Service Provider Business Recommended Phases & Structures:

Business scenarios that involve providing services can be very simple, or they can be very complex.

 

Whether the structure is simple or complex depends on a few different aspects of the business. These  include what type of services are being provided, whether there is high liability, whether you need all of the money coming in personally, if there is extra money to expand the business, etc.

 

We have analyzed the best corporate structure for a Service Provider business, and have identified the four different and distinct phases of corporate growth specific to service providers. 

 

Next, we will describe the different phases, and we will show you, based on your current position, what phase you are in, and then we are going to outline the corporate structure recommendations that will afford you the most asset protection and tax reduction - while keeping in mind your goals and the phase you are in presently.

  1. LLC "S" Election

  1. LLC "S" Election

  2. LLC "S" Election

  1. LLC "S" Election

  2. LLC "S" Election

  3. LLC "C" Election

  1. LLC "S" Election

  2. LLC "S" Election

  3. LLC "C" Election

If you have one of the following (Phase 1):

  • You want to receive all income Personally

  • Engage in High Liability activities, or

  • Make more than the industry average

If you have one of the following (Phase 2):

  • Valuable business assets, or

  • Make more than the industry average

If you have one of the following (Phase 3):

  • You don't need all of the income personally, and you're

  • Expanding Your Business, or

  • Investing in high value or dangerous assets

If you have one of the following (Phase 4):

  • You're putting funds into the business or investments

  • Desire additional asset protection, or

  • Desire for additional tax savings

Then Phase 1 applies:

Phase 1 is to set up an:

  • "S" Elected LLC or Corp, and

  • use it as an operating company to deal with the general public

Then Phase 2 applies:

Phase 2 is to set up another:

  • "S" Elected LLC, 

       and

  • use it as a holding company for your high value assets

Then Phase 3 applies:

Phase 3 is to set up a:

  • "C" Elected LLC or Corp and

  • use it as a management company for your operating company

Then Phase 4 applies:

Phase 4 is to set up a:

  • Utilize the already set up "C" Elected LLC or Corp as a lending company.

 
Service Provider Structure - Phase One

Service Provider - Phase One

 

When you have a service business, the first step in structuring your business entities is creating an operating company that interacts and engages with the general public. 

 

When you have a company that is "front-facing" and deals with the general public, the business will always be open to a direct lawsuit from the other businesses or individuals with whom you interact.

 

For this reason, when you have a service business, ideally the business itself owns nothing. The business's only function would be to receive income, pay bills, pay you, and pay other companies that you own. 

 

The best type of "entity" or corporate business structure for a service business is an "S" elected LLC or Corporation. We recommend setting up an LLC with an "S" election. 

 

Why "S" Elected?

 

"S" elected means that the profit or loss flows down to you as an individual (so its taxable to your "S"elf). While this might not sound ideal, you will be able to save self employment taxes - and this amount is 15.3% of your income. You will see the estimated amount that this election will save you in a couple of pages.

 

Why Not "C" Elected:

 

The other option for taxation is "C" elected taxation. This means that the business taxes are calculated at a flat 21% (so its taxed at the "C"orporate level). The problem with a "C" elected service company is that any of the profits after tax need to be spent on company expenses or expansion, and if there ever is a lawsuit all of the funds that are in the company are available to be used for a settlement. So to leave money in the company is not ideal, and therefore "S" elected taxation is preferred for a service company.

 

Phase Two and Three discuss how to accumulate assets, and how to introduce a "C" elected management company for tax reduction purposes.

 

What Documentation:

 

In phase one of a service structure there are not a lot of contracts or inter-company agreements. Agreements with third parties would include:

     - Service Engagement Letter

     - Scope of Services Agreement

 

Monthly Activities:

     - Additional engagement letters

     - Invoice clients

     - Complete company books

     - Maintain minutes and resolutions

Services Provider - Phase Two (Business Assets)

 

ASSET PROTECTION

 

Now that you have an operating company and it is making money, you want to accumulate business assets, and so forth. You should not accumulate business assets in the operating business, especially if the operating company has high liability, you are constantly traveling for work, or if the business has a vehicle it owns or reimburses you for. 

 

If the assets that you want to acquire are small assets with little or no value, and you can easily replace them then by all means have the operating business acquire them.

 

If on the other hand you acquire $10,000 worth of business furniture or a $25,000 copy machine - you should set up a separate LLC to hold these assets and lease them back to the operating business. 

 

The LLC should be located in the state that you are in, or that the service business is located in. 

 

From an asset protection standpoint, by employing this strategy, you have completely protected all of the business assets. For example, let's say that you had $100,000 in business furniture, computer equipment, and machinery in an LLC. That Asset Holding LLC ("Asset Company") leases the equipment to your service company - and let's say that someone sued your service business. What would they get? 

 

Nothing. 

 

Because the entity is "S" elected it does not have any retained earnings, nor does the business own any assets - so there are no assets to seize. In fact, if you think about it, if there is no money and no assets, why would they sue? Or even bettter, if they do win - they get nothing, and the next day you set up a new entity, complete a new lease agreement for the equipment and you are up and ready to do business again!

 

That was simple. 

 

Oh, because of what is called a "charging order", a legal remedy imposed by the court in a lawsuit, not only will they not get anything, but if they win the suit they will also be liable for your taxes. That's right, they are liable to pay taxes due from the company they sued - your company. It's simply amazing!

 

Switching Gears - Tax Reduction

 

The above outlined strategy is excellent for asset protection, but it also has huge tax reduction benefits! 

 

The Asset Company mentioned above, that holds your furniture and equipment, can also provide support services to your operating company.  Support services include providing marketing, sales calls, sales support, managing of the office operations, coordinating scheduling, and other services. 

 

Depending on the services you provide you may or may not be able to take advantage of the 20% tax deduction that is applied to income that does not qualify as "qualified business income" ("QBI"). This tax nuance is call the QBI reduction.  

 

If it is available, this strategy can save a lot in taxes. For example, assume your operating company has $150,000 worth of service income, and there are $65,000 of support services provided to the operating company by your support services company.  In this example, your support services company will receive a 20% "discount" on the $65,000 of support services provided, reducing your taxable income, which amounts to an additional $13,000 of tax deductions! 

 

Additionally, the support services contract allows you to move money from the operating company that deals with the general public, to a private company with zero risk or liability.

 

What Documentation:

 

In Phase Two of a Service structure there are not a lot of contracts or inter-company agreements. Agreements with third parties would include:

 

     - Engagement Letter (for your clients)

     - Scope of Services Agreement (for your clients)

     - Resolution Authorizing Lease of Furniture / Equipment 

     - Lease agreement (for lease of assets from Asset Company)

     - Resolution Authorizing Support Services Agreement     

     - Support Services Agreement 

 

Monthly Activities:

 

     - Additional engagement letters 

     - Invoice clients

     - Receive invoices and create bills

     - Complete company books

     - Maintain minutes and resolutions

 

1st of the Month Activities:

 

 

Asset Company:       

 

1. Send out invoice from Asset Company to Operating Company for leased furniture or equipment

2. Send out invoice from Support Service Company to Operating Company for monthly services

 

Operating Company:

 

1. Send out invoices to clients

2. Receive invoice from Asset Company for leased furniture or equipment - create bill 

3. Pay leased furniture and equipment bill (pay to Asset Company)

4. Receive invoice from Support Service Company for monthly services - create bill

5. Pay Support Service Company bill (pay to Asset Company)

 
Service Provider Structure - Phase Two

Services Provider - Phase Three (Money Control / Investing / Tax Reduction)

 

YOU DON'T NEED ALL OF THE MONEY

 

The largest factor of reaching Services Provider - Phase Three is that you no longer personally need all of the funds being generated.

 

Basically, Services Provider - Phase Three is used once you reach the point where there are extra funds available in the business that you would like to use 1) to further business operations, or 2) to invest into other business scenarios. 

 

In this phase we introduce a management company to manage your "S" elected operating Service Provider Company. The management company provides different services than the support services company, things like corporate compliance, accounting, management and accountability, sales training, CEO and or CFO services, and so forth. 

 

This company is a "C" elected LLC (or corporation if you prefer).  This company only deals with companies that you own 51% or more, or where you are a partner and there is an indemnification agreement or clause documented.  The reason that we would like to limit the amount of companies that could sue this business directly, is because this company will accumulate funds and in essence become your main holding and investment company.  If a company or individual could sue it directly, they would be able to get to the assets of the company (i.e.; funds accumulated in the company).

 

This Management and Investment Company (MI Company) can manage any of your companies from any business scenario. The MI Company's purpose is to flow money to one key entity.  Once the money is in this entity it can be lent to any companies or individuals that you would like. 

 

Switching Gears - Tax Reduction

 

The beautiful thing about a "C" elected entity is that it has a flat tax of 21%. This means that if your personal tax rate is 38% (federal and state combined), and the management company is a 21% taxpayer, you will save 17% on any money that flows from your service provider company to your management company. 

 

If you selected "Save Money in Business" in the questionnaire, the program will actually outline the estimated amount that you will save utilizing a management company given your income and the state that you live and operate in.

 

What State should I set up the Management Company?

 

At the end of the day, the goal is to have your management company set up in a state that has no corporate state income tax.

 

In the recommendations section, the report will compare having the management company in your home-state vs having the company in Nevada. 

 

What Documentation:

 

In Phase Three of a Service Provider structure include:

 

     - Engagement Letter (for your clients)

     - Consulting Scope of Services Agreement (for your clients)

     - Resolution Authorizing Lease of Furniture / Equipment 

     - Lease Agreement (for lease of assets from Asset Company)

     - Resolution Authorizing Support Services Agreement     

     - Support Services Agreement 

     - Resolution Authorizing Management Agreement

     - Management Agreement 

 

Monthly Activities:

 

     - Additional engagement letters 

     - Invoice clients

     - Receive invoices and create bills

     - Complete company books

     - Maintain minutes and resolutions

 

1st of the Month Activities:

 

Asset Company:       

 

1. Send out invoice from Asset Company to Operating Company for leased furniture or equipment

2. Send out invoice from Support Service Company to Operating Company for monthly services

3. Pay Management Company bill (pay to MI Company if there is a management agreement with Asset Company) 

 

MI Company:       

 

1. Send out invoice from MI Company to Operating Company for monthly services

2. Send out Invoice from MI Company to Asset Company for monthly services (if there is a management agreement with Asset Company)

 

Operating Company:

 

1. Send out invoices to clients

2. Receive invoice from Asset Company for leased furniture or equipment - create bill 

3. Pay leased furniture & equipment bill (pay to Asset Company)

4. Receive invoice from Support Service Company for monthly services - create bill

5. Pay Support Service Company bill (pay to Asset Company)

6. Receive invoice from Management Company for monthly services - create bill

7. Pay Management Company bill (pay to MI Company)

 
Service Provider Structure - Phase Three
Service Provider Structure - Phase Four

Services Provider - Phase Four (Lending Money Between Entities)

 

LENDING MONEY BETWEEN ENTITIES 

 

Asset Protection

 

Services Provider - Phase Four is about utilizing the entities at your disposal There are a number of things that your Management and Investment Company (MI Company) can do.

 

Let's say that you find yourself wanting to purchase a new item for the business, but all of the excess cash is in your MI Company. Well, this is exactly why your structure was designed to be versatile. Your MI Company would loan money to your Operating Company or Asset Company (depending on the type and amount of asset).

 

Let's say that the asset was purchased by the Operating Company and the Operating Company was sued, well there would be a loan in place from the MI Company and potentially a UCC1 or Deed of Trust filed that would give the MI company first right and standing (so the assets would already have an encumbrance  - by a company you own or control).

 

If the loan was to the Asset Company, then the Operating Company does not own the asset. Because Asset Company does not do business with third party companies it has no exposure. This means everything is completely protected. 

 

Switching Gears - Tax Reduction

 

When lending funds, the interest rate would flow to the MI company which would be taxed at a rate of 21%.

 

What Documentation:

 

In Phase Four of a Services Provider Structure include:

 

     - Engagement Letter (for your clients)

     - Scope of Services Agreement (for your clients)

     - Resolution Authorizing Lease of Furniture / Equipment 

     - Lease agreement (for lease of assets from Asset Company)

     - Resolution Authorizing Support Services Agreement     

     - Support Services Agreement 

     - Resolution Authorizing Management Agreement

     - Management Agreement 

     - Resolution Approving Lending of Funds

     - Resolution Approving the Borrowing of Funds

     - Loan agreement or Line of Credit from MI Company

 

Monthly Activities:

     

     - Additional engagement letters 

     - Invoice clients

     - Receive invoices and create bills

     - Complete company books

     - Maintain minutes and resolutions

 

1st of the Month Activities:

 

 

Asset Company:       

 

1. Send out invoice from Asset Company to Operating Company for leased furniture or equipment

2. Send out invoice from Support Service Company to Operating Company for monthly services

3. Pay MI Company bill (pay to MI Company if there is a management agreement with Asset Company) 

4. Document Loan Payable / Line of Credit.

 

MI Company:       

 

1. Send out invoice from MI Company to Operating Company for monthly services

2. Send out invoice from MI Company to Asset Company for monthly services (if there is a management agreement with Asset Company)

3. Send out invoice for loan payable or line of credit

4. Receive interest income from loan or accrue loan payable / line of credit

 

Operating Co:

 

1. Send out invoices to clients

2. Receive invoice from Asset Company for leased furniture or equipment -create bill 

3. Pay leased furniture & equipment bill (pay to Asset Company)

4. Receive Invoice from Support Service Company for monthly services - create bill

5. Pay Support Service Company bill (pay to Asset Company)

6. Receive invoice from Management Company for monthly services - create bill

7. Pay Management Company bill (pay to MI Company)

8. Make payment on loan payable /line of credit

 

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