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Becoming Fully Taxated
Incorporation Tips
The material in this article series is intended to help move you closer to economic independence. This originally started as some strategies, called becoming "Fully Taxated", which describe how to use the same legal means that fat cats use to force most of the tax burden onto the proles.
Part of that strategy is to become incorporated. While writing the Fully Taxated article series, it became obvious that many people wanting to incorporate don't even know where to start. I must, as usual, give a disclaimer. What I am about to describe to you is legal to the best of my knowledge and understanding. However, I am not a tax or law professional and you shouldn't take anything out of this article other than pure entertainment. I must also repeat an essential point from the first article in that series: to thrive in any system, you must first recognize the reality of that system, and then act accordingly in order to manipulate its energy to your own purpose. To thrive in this system and not be perpetually frustrated, or worse, you must accept the premise that our system is not fundamentally noble, but was specifically designed to feed a class of certain very wealthy people. Refuse to accept this fact, and I can't help you.
In my "normal" consulting work, I make more money using all of these resources I talk about (including two-thirds of "Starving the Monkeys") than I would if I just did the equivalent work as an employee. But I would be willing to make less, if I had to, to enjoy the freedom of not being chained to the whims and dictates of an HR department. Hit me up in person sometime and I'll explain the deeper implications of this, including freedom of action that I enjoy. This freedom of action includes the freedom to get arrested in support of a cause I value. Can you honestly say that you could spend a month (or more) in jail, or fighting prosecution a couple of days a week, and not have your employment slave career crippled by that? I can.
Or, can you just simply be somewhere other than where you are "supposed" to be, for an extended period, at any time (hint, hint)? I can. Then are you as free as I am? Are you as free, by your own choice, as you could otherwise be? More importantly, are you, as a wage slave or even as a cash-only earner (and thus limited in opportunity) as potentially effective in this fight as someone who can be anywhere at anytime but still projects a legitimate footprint?
If not, then read and learn. Self-sufficiency includes effective use of the system around you as it exists today.
Now, let's discuss the need for full incorporation a little more. When I say full incorporation, what I mean is forming a C-corporation, versus the seemingly more simple administration required of an S-corporation. The distinction between these two is only in the eye of the federal reserve collection service known as the IRS; the amount of effort required to create a corporation of any kind is dependent on your state, and these usually make no distinction.
To the IRS, the distinction is that an S-corporation reports its dealings as additional schedules filed with the individual 1040s of all shareholders, while a C-corporation files completely separate tax returns. This is an essential point: you will collect the same information in either case, but the IRS, and potential jurists, will see totally separate sets of data between you and your company. Filing as a C-corporation will establish you as a noble and worthy trustee of The Realm, while filing as an S-corporation gives you the image, rightly, of a wannabe trying to "get away with it." Filing your 1040 as WannabeChuck having $100,000 in gross income, but with $70,000 in immediately suspect deductions, paints one picture. Filing as poor old broken-down SlaveChuck, who only got $30,000 after that mean old ChuckInc took $70,000 of his labor, paints another. Get the picture? Now imagine which picture you want to paint to a dozen jurists.
LLCs, partnerships, sole proprietorships (and other variants of these depending on your administrative jurisdiction we laughingly call states), suffer the same defect. Others imagine that individuals are entitled to the same deductions as small corporations. Yet, attempting to do so is not only a flag for an audit, it is also a flag that you are clinging to the fantasy that our system is fundamentally noble and just, if a bit temporarily misguided. As an individual subject of The Realm, you are considered as nothing more than someone's employee, not a business. As a subject (slave or serf, take your pick) of The Realm, deductions for your maintenance are the rightful property of your titleholder (employer), not you.
Creating a corporation is easier and cheaper than ever before. In the past, one went to an attorney, plunked down $500 or so, and they then gave you a book of all your essential papers, including the S-corporation election they often automatically filed with the IRS without even asking you. Now, in the Internet age, all one needs to do is visit the corporations section of your state's department of state website. The entire process can usually be done online, in a single evening, and with a slightly bruised credit card to the tune of $100 or so. Most states have made it easy, particularly because they want you to cough up the cash they desperately need right now (but thanks to these articles, more of which they won't be getting from you).
The first step will be to file a name reservation, which simply makes sure that you aren't using a name already taken in that state. Selection of a name is important, and I've made all the mistakes already, so pay attention. Picking a name that is too general runs the risk that a similarly-sounding previous company has the reputation for ripping a lot of people off. You don't really need all those misdirected collection calls. Picking a name that is too specific boxes in assumptions about your business activities. Picking a company name particularly involving your own name too closely associates your company with you personally.
Also avoid using the word "Services" or similar words which would imply the classification of a "personal services company". Recall that earlier in this series we discussed the idea that providers of original value get taxed more heavily than those who broker that value. You may be starting off as providing services, but you will eventually diversify into any number of areas. Also don't use the word "Engineering", or similar terms, which would imply the necessity of licenses which you may not hold. Pick something unusual, but deliberately vague and anonymous. Depending on your state, it may also have to have one of the words "Inc.", "Incorporated", "Corp." or "Corporation" in it. The website where you file will let you know whether this is the case.
You will also need to establish the Incorporator, who is a person who files for incorporation. This person traditionally was your attorney, but can be you or whomever you wish. You will also be asked for a physical address for the company (important later when applying for a business license, as we'll see). Usually, P.O. boxes aren't acceptable for this purpose.
You will be asked to provide names and titles for the corporation's officers. Each state has a mandatory set of officers which you must have, but usually all of them can be the same person. A corporate Secretary, for example, is responsible for all the minutes and such (in a role like that of a club secretary rather than that of the boss' hot personal secretary). The head of the corporation will usually be the Chief Executive Officer, while the President may or may not be a different required title. At this point these are just your name on a form.
Also required will be the number of shares your corporation is authorized to issue. Don't go wild and pick something like 10,000,000. You aren't going to be selling shares to anyone anyway. Pick something more reasonable, such as 1,000 or 10,000. Many states tax your company on the number of authorized shares, so do some research and pick a small but useful number. A few thousand will probably be plenty, ten is probably not enough.
With all this information, the secretary of state's website will automatically generate a document known as your "Articles of Incorporation". This usually single-page document is your company's birth certificate, hang on to it. Additional documents will probably also be generated, but in any case a list of required documents to consummate the incorporation will usually be listed on the website.
The next step after incorporating is to hop over to the IRS website and file for an Employer Identification Number (EIN). This is effectively the same as an SSN for your company, but in the format XX-YYYYYYY rather than the SSN format EAT-MY-SHHH. More importantly, an EIN is your license to own slaves (such as yourself) and to take deductions for their care and feeding. You will, of course, feed them (especially yourself) preciously little.
Then, go back to the state website, but this time to the Department of Revenue or the like and file for a state tax ID. This is the state's equivalent of an EIN. Also visit the Department of Labor and file for an unemployment number, which you will use to file unemployment reports which qualify you for an unemployment tax (ridiculously minor compared to what you are going to save in the big taxes). Some states will simply use the state tax ID for this purpose. Then, go back to the Department of Revenue's site and apply for a sales tax number. You will use this to file your sales tax returns, but this number also entitles your company to buy some items free of sales tax.
Keep track of these expenses and print the receipts for amounts incurred so far. You will later get a tax-free reimbursement from the company for these amounts, which become your company's first pre-tax expenses. These so-called startup costs are handled differently from normal expenses tax-wise, though. The rest of the expenses which follow will be treated as more normal expenses.
If you're feeling fancy, go online and order a reasonable corporate kit specific to your state. Get one with a few pre-printed share certificates, one of those squishy seal thingies and a starter kit of corporate minutes and a log for your issued certificates. Each year you will have to have a meeting of your officers and shareholders, keep your minutes accordingly. These kits are handy for holding all of that stuff, and usually have a nice box it all fits in. The convenience is worth the $50 or $100 you'll pay for this.
Once all these steps have been taken, use a few shares and fund your company with a personal check made out to the company. Sell yourself ten or a hundred shares for a thousand dollars, for example, and annotate this on the For line. If you need more startup cash later, you can always sell yourself more shares. When your corporate kit arrives, catch this transaction up to date.
The next morning after incorporating, visit your county clerk's office and ask them to direct you to wherever you need to file for a business license. Surfing this system is an entire article all by itself. The most essential detail is that if you live in a subdivision, move. If you live in a county that imagines itself a branch of the feds by virtue of contorted and needlessly restrictive licensing requirements, move. If you can't move because the bankers stole all your equity and then some when declaring economic war on all of us a couple of years back, then figure out how to. This is a problem you must solve lest ye starve with the minions when it all goes to hell. I took a half-million dollar bite to do it, you can, too. And you must. And then apply for the most general business license you can. Do a little web research for your county first, to find out things like rules for home-based businesses, and then act accordingly.
On the way back from your trip to the county clerk, visit your local bank and open an account with your articles of incorporation using the check with which you bought your initial shares. They will ask you to fill out a pre-printed form called a "corporate resolution", in which you, as an officer of the corporation, resolve to open an account. It will also ask for your seal, which is usually just your signature followed by the word "President", or whatever. Find out what balances are required to avoid fees, and if necessary and practical, sell yourself more shares to hit this limit and then some. A little shopping around ahead of time will help a lot. Don't be surprised if banks hit your company with more fees than you would as an individual. I think they can smell what you're up to, and are trying to punish you for it.
You will want to open the simplest, cheapest checking account you can, and order checks from the cheap end, including just the little reserve-note sized checks. In this economy, no one should be worried about fancy logos on your giant multi-part lottery-winner business checks. I don't, all I care about is whether checks I get from others are any good.
After following the steps above, your corporation is established, you have your federal reserve Employer Identification Number (EIN) and are ready to do business. Once a year, more or less on the anniversary of incorporation, you will have to hold a quick officer's and shareholder's meeting. Be sure to keep track of the expenses required for this mandatory meeting and deduct accordingly. Pick an appropriate venue.
Next, visit the Fully Taxated article series, and find out how to use this new company to start starving the monkeys.
(note: figures in the following sections are for the 2010 tax year, updates coming soon)
Read the first part of this series
Read the second part of this series
Read the third part of this series
Read the fourth part of this series
Important Obamacare Update!
An important provision of Obamacare is the requirement that even smallish companies (more than 30 employees) have to jump through regulatory hoops regarding provision and reporting of healthcare benefits. This is yet another deliberate effort to cripple small companies in favor of larger companies that can more easily amortize these costs over a larger employee base. The same system and processes that would be prohibitively expensive for small companies, costs only a few dollars per head for a GE to implement.
So, what does this mean to you? Plenty. If you work for a company that has, say, 40 to 50 employees, expect a permanent down-sizing post-haste to get under that threshold. Or, expect larger companies to fragment into smaller subsidiaries which themselves then down-size. Or, if you work for a company that is under the limit, expect growth to be severely curtailed. News flash, that is a lot of companies, and a lot of jobs, quite possibly even yours. As always, expect this threshold to move incrementally downward over time to "capture" as many people in this net as possible.
An important side effect of this will be that many companies will be much more open to the idea of hiring contractors who have their own corporations. Make sure that this pool of qualified contractors includes you by using this material to your advantage.
Additional sections chock-full of practical tips coming soon!