Following on from the over whelming feedback on “Getting the Most Out of Incorporating Your Legal Practice”, this months topic is “Putting an Incorporated Legal Practice in Context”.
In “Getting the Most Out of Incorporating Your Legal Practice”, I highlighted some specific outcomes that can be achieved by incorporation, and have demystified the perceived complexities, but you need to consider incorporating your law practice not just from the immediate and short term benefits, but from the significant long term wealth accumulation advantages.
Cutting to the chase, the long term impact of a greater after tax return to re-invest in your business will provide you with significantly more assets long term.
Let’s put it into perspective.
You pay 46.5% tax on income earned over $180,000 in your own name (the usual structure for a sole principal or legal partnership).
You pay 30% tax in a company.
That’s 16.5% difference.
If you apply this difference to $100,000 of income, that’s $16,500.
If that income grew by CPI (3%) each year, over 20 years, that will provide you with $330,000 of additional capital, in today’s dollars.
If this additional capital was invested and earned an after tax income return of only 4% per annum that was reinvested, then the additional capital you would have in 20 years, in today’s dollars would be $446,926.
If you invested the difference into business assets (such as an acquisition or expansion strategy) that produced an after tax return of say 20% per annum, that would result in an additional net asset value (ignoring growth in goodwill) of $2,321,118 in todays dollars over 20 years.
This is achieved simply by having more of your after tax income to reinvest and retain in your incorporated legal practice. You might think these numbers are extreme, but they are not. A simple present value calculation based on more cash to invest. Consider the impact on your business.
Practically, what you can do with this money:
- Retire debt at a faster rate;
- Reinvest in business assets (acquisition, technology, people, marketing) to drive improved profit and cash flow returns;
- Invest in passive assets, such as business premises;
- Take the pressure off funding your drawings.
Paying tax in a 30% tax environment provides you with options. Take advantage of them.
For every law firm I offer a free Incorporated Legal Practice Restructure Review. We will meet and discuss the opportunities, costs and benefits of incorporating your business, and discuss strategies that you can implement to determine if incorporating your legal practice is of benefit to you. This is provided to you free of charge. Just click on firstname.lastname@example.org to unlock the benefits of incorporating your legal practice, free of charge and obligation free.
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