What's the Proper Business Structure to Protect Your Assets? What's the Proper Way to Pay Yourself? Should I Continue to File as Self-Employed?

What's the Proper Business Structure to Protect Your Assets? What's the Proper Way to Pay Yourself? Should I Continue to File as Self-Employed?

In today’s complex business environment, choosing the right business structure isn’t just about limiting liability—it’s about creating a framework for sustainable growth while protecting your assets. Let’s dive into how to structure your business properly and understand the most tax-efficient ways to pay yourself.

The Problem With Self-Employment

Many entrepreneurs start as self-employed individuals, but this can be a costly mistake. Here’s why:

1. Self-Employment Tax Burden

   • You’re paying 15.3% in self-employment tax on all profits.

   • No separation between personal and business assets.

   • Higher audit risk (13 times more likely than other business structures).

   • Limited ability to build business credit.

2. Personal Asset Exposure

   • Your personal assets are at risk in business disputes.

   • No legal separation between you and your business.

   • Creditors can pursue your personal assets for business debts.

The Trifecta Approach to Asset Protection

The most effective approach to structuring your business involves what’s called the "Trifecta" model:

1. Operations Side (Left Side)

   • Houses your active business operations.

   • Where you make money from services or products.

   • Typically structured as an LLC taxed as an S-Corporation.

   • Generates ordinary income.

2. Asset Side (Right Side)

   • Holds investments and passive income generators.

   • Real estate holdings.

   • Intellectual property.

   • Investment accounts.

3. Estate Planning Foundation

   • Revocable living trust.

   • Coordinates all entities.

   • Provides succession planning.

   • Manages personal assets.

The Optimal Structure for Most Businesses

Step 1: Form an LLC

• Start with a basic LLC in your state of operation.

• Establish separate business bank accounts.

• Get an EIN from the IRS.

• Build initial business credit.

Step 2: Consider S-Corporation Election

When your net income reaches approximately $40,000-$50,000 annually:

• File Form 2553 to elect S-Corporation taxation.

• Create a reasonable salary structure.

• Save on self-employment taxes.

• Maintain corporate formalities.

How to Pay Yourself Properly

For LLC Owners:

1. Draw/Distribution Method

   • Take owner’s draws as needed.

   • No withholding required.

   • Must pay quarterly estimated taxes.

   • Subject to self-employment tax.

For S-Corporation Owners:

1. Salary + Distribution Method

   • Pay yourself a reasonable salary.

   • Take additional profits as distributions.

   • Save on self-employment tax for distributions.

   • Must run payroll and withhold taxes.

Advanced Protection Strategies

1. Holding Company Structure

   • Consider setting up a holding company if you have:

     • Multiple business ventures.

     • Significant assets to protect.

     • Intellectual property.

     • Real estate holdings.

2. Asset Segregation

   • Keep operating entities separate from asset-holding entities.

   • Use separate LLCs for different properties or ventures.

   • Never mix personal and business assets.

Common Mistakes to Avoid

1. Inadequate Documentation

   • Failing to maintain corporate minutes.

   • Not keeping separate bank accounts.

   • Missing annual filings.

   • Poor record-keeping.

2. Improper Asset Division

   • Holding all assets in one entity.

   • Operating business owning its own building.

   • Mixing personal and business expenses.

3. Tax Structure Mistakes

   • Staying self-employed too long.

   • Not making S-Corp election when profitable.

   • Taking incorrect deductions.

   • Poor payroll management.

When to Make the Switch

Consider moving away from self-employed status when:

1. Your net income consistently exceeds $40,000-$50,000.

2. You have valuable personal assets to protect.

3. You’re planning to scale your business.

4. You want to build business credit.

5. You’re concerned about liability protection.

Implementation Steps

1. Initial Setup

   • Form LLC in your state.

   • Obtain EIN from IRS.

   • Open business bank accounts.

   • Establish accounting system.

2. Operation Phase

   • Maintain corporate formalities.

   • Keep detailed records.

   • Run proper payroll if S-Corp.

   • Track all expenses separately.

3. Growth Phase

   • Consider holding company structure.

   • Separate valuable assets.

   • Implement advanced tax strategies.

   • Build business credit.

The Bottom Line

The days of operating as a self-employed individual should be limited to the very early stages of your business. As soon as you’re generating consistent profit, implementing a proper business structure becomes crucial for both asset protection and tax efficiency.

Remember: The goal isn’t just to save on taxes—it’s to build a sustainable business structure that protects your assets and supports your growth. Consult with qualified legal and tax professionals to ensure your structure aligns with your specific situation and goals.

Action Steps:

1. Evaluate your current business income and assets.

2. Consult with a tax professional about S-Corporation election.

3. Set up proper banking and accounting systems.

4. Implement regular corporate maintenance procedures.

5. Review and adjust your structure annually as your business grows.

Don’t wait until you’re facing legal issues or tax problems to implement these strategies. The best time to protect your assets is before you need the protection.