Blog | Entrepreneurship

The Power of the Corporation

How to legally protect your income and keep more money

Summary

• We all have the same rules, are you using them to your advantage?

• Corporations are the key to using the tax code to get (and stay) rich

• Don't get mad at the rich - get as smart as the rich

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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.

A simple truth about taxes

Rather than talk about whether the tax code is fair or unfair, the discussion should be looked at through a different lens; as Robert Kiyosaki put it: “Tax breaks are rewarded to the rich who build the economy and provide jobs.” Given that, the question becomes less, “Is it fair to tax the rich?” and more, “Are high-income employees building the economy and providing jobs?”

The answer is, of course, no. While it’s true they may help build a company’s bottom line, and they may also do some hiring for that company, they are not personally building the economy or providing jobs. Their company is. They are just very high-paid (and high-taxed!) employees of that company.

Why corporations are important

In his book, Rich Dad Poor Dad, Robert Kiyosaki briefly covered why corporations are important:

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.

How will you respond to the Trump tax plan?

In 2017, President Trump rolled out his proposed tax plan. It was hailed as the biggest overhaul of the tax code in decades. From the White House’s own one-page summary, here’s what the plan aimed to change for businesses:

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.

   Now that he’s back in office, we can expect more changes to the tax law. But in the above list, you can see that President Trump is setting up the tax code to reward who grow the economy and create jobs, while also eliminating some pressures for the middle-class.

   Baby steps

   Many people may find reason to complain about this tax code.But rather than get mad, get smart. Figure out how you can be someone who either grows the economy or creates jobs…or both. By doing so you will benefit from the very behaviors the tax code is designed to reward. The economy and your wallet will be better off for it.

   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.

   This is why it’s important to begin by 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? Read Rich Dad Advisor, Garrett Sutton's book, Start Your Own Corporation: Why The Rich Own Their Own Companies and Everyone Else Works For Them.

   • 15% business tax rate

   • Territorial tax system to level the playing field for American companies

   • One-time tax on trillions of dollars held overseas

   • Eliminate tax breaks for special interests