| The reason clients ask these questions is because | | | | Corporation: |
| they hope to minimize paperwork (tax filings) and | | | | You often hear the statement that C Corporation |
| enjoy the perceived “flow-through” or | | | | earnings are subject to “double taxation”. This |
| “pass-through” tax benefits of those other | | | | may or may not be true if you own the C |
| entities. | | | | Corporation’s stock individually, depending on your |
| Some of the most frequently asked questions we get | | | | circumstances and proper tax planning. It is definitely |
| from clients are: | | | | not true when the corporation is predominately owned |
| - “Why do I have to establish a C Corporation to | | | | by a tax exempt retirement plan like the BORSA™ |
| implement the BORSA™?” | | | | plan. |
| - Why can’t I establish an S Corporation, LLC | | | | The concerns about “double taxation” of profits |
| (limited liability company), LP (limited partnership), or GP | | | | stems from a C Corporation earning profits which are |
| (general partnership) to implement the | | | | taxed at the corporate level, |
| BORSA™?” | | | | Corporate Income Tax Rates: 2008 |
| - Won’t I pay double tax with a C Corporation? | | | | Taxable income over Not over Tax |
| The reason clients ask these questions is because | | | | rate $ 0 |
| they hope to minimize paperwork (tax filings) and | | | | $ 50,000 15% |
| enjoy the perceived “flow-through” or | | | | 50,000 |
| “pass-through” tax benefits of those other | | | | 75,000 25% |
| entities. As you will see below, that is not always the | | | | 75,000 100,000 34% |
| case. | | | | 100,000 |
| Here’s why any entity other than a C Corporation | | | | 335,000 39% |
| won’t work for the BORSA™. | | | | 335,000 10,000,000 34% |
| Consider the essence of the BORSA™ structure: a | | | | 10,000,000 |
| C Corporation adopts a 401(k) plan and the 401(k) | | | | 15,000,000 35% |
| participant chooses to self-direct his account to buy | | | | 15,000,000 |
| stock in the C Corporation. Thus, a 401(k) plan (for | | | | 18,333,333 38% |
| the benefit of its participant) becomes a shareholder of | | | | 18,333,333 .......... 35%and then |
| the C Corporation. Now consider this: | | | | declaring a dividend to a taxable owner (i.e. an |
| In order to function as a flow-through entity, an S | | | | individual) of the after-tax profits, which are then taxed |
| Corporation must be owned by an individual(s) or by a | | | | at the individual’s dividend tax rate (15% if your |
| qualified Subchapter S Trust. A 401(k) plan cannot be | | | | income tax bracket is >15%). |
| a shareholder in an S Corporation. | | | | However, a retirement plan (the 401(k) in the |
| LLC’s, LP’s, and GP’s are all capital-account | | | | BORSA™) never pays tax on its earnings, be they |
| based entities – there are no shareholders, and | | | | dividends, interest, or capital gains. Accordingly, a |
| there is no stock to issue to the BORSA™’s | | | | BORSA™ plan will never pay a “double tax” |
| 401(k) plan. Under section 408(e) of ERISA, the only | | | | on corporate earnings. The individual participants will |
| “qualifying employer securities” that can be | | | | be taxed on retirement plan distributions when they |
| owned by a qualified plan like a 401(k) are: | | | | receive them - but that may be 10 to 20 years, or |
| - Stock | | | | more, in the future. If the value of your C |
| - Marketable obligations | | | | Corporation’s stock in the 401(k) plan grows by 6% |
| - Interest in publicly traded partnerships | | | | or more for 5 years, you will usually have more than |
| Membership interests in an LLC and partnership | | | | offset the tax that will be due when retirement plan |
| interests in a non- publicly traded LP or GP do not | | | | distributions are finally received – that is the power |
| meet the definitions of “qualifying employer | | | | of tax-deferred compounding. |
| securities”. | | | | Another issue that is often forgotten is the additional |
| Regarding the paperwork concern: | | | | tax cost of accumulating profits in a flow- through |
| - C Corporations file tax Form 1120 annually with the | | | | entity. In a flow-through entity, the profits will be taxed |
| IRS. | | | | to the owner at their highest personal income tax |
| - S Corporations file tax Form 1120S annually with the | | | | bracket. The owner’s personal income tax |
| IRS. | | | | bracket could be 30% or higher depending on their |
| - LLC’s, LP’s, and GP’s all file tax Form 1065 | | | | salary and other income. In their early years, most |
| annually with the IRS. | | | | small businesses have to retain profits to service debt |
| Although S Corp’s, LLC’s, LP’s, and GP’s | | | | as well as finance growth. With a C Corporation |
| do not pay income tax at the entity level – rather, | | | | you can accumulate $50,000 per year at the 15% |
| they “pass through” their income gains or losses | | | | corporate tax bracket rather than at the owner’s |
| to their individual shareholders, members, or partners | | | | likely higher personal tax rate. |
| – they still have to file annual tax returns that | | | | Moreover, the biggest expense of any entity is |
| delineate the “pass- through” amounts. There | | | | probably going to be your salary. The income you |
| is no escape from the IRS’ paperwork | | | | receive as a salary will be taxed at your same |
| requirements regardless of the entity selected. | | | | personal income tax rate, no matter what kind of entity |
| Lastly, the concern over “double taxation” in a C | | | | pays it to you. |