Business Credit

One of the real upsides of having a corporate entity is having a separate credit profile completely segregated from your individual credit score.

It sounds like paradise, especially these days with individual’s FICO scores dropping like flies (FICO is your credit score issued by Fair Isaac Corporation in San Rafael, CA. that combines information from the 3 credit reporting bureaus, Trans-Union, Equifax and Experian. They try to make it a state secret on the formula they use but it’s mostly easy to figure out, pay your bills on time, don’t max your credit card balances, etc.

However, since credit has so much bearing on your life, it’s a good idea to stay on top of it. You also don’t want to be a victim of identity theft.

There are some important differences to know about personal vs. business credit.

As an individual consumer, you are protected by Federal statutes. You can dispute incorrect entries or derogatory reports on your credit report. If the reporting bureau doesn’t reply in 30 days after informing them in writing that you dispute the entry, by law it must be removed.

Not so with businesses. They don’t have these rights. So you better do this thing right because it can take years possibly to remove a derogatory entry or maybe not at all. It might make more sense to form a new entity and start from scratch.

And you have to be really careful with these “business credit builders” that advertise on the internet. Most take your money (usually an exorbitant fee) and produce nothing or very little.

Business credit is also scored differently than a FICO. Instead of 100 to 850, it’s 1 to 100.

The good news is that, done properly, you can have a Dun & Bradstreet Paydex or Experian Intelliscore of 80 that’s equivalent to a FICO of 750 or 800 which is considered excellent. This is separate from your individual credit score so it would probably make more sense to use your business credit score whenever possible.

I really don’t like D&B so much as they are always trying to upsell you and they have been known to arbitrarlly change their rating criteria, but they’ve been around forever so the vendors and lenders are used to seeing Paydex scores. They’ve also moved pretty much to India which doesn’t make me warm and fuzzy when they’re rating American businesses.

Usually, most vendors and lenders want to see an LLC or corporation that is at least 2 years old but these can be found for a reasonable price if you know where to look. Try and avoid the big incorporating outfits. They usually want big bucks and often deliver poor service. You must also check that the “shelf corporation” is free from things like liens and encumbrances.

If you’re not wanting $30,000 in cash immediately or some ridiculous credit line, you can find many vendors that will extend credit to new entities. Then you can build from there, one step at a time.

The nice thing about having a corporate entity with its own credit profile is that, regardless of personal credit problems in the past, you can have a vehicle for financing things like business equipment, business expenses like travel, seminars, software and hardware purchases, even vehicles. I will post later on tax savings…it’s a biggie.

Of course, the smart thing would be to work on your personal credit as well while you are continually enhancing your business credit.

The main thing to remember is that an internet business is still a business and, if you treat it as such, you will be richly rewarded.

Why Incorporate in Nevada?

Once you’ve decided to incorporate, the question becomes, “Where?”  The best choice is Nevada, hands down, no contest. Why?

The corporate veil in Nevada has been pierced only twice in the last 26 years, and both cases involved outright fraud.

In fact, there were other Nevada cases where the corporation didn’t do resolutions, minutes and meetings, had thinly capitalized the company, commingled funds, all practices that have lead to piercing in other states, and still, Nevada protected the corporate veil! Nevada is a pro-business state, meaning they strongly protect the business owner.

This low rate of piercing success (“piercing the corporate veil” is where a litigating attorney tries to prove in court that the corporate entity is really YOU and will try to seize your personal assets as well as your business assets, bank accounts, etc. Reverse piercing is where you are being sued personally and they will try to seize your business assets as well. Nevada’s protection applies to both)  is less than 1/10th of 1% and this extremely low success rate will discourage even the most optimistic of litigators. He/she must consider the likelihood of a successful outcome in their lawsuit being extremely unlikely. Other states have as high as a 45-50% successful piercing rates (California is one of them.)

In Nevada, corporate officers and directors as well as LLC managers have always enjoyed the highest level of protection. However, a few years ago the President of the Nevada Registered Agents Association lobbied to have a bill passed that states INTENT to commit fraud must be proven in a court of law. Ask any attorney just how difficult that is.

Corporate officers/LLC Managers were already protected in Nevada like no other state, but, with this new legislation, it’s like adding the legal equivalent of five Kevlar vests in additional protection.

I researched this myself and found there were a couple of reasons that Nevada is so business friendly and has gone so far to protect the owners of corporations and LLCs.

First of all, Nevada is right next to California and has always been in competition with this neighboring state to attract business to Nevada. This is aided by California having a very unfriendly environment for business as any CA. business owner can attest to. The California Franchise Tax Board has been known to chase business owners to other countries to collect their fees which not even the U.S. Federal Government goes to such lengths.

Secondly, there is an independent mindset that Nevadans have a history of going back over a hundred years. Rural Nevada is comprised of mostly Mormons and Fundamentalist Christians. Yet, Nevada was the first state to legalize full blown gambling and is still the only state with legalized prostitution. Not where the population exceeds 200,000 people, like Reno and Las Vegas, but there are legal brothels in other counties (they dutifully pay their taxes and there has never been one case of HIV/AIDS reported from a legal brothel.)

It’s not that these vices are endorsed by rural Nevadans, it’s that Nevadans have historically resisted big government control. It boils down to “look, we don’t approve or participate in these types of behaviors, but, as long as you don’t make trouble for your neighbor, we really don’t care.”

This is also reflected in rulings by Nevada judges over the years. Their attitude has been “we don’t care what your state laws are, this is Nevada and corporate entities that are domiciled in this state are subject to Nevada’s statutes.”

There is also no corporate or personal income tax in Nevada (be careful, though, this applies to companies actually doing business and based in NV.) This is in Nevada’s constitution and will likely never be changed. It would take a constitutional amendment taking at least 5 years to pass and Nevada residents would never let that kind of legislation become law. Would you vote to tax yourselves when you haven’t been taxed for decades? To  this day, even with the current financial crisis, gaming revenues from the Hotel/Resort Industry still provide the lion’s share of state revenues.

There have been arguments about advantages to forming corporate entities in other states such as Delaware, Wyoming and New Mexico but I will address this in another post that will show that Nevada is simply the best state…period.

See ‘ya next post, FranksternVegas.

Sole Proprietor vs. Incorporating/Audit Risk

What many small business owners do not know is that filing as a sole proprietorship could put you at risk for being audited. With any business, there are of course necessary deductions but a sole proprietorship may raise a few more needless red flags that could be avoided by running your business as a corporation. So what are those pesky red flags and how does a corporation help avoid them? Here are just a few:

// The Home Office Deduction

You may be thinking – yes, yes – we all know about the home office deduction! Unfortunately, most people don’t read through how the deduction actually works. Take into account that most sole proprietors work from home and you can see how trouble can brew. The home office deduction should only be taken if you use the room exclusively for business purposes. The kitchen nook that doubles as your office space is not exactly what the IRS considers an eligible office. The space must be clearly used for business purposes. Remember, only a certain percentage can actually be claimed. The other pesky issue is that all of those business deductions then have to be written on a separate form that itemizes home business expenses which can send up a red flag. On the flip side, with an S or C Corporation, you don’t have to file a separate deduction form.

Schedule C

Ultimately, the problem with a sole proprietorship is that no matter what you deduct, the Schedule C form draws attention. In 2006 alone, 4 percent of all sole proprietors filing a Schedule C were randomly audited as compared to less than 1 percent of all corporations who filed either Form 1065 or Form 1120S. Why? Well, the IRS is on the lookout for those business owners who hide portions of their earnings because so many people historically attempt to overstate their expenses or downplay their actual cash earnings.

Cash Based Businesses

One of the IRS’s biggest concerns is the sole proprietor with a cash based business. Caterers, personal trainers, dog walkers, this means you. Many self-employed professionals tend to receive large amounts of cash that go undeclared. And unfortunately, the IRS is all too aware of that.

Understating Earnings

Another common mistake is “understating” your earnings by “overstating” your deductions and expenses on your Schedule C. And, well there is a difference between deducting a few business meals a month and deducting your weekends out with your spouse for the entire year. Again, entertaining business clients or paying for business meals may be part of your job but only a certain portion can be deducted and only under certain conditions.

The other thing you want to avoid is taking too much of a deduction on your automobile expenses. You can deduct the cost of your car if used for business purposes. That means you can either deduct the mileage at the rate of 44.5 cents per mile in 2006 or you can deduct the ordinary expenses you incur such as gas, oil changes, and parking fees. But, when you also start to deduct the cost of gas on your family road trips to the Grand Canyon or Yellowstone National Park, you may raise a few eyebrows.

Other No-No’s

There are a few other areas where a sole proprietor can get themselves into a bit of trouble. One of the biggest no-no’s is co-mingling business and personal expenses and monies in the same bank account. It makes the business look like a hobby more than a business and it makes bookkeeping infinitely more difficult. Solution? Always use separate bank accounts.

Oh, and estimates might get you into a bit of heat as well. It is rare that you will get your meals or other deductions to equal a perfectly round number so jotting them down on a Schedule C that way can easily send up a red flag. Solution? Never use round numbers.

The Benefits of a Corporation

With a Corporation, your expenses are entirely separate from the expenses of the business. It is likely you will have a separate credit card and banking accounts where you can track business meals, gas for business, and other issues. Also, the IRS forms are consolidated and filed separately from your personal expenses because the business is a separate legal entity.

We’ll be discussing liability issues later as well, but taxes are a biggie.

LLCs and Corporations for Internet Marketers

Hello Internet Marketers!

This blog will contain information on Limited Liability Companies, “C” and “S” corporations geared toward Internet Marketers or any other small business owners. I am an expert in this field, having been a corporate consultant for the top incorporating companies in Nevada, which incorporates more companies than the other 49 states combined. I’ll let you know why this is in later posts.

I also have 2 decades experience on Wall St. as a stockbroker/supervisory principal and have participated in 6 or 7 dozen IPOs and a half dozen secondary offerings, none under USD $25 million. I have pretty much single-handedly brought 2 Chinese companies public under NV. Regulation D so I have a well rounded corporate background.

Since I have entered the IM arena, I have noticed that many Internet Marketers are very under informed on how to structure their businesses for maximum liability protection as well as tax savings. Some are getting just downright bad information from licensed professionals such as attorneys, CPAs and financial planners.

In some cases, this has cost them thousands of dollars and, in more extreme cases, caused them serious problems with both state and Federal agencies.

I will be addressing many of these issues and will reveal resources to help business owners keep more of their hard earned money while showing techniques that will legally protect their assets and obtain every tax break they are entitled to.

I also invite comments and resource providers that will benefit everyone safely and legally.

See ‘ya on the next post, FranksternVegas.