How the Rich Use S Corps to Explode Their Wealth!

What is an S Corporation? [00:56]

• An S corporation is a tax election, not a type of legal entity.
• It can be applied to an LLC or a corporation (Inc.) already established at the state level.
• The S election changes how business income is taxed, working in conjunction with operational income, asset holding companies (like LLCs for rentals), and the ultimate 1040 tax return.

The S corp just is overlaid on top of an entity you've already created.

Strategy 1: Slash Self-Employment Tax [02:10]

• This is a primary benefit for small business owners, allowing them to reduce the 15.3% self-employment tax.
• Instead of paying self-employment tax on the entire net profit (e.g., $75,000 from $100,000 revenue minus $25,000 expenses), income is split.
• A portion is taken as a reasonable salary subject to payroll taxes, and the remainder as distributions, which are not subject to self-employment tax.
• For example, a $75,000 profit could be split into $25,000 salary and $50,000 in distributions, saving approximately 15.3% on the $50,000, or around $7,500.
• The income threshold to consider an S corp is typically $40,000 to $50,000 of net profit per year.
• Contrary to some beliefs, using an S corporation actually makes a business less likely to be audited than a basic LLC or sole proprietorship.

An LLC is not going to be able to save you self-employment tax. You cannot take a salary out of a basic LLC on a sole proprietorship.

Strategy 2: Fund a Solo 401(k) [04:49]

• After saving on taxes, the extra disposable income can be funneled into tax-advantaged retirement accounts.
• The wealthy use their S corp to fund a solo 401(k), allowing for significant tax-deferred or tax-free growth.
• As an employee, one can defer up to $30,000 (or more depending on age) from their S corp salary.
• The S corp, acting as the employer, can match this contribution, pushing total 401(k) contributions well over $70,000 annually.
• These funds can be invested in various assets, including real estate, crypto, syndications, stocks, and mutual funds.
• A common mistake is not setting up a solo 401(k), leaving substantial tax-free wealth on the table.
• Health insurance benefits also go hand-in-hand with 401(k) planning and can generate additional deductions.

You could be putting away tens of thousands of dollars every year, building wealth in a bucket the IRS can't touch until retirement, or not at all.

Strategy 3: Build a Board of Directors/Advisors [07:11]

• Wealthy entrepreneurs leverage boards for advice, support, and to unlock further deductions and asset protection.
• Formalizing annual board meetings creates a "family office" structure within the corporation.
• This allows for legitimate business deductions for travel, meals, and communication related to these meetings.
• Family members, friends, and trusted advisors can be added to the board.
• Documenting board meetings with minutes, including accountable plan provisions, helps audit-proof tax returns and increase deductions.
• Failing to document or hold these meetings can lead to disallowed deductions by the IRS.
• These meetings also strengthen the corporate veil and enhance asset protection.

See, with an S corporation, you can add family members, friends, and trusted adviserss to your board. And you're going to hold board meetings on a regular basis where business is legitimately discussed