RE: Personal Incorporation (was Re: Free speech vs. big money

James Rogers (jamesr@best.com)
Tue, 24 Jun 1997 18:00:58 -0700


At 05:50 PM 6/24/97 -0400, Michael Lorrey wrote:
>Guru George wrote:
>> Isn't the main reason why corporations are treated as persons in the law
>> so that they can be held responsible for their actions? i.e. the people
>> who form the corporation are held collectively responsible for anything
>> 'it' does?
>>
>
>Really, how do you put a corporation in jail? How do you execute it?
>Granted it can be fined for its actions, but bankruptcy law gives any
>corporation the ability to shirk that debt off onto a money losing unit,
>spin it off, and close it down, ergo, no fine. Since corporations cannot
>be jailed or executed under criminal law, they have greater protection
>under the law from government than real citizens do. Perhaps a step
>along the road to personal sovereignty is personal incorporation. What
>are the limits of legality with regard to corporate/officer/owner
>liability? Its been a while, so I don't remember.
>

Personal incorporation creates a second legal entity, and is
distinguishable from your person.

Corporations legally protect its agents (i.e. employees) from most forms of
civil prosecution and some cases of criminal prosecution. However, certain
individuals with executive powers do not enjoy the same level of exemption.
Executive officers can be held criminally responsible for the behavior of
the corporation in certain instances. In the case of a one person
corporation, this would more or less always be the case. Legally this
would do little to protect your assets. Also, unless you have *a lot* of
money, capital gains taxes for the corporation are probably higher than
your personal taxes on the same assets (although a subchapter S corp would
fix that aspect).

For example, in a criminal case against your personal corporation, the
individual as sole executive officer and employee would be directly liable
in virtually all cases, just as though you were an individual. The rules
regarding this vary little from state to state. Personal incorporation
produces no net benefit in terms of protecting your assets in a civil
trial. Your 100% stock ownership is a personal asset that can be taken
away from the individual, and all corporate assets (i.e. 100% of your stock
value) can be taken away from the corporation.

There is a possible viable alternative. This is an idea that I have that
might work, although a little complex. The details in a couple parts are
sketchy.

The above scenarios are based on Corporate laws found in the U.S. Since
corporations are internationally recognized entities, an alternative would
be to incorporate in a foreign tax shelter. Anguilla is a well-known
example.

You set up a corporation in Anguilla ( no corporate income tax ) of which
you are the sole shareholder. You then become an employee of your own
foreign corporation living in the U.S. This will require filing foreign
franchise paperwork in the state you live in and usually involves paying a
fee in most states ($800 in California). You give yourself a minimal
paycheck and have the corporation own your car, house, etc. The
corporation pays for the taxes that are still incurred on assets. You are
now *personally* responsible only for paying income taxes on your measly
paycheck. The corporation is then responsible only for property taxes and
various employment taxes. A large chunk of your earnings is retained by
the corporation, which is never taxed at a corporate level. Corporations
generally only pay income taxes in their locale of incorporation. Because
you are a 100% shareholder, you still own your assets, but they are never
taxable. The value of your company's stock is subject to long-term capital
gains taxes, so you would never have to pay capital appreciation if you
never sell it. As long as you aren't stupid about it(***see below), you
could spend the corporation's money any way you like.

The limitation is that your job would be limited to working under the
auspices of your dummy foreign corporation. For contractors, like many
software developers, this should not be much of a problem. Many
contractors incorporate themselves locally.

This is just an idea, and not fully researched, but may be workable.

*** The IRS has something called a lifestyle audit, although rarely
initiated, it allows them to arbitrarily set your taxable income based on
their estimation of the cost of your lifestyle. These are usually
initiated against individuals who live flagrantly wealthy lifestyles yet
claim a very modest taxable income. It was originally designed to be used
against drug dealers and organized crime figures, but has been used
recently in more general cases. However, initiation of this type of audit
does require "probable cause". In the words of a CPA and tax consultant,
if a lifestyle audit is initiated against you, "you're f**ked, pure and
simple".

-James Rogers
jamesr@best.com