In Robert Kiyosaki's "Rich Dad, Poor Dad" he talks about building a corporation and doing transaction through it instead of doing them yourself, directly. There seems to be a lot of advantages in doing this like paying less taxes and reduced liability. This seems to be a wonderful idea but I don't understand what are the disadvantages.

Can anyone explain why creating a corporation can be a bad practice?

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    IRS, IRS, IRS and the torture they heap on you when they want to investigate !! – DumbCoder Jan 23 '12 at 16:17
  • +1, from second hand experinces (people hired "tax consultants" who got them back a lot of money in refunds but disappeared when IRS followed up) – f1StudentInUS Jan 24 '12 at 19:27
  • Whether it is good or bad practice likely has much to do with the function of the corporation. What kinds of business will the corporation be doing? More details may get you better answers. – jkuz Jun 1 '16 at 15:35

Creating a corporation is not necessarily less taxes. In fact, you'll face the problem of double taxation, and since you must pay yourself a reasonable salary, if your corporation doesn't earn much to give you as dividend after the salary, and/or your tax bracket is low, you'll in fact may end up paying more taxes. Also there's a lot of bureaucracy involved in managing a corporation.

Liability on the other hand is important, and what's more important - is asset separation and limiting the liability to the corporation assets, keeping your personal assets safe. To achieve that, you don't have to create a corporation, but you can create a Limited Liability Company (LLC). LLC are disregarded entities for tax purposes (i.e.: you won't have to pay taxes twice, only once as a sole proprietor/partner), but provide the liability limitation and asset separation. LLC's are much less formal, and require much less paperwork reducing the risk of corporate veil piercing because of non-compliance.

I myself decided to manage my investments through LLC's for that very reason (asset separation).

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  • Excellent answer, well worth my +1. – ChrisInEdmonton Jan 23 '12 at 14:48
  • This might be besides the point, but would you recommend anyone actually follow Robert Kiyosaki's "advice"? I do read his books, but just for entertainment and as fodder for evenings at the pub. – f1StudentInUS Jan 24 '12 at 19:25
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    @f1StudentInUS I have no idea who he is and never read his books, but usually most of the books on the topic "how to become a millionaire" can be summarized in one sentence: "sell a million books on the topic of how to become a millionaire". – littleadv Jan 24 '12 at 19:29
  • Pardon my DV, but your first paragraph has some incorrect information. Double taxation only applies to C-Corps, not S-Corps. On the other hand, Reasonable Salary only applies to S-Corps, not C-Corps. With an S-Corp, I don't think it's possible to pay more in taxes than you would without it. – TTT May 31 '16 at 22:25
  • @littleadv - "sell a million books" - so true! Apparently it's sold 26 million copies: en.wikipedia.org/wiki/Rich_Dad_Poor_Dad – TTT May 31 '16 at 22:31

Compared with a Sole Proprietorship, the main disadvantages of an S-Corporation or an LLC are that it adds a lot of management overhead (time, and possibly money if you don't do it all yourself), and there are fees you must pay to incorporate, as well as additional yearly maintenance fees which vary by state. You should be able to weigh the tax savings and liability protection against the extra costs and hassle, and see which way the scales tip. As a rule of thumb, the bigger your business gets or the more income you make, the more attractive incorporating becomes.

Note there are some additional taxes that certain jurisdictions impose on business income. For example, IL and CA charge 1.5% tax, NY is less, but NYC is 8.85%! In NYC specifically, you could actually end up paying slightly more tax as an S-Corp than you would as a Sole Proprietorship. In most places though, the nominal local taxes will still be less than the FICA taxes you could potentially save.

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    Would the DVer care to comment so I can improve my answer? – TTT Jun 1 '16 at 14:06
  • they rarely do. I've posted many answers that I think are good, and they get DV with no comment. I think that SE should require a reason for a DV. – MikeP Nov 22 '17 at 20:18
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    @MikeP - your suggestion gets made all the time on Meta, and although it's possible the majority of people agree with you, it will likely never happen because of the belief that allowing anonymous DVs is more important than the integrity of a DV. I once floated the idea of the price to DV with a comment is -1, and the price to DV anonymously is more costly than that (perhaps in the -2 to -5 range), but it didn't gain any traction. – TTT Nov 22 '17 at 22:16

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