You may increase your profit by enforcing contracts with your patients, clients, customers and third-party vendors, and by operating a business structure that limits your tax liability.
Making a Great Contract
Running a business is great when revenue is high and complaints are low. You can accomplish this when you lay out expectations with your patients, clients, customers, distributors, employees, manufacturers, suppliers, and vendors. I recommend setting these expectations in a written contract with clear, active language, well-defined key terms, liability limitations, and enforceable remedies to ensure you get paid.
Great contracts are written documents that are clearly understood and signed by all parties. Use, clear active language. Passive language is often ambiguous. Define key terms. Don’t be the victim of assumption. People who assume that the other party knows what they mean often must prove trade usage in court. You might win in court, but the time and expense of proving your case will likely frustrate you.
Parties to a contract may limit the remedies for breaching the contract. Try not to think of breaching (also known as breaking) the contract as a good or a bad thing. Contracting parties will do whatever is in their own best interest. If there is a financial advantage to breaking the contract, the party should consider doing so, but the breaching party may need to take into account what the other contracting party’s remedy for the breach may be. You can limit the monetary damage, set liquidated damages, require specific performance, or disclaim certain warranties. A contract might be breached through no fault of your own because of commercial impracticability. Include a force majeure clause if you want to avoid liability when natural disaster or some other unforeseen event causes the breach.
Ensure you get paid. I see contracts that penalize late payment by charging interest. Make sure the interest you charge is not usury (interest deemed by law so high it is unfair). If you are in the business of building, repairing, or leasing, you will want to enforce your mechanic’s lien. This lien gives you the right to hold on to the property or to force the sale so that you can be paid. In order to enforce your lien, you must follow strict procedures and meet strict timelines.
The Right Business Structure
Your business will keep more of its revenue when taxes are low. Most of us are not able to influence Congress to enact tax loopholes that benefit us, but we can make the best use of the tax rules that exist already. Business owners generally have the freedom to change their legal structure to align with tax optimization goals. Usually, an owner begins business as a sole proprietor (also known as a “sole proprietorship”). There eventually comes a time when the sole proprietorship should be converted into an organized business structure like a corporation, limited liability company (LLC), or a limited partnership.
Under certain circumstances, you may be able to exclude fringe benefits from your income if your company is organized as a traditional corporation (C-Corporation), even if you are also an employee. Choosing the C-Corp structure typically makes more sense if your individual tax bracket is a higher percentage than the corporation’s tax bracket.
Electing Subchapter S-Corp status and making the owner an actual W-2 employee of the company may help you reduce social security, Medicare, or federal unemployment tax liabilities. Your reasonable salary will be taxed according to your individual income tax bracket, and you will pay social security, Medicare, and federal unemployment tax as an employee of the company. You benefit the most when you take distributions out of the company’s profits because the company’s profits have already been taxed at the owner level and these distributions are taxed as income but are not a basis for social security, Medicare, and federal unemployment tax.
Structuring your company as a partnership may not be subject to state franchise taxes and might assist planning to limit federal estate taxes. You might choose this entity even if your company is structured as a corporation or LLC and your net worth exceeds $5,340,000. Talk to an estate planning attorney before you start asking for discounts on the value of your company because you will also want to step up your basis at the time of death so that the beneficiaries of your estate pay less taxes on capital gains.
In addition to the possible tax implications explained above, a business owner should also consider additional factors that affect the best business structure. Visit https://www.marquardtlawfirm.com/business-law.html to review these additional factors.
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