I had a conversation with an owner of a trucking recently and when I asked them why they were structured as a C-Corp they really didn't know. They are are a small business with one owner who is involved in all the day to day operations and decision making. They take draws from the business and wages. The accounting and control processes aren't formally designed.

​In most cases, I advise small business owners to not structure their business as a C Corporation. The main reason for this the owner's need for the business to provide supplemental cash flow for their personal life. Another reason is that for most small business owners the executive structures compliant to running a C Corporation aren’t really what they are looking for.

​C Corporations are designed for optimally capitalizing your business idea through shareholder equity. The corporation has a responsibility to the shareholders, and the structures and functions governing the business reflect that responsibility. There is a further level of detachment from the owner(s) distinct from sole proprietorships, partnerships, LLCs, and S Corporations. Whereas LLCs, Partnerships, and S Corporations have income that gets passed directly to the owner(s), a C Corporation is a being that retains its own income separate from the owner(s). The tax liability remains with the corporation. 

​What does this mean for the small business owner who wants to make a choice between a C-Corp and other entities? You really want to have an intention for how you want your business to relate your life, and for what you want the business to be in the world. For example, if you want to draw money from your business that isn’t in the form of a W-2 wage, a C-Corp most likely isn’t the structure for your business. If you want to be your business to be run by a CEO and board of directors so that operations don’t completely depend on you, and W-2 wages works for you, then you may want to consider the C-Corp.

​Am I saying that the only income you can take from your C-Corp is W-2 wages? No. You can take dividend income from a C-Corp, and it may be optimal for you to take dividend income. The underlying consideration for C-Corps when it comes to you extracting an income from it, is double taxation. Double taxation occurs with this structure because the corporation is taxed on its net income, and you as the owner of the corporation will be taxed on any income you receive from it. How you decide which way to be taxed on your income from the corporation is up to you.

​The C-Corp game can be an exciting and fulfilling one to play. You just want to understand the rules, so you have full access to choose as to whether you want to play and play it well if that is what you choose. There are complexities around executive governance, capital structure, and taxation that you will want to understand. 

​The benefit of a C-Corp is capitalization and growth through governing structures. It’s a good structure to build net worth if you don’t need to have access to all the profits from the business. You can let the retained earnings grow from year to year. It’s a structure that isn’t right for many small businesses. But you will want to understand what the structure was designed for, and what your specific goals are so you can determine if it’s the right structure for your business. 

​I’m currently working with a trucking company who operates a fleet of 60-70 units. They have constantly struggled with financial reporting & cash flow management. Their accounting systems are comprised of QuickBooks Online, OpenInvoice, spreadsheets, and other manual processes. Nothing is completely streamlined. There is disjointedness.
An ironclad control process for accounts payable and accounts receivable haven’t clearly been established. No formal accounting department exists. They are feeling the pain of this, but it’s more like a stoicism, because they are putting up with it as it is “the way they’ve been doing things”.

I’m bringing this to attention because I feel there are many business owners who just want to focus on “running the business”. This is what’s most important to them. The accounting, and bookkeeping are more of a chore they know needs to be done at some point, but it is not really seen as “running the business”. I want to let you in on a little secret: “THE ACCOUNTING IS THE BUSINESS”.

​It may not be the service, or the product you provide. It may not be the customer relations. It may not be the hiring, recruiting, or training. It may not be supply or value chain management. It’s not any one of these. It’s all of these. It is the platform or earth on which all this stands. It is the bottom-line reason you became an entrepreneur. To succeed. To make a profit. To build something sustainable for yourself and for your family. It is the reality we must constantly be present to. Without it, you may just be spinning your wheels with nothing to show for all your time and effort.
​
Without committing executive importance on establishing an effective and efficient accounting system, this trucking company will continue to bleed. This is the reality. Committing to this requires change, which can be daunting. Change is often not welcome. It’s disruptive. But it is the only thing that leaders recognize as being essential to evolution, or even survival. Therefore, it must be welcomed.

At the basic level, not embracing the change will lead to overpaying vendors, and not getting paid on open invoices. This equates to hundreds of thousands of dollars annually. At a deeper level, it degrades quality of service and employee morale. The employees are overworked due to inefficiencies and don’t produce as much as a competitor. While your company struggles, others can do more with less. 

Your accounting systems should be defined from day one. If you're already in business, then now is the time. It is a process that must constantly be revisited as the business grows and needs change.

What bank accounts are you going to use, and why? Who is going to deposit checks, and who is going to sign off on them? What is going to be your collections procedure? What software, or combination of software are you going to use for your accounting? What is going to be the approval procedure for purchases? How are expense reimbursements going to work?

These are a few of the questions you will want to answer for your business, and you want to have them answered from the beginning. At the end of the day, you want a healthy, profitable, and sustainable business. Putting this in place gives you the best chance. Not doing so is most likely a setup for disaster. 

Owning a business provides access to control over your taxation. As a wage earner, your income is taxed before you even receive it. Federal and state withholdings, Social Security and Medicare are all deducted from your paycheck before it's even issued to you. There are some things you can do to defer the amount of tax on your earned income like retirement contribution, or HSA contributions. This doesn't change the fact that you will be taxed on the net amount of income earned before it gets to you.

Because your earned income is seen as net income to you by the tax authorities, it is pretty cut and dry that they are owed their cut of that amount. The taxable income flow for a wage earner works like this:

Can you see how this give you less control as an employee? You work hard, then before you get a chance to use your money, the government takes their cut and leaves you what's leftover. 

Owning a business works differently: 

By being a business owner, you earn your money and have access to how you spend it before it is taxed. Many of the expenses you have as a business owner become ordinary & necessary for running your business which will qualify your spending as deductible. This also lowers your taxable income. The government taxes what's leftover. Long story short: As a business owner you get access to your money first, and the government taxes the lower amount later leaving you with a lower tax burden. 

In theory this sounds good, but how do you maximize this in real life? There are other considerations. What business can I start? What structure do I need? Isn't owning a business risky? What about self-employment tax? How do I keep track of everything? Owning a business is a lot of work, right?

These questions (and more) may show up for you. This is fine. Even if you have a business you may want to know how to maximize it so really does work like what we discussed. Having a real tax strategy in place is a good place to start. Planning is key, and having someone in your corner who understands how you can leverage your business as well as other aspects of your life will be the difference maker.

Whether with me or another good tax strategist, it could be the difference maker in your ability to accelerate your wealth. Taxes are going to be the number one expense in your lifetime. Owning a business gives you access to control over this. I invite you to consider what this makes available for you. What does it make available for your family? Your lifestyle? Your quality of life? The ball is in your court!