Start Your Own Corporation

1. Avoid Bad Entities: Sole Proprietorships & General Partnerships Offer No Protection.

Sole proprietorships and general partnerships provide no asset protection.

No legal separation. Unlike formal entities, sole proprietorships and general partnerships are not legally distinct from their owners. This means there is no shield between business liabilities and personal assets. A lawsuit against the business is a lawsuit against you personally.

Unlimited personal liability. In these structures, your personal assets—like your house, savings, and other investments—are fully exposed to business debts and legal claims. A single adverse event, such as an employee's misconduct or a business debt gone wrong, can wipe out everything you own, as illustrated by the cases of Johnny the plumber and Louise the gift shop owner.

• Sole proprietorship: One owner, unlimited personal liability.
• General partnership: Two or more owners, unlimited personal liability for your acts and your partners' acts.

Significant disadvantages. Beyond liability, these entities suffer from other drawbacks. They are difficult to sell, terminate upon the owner's or a partner's death or departure, and face higher IRS audit rates (Schedule C returns are audited five times more often than corporate returns). Using these structures is fundamentally risky and should be avoided if you are serious about protecting your wealth.

2. Choose a Good Entity: Corporations, LLCs, & LPs Limit Liability.

All of them offer owners limited personal liability for business debts and the acts of others.

Separate legal beings. Good entities—C corporations, S corporations, Limited Liability Companies (LLCs), and Limited Partnerships (LPs)—are recognized by law as distinct from their owners. This separation is achieved by filing specific documents with the state government, creating a "corporate veil" or similar protective barrier.

Limited personal liability. The primary benefit is that owners' personal liability is limited to their investment in the entity. If the business is sued or incurs debt, creditors can typically only pursue the assets owned by the entity itself, not the personal assets of the owners. This encourages risk-taking and economic activity by protecting individual wealth.

Historical precedent. Corporations have provided this protection for centuries, evolving from maritime ventures in the 1500s to shield investors from losing everything if a ship was lost. LLCs and LPs are more modern variations offering similar, and in some cases enhanced, liability protection tailored to different business needs and ownership structures.

3. Select the Right Entity for Your Purpose: Business Operations vs. Asset Holding.

Again, one size does not fit all.

Different entities, different strengths. The best entity choice depends heavily on whether you are operating an active business or holding passive assets like real estate or investments. Each entity type has unique features regarding taxation, management flexibility, and asset protection that make it better suited for specific purposes.

Operating a business. For active businesses with employees and public interaction, key considerations include payroll taxes, business debt treatment, and fringe benefits.

• S Corporations are often favored for minimizing payroll taxes on profits above a reasonable salary.
• C Corporations offer the best fringe benefits and lower tax rates on initial profits, suitable for reinvestment.
• LLCs offer flexibility but may subject all active member income to self-employment tax (unless taxed as an S-corp).

Holding assets. For passive asset holding, the primary goal is asset protection from outside claims and ease of transferring assets.

• LLCs generally offer superior asset protection compared to corporations, particularly through charging order protections.
• LLCs allow assets to be transferred in and out at their tax basis without triggering immediate taxation, unlike C corporations.
• Limited Partnerships are excellent for holding assets, especially in estate planning, offering management control to the general partner while limiting liability for passive limited partners.

4. Leverage State Advantages: Nevada & Wyoming Offer Key Benefits.

And, as we have learned, the best states for legally reducing your tax obligation as well as protecting your assets are Nevada and Wyoming.

Tax advantages. Nevada and Wyoming stand out because they have no state income or corporate taxes. While you must pay taxes in the state where you conduct business and generate revenue, incorporating or forming an entity in these states for legal benefits does not incur additional state taxes there, only modest annual fees.

Legal protections. These states offer favorable legal environments, particularly regarding asset protection and corporate governance.

• Nevada provides charging order protection for corporations with 1-99 shareholders.
• Both Nevada and Wyoming offer strong charging order protections for LLCs and LPs, often as the exclusive remedy for creditors.
• They offer flexibility in corporate management and structuring.

Strategic use. You can leverage these benefits even if you operate elsewhere. You can form an entity in Nevada or Wyoming and "qualify" it to do business in your home state. This allows you to benefit from the formation state's laws for internal governance and asset protection while paying taxes and complying with regulations in your operating state. A more advanced strategy involves using a Nevada or Wyoming entity to own entities formed in states with weaker asset protection laws.

5. Master Asset Protection: Segregate Assets & Understand Charging Orders.

The charging order procedure is a unique part of the asset protection offered by limited partnerships and limited liability companies.

Segregation is key. A fundamental strategy is to separate different types of assets and high-risk activities into distinct legal entities. This compartmentalization ensures that a claim against one asset or business operation does not expose unrelated assets held in separate entities.

• Don't put multiple properties in one LLC.
• Don't mix operating businesses with passive asset holding entities.
• Consider leasing valuable equipment from a separate entity to the operating company.

Charging order protection. For LLCs and LPs (and Nevada corporations), a charging order is a creditor's remedy against an owner's interest. Instead of seizing the underlying assets of the entity, the creditor is only entitled to receive distributions made to that owner.

• The creditor cannot take control of the entity or force the sale of its assets.
• The entity's management can choose not to make distributions, leaving the creditor with "phantom income" (tax liability without receiving cash).
• Nevada and Wyoming offer the strongest charging order protections, often making it the exclusive remedy.

Deterring litigation. This limited remedy makes pursuing claims against assets held in properly structured LLCs or LPs less attractive to creditors and their attorneys, often leading to favorable settlements. It's a powerful tool against frivolous lawsuits and aggressive collection efforts.

6. Maintain the Entity Veil: Follow Formalities to Preserve Protection.

Failure to follow such formalities may allow a creditor to disregard officers, directors, and shareholders.

Separateness is paramount. The legal protection offered by corporations, LLCs, and LPs hinges on treating the entity as a separate legal person. Ignoring this distinction can lead courts to "pierce the corporate veil," holding owners personally liable for business obligations.

Essential formalities: Adhering to simple, ongoing requirements is crucial to demonstrate the entity's separate existence.

• File annual reports and pay state fees on time.
• Hold regular meetings (annual shareholder/director meetings for corporations, advisable for LLCs/LPs) and keep minutes.
• Use a separate bank account for all business finances; never commingle personal and business funds.
• File separate tax returns for the entity.
• Clearly identify the entity name (e.g., "Inc.," "LLC") on all business documents, contracts, and signage.

Consequences of failure. As seen in the case of Roger and Donny, neglecting formalities like obtaining an EIN, opening a separate bank account, filing reports, or holding meetings can easily lead to personal liability when the business faces a lawsuit. Consistency in following these rules is key to preserving the liability shield.

7. Maximize Tax Benefits: Unlock Business Deductions & Payroll Savings.

By paying attention to your deductions and by working with your tax advisor and bookkeeper to legally maximize your write-offs, you can save thousands to tens of thousands of dollars a year or more in taxes.

Business owners' advantage. Unlike employees who are taxed on gross income, business owners are taxed on net profit after expenses. The tax code allows businesses to deduct a wide range of legitimate operating costs, significantly reducing taxable income.

Key deduction categories:

• Start-up expenses (deductible immediately or amortized).
• Operating expenses (rent, salaries, utilities, travel, auto, supplies).
• Inventory costs (deducted when sold).
• Capital expenses (depreciated over time, or potentially expensed immediately up to a limit via Section 179).

Payroll tax optimization. Entity choice impacts how self-employment/payroll taxes are handled.

• Sole proprietors/active LLC members (by default) pay self-employment tax on all profits.
• S Corporations allow owners to pay themselves a "reasonable salary" subject to payroll tax, while remaining profits can be distributed without additional payroll tax, offering significant savings (as seen with Brendan the pool cleaner).

Fringe benefits. Corporations (especially C-corps) offer the best tax-advantaged fringe benefits for owners and employees, such as health insurance, retirement plans, and certain achievement awards, which can be deducted by the business and received tax-free by the employee.

8. Understand Raising Capital: Navigate Securities Laws for Funding.

Raising money for your business can be tricky.

Selling ownership interests. To fund growth, businesses often sell equity (stock in corporations, membership interests in LLCs, partnership interests in LPs). This process is governed by complex federal and state securities laws designed to protect investors.

Disclosure is key. The core principle is "adequate full disclosure." Companies must provide potential investors with comprehensive information about the business, risks, and projections. This is the basis of federal law (SEC), while some states also impose "merit review," judging the investment's inherent quality.

Exemptions simplify. Registering a public offering is costly and complex. Private placements, often under SEC Regulation D, Rule 506, offer exemptions.

• Rule 506 allows interstate sales without SEC registration if certain conditions are met.
• It preempts state merit review, requiring only simple state filings.
• Limits apply to the number of nonaccredited investors (currently 35 federally, potentially fewer by state).

Process and pitfalls. Raising money requires careful documentation (business plan, financials, subscription agreements) and adherence to rules regarding solicitation and investor classification. Failure to comply can lead to severe penalties, including fines and rescission rights for investors. Seeking experienced securities counsel is essential, especially beyond initial "friends and family" rounds.

9. Know Your Team: Vet Directors & Officers, Use Buy-Sell Agreements.

You must know who your directors and officers really are.

Power and responsibility. Directors and officers hold significant power, controlling the company's direction, finances, and contracts. They owe a "fiduciary duty" to act in the company's best interest, not their own. Breaching this duty can lead to personal liability.

Investor confidence. The background and reputation of your management team are critical to attracting investors. Undisclosed criminal history, bankruptcy, or securities violations can derail funding and lead to legal trouble for the company. Vetting potential directors and officers is a necessary due diligence step.

Buy-sell agreements. For closely held entities, a buy-sell agreement is vital. It pre-arranges the terms for buying back an owner's interest upon specific events like death, disability, divorce, or departure.

• Prevents unwanted outsiders (like ex-spouses or heirs) from becoming co-owners.
• Provides a mechanism and valuation method (e.g., book value, appraisal) for orderly transitions.
• Can be funded by life or disability insurance policies.
• Requires careful drafting and spousal consent to be effective, as seen in the AweTech case.

10. Protect Against Scams: Be Wary of Over-Promised Asset Protection.

You must be diligent about who you are trusting to assist you with your asset protection plan.

Confidence artists. The asset protection field, like any other, attracts scam artists who prey on fear and lack of knowledge. These "confidence men" appear professional and sincere but aim to defraud clients.

Common scams:

• Over-complicating structures: Selling far more entities than necessary, often at inflated prices, using fear tactics (like Pamela's $15,000 experience).
• $99 incorporation come-ons: Offering minimal filing services for a low price, then upselling expensive, unnecessary add-ons or leaving the client with an incomplete, unprotected entity.
• Misrepresenting state laws: Claiming mandatory, expensive services (like a Nevada office package) that are not legally required.
• Promoting ineffective tools: Selling "stealth" strategies like land trusts or bearer shares (now outlawed in many places) that offer no real asset protection and can lead to legal issues.

Due diligence is essential. Do not choose advisors based solely on price, aggressive sales tactics, or promises that sound too good to be true. Work only with reputable attorneys and accountants who provide clear, ethical advice tailored to your actual needs, not their sales quotas. Structure based on established legal principles trumps questionable "stealth" tactics.

Last updated: May 31, 2025