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83 of 85 people found the following review helpful:
4.0 out of 5 stars
Has the potential to be great, but some problems also, April 11, 2001
Having sold over 500,000 copies over twenty years, "Inc. Yourself" has earned a position as a business classic. And, I like the book. However, the subtitle ("How To Profit By Setting Up Your Own Corporation") is a bit misguided. Too many people believe that you will somehow "profit" by forming a corporation. By-and-large, this isn't true. You still need to build the business and generate sales of profitable products/services. That's the key!The key reason to incorporate is the liability protection offered by incorporation. "Inc. Yourself" focuses on the potential tax savings of incorporation. For example, McQuown discusses the dividends-received-deduction at great length, claiming it's a tremendous advantage of forming a C-corporation. The dividends-received-deduction means is that only 30% of dividends received from domestic corporations are taxed to a C-corporation holding the dividend-paying stocks. So, if your C-corporation is in the 15% marginal tax bracket, this amounts to an effective income tax rate on dividends of only 4.5% (calculated as 0.3 times 0.15). Now, that sounds great, and McQuown gives tables showing how much is "saved" by holding your dividend-paying stocks in a C-corporation. However, McQuown never addresses how this money is withdrawn from the C-corporation (assuming you want to spend it for personal things, for example.). And, how this money is removed from a C-corporation has a significant impact upon how much wealth you ultimately retain! It's not something that should be glossed over! McQuown writes: "... a sixty-year old professional could incorporate and turn over his stock portfolio to his corporation, at which point his dividends would be 70 percent tax-exempt. As long as his earned income constituted 40% or more of his total annual income, he would not be held to be a personal holding corporation. He could then retire at sixty-five or seventy with lots of tax-free dividend accumulation and a fairly high basis on his stock, so that when his corporation was liquidated, a good part of the assets would be considered a return of capital and therefore be tax-free." I worked the above out for high-dividend paying stocks ($40,000 investment, 5% dividend yield, 3% growth in share value assumed) over five years.... In my calculation, you lose about $1371 by forming a C-corporation and holding your high-dividend paying stocks within a C-corporation for only five years, and, then, liquidating the corporation. This is because, one way or another, those dividends are taxed twice, even upon corporate liquidation (from a tax standpoint, paying a wage is worse, paying dividends is worse. Possibly, you can find a justifiable expense for the business that also benefits you and spend the money on that, but here you're really restricted). The dividend-received-deduction isn't as valuable as it might appear, in part, because, along with dividends received, most stocks will appreciate in value. Outside a C-corporation structure, this appreciation isn't taxed until the sale of the stock (you might hold a great stock for decades). Then, it is taxed at the favorable, personal, capital gains tax rates (capital gains tax rates are constantly changing and appear to be getting more favorable, but who knows what the tax laws will say down the road?). However, within the C-corporation, this appreciation is taxed upon liquidation of the corporation. And, it's taxed twice. So, following McQuown's advice would probably be a mistake for someone near retirement who wants to own dividend-paying stocks. McQuown does write that corporate liquidation has significant tax advantages and that you should consult a professional upon corporate liquidation. However, if you incorporate, follow the advice, and consult a professional later, as discussed above, you'll probably lose a little bit of money. Consult first! As mentioned in another review, there is also a note about corporate structure being off-limits to computer consultants. That's the first I've heard of that also. There are many incorporated computer consultants. .... Another potentially serious problem readers could get into is following McQuown statement that your cost is your only significant basis when contributing property to your corporation. Period. End of story. Ah...not quite! Market value does enter the picture in some cases. Try this for example. Round up all your old PC's (8086's, 486's, Apples). Contribute them to your corporation and record the basis as the original cost. That's several thousand dollars in contributed basis, versus the market value of a couple of bucks. The IRS will not accept that! The nice thing about taxes is that if you don't consult a professional and you do something in error that saves you a lot of money, the professionals will contact you. Overall, I really do like this book, and I don't mean to be unduly harsh. The book introduces many incorporation topics readers might not know. However, I'd also strongly suggest going to the IRS web site and downloading many of the free acrobat publications that address corporate and personal taxation. No one can keep current on it all. As Robert T. Kiyosaki (Rich Dad, Poor Dad fame) says, a big goal of having money isn't the expensive trips you can take or the expensive home, it's being able to hire a battery of attorneys and tax experts to help you mind your business. Peter Hupalo, Author of "Thinking Like An Entrepreneur."
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