Incorporating a Business; Investing for Kids

QUESTION: I’m retiring and will do some consulting work. A friend suggested I form a limited liability company (LLC) or an S corporation. What are the advantages?
—Bill McIver, Cumming, Ga.

Both legal entities help separate your business assets from your personal ones. This way, you won’t lose your savings or home should your business go belly-up due to crushing debt or a lawsuit. (You won’t be protected in every legal scenario; your personal assets are still on the line in cases of gross negligence, for example.) Both S corps and LLCs are called pass-through entities, which means your business profits are taxed at individual income rates rather than at the corporate level.

For a simple one-person consulting business, an LLC is likely the way to go, says John Evans, tax partner at BDO Seidman. “It’s easier to administer and requires fewer corporate formalities,” he says. S corps require annual meetings, a board of directors and more paperwork than LLCs, including federal tax filings. That said, if you envision your small business including other employees, the S corp may provide an advantage when it comes to employment taxes (though you can always make the switch later). Schedule a consultation with a tax pro and an attorney.

QUESTION: I’m paying off $13,000 in credit card debt. Which would be better—pulling cash out of my home by refinancing my mortgage or tapping a retirement account early?
—Teena Hashemi, Edmond, Okla.

How about door No. 3, which I’ll loosely define as anything other than those two options. Raiding your retirement stash (and getting socked with a 10 percent early-withdrawal penalty) or spreading your short-term credit card debt over a 30-year mortgage are two lousy ideas that could leave you worse off than when you started—especially if you run up those credit cards again. Any chance you have a wealthy aunt to hit up? Could you raise extra money selling your unwanted junk on eBay? If the debt was accrued because of a onetime event, even borrowing from your 401(k)—which carries the notable risk that the loan will need to be paid back immediately if you leave your company for any reason—could be a better option.

While $13,000 may take several years to pay off, simply leaving the debt on your credit cards may be your best bet—particularly if the debt was accrued from chronic overspending. “Getting out of debt quick is like getting rich quick—it doesn’t really work that way,” says financial planner Sheryl Garrett, founder of the Garrett Planning Network. Slowly but surely paying down credit card debt is like “running a marathon and finishing—you’ll be a different person at the end,” she says.

QUESTION: My children, ages 5 and 9, each inherited $15,000 from their grandmother. She requested it be made available at age 21. How should we invest?
—David Wohl, Chapel Hill, N.C.

Open two UTMA (Uniform Transfers to Minors Act) accounts at a low-fee fund company. These accounts put you in charge until the “age of termination,” at which point the account is transferred to the beneficiary. The age varies by state but is typically 18 or 21—and you can often specify ages in between.

With a horizon of at least 12 years, the majority of each account should be invested in a diversified pool of stocks—up to 85 percent, depending on your risk tolerance—with the allocation becoming more conservative over time (assuming the money will be used when the kids gain access). Also, familiarize yourself with the “kiddie tax” rules, as investment gains could be subject to them.