11 Comments

  1. She’s giving up her whole (soon-to-be-nonexistent) salary. But I think you have analyzed the risk correctly.

    And it’ll be a good business lesson even if it doesn’t work.

  2. Your salary is protected. You get what you’ve earned from state regulators (some states) and you have a high-level claim on a bankrupt entity’s corpus of assets. As an equity owner, you have the hightest upside, but also the lowest downside. Not only are you not ensured of getting anything (last in line at bankruptcy proceedings) but you also may be responsible for debts.

  3. @James Pollock, the whole purpose of incorporating a business is to protect the owners from business debt. Well, one main purpose.

  4. Most of the overhead expense of a business is not in the “protected by being a corporation” category. Especially in small businesses, the landlord may demand the business owners accept personal liability for any rent not paid by the business. Also, any loan on the actual business is probably secured by personal assets. Corporate limited liability works better on things like civil lawsuits for defective products or employee misconduct.

  5. “@James Pollock, the whole purpose of incorporating a business is to protect the owners from business debt. Well, one main purpose.”

    One of the reasons for hiring a good attorney, however, is to “pierce the corporate veil”, and pursue the personal assets of the owner of a corporation. And, of course, not all businesses ARE corporations. Most of them, in fact, are not.

  6. I have a client who has a cousin (employed at a major brokerage company) who she and her husband trust to make their investments. After questioning his investments for them – which tend to have bigger losses than they can deduct or otherwise use – I gave up.

    This year I was doing their return and he put them into a limited partnership investment! Client wife (she does the financials – husband is an artist) attached a note to the paperwork on the form from the partnership (which had a loss for the year) asking what the form was. Her cousin had not even told them what kind of investment he had made! I had to send her an explanation.

    So just because someone invests in something does not mean that they understand what they have done at all.

  7. Capital losses carry over from year to year, of course. I have been taking 3k per year against ordinary income since 2008. I still have five-figures of losses. That’s what happens when you develop your portfolio and invest a bunch of cash in taxable right before the worst crash most of us have seen.

  8. Brian in STL – Since every year they have losses higher than than profits for the year and in excess of the $3000 loss which can be deducted from their other income so they would be better off to have a gain once in awhile as it would be offset anyway and they don’t seem to receive any other income from the stocks sold that result in the losses which would be offset by the losses.

    This year he bought them into a limited partnership. Client put a note on the K1 asking me what it was and I had to explain it to her. He should at least be explaining what investments he is putting them into. It also had a loss with no income of any sort coming from it to offset the loss.

    They are in their 80s and need steady & certain income – not losses when they might need to sell the stocks at some point if there is a major situation that the need to pay for. (Like their rent going up if Amazon had moved into their neighborhood.) I don’t think the investments are appropriate for people living on Social Security and $8,000 in IRA withdrawals, but since I have advised the client wife who handles their financial stuff and she is a competent person (and was when I first questioned this with her at least a decade ago) there is nothing I can do about it.

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