Sole Proprietor

As a sole proprietor, all of the net income from your business must be treated as personal income. This means that every dollar you earn is subject to employment taxes and income taxes. Sole proprietors also have to pay an estimated tax four times a year.

Take the example of Robert, an Atlanta, GA resident, who started his own network marketing business. Robert earned $80,000 from his activities in the first year. Robert was justifiably proud of the considerable sum he earned until he saw his tax advisor. There, he found out he owed $17,257 in income taxes and $12,240 in employment taxes. Robert was stunned to learn that he had lost over 37% of his earnings to taxes.

In the end, Robert saw the light. He realized that in order to succeed in business, he had to start thinking like a business person. He set up his company as a separate entity, thus reaping the dual benefits of asset protection and lower taxes. Robert could now rest easy knowing that he was doing business the right way.

The problem Robert had (and many other of our successful network marketing clients in this position have) is a fundamental misunderstanding of the way business entities work. The fact is that most people have never been introduced to the profit producing power and fantastic tax savings and rock solid asset protection. How does that sound? All this with just a little more effort than running your business as a sole proprietor.

From a business perspective, corporations provide greater tax deductions. It's just that simple. Some of these benefits include pension plans that allow you to save up to $40,000 per year tax-free, medical plans that can make all medical expenses tax deductible, or tax-free rental income paid to you personally from your corporation for the "use" of your house. In addition, there are substantial tax savings on the purchase of many business-related items like computers, phones, copiers and other equipment.

Many of the home-based network marketers we work with seek home office business tax deductions. But what they don't realize is that a home office deduction is a "red flag" for the IRS and can significantly increase the chance of being audited. In contrast, a corporation is not required to file a separate form, yet the very same deductions can be claimed. This is great news for network marketers who work out of their homes!

Another key reason to incorporate is to protect yourself from lawsuits. In a corporation the owners, officers and directors typically are not personally liable for the company's debts. Unlike sole proprietors, corporations are separate legal entities, independent of the individuals who own them.

Let's look at Robert again and see what the financial result would be if he ran his business through a corporation. As an employee of his corporation, Robert will pay himself a reasonable salary of $35,000 and take the remaining $45,000 as a flow through distribution. In this situation his employment taxes will drop from $12,240 to $5,355, a savings of $6,885.

However, Robert could elect to contribute $8,750 to a pension plan, rent his house to his corporation for $1,000 per month for monthly meetings and his personal income tax liability will drop from $17,621 to $12,076; a savings of $5,191. Thus, Robert will cumulatively save $12,076 in taxes and have personal liability protection from his business activities.