"It used to be you'd have to set up a corporation to protect yourself, but today the courts routinely go right through a corporation," Oxenham says. "There are a lot of tools you can use to protect your business, but sometimes the attorney or accountant that helped you set up the business gave you a tool they learned about in college. Things have changed since then, and you have to take responsibility for staying up to speed."
In Oxenham's NACE session on Monday, "Advanced Lawsuit Protection, Tax Reduction and Estate Planning Strategies," he outlined specific types of corporation and limited partnership scenarios that could significantly reduce a company's tax burden, while offering better protection from lawsuits and easing succession issues.
Oxenham recommends that body shop owners set up their businesses as limited partnerships. They can name their corporation as a general partner in the business, providing 100 percent operational control regardless of what percentage of the business the corporation owns. Limited partners can be any legal entity, and those partners can be prohibited from making any management decisions. Further, limited partners can only be liable for the amount of their share in the partnership.
"If you have three children, for example, and you want them to each be a limited partner, but you only want to be able to manage the business, you can set up the partnership that way," Oxenham says. "And the other two children can't prevent that from happening in court, so it prevents family arguments or partner issues. A partnership is the most comprehensive tool we have in America, when it's done right."
A limited partnership can also help in succession planning for a business. "At the time the partnership is set up, you can determine what will happen in the future," Oxenham says. "If you die, who takes over? If your partner dies, who will take over his part of the business? If you want to leave portions of the business to certain employees, you can list them as limited partners and determine what percentage of the company will go to them."
As for incorporating the business, Oxenham says that although many small businesses are established as S-Corporations, they should really be C-Corporations."The S-Corp is cheap to set up, but is very heavily taxed," Oxenham says. "Accountants will warn you away from C-Corps because they claim you'll be double taxed. But 60 percent of C-Corps don't pay a penny in double taxation. There are far greater tax advantages."
While S-Corps pay no corporate income tax, all revenue is counted as personal income, which often pushes owners into much higher tax brackets. C-Corp revenue is only double taxed if revenue is distributed to shareholders as dividends. Owners can avoid this issue by withdrawing compensation as wages, consulting income, interest payments, lease payments, etc. Profits also can be kept within the corporation to pay for marketing, equipment, etc., where the money will be taxed at the typically lower corporate rate.
More importantly, the corporation should never own any valuable assets. "You let the corporation manage your business, but never let it own anything you want to keep," Oxenham says.
