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I was curious if it were legal (USA) and possible to live "inside" of a corporation. As in I would purchase a house/car/etc through a corporate entity (I realize I'd likely pay more, but bear with me) and use the limited liability benefits so that if I were to ever get into trouble I could not PERSONALLY be held liable for the corporation's assets.

The way it'd work would be "renting" the house/car/etc to myself via the corporation as a benefit to a Director of the company. I've seen this done with companies who purchase (at least) temporary housing for relocating employees so I wonder if it falls into the realm of it being legal.

Is this possible?

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Even if possible, you would lose many benefits, such as the ability to deduct mortgage interest for your primary residence. –  Steven Aug 6 at 15:29
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assuming the company borrowed money to buy the house as an investment, would it not be able to deduct that interest as a business expense? –  Kate Gregory Aug 6 at 16:04
    
@KateGregory what business???? –  littleadv Aug 7 at 8:04
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@littleadv not sure I understand the question, but my business deducts interest on its overdraft, on car loans etc as a matter of course. These things are expenses. –  Kate Gregory Aug 7 at 11:15

4 Answers 4

Directors can be held responsible for the liabilities of the corporation - see this Wikipedia article - and especially if it was clear that was the reason for the arrangement, you might well find this happening.

That said, I know a Canadian who sold his house to a corporation he already owned (he was doing consulting work through it) at the (in his opinion ridiculously high) amount it had been assessed for property tax purposes. The company paid and claimed any and all expenses including paying for the lawn to be mowed and the house to be painted. He lived in it at a reduced rent (this rent was then income to the company) in exchange for looking after it. He was very happy with the arrangement. He was losing the "no income tax when you sell your primary residence" benefit we have here, but since he expected to never be able to sell it for more than the amount the company had paid, he wasn't worried.

If the company exists for no reason other than to shelter income, hide you from liability, and reduce your taxes, then I would expect it would get you some unwanted attention and possibly some rulings you didn't like. If the company exists for a real purpose, and has income and expenses that outweigh whatever games you're playing with cars and homes, you might be able to achieve this. You need to work out what the benefits (other than ducking liabilities) would be and whether they are worth the hassle.

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+1, at least, for pointing out the corporate veil. –  ChrisInEdmonton Aug 6 at 17:45
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+1. There's a difference between a corporation and a business. You can create a corporation if you feel like it, but it won't actually protect you unless it is engaged in actual business activities. –  BrenBarn Aug 6 at 20:00
    
The corporate veil is relevant in relation to shareholders/owners, not directors as such. Often with small companies the two are the same, of course. –  Ganesh Sittampalam Aug 8 at 22:30

The government thought of that a long time ago, and has any loophole there plugged.

Like if you set up a company to buy a car and then allow you to use it ... You can use the car for company business, like driving to a customer's office to make a sales call or delivery, and the cost of the car is then tax deductible. But the company must either prohibit personal use of the car, or keep a log of personal versus business use and the personal use becomes taxable income to you. So at best you'd get to deduct an expense here and then you'd have to add it back there for a net change in taxable income of zero.

In general the IRS is very careful about personal use of business property and makes it tough to get away with a free ride. I'm sure there are people who lie about it and get away with it because they're never audited, but even if that causes you no ethical qualms, it's very risky. I don't doubt that there are people with very smart lawyers who have found loopholes in the rules. But it's not as simple as, "I call myself a business and now all my personal expenses become tax deductible business expenses." If you could do that, everybody would do it and no one would pay taxes. Which might be a good thing, but the IRS doesn't see it that way.

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The biggest problem with this that others seem to have missed is that a corporation must have a profit motive. Meaning at some point after a "startup phase" your company needs to turn a profit to not be considered a hobby.

Will your employer be paying your corporation for your salary? Is that the company's business endeavor? If you run profits through the company and treat it like a true business, this may be technically possible, but as others have mentioned probably will cost more than any benefits you'd receive. And at every step you'll be throwing tons of audit flags.

Rich Dad Poor Dad advocates a light version of this. Essentially running a business like Real Estate through an LLC, and then using that LLC for "business trips" (vacation with some justifiable business motive) or capital purchases (laptop, etc...) and the like, such that you're paying with "Pre-tax" money instead of "Post tax", but again the business needs a revenue source.

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It is definitely legal, however none of such expenses will be allowed as a tax deduction for the corporation. Basically, you'll end up paying more to maintain the entity and pay taxes on its income (the rent you're paying to yourself as a corporation) at corporate rates, for no apparent benefit.

Being the director/executive in the corporation will make you liable for whatever the corporation is liable, so liability isn't going away.

The reason corporation is considered "limited liability" for owners is because shareholders are shielded from the corporate liability. Not directors or executives (which are explicitly not shielded).

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In most/all jurisdictions, directors and executives are just officers of the company and so don't need to be shielded because they wouldn't have any inherent liability even for an unlimited company. If they acted negligently or fraudulently that might lead to them being liable to the company for their actions, but that's slightly different. –  Ganesh Sittampalam Aug 8 at 22:29

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