A so-called
”
pyramid
”
scheme that encourages and offers incentives to businesses to
incorporate has made its way into San Benito County.
A so-called “pyramid” scheme that encourages and offers incentives to businesses to incorporate has made its way into San Benito County.
While there are benefits for small businesses to incorporate, it’s not something every business should do, said Barbara Andres, a CPA and partner with Bianchi, Lorincz and Company in Hollister.
Andres recently came into contact with the pyramid scheme while preparing taxes for two of her clients. The company in charge of this particular scheme is MSTG Solutions, Inc., whose idea is to incorporate a business, then get other people to do the same.
These people would be called “independent representatives,” according to an MSTG Solutions representative at its corporate office in Orange. These independent representatives sell services and packages and make a commission, said the representative, who refused to give his name.
Initial cost of incorporation is $2,000, Andres said, with an $800 California tax minimum. People have to pay the cost of a second tax return, which can be from $500 to $1,500, she said.
“From a CPA’s point of view, this is absolutely bogus,” Andres said. “These are the people who can least afford this.”
Depending on the business, incorporating can put someone into a lower tax bracket. Also, the process of incorporation gives the company separate legal standing from its owners and protects those owners from being personally liable in the event that the company is sued, the MSTG Solutions representative said.
MSTG Solutions, Inc. is a national company that provides small business services to small businesses. Incorporation service is “the biggest thing right now,” the company representative said.
Incorporation also provides companies with a more flexible way to manage their ownership structure. In addition, there are different tax implications for corporations, although these can be both advantageous and disadvantageous, according to several definitions of incorporation.
Small businesses that have chosen “valid incorporation” include contractors, real estate agents, physicians and gardeners, Andres said. Both of Andres’ clients were approached to incorporate by friends.
“If people want to incorporate, they should go to an attorney,” Andres said. “Incorporation was recommended by people they trust.”
Neither of Andres’ clients returned phone requests for an interview.
Andres debunks the idea that incorporating will save money. People involved with a small business can deduct expenses without being incorporated, she said.
Andres said she has clients deduct business expenses, such as an obstetrician deducting baby booties given to patients. Also, once a business is incorporated, it costs more to file taxes since corporate returns have to be filed.
The forceful nature of the pyramid scheme is what bothers Andres.
“It’s such a high-pressure situation. It’s like a time share. When they’re pursuing people, it’s not legit,” she said.
Andres said the arrangement is a business scheme in corporate form. In addition to getting people to incorporate their business, people are also buying packages to sell to other people. A person will buy a package, then sell it for more than they paid for it, she said.
Andres’ point is that doctors or gardeners should not be selling incorporations. Most people are unsophisticated about what incorporation could mean, she said.
Both Andres’ clients dissolved their corporations, costing them even more money, she said.
