Business Legality Basics: The Fun Side of Protecting Profit
Anyone from new business owners to even the more experienced among us usually share one big thing in common: the legal side of running a company can feel overwhelming, confusing, and frustrating. But in a world of jargon, technicalities, and loopholes, we can still find some order and access points for easy understanding.
What layers of legal protection are the most pressing? How should you be approaching taxes? Is your intellectual property protected? As a business owner, it is so important to really look under the hood of your business, see what's going on on the inside, take a good look at the profitability of your business and, of course, have a keen understanding of your taxes. If you want your enterprise to be set up for success, you need to back up your profit plans with legal protection and adherence.
The Cash Flow Pipeline
In business, you’ll find that your money flows in a system, rather like a series of pipes. First, money leaves from your client and enters your business bank account. In that account, you typically have low expenses and high market margins. From there, money flows into your personal bank account and then some flows onto your retirement account. It seems relatively straight forward, but there are so many different steps along each level where things can get confusing, especially if you want to make sure you’re optimally set up for taxes.
Layers Of Legal Protection
Melissa Houston
Like anything, there are levels of legal protection. Some are more essential than others, while some can be highly useful but only in certain situations. And the number and type of layers you need are dependent on the riskiness of your business. There are some essentials that we should all have, such as business insurance and contracts, while other types, like trademarks, aren’t really a necessity unless you have something highly unique or are very far along in your brand.
So it is important to focus on the layers of protection that most benefit you. For example, having sound contracts really protects your time and investments, otherwise, you may end up being liable for a lot of unplanned refunds. Contracts protect your profits. And that’s where an LLC also comes into play. Because if part of a cash flow pipeline, as mentioned earlier, gets disrupted, an LLC protects your personal assets and prevents greater losses.
At the end of the day, legal protections are essential ways to protect your bank accounts, from business to personal.
LLC Personal Protections
Business reporting and charts
Setting up an LLC can afford you more financial protection than you might have thought. It’s like a magical bubble of protection. If a worst-case scenario were to happen and you were on the receiving end of a lawsuit, it is likely your business would suffer and fall apart. But an LLC adds a layer of protection, shielding your personal assets (your car, your home, your retirement) from falling apart, too. No one ever plans to have a serious legal judgment, but that’s never stopped a lawsuit from happening. So an LLC is a smart move to pre-protect yourself from the worst
S Corp Tax Protections
Business meeting
Further, an S Corp can provide some benefits when it comes to taxes. Think about high-level executives and business owners. If they put themselves on a regular salary, they pay self-employment tax on that salary because the IRS collects Medicare and Social Security only on what they deem earned income. But passive income, i.e. money from investments, etc., is considered passive income and not taxed the same way. There is no self-employment tax. And an S Corp, then, acts as a passive income translator for the rest of us. It allows non-high-powered executives to set up the same type of tax break benefits as a large corporation.
How are you setting your small business up for optimal tax benefit success? What opportunities do you have to protect your assets? Reach out and book a free consultation call with me and let’s strategize how to maximize your personal profit and protect you from the worst of it. Contact me today to make the system work for you.