Protect Your Assets by Incorporating
I’ve never really been one for getting advice. I guess I’m the stereotypical male who, no matter how lost, won’t ask for directions. But I’ve read a lot of Rich Dad material at this point and he is constantly emphasizing the need to have a team of experts to guide your money making endeavors. So, against my nature, last week my partner and I booked an introduction session with a certified accountant [he offered us a free one hour interview!] that specializes in small business.
It turned out to be a very wise move. As he straight away set out a corporate structure that allows us to be protected from almost all legal and credit threat issues [see my story Online Marketing Perils for why this is important]. Please note as you read this that my accountant and I are both Canadian and that the law or the details of the information may not apply in your country / region. I’m hoping the concept does apply to where you if you have your own business.
The picture he drew looked something like this. The most important element of the image is the grey horizontal line in the middle of the two rectangles. That line represents the corporate veil. It is where the liability for corporate issues stops. I’ll explain more about how that works in a minute. First the other pieces of the image.
The Operating Company [ABC] is the one that does all the work. It is from this company that day to day activities are carried out.
The Holding Company [XYZ] holds 100% of the shares of the Operating Company and carries on no business activity. My partner and I are the shareholders of this company.
Let’s follow the money path through this structure. ABC collects all the revenue from business activities and pays all the expenses related to those activities. On a regular basis, probably monthly, it will pay a dividend to its shareholder [which is XYZ] of almost all of its profit or cash on hand. In Canada an inter corporation dividend is tax free so there are no tax issues with this dividend. As I mentioned above, once the money has been transferred to XYZ it is safe from being taken due to law suit or bankruptcy issues of the ABC company. Since XYZ does not carry out any business activity of its own, there should be no legal attacked pointed to it directly.
Once the money has made it to the XYZ company, it can now issue dividends to my partner and I and we can take our money out of the company. I was disappointed to find out that paying out dividends in this manner does not result in significant tax benefits for the shareholds. However, reinvesting the money before paying it out as a dividend does turn out to be a very smart tax strategy.
Those are the basics of the corporate structure that we have set up. If you are doing any type of business, especially on the Internet, I’d recommend at least contacting an accountant and getting their advice on how you can limit your personal liability through some sort of corporate structure. The whole process cost us less than $500, although it will require more work and costs in accounting, tax filings and bookkeeping. I’ll document some of the other specifics around having a proper corporate structure in future articles.
Disclaimer: I’m just presenting my own experieces here, if you want to set up a structure to protect your assets please be aware that you’ll need to contact professional advisors to guide you through the process.