Inc. Yourself, 11th Edition

Praise for Inc. Yourself:

"Judith McQuown always gives you the right advice to create and make your new business flourish. If you don’t understand that your best wealth-builder is your own company, you will by the time you finish the latest edition of Inc. Yourself."

—Adriane Berg, former WABC Radio host

"Inc. Yourself has set countless readers on the road to entrepreneurial success with its excellent advice. In the process, it has become one of the most respected business books in America today."

—Alan Caruba, Bookviews

Finally...a guide that cuts through all the legal jargon with clear and actionable information! We recommend it on our national radio program all the time.

—Daria Dolan and Ken Dolan, WOR Radio Network, CBS Television

"lnc. Yourself is a true entrepreneurial classic. Before starting your own business, this is the one book you must read!"

—Chris J. Witting, Success Journal Radio Network, WMAQ Radio, Chicago

"The next millennium will be the era of the entrepreneur. Inc. Yourself should be the first book you read, before you formally go into business."

—Mitchell Schlimer, chairman, Let’s Talk Business Network, Inc. and radio host, Let’s Talk Business

"I have found Inc. Yourself to be an interesting and important guide for my students. Nowhere else can they find such a detailed discussion of the impact the decision to incorporate can have on their personal financial lives. I look forward to recommending the new edition."

—Christine Helm, Small Business Center, Fashion Institute of Technology

The first step in starting a business is to get off on the right foot, and this classic does that. Read it and reread it before you talk to your professional advisers, as it will save you a fortune.

—Joseph R. Mancuso, founder, Center for Entrepreneurial Management and Chief Executive Officers’ Club

"Inc. Yourself is an indispensable resource for the small business person. If you’ve recently left the corporate world to go into business for yourself, or if you’re thinking of doing so, this book is a must."

—Stephen M. Pollan, author of Die Broke

This invaluable guide shows you how to cut your taxes, shelter your income, get free insurance, and put it all together as an entrepreneur or professional.

—Marilyn Ross, co-author, Shameless Marketing for Brazen Hussies

"With ‘free agency,’ self-employment, and entrepreneurship as the wave of the future, we badly need good books like Inc. Yourself."

— Michael C. Wilder, Lt. Colonel, USAF (retired)

"Judith McQuown’s...Inc. Yourself offered a powerful message to my Central New York listeners and the North American readers of my Elks small-business column. McQuown raises the pertinent questions that every small-business owner and entrepreneur should ask."

— John C. Behrens, WlBX/CBS

"Whether you’re a one person band or a full orchestra, Inc. Yourself can help you strike out on your own."

—Sonya Donaldson, Home Office Computing

Inc. Yourself 11th Edition

How to Profit by Setting Up Your Own Corporation

By Judith H. McQuown

Copyright © 2014 by Judith H. McQuown

All rights reserved under the Pan-American and International Copyright Conventions. This book may not be reproduced, in whole or in part, in any form or by any means electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system now known or hereafter invented, without written permission from the publisher, The Career Press.

INC. YOURSELF, 11TH EDITION

EDITED BY JODI BRANDON

TYPESET BY DIANA GHAZZAWI

Cover design by Rob Johnson/Toprotype

Printed in the U.S.A.

To order this title, please call toll-free 1-800-CAREER-1 (NJ and Canada: 201-848-0310) to order using VISA or MasterCard, or for further information on books from Career Press.

Chart on pages 103–108 © 2004-2012, 2013 Alan E. Weiner, CPA, JD, LL.M.

The Career Press, Inc.

220 West Parkway, Unit 12

Pompton Plains, NJ 07444

www.careerpress.com

                Library of Congress Cataloging-in-Publication Data

McQuown, Judith H.

Inc. yourself : how to profit by setting up your own corporation / by Judith H. McQuown. -- 11th Edition.

       pages cm

Includes bibliographical references and index.

ISBN 978-1-60163-301-9 -- ISBN 978-1-60163-490-0 (ebook)

     1. Corporations--Handbooks, manuals, etc. 2. One-person corporations--Handbooks, manuals, etc. I. Title.

HD2741.M38 2014

658.1’145--dc23

2013043776

In loving memory of four remarkable women:

Bessie Rosenberg, my grandmother

Pearl Hershkowitz, my mother

Isabel Rosenberg, my aunt

Rhoda Haas, my godmother

Acknowledgments

This book could not have been written without the help of many experts, for whose time, knowledge, patience, and enthusiasm I am most grateful.

In particular, I wish to thank Sales Doctor Brian Azar; Melody Borchers, former manager, Women’s Business Resource Program, Ohio Department of Development; John A. Challenger, CEO, Challenger, Gray & Christmas; Paul A. Gibson, Statewide HUB Program Manager, Texas Procurement and Support Services (TPASS) Division; and some very helpful people at the Internal Revenue Service who must perforce remain anonymous.

Special thanks go to Alan E. Weiner, CPA, JD, Partner Emeritus, Baker Tilly Virchow Krause, LLP; Lauren Melesio, Crain’s New York Business; Linda Knopp, Director of Knowledge Services, National Business Incubation Association; Leonard B. Stern, president, Leonard B. Stern & Company; Cathy G. Waxenberg, Esq., president, Laiken Associates, Inc.; and Alfred Wheeler, Esq., of Counsel, McElroy, Deutsch, Mulvaney & Carpenter, LLP.

As always, I am grateful for the help, advice, and unflagging support of Claudia Menza, my agent; Michael Pye, my editor; and Ron Fry, my publisher.

First you jump off the cliff; then you build your wings on the way down.

—Ray Bradbury

The best thing about the future is that it comes only one day at a time.

—Abraham Lincoln

Don’t play what’s there. Play what’s not there.

—Miles Davis

I’ve spoken to hundreds of people who have gone into business for themselves. I’ve yet to find one who’s said, You know, I really enjoyed that cubicle.

—Scott Adams, creator of Dilbert

The cure for boredom is curiosity. There is no cure for curiosity.

—Dorothy Parker

It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.

—Charles Darwin

Everything in life has some risk, and what you have to actually learn to do is how to navigate it.

—Reid Hoffman, LinkedIn co-founder

Fortune favors the prepared mind.

—Louis Pasteur

The future belongs to those who believe in the beauty of their dreams.

—Eleanor Roosevelt

Contents

Preface to the 11th Edition

Introduction

1: So You Want to Be a Corporation

2: Getting Ready

3: And Now, the Paperwork

4: Your Office: Home or Away?

5: Your Business Plan: Preparing for Success

6: Limited Liability Companies (LLCs): An Entity Growing in Popularity

7: How to Profit From Your S Corporation

8: Especially for Women and Minorities: Taking Advantage of Minority-Supplier Contracts and Business Incubators

9: Your Employees

10: Free Insurance

11: Medical Benefits

12: Your Best Tax-Sheltered Pension and Profit-Sharing Plans

13: But I Already Have a Keogh Plan!

14: Investing Your Corporate Surplus

15: Putting It All Together

16: Retire With the Biggest Tax Break Possible

17: Long-Term Planning for Yourself and Your Heirs

18: If You Should Die First

19: Back to the Future—and the Present

Appendix A: State Requirements for General Business and Professional Corporations

Appendix B: Sample Minutes and Bylaws for a Small Corporation

Index

About the Author

Preface to the 11th Edition

At no time in the 37-year history of Inc. Yourself have there been so many changes as between the 10th and 11th editions. This is especially true in the areas of an entrepreneur’s choice of business organization, choice of pension plan, and choice of strategies and tactics of investing his or her corporate surplus.

And yet some things do remain the same. The core reasons that people become entrepreneurs have not changed. Much like Shakespeare’s comment on greatness in Twelfth Night, some are born entrepreneurs, some achieve entrepreneurship, and some have entrepreneurship thrust upon them.

Many people have become reluctant entrepreneurs. By early 2002, just when we all thought that the tsunami of corporate downsizing had been completed, more waves of downsizing by Fortune 500 companies came crashing down on our unprotected heads.

In the preface to the ninth edition of Inc. Yourself, I mentioned Raytheon’s announced layoff of 10,000 workers, AT&T’s announced cut of 19,000 employees, Boeing’s of 20,000, and Compaq’s and Motorola’s of 17,000 each.

But now these numbers seem trivial, thanks to the blowup of the housing bubble and the subsequent financial near-collapse of 2008–2009.

In The Layoff Kings (August 2010), author Douglas McIntyre writes: "Between December 2007 (when the recession officially begun) and last month, more than 8 million Americans have lost their jobs, according to the government. Of these job losses, 700,000 stem from layoffs at just 25 companies, according to 24/7 Wall Street’s analysis of data from employment consulting firm Challenger, Gray & Christmas."

Downsizing and rightsizing have been replaced by a new euphemism: streamlining. Whatever the shibboleth, corporate restructuring over the past 25 years has cost Americans more than 20 million jobs. And, for the first time in U.S. history, more executives, managers, and professionals have lost their jobs than blue-collar workers, which may explain the 38 million home-based businesses (U.S. 2010 Census).

Welcome to the Age of the Accidental Entrepreneur! People just a few years older than the baby boomers, who started working for major corporations or organizations in the 1960s or 1970s, were led to believe that as long as they did pretty good work, they had guaranteed jobs and periodic promotions. The last 25 years have proved the falsity of that corporate fairytale. Now no one is safe—neither executive vice presidents, nor tenured professors. Long-term unemployment is at an 80-year high, according to some pundits. Whereas hundreds of thousands of 20- to-30-year-olds have lost their jobs, people in their 40s and 50s have been especially hard hit. Many search for new jobs for more than a year. Where only a generation ago corporate employment was safe and entrepreneurism was hazardous, now it is clear that the risks are reversed. However, the rewards were always greater in entrepreneuring!

Confronting the glass ceiling—or simply needing more time for child rearing—has forced many women and minorities into starting their own businesses.

Fortunately, the proliferation of affordable portable office technology has made it possible for many entrepreneurs to work at home. The trend has become so great that a new acronym has arisen: SOHO (Small Office/Home Office). Magazines such as Entrepreneur, Success, and Home Business have sprung up, as have powerful micro- and small-business advocacy organizations such as the National Federation of Independent Business (350,000 members), National Association for the Self-Employed (more than 350,000 members), and the National Association of Women Business Owners. In Free Agent Nation: How America’s New Independent Workers Are Transforming the Way We Live, author Daniel H. Pink calls this phenomenon Digital Marxism; inexpensive, portable technology lets workers now own the means of production.

The article Key Statistics on the Growing Home-Based Business Market in the March 2010 issue of Home Business magazine states: The number of home-based businesses ranges up to 38 million, depending on who is doing the counting (U.S. Census Statistics). According to the U.S. Bureau of Labor Statistics, the number of home-based businesses exceeds 18.3 million businesses.

All this may explain the dramatic rise in the number of corporations formed in the United States during the past 12 years: since 2002, more than 10 million new corporations were registered.

Many states have responded swiftly to the twin forces of massive Fortune 500 layoffs and the upsurge in entrepreneurism. In California, 1.9 million corporations and LLCs were registered since the 10th edition of Inc. Yourself was published in 2002; in Texas, 1.07 million.

The U.S. Chamber of Commerce recently ranked the 10 best states for entrepreneurship and innovation, measured by the number of hightech businesses, programs supporting entrepreneurs, and Science, Technology, Engineering, and Math (STEM) job concentration. Each state in the list offered a unique program for entrepreneurs:

1. Maryland.

2. Colorado.

3. Virginia.

4. Utah.

5. Massachusetts.

6. Texas.

7. Washington.

8. Arizona.

9. Georgia.

10. Florida.

So, welcome to the 11th edition of Inc. Yourself: How to Profit by Setting Up Your Own Corporation. When I first wrote Inc. Yourself, 37 years and 700,000 copies ago, the decision to incorporate was a fairly simple one to make.

It isn’t anymore.

The past decade has produced major tax legislation that has impacted individuals and small businesses:

• 2001—Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).

• 2003—Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA).

• 2010—Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010; Patient Protection and Affordable Care Act of 2010 (Obamacare).

• 2012—American Taxpayer Relief Act of 2012.

Many of the changes have benefited small corporations. IRS tax tables show that tax rates for most small corporations have been lowered, as shown here:

A corporation whose net income was $50,000 would have paid $9,250 in federal income taxes in 1981, but only $7,500 in 2012—a decrease of 19 percent.

Only for personal service corporations in the following professions was the corporate rate boosted to a flat 35 percent by the Revenue Act of 1987: ...health, law, engineering, architecture, accounting, actuarial science, performing arts or consulting.... (Internal Revenue Code §448).

For individuals in these fields, it still may pay to Inc. Yourself. By using an S corporation, they can enjoy the legal and business status of a corporation while being taxed at what may be a slightly lower individual rate.

Another option is one that did not exist several years ago: the limited liability company (LLC), which is the subject of an entire expanded chapter in this edition of Inc. Yourself.

Clearly, there are many compelling business and tax reasons to Inc. Yourself. This book will help you make the right decision.

Introduction

This book is not designed to substitute for your lawyer or accountant, but rather to serve as a guide and enable you to make the most of their professional help. Although you can incorporate and create tax-free benefits for yourself without legal advice, it is far more desirable not to go it alone. Tax laws are complicated and often change from year to year; it takes a skilled professional to stay on top of them.

You don’t have to be a professional to incorporate. If you’re a self-employed salesman, plumber, real estate agent, antique dealer, or hairdresser, this book can save you money. If you can show a net profit, this book can save you money. All you have to do is form a corporation, and this book will show you how it could be done, step by step.

We’ll discuss corporations completely in Chapter 1, So You Want to Be a Corporation; for now, let’s define a corporation simply as a body of persons granted a charter that legally recognizes them as a separate entity with its own rights, privileges, and liabilities. But don’t let the body of persons wording scare you; every state permits one person to incorporate. (See Appendix A.)

Depending on the state you live in, your business or profession may require you to incorporate as a professional corporation (see Appendix A), but this means only that your professional practice is now able to enjoy all the benefits and privileges of corporations that had earlier been prohibited. There is no difference in the tax treatment of professional versus business corporations; the only difference is a legal and supervisory one. If you form a professional corporation, all the shareholders and officers of the corporation