Learn how to incorporate your Delaware business as well as tips, suggestions and smart business ideas for you to utlize before and after incorporating a company in Delaware.
Rocco Beatrice is a CPA, MBA, MST with Estate Street Partners, a team of lawyers, accountants and business strategists that, combined with our actuarial partners, have helped more than 5,000 doctors, 1099 employees and business owners work with their own CPA’s in order to take advantage of these tax-altering pension, Super 401(k) and 401(h) plans over our 30+ years in business.
The most exciting changes that came along with the Pension Protection Act are also, shockingly, one of the least discussed sections of the Internal Revenue Code: the changes to the 401(h).
Section 401(h) of the IRC provides for specific accounts to be created for the purpose of paying for medical-related expenses during retirement.
Similar to the 401(k), the IRS classifies the 401(h) as a cafeteria plan, which means it is intended to be managed by employers for the benefit of employees. Unlike the 401(k), however, the 401(h) is not a plan that is perfect for everyone.
The amazing fact is that 98% of the most qualified individuals for these plans never take advantage of them, primarily because they, nor their CPA, have never heard of them.
The cost to implement and maintain these plans is far outweighed by the benefits these plans offer, which can potentially lead to some of the best ROI in the IRS tax code. Ask your CPA about a 401(h).
How the 401(h) Plan Works
In essence, the 401(h) is a medical expense account attached to a Cash Balance Plan account that aims to alleviate the financial burden of health conditions, accidents and hospitalizations that individuals and their dependents may come across in their retirement.
As with other plans, a 401(h) account must be separately funded and managed. As the plan is being funded, the contributions made are tax deductible.
The money is allowed to grow capital gains, tax-free. When funds are later withdrawn in retirement, the money that comes out of a 401(h) plan is also tax free.
In other words:
1. 401(h) plans can be funded with tax-deductible money.
2. Funds deposited into 401(h) plans are allowed to grow without the burden of taxation.
3. Funds withdrawn by 401(h) account beneficiaries once they retire are not taxed.
To some extent, 401(h) plans are similar to voluntary employee beneficiary associations, which are better known as 501(c) plans, in the sense that they are designed to provide retirees financial cushions for health expenses and life insurance. In fact, 501(c) plans can be combined with 401(h) plans.
Unlike the Roth Individual Retirement Arrangement or certain insurance-based instruments such as annuities, a 401(h) plan can actually provide a fully tax-free solution for retirement.
A business owner who takes Cash Balance Plan account and deposits them into a 401(h) account is essentially shielding those funds from taxation forever. This is one of the very few IRC provisions that provide a completely tax-free environment, and it is an opportunity that is certainly worth exploring by individuals who are interested in asset protection and wealth preservation strategies.
The Rationale of 401(h) Plans
Even after the insurance reform of the Affordable Care Act, healthcare inflation has not stopped. In 2014, the inflation rate of medical care in the United States increased by a little more than 3.5 percent, which is about 400 percent higher than the consumer price index.
By the end of this decade, retirees can expect that the costs of their medical expenses could climb between five and seven percent annually.
AARP cites Fidelity Investments which estimates “that a 65-year-old couple retiring [in 2013] will need $240,000 to cover future medical costs. That doesn't include the high cost of long-term care. Nor does it take into account additional costs you may incur if you decide to take — or are forced into — early retirement before your Medicare kicks in.” Doctors who celebrate their 55th birthdays today can expect their medical care costs to be nearly $465K when they retire with their spouses in the next 10 years.
Supplemental insurance policies combined with Medicare plans are not sufficient to cover all medical expenses that business-owners and other professionals are bound to face during their retirements.
Most often, retirees dip into their savings or tap into their taxable retirement income to pay for out-of-pocket medical expenses. These are the situations that 401(h) plans seek to alleviate.
When a business-owner who decides to participate in a 401(h) plan for the benefit of his staff, he or she must establish the contributions amounts, which must be reasonable, under Treasury Regulation 1.401-14(c)(3).
This is related to the aforementioned estimate of healthcare costs and their inflation; in other words, a 401(h) plan can accumulate up to $460K in contributions that can be grown through investments and later withdrawn without any taxation.
Furthermore, the IRC can be amended in the future to allow greater contribution limits to match the rising inflation of medical expenses.
Another advantage of 401(h) plans is that the list of qualified benefits is very extensive. A few treatments that are typically excluded from health insurance policies are allowed by 401(h) plans.
Some of these include:
The Practicality of 401(h) Funds401(h) plans give business-owners the ability to fund part of their retirement with deductible money so they can later enjoy tax-free distributions to cover a broad range of medically-related expenses.
This is money that can truly come out 100 percent tax-free when business-owners, 1099 employees and doctor-owners retire.
Let's say Dr. Elsa Parks, a 55-year old general practitioner, runs a family medicine practice that employs two medical assistants and a licensed practical nurse. She is married and has an average income of $700,000 per year.
Living in California, she pays federal income taxes at 39.6% and state income tax at a rate of 11%, for a total of 50.1%. This does not include FICA or self-employment taxes.
As a small business owner, Dr. Parks can use the existing corporate structure of her practice to establish a Cash Balance Plan and medical expense account under section 401(h) of the IRC.
Even if Dr. Parks worked only as a self-employed on-call physician, she could actually get some advice on how to form a business entity in her state for the purpose of setting up a Cash Balance Plan and 401(h).
Being 55 years old, married and having income of $700,000 per year gives her the ability to fund her Cash Balance and 401(h) by up to $670,000 per year. She has chosen to contribute $600,000 to her Cash Balance and 401(h) plan. Effectively, she has reduced her quarterly income tax check by $64,500.
The bottom line of 401(h) plans is that Americans are living longer and seeing their healthcare costs rise every year.
With so many retirement plans subject to taxable distributions, the 401(h) is one of the tops option for business owners, 1099 employees and doctors who would like to cover their out-of-pocket medical expenses without the burden of taxation.
We help clients from across the globe form Delaware LLCs, Delaware Limited Partnerships, and Delaware Corporations.
By now, it’s common knowledge that Delaware is the gold standard when it comes to forming an LLC, LP, or Corporation.
Delaware’s reputation is world-renowned for having the strongest corporate law structure, and this reputation is what solidifies Delaware’s position as the most popular place to incorporate.
People often inquire about running multiple different business ventures under the same Delaware LLC. They want to know if they can operate several real estate properties, retail stores or car dealerships, for example, under one LLC.
Can this be done? Sure, Delaware LLCs can conduct lawful business activity anywhere in the world. However, should this be done?
From a cost perspective, it does make sense, if that’s the only concern. You end up spending less money to set up a single Delaware LLC, as opposed to forming multiple LLCs for each part of your business.
You would also likely incur fewer annual maintenance fees, lower annual Franchise Tax and a single Registered Agent Fee.
However, as far as limiting the liability of the company, which is the whole point of forming an LLC in the first place, then the answer is no, you should not operate multiple parts of a business under one LLC.
Why not? The answer is pretty simple.
If you were to run different businesses within the same LLC, you would possibly increase the liability of the LLC as a whole.
Since the businesses would be tied to one another via the one LLC, you could be risking all the businesses if something were to happen to one of them (such as a lawsuit, fire or fraud).
If one of the pieces of the LLC were to be held liable, then so could the entire LLC.
Although you may want to keep the cost of your multiple businesses down, it is typically not worth the risk, as it could become significantly more problematic than it’s worth.
The stalwart and reliable traditional LLC is still usually a business owner’s best option. Most entrepreneurs opt to set up separate LLCs for each of their business ventures.
This way, the debts and liabilities of each LLC are completely separate from one another.
If you have any questions about forming your Delaware LLC, we can be reached at 1-800-345-2677, Ext 6133 or 302-644-6265.
THE ABOVE ARTICLE IS NOT LEGAL ADVICE AND SHOULD NOT BE CONSTRUED AS LEGAL ADVICE. IT IS NOT AN ATTEMPT TO LIST ALL CONSIDERATIONS THAT MIGHT BE ADVISABLE BY AN ATTORNEY FAMILIAR WITH DELAWARE LLC LAW. IF YOU REQUIRE LEGAL ADVICE, WE RECOMMEND YOU ENGAGE THE SERVICES OF A LICENSED ATTORNEY.
Did you know you can set up a new Delaware LLC or Delaware corporation so it’s ready for business at the start of 2017?
It’s actually a very good idea to file your new company before the first business day of the new year. We can help form and file a new Delaware LLC or corporation and save you hundreds of dollars at the same time.
Here’s how: Call us immediately and ask to form your new company in December but make the “effective date” January 1, 2017. This will give your company a start date of January 1, and will save you hundreds of dollars in Delaware Franchise Taxes. Since your company's start date will be in 2017, you won't owe Franchise Tax until either March of 2018 (for a corporation) or June of 2018 (for an LLC).
It will also make you eligible for our December discount of $100 off your filing fee, which will not be available in January. Watch this 30-second video for the details:
If you have any questions about setting up your new Delaware LLC or corporation, give us a call today. We can be reached at 1-800-345-2677, via Skype at Delawareinc or you can live chat with us from our homepage at www.delawareinc.com.
Sometimes, despite meticulous strategies, our business plans don’t come to fruition, and we have to accept that the start-up we have worked so hard to establish is just not succeeding the way we hoped it would.
If, unfortunately, you find yourself in this position, here are nine things you should consider before closing your company:
Review your LLC Operating Agreement or corporation bylaws; both should specifically state how your Delaware company should be closed, including how to handle outstanding debts, how to liquidate assets and how to notify the appropriate parties involved.
Speak with your accountant to see if your company needs to file federal and/or state tax returns for one final time.
Contact the IRS in order to terminate your company’s EIN (Federal Tax ID Number).
Evaluate all unresolved contracts, loans and obligations your LLC or corporation may owe.
Meet with your bank representative in order to close your business bank accounts.
File a Certificate of Cancellation (for an LLC) or a Certificate of Dissolution (corporation) with the Delaware Secretary of State. Your Registered Agent can assist with this filing.
Consider closing the company before the end of the calendar year to avoid additional Franchise Tax Fees imposed by the state.
If your LLC or corporation filed for Foreign Qualification in another state, then typically a Certificate of Withdrawal will need to be filed with that state.
Remember that once a company is officially closed, it can be expensive to re-activate it, if it is even feasible to do so. Also, keep in mind that your original company name may no longer be available.
It is also wise to consult with an attorney to review your company’s specific details, as this list is not comprehensive and every business situation is different.
One of the benefits of incorporating a company in the state of Delaware is the flexibility of the corporate structure.
Regardless of the reason you may need to amend your company stock, if you own a Delaware company, you possess the ability to quickly and easily make changes to your business entity’s charter in order to meet your needs.
You can increase or decrease the number of shares your Delaware company has authorized; you can also add or remove classes of stock and/or modify the par value of the stock.
For example, let’s say you and your business partner decide to start a new company. Since it’s just you two as owners, the ownership will be split 50/50, evenly. In order to keep things simple, your company initially authorizes 2,000 shares of common stock, and each partner receives 1,000 shares.
Now fast forward a couple of years to when your business is rapidly expanding. You both want to bring in additional people to be part of your company’s internal organization, so you’ll need to find a way to increase the number of your company’s authorized shares.
Perhaps you need to add another class of stock, such as preferred shares, so that the original owners will own the class of preferred stock while the new people can buy shares of common stock in the company.
On the flip side, if you had originally formed a company with 2,500,000 authorized shares because you were expecting numerous investors but, due to unexpected circumstances, your company didn’t flourish as you’d hoped it would.
You still want to keep the company, but on a much smaller scale; thus, you need to reduce the stock structure of the company in order to accommodate its current status.
Further to this example, a company with 2,500,000 authorized shares will receive a large Franchise Tax notice from the state of Delaware. The state uses one of two methods to calculate annual Franchise Tax Fees, and the first method, the Authorized Shares Method, is how the state always sends the notices.
Typically, you can file your company’s annual report via the Assumed Par Value Capital Method (aka the Alternative Method), and pay a significantly lower amount than via the first method. You can ascertain how much your company’s Franchise Tax fees will be via each method using our Franchise Tax calculator.
If you and your new team don’t want to bother with the calculations each year to try and pay a lower amount of Franchise Tax, you may determine it is in the best interest of the company to simply reduce the number of authorized shares, which will result in Delaware imposing a flat Franchise Tax Fee on your company each year.
In order to make stock amendments, you should first hold an internal company meeting and have any changes approved by the company’s appropriate authorities.
Next, file a Certificate of Amendment with the Delaware Secretary of State’s office. This Certificate indicates that an authorized officer of your company has authorized a change of the stock structure.
The new details of the number of authorized shares, classes of stock and/or par value should be listed on the Certificate. The document must be signed by an Authorized Officer of the company.
When the Certificate is filed with the Delaware Secretary of State, your stock amendment will officially become effective.
The important thing to remember is that, as the owner of a Delaware company, you are not limited in how many stock amendments can be filed for your business entity. You have the option to adjust the structure of your business as it develops and evolves.