Q. Hi Adrian, I’m new to coaching. Should I set myself up as a corporation for liability protection?

Absolutely you should, but make sure it’s the RIGHT type of incorporation.

If you do this right, this could prove to be a goldmine for your coaching practice.

By the way, I am NOT an attorney or a CPA, so please seek out professional advice before you set up any type of corporate structure.

There are multiple factors to consider, and you need professional advice to make sure you set up the one that’s best for you.

But here’s what has worked well for me.

I can highlight the major benefits of forming an LLC or incorporating your business by discussing how this would work for a US-based coach, but if you’re located in a different country, please check with a local professional and see how this might apply to your individual situation.

You may find a similar benefit exists like the one we’re about to describe. First, what is incorporation?

Forming an LLC or incorporating a business means turning your sole proprietorship or general partnership into a company formally recognized by your state and the IRS.

When a business forms an LLC or incorporates, it becomes its own legal business structure set apart from the individuals who founded the business.

There are multiple pros and cons to forming an LLC or incorporating, and that’s why you should always check with a professional that understands incorporation before you do so, but for today, I want to make you aware of two major benefits that forming an LLC or incorporation provides.

Two Major Benefits

The most common reason to incorporate a business is to limit your personal liability for business obligations.

This means if you’re sued for business debts or obligations, your home, car and personal assets are protected. But the second benefit is the one that can put immediate cash in your pocket as a business coach.

I’m talking about the difference between an LLC, which stands for limited liability company, and an S Corporation.

First, the plain and simple facts. Fifty to sixty percent of all small businesses have NO LLC or corporate structure at all. If that’s you, set up an LLC or incorporate your business IMMEDIATELY.

The remainder that have incorporated are typically set up as an LLC.

If they were structured to be taxed as an S Corporation, they would enjoy a major tax advantage. Though profit and loss typically pass through an LLC and get reported on the personal income tax returns of owners, an LLC can also elect to be taxed as a corporation. In other words, you can elect to be taxed as an S Corp while retaining the structure of an LLC.

Here’s why this is so important.

As an S Corporation, you MUST pay yourself a “reasonable” salary, but the rest of your income can pass through your corporation and be taken as dividends. I

n the U.S., we have to pay 15.3% in social security and Medicare taxes known as FICA. If you’re an employee, you pay half that amount every year on your salary and your employer pays the other half… up to a maximum income of $137,700. Anything over that amount is now exempt from FICA for the remainder of that year.

The keyword here is SALARY!

Remember, as an S Corporation, the tax code says you must pay yourself a “reasonable” salary. Most accountants agree that a reasonable salary is much less than the $137,700 annually in most industries, with the rest of your income passing through as a dividend. So, what’s the benefit?

You only pay FICA and Medicare taxes (15.3%) on your salary. As an example, let’s say you earn $140,000 this year.

If you’re set up as an LLC and are taxed as a sole proprietor or partnership, you will pay a FICA tax of $21,068. Electing to be taxed as an S Corporation and paying yourself a $40,000 salary… assuming that is a reasonable salary for your industry, you would only pay $6,120.

You would save $14,948. WOW!

And remember, you can elect to be taxed as an S Corp while retaining the structure of an LLC. Check with your accountant and see if an S Corporation is right for your business and what is a reasonable salary for your industry. 

Also remember this tax savings is NOT a one-time deal. This is an ongoing savings to your business every year moving forward. But we’re still not done saving you money.

When you meet with your accountant to discuss incorporation, ask if you qualify to write off your home office, your office supplies, business meals, your automobile expenses such as your lease payment… or if you own your car… can you deduct for business mileage.

Ask about repairs to your car or office, equipment depreciation, and so on.

How about this? Do you have kids? STOP giving them an allowance and instead, put them on your payroll.

Pay them a salary to clean your office, empty trash, run errands, and so on.

As long as these are expenses you would normally have to pay someone to do for you, and they are reasonable for the age of the child and the hours worked, they become legitimate deductions.

In the U.S., kids can make up to $12,200 each annually and they do NOT have to file a tax return. All of the above are deductions that save you additional thousands in taxes.

So, until next time, here’s to your success.