“A Corporation is a Fiction!”
Welcome back, brothers and sisters. I was giving a seminar a few years ago, and I was explaining the benefits of a corporation when one of the attendees started yelling out, “A corporation is a fiction! A corporation is a fiction! A corporation is a fiction!” The rest of the attendees shuffled away from this guy, obviously frightened that he was having some kind of a mental episode. I stayed silent for a few minutes, waited for him to calm down, and got on with my speech.
In a weird way, this guy that most considered crazy had a point. Today I would like to share with you some sound business advice about corporations…
When most people hear the word ‘corporation’, they imagine a building with people working inside it. They picture something real. But a corporation isn’t really real, not in the tangible sense. It’s just a few papers sitting in a file in a lawyer’s office. So, although corporations aren’t quite a “fiction”, they aren’t far off, and this fine ‘veil’ between you and your corporation can be pierced if you aren’t careful.
And yet, corporations can be one of the best ways to save and protect your money IF you understand them. Otherwise, they can give you a false sense of security…
The corporation was born in Roman times and survived through medieval times in use by the church. This was supposed to represent a community of people with the same interests, but the corporation would live longer than any of those members, thus the corporation would go on forever.
But it was the British East India Company who would steal the credit for its invention, which is why some people, perhaps incorrectly, say corporations were a British invention.
These entrepreneurs who sponsored expeditions to the New World developed a way to protect themselves against loss, so that if a ship sunk and the crew drowned the loss and liability would be limited to just that vessel- they used London lawyers to create the modern depiction of what we know today as a corporation. To this day there’s a surviving ancestor of this time in the form of Lloyd’s of London still being the world standard for shipping insurance and registry.
A corporation was now an independent entity that had privileges and liabilities distinct from those of its members.
That’s the important part above.
If your corporation sells something and a customer tries to sue, they sue the corporation, not you. Thus, the financial damage is, in theory, limited to the assets of that corporation. Great. You probably already knew that.
But what happens if the amount of damages claimed exceeds the assets of the corporation? Are the owners (perhaps you) still safe, as the British East India Company had intended?
The answer, like all legal answers, is murky. The answer, as any good lawyer says, is: “It depends… now, are you aware of my hourly rate?”
But it’s not that hard to decode the common lawyer’s answer when you understand the history of corporations and what a corporation truly is, and it’s vital that you know these answers if you’re to reap the substantial rewards a corporation offers and still sleep at night.
In a way, and somewhat disturbingly, you have to get inside the head of that maniac in the seminar I spoke about earlier because that guy appreciates the fact that a corporation is not real, it’s not you or him, it’s a made up legal thing, it’s an entity all to itself.
And unless you treat your corporation in this way, you may come unstuck.
Let’s take a couple of examples of how not to do things…
If you ‘co-mingle’ funds between your personal money and your corporation’s money, your corporation could be rendered worthless as a shield against your personal assets. For example, paying for your daughter’s wedding with your corporation’s money using some lame justification that suits you mentally (“entertaining clients” no doubt!), you just made a statement to the world that your corporation is NOT a separate entity; your corporation is really YOU. “Your corporation is a fiction! Your corporation is a fiction!” Thus, any attacker would certainly be able to ‘pierce the veil’ that your corporation provides you, and they could come after your house or whatever.
Do NOT co-mingle funds.
You may think you’re being cute by putting all number of personal items or “entertaining” down as a corporate expense, but it’s not just the tax man who will have a problem with this if you get caught, it’s also any would-be claimant. By paying for that baseball game or whatever with your corporation debit card, you just made a useful statement to some lawyer who wants to roll the dice for a frivolous client (and you’re required by law to keep all accounts and receipts for six years).
Think of everything in terms of your corporation being a friend, a ‘business buddy’. Do whatever you would do as if it was your friend’s bank account, and what would be fair to him in the line of his work.
By that same token then, if you expect your ‘business-buddy’ to be able to operate effectively, you’d give him all the tools he needs to do his job, including dealing with complaints and any litigation. If you don’t, and by that I mean you don’t provide him with enough operating capital and most of all insurance, a suing lawyer could argue that this corporation is indeed a ‘fiction’, and come after you personally; because the corporation was not adequately capitalized (i.e. you sucked all the cash out to avoid loss in any litigation).
But if you bear all this in mind, a corporation will save you tax and allow you to do business safely in an extremely litigious country. Moreover, it will allow you to exploit some of the greatest secrets of the wealthy, and one of the reasons why the rich get richer and the poor get poorer…
If you’re an employee of a corporation instead of an owner, you work, the government taxes you, and only then can you buy certain things.
But if you’re the owner of a corporation, you buy certain things and THEN pay tax.
This is obviously a big advantage. Gasoline for work, computer equipment, stationery, legitimate entertaining of clients, etc. etc. anything your ‘business-buddy’ incurs as expense in the course of him doing business. All this is paid for with PRE-TAX dollars. And then there’s ‘phantom’ expenses like depreciation of your car- your car sticker price can be written off over a few years against your tax bill. You can even write off the ‘depreciation’ of an investment property through a corporation!
But there’s much more to all this business of your corporation being a separate entity, and this is the biggest point I need to make today:
Keep your personal views out of your business!
You’re not being fair on your ‘business buddy’. Why should he be weighed down with your prejudices? The poor guy just wants to make money- that’s his sole purpose – so don’t get in the way of that.
And I don’t just mean to not make corporate statements that hurt others who don’t share your personal views, I’m also, and perhaps most of all, speaking about marketing.
Purely for demonstration purposes, an example: You may think it’s a good idea not to open for business on Sundays because you think it should be a day of rest for everyone, including your customers. But guess what? Your ‘business buddy’ only thinks about profitability. He’ll comply with your commands, but he would tell you that’s dumb if he could speak.
Same goes for all your marketing ideas. Your corporation only cares about giving your customers what they want, however dumb you may think that request, your corporation doesn’t care.
When you do something in the name of your corporation, wear a different hat- the hat of your business buddy. And that’s a nice hat to wear, because your corporation- your business buddy- thinks a lot clearer than you or I do, and he is without prejudice. And his clarity is what will get you to your goals… if you treat him right.