Construction Today

Serve and Protect

Are you protecting what you earn? improve your company’s bottom line by following five simple taxation and asset protection strategies.

By Timothy M. Foster

Anyone who has ever owned a business understands it takes a tremendous amount of personal time and effort to run. In fact, many owners, who may be strong product or technical specialists, are just too busy with operations to comprehend the financial and legal aspects of their companies. Accordingly, they seldom take advantage of the strategies that would help them protect assets and minimize risks.

This happens for one simple reason: They don’t know what they don’t know. Erroneously, they think their hired advisory professionals such as CPAs and attorneys would discuss these issues with them if they were really important. Nothing could be further from the truth.

Taxation Strategies

Here are five important taxation strategies construction company owners should be aware of and use to keep more money in their pockets:

Create a multi-entity structure – In other words, make different aspects or equipment of the business a separate corporation. For example, if the company owns several concrete mixer trucks, then each truck will become a corporation, rather than placing all the trucks under one corporation.

This is the most important strategy to incorporate for tax savings. The secret is to determine the best entity to use based on the business, the ownership group and what state the business operates in. There are myriad choices, so determine which one meets the company’s needs for tax and legal reasons.

Pay attention to benefit packages – The most attractive benefit packages are geared specifically to the ownership group or key employees. This helps draw new employees and retain superior employees. Put together a tax-advantaged benefit package based on the company’s entities because the type of entity determines the tax code, as well as allows for different avenues for compensation and benefits.

Maximize retirement planning and income deferral opportunities – Many opportunities exist for business owners. This presents a powerful way for owners to use pre-tax income to save money, yet there are many planning techniques that limit the amount that can be deferred and, therefore, saved annually, such as with 401(k) retirement plans. Work with professionals who have the expertise to know what other opportunities owners can take advantage of after they have maxed out their 401(k)s.

Review the current tax compliance and tax returns to reduce audit exposure – Many small businesses do not take this step to eliminate the risk of audit. Make sure tax returns are always completed properly. If there are any red flags or inconsistencies within the tax return, they might result in an audit.

Engage in succession and estate planning – Every owner should create a plan to exit the business. The IRS will consider a transfer of the business to be a taxable event. Even though it might be a second- or third-generation business passed down among family members for a handshake, the IRS is valuing that handshake, which might have a significant tax impact on the business.

What Are We, Anyway?

Most owners start a business to make money, but making money isn’t enough. Owners need to protect what they earn. Here are three critical asset-protection strategies owners should consider in order to safeguard their capital:

Pay attention to the business entity’s structure – Everything is determined by how the company’s entity is structured. Unfortunately, many business owners do not know how they are structured – are they a C corporation, an S corporation, a limited liability company (LLC), a partnership or a sole proprietorship?

Most allow their CPAs to determine which entity is best for the company. Yet, there are numerous legal aspects to consider regarding asset protection. Therefore, sometimes more than one attorney should be involved in determining the company’s entity structure. In an ideal situation, the owner will have access to a group of professionals who debate the best entity structures from a legal and tax perspective, as well as for satisfying the other needs of the company.

Institute proper employee controls – Employee discretion, or lack thereof, can cause liability directly to the business owners. That’s why it’s important to have some degree of control over employees’ actions. For example, an employee who is drinking or abusing drugs on the job and then drives company vehicles is a huge liability. If this employee causes an accident, the owner will have a difficult time relying on the insurance company to pay for that claim. The insurance company will contend the owner should have taken reasonable steps to have better control over the employees to ensure that behavior doesn’t happen.

Follow corporate formalities – The majority of small business owners do not follow corporate formalities such as scheduling meetings, updating corporate minutes and avoiding co-mingling dollars. If the owner does not respect the corporate entity, it’s doubtful the entity will be respected in a court of law, thereby making future lawsuits more problematic for the company.

Take It to the Bank

Working with knowledgeable professionals to implement tax and asset-protection strategies will help construction company owners create an appropriate plan for the business. In addition, owners can use these suggestions to have a positive impact on the company’s bottom line:

Reduce the amount of payroll, income and other taxes – It’s frustrating to see how little money the business has made after it’s been exposed to so many different corporate and individual taxes. Small business owners as a percentage are paying more than large corporations because many don’t have tax planning strategies in place.

Understand and receive the maximum benefit of having a business by creating corporate expenses rather than individual expenses – The corporate expenses can be deducted while most of the individual ones are limited or cannot be deducted.

Reduce the potential for litigation – As the owner and company’s net worth grow, include the asset protection strategies to protect the company’s capital. It would be unfortunate if, as the business becomes more profitable, it also becomes more at-risk at the hands of any adverse party. The goal is to make the business as unattractive to litigation as possible.

For example, an attorney who represents a claimant injured by one of the company vehicles looks to see which business and personal assets are available. Many owners wrongly assume they are completely protected because they set up a corporation.

No Crystal Ball

Business owners can be destroyed by their failure to consider tax advantages and asset-protection strategies. Unfortunately, once an accident happens, all assets that existed at that particular time are frozen in time.

There are no crystal balls. Owners do not know when an employee will act negligently and injure someone. Understanding how to structure and operate businesses might be the tipping point that determines whether small business owners can survive litigation and protect assets. So why risk financial security on some future event that could easily be minimized or eliminated with careful planning?

Timothy M. Foster, JD, MST, is a tax services director for International Tax Advisors Inc., a tax consulting firm and a related company of International Profit Associates Inc. For more information, call 800-531-7000 or visit www.ipa-iba.com