreement. Limited partnerships require a certificate of limited partnership and a partnership agreement.

Texas requires a minimum capitalization of $1,000 to start a company, and defendants typically have 20 to 30 days to answer a legal complaint after service.

• Select a name and check availability with the secretary of state.
• Designate a reliable resident agent to receive service of a lawsuit.
• Prepare and adopt bylaws, operating agreements, or partnership agreements.

Failing to follow corporate formalities allows creditors to pierce the corporate veil and hold shareholders personally liable for business liabilities.

To maintain limited liability, you must respect the legal separateness of your entity by filing annual reports, holding annual meetings with minutes, identifying the corporate status on all materials and contracts, maintaining separate bank accounts, and filing separate tax returns.

Roger and Donny formed a corporation for a Burger Bell franchise without an attorney, failed to get an EIN, used personal bank accounts, missed annual filings, and signed a contract as an individual, leading to personal liability when an accident occurred.

• File annual reports and pay annual fees to the state.
• Prepare minutes of annual shareholder and director meetings.
• Identify the business clearly as a corporation on all contracts, checks, and stationery.
• Maintain a separate and independent corporate bank account.
• File separate corporate tax returns.

Wyoming charges a low annual fee and report cost of $50, while Sutton's firm typically charges $150 to prepare meeting minutes.

5. Deductions, Credit, Insurance, and Joint Ventures

Business owners can leverage legitimate tax deductions, establish separate corporate credit, utilize insurance, and structure joint ventures to grow safely.

Unlike wage earners who pay taxes first, you risk money and pay vendors, landlords, and employees first. You can deduct four major types of business expenses to reduce your net profits.

• Start-up expenses
• Operating expenses
• Inventory costs
• Capital expenses

Tony and Theresa formed T&T, Inc. for network marketing, allowing them to deduct home office rent, startup costs, a computer, a business phone line, auto allowance, health insurance, and retirement contributions.

Section 179 sets the annual deduction limit at $125,000. A home office of 140 square feet costs $1.75 per square foot or $245 per month. You can deduct 50 percent of meal costs while traveling. The 15.3 percent tax for Social Security and Medicare splits between the employee and corporation on salary up to $110,100, and a 2.9 percent Medicare tax applies to salary above $110,100. An auto allowance of $555.00 per month is based on 1,000 miles multiplied by .555 cents per mile. Other perks include $400 a year for a nonqualified achievement award, $1,600 under a defined qualified achievement plan, and $175 a month saved on dependent health coverage. You can also provide $50,000 worth of group term life insurance and $5,000 in dependent care services per employee, with a $2,500 limit if married and filing separately. A defined contribution plan allows 15 percent of eligible compensation up to $50,000 per year, and a defined benefit plan permits contributions up to $200,000 based on salary.

Tax Deductions and Credit

Establishing a corporate credit rating separates business debt from personal credit, protects personal credit scores, and avoids personal guarantees. Business owners often carry $50,000 to $100,000 in personal credit card debt, which triggers 29 percent interest rates due to high balances. Businesses move through three levels of credit.

• Level One: Whatever It Takes
• Level Two: Wising Up
• Level Three: Established Business Credit

Level One relies on personal credit and bootstrapping. Level Two separates business accounts but often still requires personal guarantees. Level Three establishes a separate business credit profile with commercial reporting agencies like D&B, Experian, and SBFE/Equifax.

Insurance and Joint Ventures

Insurance serves as the first line of defense to protect real property, personal property, and liability, complementing asset protection entities like corporations. While corporations protect outside assets, business insurance protects inside assets. You must evaluate replacement cost versus current value, liability policies, and specialized coverages.

• Real property (real estate)
• Personal property
• Liability insurance
• Professional liability insurance
• Business interruption
• Director/Officer liability

Joint ventures allow two parties to combine skills, legal standing, or geographic access to pursue opportunities neither could achieve alone.

Jon had a patent for a mobile social networking device alerting friends within 200 yards, but struggled with VCs. He formed a joint venture LLC called Jon Singh, LLC with Singh, a technology services provider, to leverage Singh's contacts in India and navigate local legal requirements. Due diligence and feasibility studies are mandatory before entering a joint venture. A Shareholder's Agreement or Operating Agreement governs your partnership.

• The partners
• Objectives of the business
• JV structure
• Partner responsibilities
• Partner expectations
• Financing and investment
• Management requirements
• Staffing and training
• Market and competition analysis
• Financial projections

Conclusion

Protecting your personal assets and minimizing taxes require deliberate legal structuring, rigorous administrative habits, and professional guidance.

You must move past sole proprietorships and general partnerships to secure your wealth behind the strong shields of corporations, limited liability companies, and limited partnerships.

1. Select the correct entity for your operational and investment goals based on liability and tax needs.
2. Establish your company in favorable states like Nevada or Wyoming when appropriate for maximum privacy and protection.
3. Separate your personal and business affairs completely by maintaining distinct bank accounts and avoiding commingled funds.
4. Document all major decisions through proper corporate minutes and resolutions to preserve your liability shield.
5. Build a trusted advisory team consisting of a CPA, attorney, and banker to guide your structural choices.

10 Key Ideas

1. Operating as a sole proprietorship or general partnership exposes personal wealth to absolute liability, whereas good entities such as corporations and LLCs create a distinct legal barrier.
2. Each good entity offers distinct structural advantages for tax treatment, liability shielding, and asset management across corporations, LLCs, and limited partnerships.
3. LLCs and limited partnerships offer superior asset protection through charging orders, preventing creditors from seizing underlying property.
4. Doing business outside your home state requires official qualification, and maintaining limited liability requires strict adherence to corporate formalities.
5. Failing to follow corporate formalities allows creditors to pierce the corporate veil and hold shareholders personally liable for business liabilities.
6. Business owners can leverage legitimate tax deductions, establish separate corporate credit, utilize insurance, and structure joint ventures to grow safely.
7. Choosing the right business structure requires evaluating a comprehensive checklist of strategic business and personal factors.
8. Subchapter S corporations provide flow-through taxation but come with strict shareholder limits and requirements.
9. Nevada and Wyoming provide optimal asset protection and tax advantages by levying no state income taxes and restricting creditors to charging orders.
10. Joint ventures allow two parties to combine skills, legal standing, or geographic access to pursue opportunities neither could achieve alone.