Financial Strategies for Business Owners, or, How to dodge taxes legally and with style
So you want to lower your tax bill while increasing your assets. We've all been there.
7 Replies
fair-rose•10mo ago
At the behest of @aurum over here https://discord.com/channels/1181304501999784027/1181322035373297684/1194140298570379355 I'm putting this thread together to give incredibly high-level examples of ways to do really neat things with insurance, investments and the like that most people who have LLCs and can't afford the Big 4 firms don't do.
One of them, and the one that activated my almonds in https://discord.com/channels/1181304501999784027/1191162961868370051/1194092424113422386 , is something called Key Person Insurance
The theory goes like this:
- The business and you, one of the owners/executives, are two legally distinct entities according to the IRS.
- This means, on paper, that you could leave your business at any time, for any reason. This would be very bad for your business, because you're considered a Key Person, or Key Employee. Removing you from the equation absolutely damages business operations.
- To hedge against this very real threat, the Business takes out a Whole Life/Variable Universal Life insurance policy out on you. This is to protect the company from the sudden loss of you.
- However, these contracts can be written in such a way that after X amount of years, that policy can be bequeathed to you. Meaning, instead of the business owning the policy, you own it.
- All overpayment of premiums, growth in the account, cash value then becomes yours.
- The IRS does not consider life insurance as income
- You pay no taxes on this transfer.
xenial-black•10mo ago
How would you execute this? With W2? Sounds easy on paper hard to execute
fair-rose•10mo ago
It has to be either a business you own, or an agremeent you make with the business you work for.
But you can't do this through a straight W2 employment contract. That's the Key part of Key person/Key employee.
conscious-sapphire•10mo ago
After X amount of years? Is there a minimum amount of years you have to own the company for?
fair-rose•10mo ago
If the company is (1) legit and (2) official, you can do it year one.
You're a key person and a key employee from the start. But again, this can't be just a paper company - any funds have to come from the company's operations themselves
you can't LLC on paper then pour W2 money from J2/J3 into this shell company and do wacky shit that way.
ambitious-aqua•10mo ago
@Manatee Outlaw what about using contract income and funneling it through your LLC? The company hired your company for consulting services or professional services?
fair-rose•10mo ago
You absolutely can do that; the important thing with these kind of vehicles is that it passes through the LLC; the LLC must be the entity making the money.