Tax planning and asset protection…run your business out of two organizations.
As if one organization is not enough? Now I want you to have two. Why, you ask? Its complicated enough as it is why make it more complex?
Enhancing the bottom line is one answer, it can provide additional opportunities for saving significant tax money.
Protecting your assets and business from liability is another answer and generally creating opportunity for additional strategies as events occur, a third benefit if not a reason.
Here is what I am talking about.
If you are a manufacturer, it may be beneficial to hold all the expensive, depreciating, equipment in one LLC and put the operational side into another LLC. This way the employee base, were most liability exposure exists, is separated from the asset base, were most of the valuable assets will be held. This provides a few opportunities.
First as we all know this is a very litigious country. You are bound to be sued for something somewhere along the way. You may owe someone money or one of your employees may commit some breach, even an auto accident or a breach of contract, and since the operation is what will be out in front whom your employees work for, it will be sued and the equipment held by a separate entity and leased to the operation entity is out of harms way and not exposed to the law suit.
The operation can probably be run at break even since you can control the lease fee for the use of the equipment and other inter corporate exchanges and thus the operational entity is for all practical purposes judgement proof. By keeping your valuable assets out of harms way in a separate LLC so you can fend off law suits with less concern and worry and expense, as there is little to gain in suing an entity with no real value. Its your operation that will cause law suits not your equipment, separate the two with two legal entities and you will protect them both.
Further we can reduce payroll taxes for the owners by having them receive rental fees from the operational entity which are not taxed as payroll and thus more valuable. Since the rental fees are associated with a depreciating asset which may also have a note and thus incur interest deductions, we are also sheltering the revenue received for rental by the deduction of the depreciation and interest expenses, insurance, and maintenance and repair and thus the revenue remains at a much lower tax base and may even be tax free depending on the circumstances and numbers.
Furthermore, based on the profitability of the operation we can move the revenue to the entity were the greatest expense may be by increasing or decreasing management draws by the owners, withdrawing profits were they do us the most good and cost the least amount of tax. It allows us to move expenses to which ever entity they will work the best for us.
Another area of strategic opportunity is in the area of sale, merger, partnerships, stock, etc. By having two entities and a split of operations from equipment (or real estate), we can omit partnership involvement in one entity or the other, we can sell one operation and retain the other, we can refinance the equipment without being concerned about the operational effect on a loan application as we can store losses in one and assets and revenue in the other. This is a good way to handle investors by placing them in ownership were the assets are.
By creating two entities that you control, we can increase your tax advantages, we can protect the valuable assets from exposure to operational liability, we gain strategic advantages and flexibility in partnering, sales and mergers, financing and other strategic opportunities.
It costs a bit more to administer two entities but in the long run it is probably well worth the expense as the gains, opportunities and protection are very much worth the effort and additional expense.
Talk to your accountant about this, if he balks, get another accountant.
If your accountant has not already recommended this organizational format get another accountant.
Call fo help 413-549-2966
