Blog | Entrepreneurship

The Power of the Corporation

How to legally protect your income and keep more money

A lot of people think there are two sets of rules, the rules for those who are successful and the rules for everyone else. But in reality the rules are the same for everyone. The only difference is that successful people use the rules to their advantage, while everyone else does not. That is the fundamental difference.

One way in which successful people use the rules of money to their advantage is through corporations. In my book Rich Dad Poor Dad, I briefly covered why corporations are important:

1. Asset protection

   If you are rich, people tend to want to take what you have through litigation. But the rich don't own anything in their own names. Their assets are held in trusts and corporations to protect them.

2. 2. Income protection

   By passing the income stream from assets through your own corporation, much of the income that is normally taken from you by the government through taxes can be sheltered.

   How an employee's income flows

   The harsh reality is that, for employees, the sequence of income goes like this:

   Earn --> Taxed --> Spend

   As an employee, your earnings are taxed and taken through withholding taxes even before you get your paycheck. So, if an employee is paid $30,000 per year, by the time the government gets through with it, it may be down to $20,000. With that money, you must then pay your mortgage and all your other daily expenses.

   If you pass your income through a corporate entity first, this is what the pattern looks like:

   Earn --> Spend --> Taxed

   By passing income from $30,000 through a corporation, you can expense much of the earnings before the government gets their hands on it. If you own the corporation, you make the rules, as long as it conforms to the tax code.

Make your own rules

An example of using a corporation to make your own rules would be writing into your bylaws that childcare is part of your employment package. The company may pay $400 per month for childcare out of pre-tax dollars. If you pay for it with after tax-dollars, you have to effectively earn hundreds more to pay for the same childcare.

The list is long, and the requirements are specific as to what an owner of a corporation can write off that an employee cannot. Certain travel expenses, for instance, can be written off with pre-tax dollars as long as you can document that you conducted business, such as a board meeting, on the trip. Just make sure you follow the rules.

At Rich Dad, we strongly suggest hiring smart advisors, obeying the law, and making lots of money legally. Your legal advisors will serve as your early warning system for upcoming changes in the law. And when laws change, wealth changes hands.

Baby steps

If you want to take advantage of a corporation to protect your money, the key is which part of the CASHFLOW Quadrant you earn your money from. If all your income is generated as an employee from a company that you don't own or control, there's little income or asset protection available to you.

That is why I often suggest that people begin taking baby steps. If you're an employee, keep your job, but also begin to spend time in the Business (B) and Investment (I) side of the quadrant. And when you do, use the power of the corporation to protect your hard-earned money. Your road to faster financial freedom is through those two quadrants.

Want to learn more about the power of corporations? I suggest reading Rich Dad Advisor, Garrett Sutton's book, Start Your Own Corporation: Why The Rich Own Their Own Companies and Everyone Else Works For Them.