You're out on your own and just beginning to realize how many perks you used to get from being an employee—sometimes it seems that to gain some independence you had to give up everything that makes work enjoyable, or at least tolerable. No more expense account lunches, company car, company medical or dental plan, training or continuing education, paid vacations, and, worst of all, no unemployment if you get laid off during slow times.
These missing perks can pile up, one on top of the other, until you start to look longingly at the idea of going back to work for someone else, and maybe you should—not everyone is cut out to manage both his or her personal and business life.
But you can still work for yourself and work for someone else at the same time. How's this possible? Simple: incorporate.
Talk to an attorney
At first, I alternated between being self-employed and working for someone else, so I know both sides of the equation pretty well. It isn't that my first independent ventures failed and I was forced back into the role of employee; it was more a matter of seeing better opportunities.
I incorporated very early in my business life, after a brief stint as a proprietorship several years before. I did this against the advice of my attorney who had no experience with my kind of business.
He was the best attorney in the region, and since I already had a relationship with him, I wanted to keep my business with him. I researched incorporation so thoroughly that when he explained his objections to what I was doing, I countered each point and convinced him that not only was I right to incorporate, but also to form a straight C corporation.
In my very first year, the corporate structure paid for itself just in tax savings.
I think a lot of people make a big mistake by either not incorporating or forming an S corporation even if their business isn't the kind that will eventually be spun off to stockholders.
Of course, you’ll need to look into the rules governing corporations in your particular state, but in most cases, I think you'll find that a C corporation is the right way for you to go.
S corporation: A form of corporation, allowed by the Internal Revenue Service for most companies with 35 or fewer shareholders, enabling the company to enjoy the benefits of incorporation but be taxed as if it were a partnership.C corporation: A business that is a completely separate entity from its owners, unlike a partnership.Courtesy of AskJeeves
Where the perks come in
There is absolutely no better way to show the IRS that you have a legitimate business than to work within the traditional corporate structure. It also gives you a level of instant credibility with new clients.
But let's look at the taxation question first.
There are some things a corporation can do that a sole proprietorship or partnership just can't. Even when all three business structures offer the same tax advantages, such as in purchasing a company vehicle, the chances of getting this past the IRS unquestioned is much better when a company owns the car or truck.
Corporations are separate entities, even when they are wholly owned by just a few people. This means you can lease equipment, buildings, or space in a building you own to the corporation; you can’t do that with a sole proprietorship.
It also means that as long as all employees of the same class—full-time, part-time, and executives—are treated identically, the corporation can pay for all those perks you miss.
Want 100 percent medical coverage? Your corporation can buy insurance for every employee and even pay all deductibles.
Need a loan? Having small corporations and their owners make loans back and forth is a standard business practice. Just keep it all on the books and pay reasonable interest both ways.
Want to take a lunch? You can hold regular lunch and dinner meetings every month with your employees and stockholders.
If you have a corporation, you also need to hold an annual meeting where you discuss business. After all, how could you run a business without taking some time with the owners to look back at the past year and make plans for the next? The IRS certainly won't look askance at the company paying for an annual meeting. In fact, if you don’t hold an annual meeting, you will quickly find yourself in trouble with whichever state agency oversees your corporation, and you'll also have trouble convincing the IRS that you run a legitimate business.
Ever worked in a company that didn't have a company picnic or Christmas party? Sometimes employees contribute to these, but as long as you legitimately invite all employees, there's no reason the company can't pick up the whole tab. You can even invite clients and vendors if you want.
To take advantage of these and other corporate perks, you can't play fast and loose with standard business practices, and you must keep the corporate finances strictly separate from your personal money even if you are the only employee and only stockholder.
In many cases, it makes a lot more sense to be just a stockholder and not even an officer in your corporation—this means you have to have corporate officers you really trust, but they can be close relatives, and you can always hold voting control.
The perks of perks
Of course, if you and a few close friends own this corporation, then all these perks actually come out of your pocket. The corporation gets to deduct the costs before paying taxes. Therefore, all these perks aren't free, but they're discounted, and many of them make great business sense even if you didn't get a tax break for them.
After all, those perks you used to get when working for someone else’s corporation also came out of your pocket indirectly. When the company spent money on office parties or other perks, it meant there was less money to go into salaries and bonuses, which are also corporate deductions.
Perhaps the most important perk of working for your own company is that it gives you the ability to quickly and easily change just what perks you get. Given the universe of potential legitimate deductions, wouldn't it be great to get to pick and choose which ones you wanted this year without having to negotiate with several layers of management?
Have you incorporated a small business? Was this a beneficial move for you? Do you offer corporate perks to yourself or your employees? Give us your thoughts by posting a comment below. If you have a question or suggestion for John McCormick, e-mail him at email@example.com.