home state the name McDonald’s Healthy Mush is available for use as a corporate name. Suppose you can obtain the domain name www.mcdonaldshealthymush.com. All is good so far. When you go to uspto.gov (the U.S. Patent and Trademark Office’s very helpful website) and do a trademark search you find a number of McDonald’s marks but nothing under McDonald’s Healthy Mush for the category of nutritious, groovy oatmeal. You may think you are good to go.
The problem is that McDonald’s, the massive hamburger chain, maintains and asserts a very strong trademark protection for their name in all categories of food. If you use their name in any phase of food production or sales (even if your own name is McDonald) they will have their attorneys demanding that you cease and desist and will promptly take you to court if you don’t. (That is how the big companies do it, and so would you in their shoes.)
So the fact that you can incorporate under the name McDonald’s and get a domain name based on the name McDonald’s is of no consequence. The trademark, which protects your name to the exclusion of others when you do business with the public, is the hurdle you want to clear.
We will discuss trademarks again in Chapter Nine. You also can download a free eBook Winning With Trademarks from www.corporatedirect.com. For now know that you want the corporate name, the domain name and the trademark all to be clear when starting your business. This may mean coming up with a more unique name than you at first anticipated. But if unique is memorable, and is remembered, that is a good thing for you in your new business.
Rich Dad Tips
• Before you start, work with your team to choose the right entity.
• Choice of entity is a key foundational step not to be ignored or taken lightly.
• The company name you choose is very important. Do the necessary research to make sure you can control your name.
You are now ready to move forward...
Today is the day you form your entity. It may be after you consult with an attorney, as our three teams will do ahead. It may be that you know exactly what you want.
Before you rush head long into it let’s explore the tax side of things a little bit more. It will help us see why Alana and Sherri and then Tom and Nancy chose the entities they did. Of course, on this matter, Bobo and Morton’s case is a little different, as we will see.
Taxing Matters
By choosing to use a good entity for your business, as a traditional C corporation, an S corporation, an LLC or an LP, you’ve made a choice that will help to protect your personal assets and those of other shareholders, members or partners in your company. You’ve also chosen an excellent entity for tax savings. If you were starting business as a sole proprietorship or general partnership there’s very little you’d need to do to prepare for paying your business taxes. Everything you made in your business would be income and everything you made would be taxed, at a fairly high tax rate.
In a sole proprietorship or general partnership all of your income is subject to payroll taxes (or self-employment taxes) of 15.3% on the first $110,010 (at this writing) and 2.9% on anything above. Know that with the good entities there are ways to minimize these payments.
As well, while you’re working with your team of professionals to put together your good entity, there are several decisions you need to make with regard to financial record keeping and preparing for the tax periods that are yet to come.
Elect a System of Accounting
You must elect a system of accounting for your business and, once selected, you need to stick to that system. The IRS does not want to play catch up in figuring out how you’re keeping your books, and to keep it simple, there are only a handful of systems allowed. The two main systems are the cash method and the accrual method. In addition, the IRS permits a hybrid method of cash and accrual, and may permit other forms of accounting allowable under IRS code. But let’s stick with the main ones.
The cash method accounts for income and outflow in real time. Income is recognized when received by the business. Expenses are considered deductible when paid. So work invoiced or billed in one financial year (i.e. December) and paid in the next (January) is not taxable the year it was invoiced but rather in the year that the money was actually received (January). Expenses coming due in one financial year and paid in the next are considered deductions in the year they were actually paid, not the year they were invoiced. So by real time we mean that income is recognized when it is really received and expenses are recognized when they are really paid.
Under the accrual method, income is recognized when it’s earned, whether or not the funds are actually received. Similarly, expenses are deductible when incurred, whether or not it takes some time to actually pay them off. So a business with a calendar (December 31st) year-end which sends out invoices in December and is paid in January is still responsible for taxes on the amount invoiced for the calendar tax year that ended in December. Again, under the cash method, taxes on the invoiced amount wouldn’t be due until the invoiced amount was actually received. So accrual is not real time receipts but rather real time billed. I prefer the certainty of receiving cash over the hope of billing for it.
Most businesses elect the cash system of accounting unless inventory is a large part of the business. No matter which method is chosen, the IRS requires business owners to make a choice and, once that choice is made, you need the IRS’s permission to change it.
In order to keep the corporate veil intact, decisions such as electing a system of accounting need to be an actual election, a vote taken or a decision made during a documented meeting of members of the LLC or shareholders of the corporation. Include such decisions in the minutes of the meeting and keep the minutes in the corporation book. Election of the professional team the business is working with, the system of accounting, opening and closing bank accounts, applying for loans and credit are all decisions that need to be recorded and maintained in the corporate minutes. Those decisions made by shareholders, members, managers or directors outside the annual meeting are made as resolutions, which need to be recorded in a written document as well and kept with the corporate meeting minutes. Decisions that need to be documented include:
• Initial election of type of business entity
• Determination of shareholder-employee or member-employee salaries
• Choice of accountant and bookkeeper
• Opening of bank accounts
