Business people are often misled by their investments in their own companies. How much to invest in the company and how much to pay to themselves? These are constant questions of operating a business.

Business people who borrow money from their companies frequently face an I.R.S. challenge. To win the case they need to have a signed note with a repayment schedule and a stated interest rate. Otherwise, the tax people are likely to view the loan as a dividend, taxable to both the business and the owner. There are more and more cases where the I.R.S. has accused business owners of family-owned S corporations of underpaying themselves.  

So, how much to pay and how much is right? The amount depended on the business and on its industry. One of the creative things business people do to keep themselves from running afoul of the I.R.S. is to keep careful minutes of board meetings and record any bonuses paid, making clear that they are performance related, not paid because the owner wanted a new car or luxurious dwelling.

Another is to insure that compensation is based on service rendered, not on the percentage of stock held. The I.R.S. is likely to view payment for stock holdings as a dividend. The last one can’t be deducted as a business expense, but compensation can be, however. The third one is to convert to an S corporation, the entity which allows earnings flow through to the owners, rather than being retained at the corporate level. This type of corporation is not always preferable, because of the various restrictions on S corporations, where only one class of stock and the corporation is must have 35 or fewer shareholders, all United States residents.

In case you go on a regular C corporation, compensation should always reflect performance, not a current performance, however. Although it’s very easy for business people to identify themselves with the company and to feel the ownership, legally the company is a separate entity, and the legal standard of financial operations including owners’ compensation packages is reasonableness. 

By citizen.com 

When it comes to setting up the legal structure of a new small business, there is no one-size-fits-all solution. As the founder of the business, you will be considering one of three legal forms — sole proprietorship, partnership or corporation — depending on answers to questions such as these.

First, will I be the only owner? If so, you may choose to remain in a sole proprietorship. Easy to form, this structure allows the owner to make all the decisions and receive all the profits. The owner also enjoys relative freedom from most government control and reporting requirements.

Next, how important is it to me to limit personal liability for debts or claims against my business? If it is highly important, you’re most likely to incorporate the business.

Next, which legal form of business organization will result in the least amount of taxes? There is no clear-cut answer here, which is one reason any small business owner should seek professional advice based on the circumstances of the owner and the business.

However, which legal form will be the simplest to set up and maintain? Generally, sole proprietorship is generally the simplest and least regulated. In fact, if your business starts up without a partner, the law will classify your business as a sole proprietorship.

The greatest disadvantage to a sole proprietorship is that your personal assets and those of your family are not protected. Should there be financial problems or a lawsuit, your assets are at risk. Additional insurance will help minimize the risk and cover liability up to a certain dollar amount; however, you also assume greater personal liability.

With more than one owner, the business can form as either a partnership or a corporation. Partnerships come in two varieties: general or limited, both giving all partners a say in the decisions. General partnerships do not require a formal written agreement (although not having one would be a serious mistake), but limited ones do and also require the filing of a certificate. The general partnership stipulates that all partners have unlimited personal liability, but in a limited partnership, partners typically are liable only to the extent of their investment.

The main advantage of incorporation is the limited financial liability of the owner. Personal assets cannot be attached and ownership is transferred through the sale of stock shares. The corporation is a legal entity and will continue to exist until its legal dissolution, even if one of the principals in the business should die.

There are different types of corporate structures. A regular corporation has government control and reporting requirements. Corporate earnings are subject to double taxation profits, and then the shareholders’ earnings through dividends. However, an S corporation provides the limited liability of the regular corporate structure, and earnings are taxed to individual owners at their individual rates. A limited liability company (LLC) offers the benefit of limited liability without being as complex as a corporation.

Finally, the list of choices is pretty clear, but whatever you choose there are advantages and disadvantages depending on specific business purpose. Usually business people consult a tax attorney before deciding on form of business organization. So, you should as well.

Bill Browder, the Hermitage Capital Management Fund owner who has managed his business in Moscow for more than 10 years with $4.1 billion in Russian stocks under his management, was abruptly denied entry when he landed in Moscow in November two years ago. He is still unable to enter Russia despite all his efforts. In 2006, Robert Amsterdam, a Canadian lawyer was expelled from his hotel room in Moscow in the middle of the night when police suddenly revoked his visa. Frank Neuman, U.S. businessman, who used to be co-owner of a chain of furniture shops in Moscow, was turned back in a local airport in February two years ago and has been unable to enter ever since.

What do foreign investors feel about doing business in Russia where it is difficult to predict what will happen next? “Well, that is why you make 23 times your money in 10 years”, answers Mr. Browder.

When most investors think of Russia, they think energy. The image of Russia is the destruction of the former Russian oil giant Yukos, the rise of the biggest state-owned enterprise Gazprom, and the tough politics of the Kremlin. But for many investors from the U.S., Europe, and Asia, investments in Russia are related to the consumer boom. Last year, foreign direct investment in Russia was estimated to be $16.7 billion, about 40% more than in 2004. Consumer-related sectors attracted Coca-Cola Co. with the $600 million acquisition of Russian fruit-juice maker Multon, Dutch brewer Heineken invested $750 million in acquisitions, and Ford, General Motors, Toyota and Volkswagen have made investments in car production. Most of that investment came to those sectors other than oil and gas, which is a sign of economic diversification. This year Citibank had 47 branches in the country and says its Russian business is growing at 70% annually.

All that business people need to know about the people of booming consumption that there is no better time to make a business in Russia than today. Across this country, “companies are spending billions of dollars to upgrade facilities and expand capacity- all in an effort to keep pace with surging consumer demand. Fueled by Russia’s vast energy sector but ranging well beyond it, the boom goes a long way to explain Russia’s new assertiveness on the world stage.”

The strength of the Russian consumer is what’s attracting these companies. There is heightened consumer demand not just in Moscow but also, increasingly, in other cities related to the capital’s breakneck economic development. “Russia’s gross domestic product grew by 6.4% last year and has averaged 7% growth over the past five years. Dollar income per capita has risen by nearly 29% per annum over the same period, faster even than in China.” These investments target Russia’s middle class.

Relatively large disposable income and a growing middle class have caused an explosion in all types of consumption. Last year, sales of new foreign cars reached 600,000, a 57% increase on 2004 and a six fold rise since 2001. Mobile-phone ownership has mushroomed from 3 million in 2000 to 80 million today. No less than a fifth of all households own a computer, four times the figure in 2001.

However, Russian business people are in some way in contact with corruption and crime. They don’t know what is legal and what illegal. Bribes and gifts are needed in order to get proper medical care, to get to sell vegetables in a marketplace, to get a good education and even to get a proper funeral for a loved one. Criminal organizations control banks, stock exchange, hotels and commercial enterprises. Bribes control political decision-making, the police, the courts, the customs and the border guards, the very people that are supposed to control crime.

Analysts note that corrupt Russian officials take bribes of US$240 billion (€189 billion) a year, an amount almost equal to the state’s entire revenues. The global anti-corruption group Transparency International and Russia’s business-funded National Anti-Corruption Committee last year estimated that the level of graft had jumped as much as sevenfold since 2001. Russia is near the top of Transparency International’s scale of corruption, at No. 121 out of 163 in 2006, along with such countries as Rwanda and Burundi. Four years ago, it had been rated 71.

The biggest concern is a mix of rising government power and criminalization. Contract killing, like other services, is subject to market rules: the lower the perceived risk, the lower the price. The risk of getting caught for buying murder in Russia is generally very low; even so, the alleged customer in the killing of Andrei Kozlov, deputy governor of Russia’s central bank, apparently miscalculated. Then, Russia’s general prosecutor said solving what was the highest-profile hit of Vladimir Putin’s presidency was a matter of honor —and solve it the authorities now say they have, fingering a group of amateurish Ukrainian hit men and middlemen, who were supposedly paid just $10,000 altogether.

Here are my rules of doing business in Russia. If you are lucky to have a business there, don’t mix it with politics, and if you do so, be ready to face a tough government inspection over your business. Don’t pursue business in any industry which serves as a main tax source of Russian economy. If you do so, be ready to actively share the revenues with Russian government. Doing both means taking heightened risk over your investment and also over your personal freedom and life in Russia.

And more important, don’t cause conflicts with your Russian business partners. If it is unavoidable, be aware of the possible consequences in terms of your personal status and the widespread corruption in the country. Your visa can be invalidated, permitting your immediate deportation or denial of entry into the country.