The Optimal Corporate Set Up

In April 2016, I wrote Part One of this series. You can read this article on JD Supra. Part One focused on the hobby loss tax rules. Four years later I am writing part two. Did I forget that I had written part one? Perhaps! Nevertheless, the circumstances have not changed at all as we progress through unknown territory, post-pandemic. Millions of Americans find themselves wondering what’s next professionally and economically. Is there a new job or profession on the horizon?

I lamented in Part I that both of my parents (of blessed memory) were comfortably retired by my age after a thirty-year career with the federal government. Fortunately, I enjoy my work and will work for as long as I can, otherwise my retirement date would be the earlier of my passing or age 95! The financial calamity created by the convergence of a new Cold War with China, and the economic effect of Covid 19 have left historic levels of American workers unemployed.

In the American workplace, there is a pretty decent chance that if downsizing happens after age 50, you may never get another job in Corporate America of a comparable scale. This dilemma has even carried over to federal, state, and municipal workers who have heretofore enjoyed great employment stability and often richer retirement and employee benefit programs than private industry.

Oddly enough, while Americans sat at home during the pandemic, millions of Americans decided to become day traders chasing the record setting level of market performance. Guess what, you are a new business owner. Congratulations! Many Americans find themselves relying on various “gigs” to keep the ship afloat. IT is the new Normal! Americans whether they like it or not have become the accidental entrepreneur.

My observation is that everyone that works in Corporate American or who is self-employed should live as if they are two weeks away from receiving their Pink Slip. Severance packages are not a constitutional right! As a result, salaried employees will find themselves (whether they like it or not) as accidental entrepreneurs. The time unemployed can seem to be infinite. You can either spend your time looking for a job, or plan for the unemployment contingency by creating your own business while you still have your job.

The bestselling business writer Michael Masterson suggests to his readers that a person should have multiple sources of income. This philosophy should also apply to those that are self-employed. Your primary business today may be great today and obsolete tomorrow.

This article is the second in a series of articles discussing the virtues and financial power of creating your own business as a vehicle for ensuring your current and future financial stability. My thesis is that everyone among the salaried and self-employed will eventually find themselves as “The Accidental Entrepreneur”. This article focuses on the optimal structure for a business owner to own and operate his various business and investment interests.

The Optimal Corporate Set Up

Even though sixty percent of small businesses are structured as S Corporations, I have long thought that this was a planning mistake. Following tax reform, the regular corporation (C Corporation) and its top marginal tax bracket of 21 percent have staged a great comeback. The ideal corporate structure contemplates a combination of various entities. The organizational structure outlined in this article is the optimal way to organize and manage a variety of entrepreneurial and investment interests.

The basic structure is a limited partnership with a corporate general partner. The business owner forms a new limited partnership (LP) and a new C corporation. The business owner owns 100 percent of the shares of the new C corporation. The C corporation serves as the sole general partner own a 1-2 percent interest in the new limited partnership from Day 1. The business owner personally owns initially a 98-99 percent in the new limited partnership. These shares can subsequently be gifted to children or trusts for various family members. The business owner creates a new limited liability (LLC) company for each separate business or real estate activity. Existing LLCs are assigned to the limited partnership.

One of the benefits of the suggested limited partnership format is the opportunity to elimina