Chicago Businesses – Watch out for scams

Many of us are looking for cash. We’re all looking for ways to create wealth and save taxes. But when a prospective tax scheme or business strategy sounds too good to be true, it usually is.

Many times I have seen how a client became caught up in an elaborate business ruse, and as aCPA in Chicago area, who have helped countless businesses in filing their corporation tax returns, I have to sort through the resulting disaster for them. They never had to needlessly lose money in this way.

Considering these days economic times, when the wolves come out in sheep’s clothing, there are more crooks out there, and they’re looking for an edge. It’s a recipe for disaster.

Some of the most common scams you should watch out for:

The non licensed business coach, or tax adviser

“Coach” is a title someone often uses when they weren’t smart enough to finish school and get a graduate degree. Now there are great reasons for “coaching” in certain areas of business, but when they start giving tax and legal advice, watch out.

There are a plethora of call center operations that rope would-be entrepreneurs into paying money to talk to someone wearing sandals and a headset who has no business offering tax and legal advice, or doesn’t know anything about running a business.

The “I have a deal for you guys.”

It’s called “affinity fraud.” A friend or relative tells you that someone in their neighborhood or church has found a “great new business” to invest in, and you should chip in big money, too.

On its own, investing in a start-up can be a great idea if you can stomach the risk, but watch out if someone says you don’t need a lawyer or makes big promises. Be realistic, and make sure you use a lawyer to properly document the investment. Suing to recoup losses can often prove too costly to make a lawsuit worth it.

The corporate credit “shelf corporation.”

I have had numerous clients come through my office wondering what they might do with a “shelf corporation” they paid $5,000 to $15,000 for.

Many of  were sold on flashy terms like Dunn and Bradstreet numbers, Paydex scores and unsecured credit, and how they would somehow win larger loans by using the shelf corporation name. The truth is there is no short-cut process. Building corporate credit takes time.

The bogus state filing fee bill.

You register a corporation or LLC in your state, or make the other required filings. Then, all of a sudden you get a piece of mail with a state insignia on the envelope, telling you that you owe another fee.

Plain and simple, these can often be a scam. There are so many times I’ve had clients call me and say, “We got this piece of mail about a state fee. What’s this all about?” And I say, “It’s a scam. Don’t pay it.” And they say, “Really?” Don’t ignore any notice you receive that looks official, but make sure you get a second opinion.

Conclusion

Unfortunately the list could go on and on. So what’s the best way to avoid a scam?

Ask for credentials, make sure you understand who is actually going to be doing the work for you or giving advice, perform due, and get a second opinion from a trusted licensed adviser when tax and legal matters are at stake.

Finally, don’t forget, if it’s too good to be true, it probably is.

Don’t forget to call us at 773-728-1500 if you have any questions related to tax planning issues.  We also provide bookkeeping services for businesses in the Chicagoland area.

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Benefits of an ‘S’ Corporation

We, the Chicago Accountants, have come to the conclusion that S Corporations are the #1 small business entities for entrepreneurs with ordinary income.

Major reasons why you may form an S-Corporation:

1.  Officers and shareholders of an S-Corporation are not personally liable for corporate debts and liabilities, and

2. The S-Corporation’s income distributed to you as a shareholder will not be subject to self-employment tax, however, your wages as an employee will be subject to social security taxes.

It is very important that business owners realize that if they have passive income (such as a rental property), an S-Corporation should generally not be used, but a Limited Liability Company (LLC) or Limited Partnership (LP). The S-Corporation is best suited to manage ordinary income, even if it is a partner in an LLC with other S-Corp partners because the LLC is an operational business.

In order to receive the asset protection of an S-Corporation it is important that the corporation be adequately financed, that various formalities required by your state be observed ( filing articles of incorporation, adopting by-laws, electing a board of directors, and holding organizational meetings), and that the existence of the corporation as a separate entity be maintained.

In regards to the wage and net-income planning, we encourage you to allocate at least 40% of their net-income to wage earnings and the remaining amount can flow out as a dividend or net-income, which are not subject to self employment tax. However, you should obtain a competent professional advice in this regard first.  It is important to maintain this procedure through proper payroll planning. Quarterly reports are required.

When it comes to first years losses in any type of business, an S-Corporation is preferable to a C-corporation from a tax standpoint. Shareholders in a C-corporation generally get no tax benefit from such losses.

On the other hand, as S-Corporation shareholders, each of you can deduct your percentage share of these losses on your personal tax return to the extent of your basis in the stock and in any loans you make to the entity. Losses that cannot be deducted because they exceed your basis are carried forward and can be deducted by you when there is sufficient basis.

Once the corporation begins to earn profits, the income will be taxed directly to you whether or not it is distributed. It will be reported on your individual tax return and be aggregated with income from other sources.

Please remember that the S-Corporation could inadvertently lose its S status if either of you transfers stock to an ineligible shareholder such as another corporation, a partnership, or a nonresident alien.

If the S election were terminated, the corporation would become a taxable entity. You would not be able to deduct any losses and earnings could be subject to double taxation–once at the corporate level and again when distributed to you.

This is, of course a short summary of the benefits of an S-Corporation and how to maintain such a company in good standing with the State and IRS.  We have incorporated thousands of businesses and have advised many of them to convert into an ‘S’ corp based on tax planning criteria.  To find out if an ‘S’ corporation is right for you, please call us at 773-728-1500.

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