The Finatical
Week of September 13th, 2022 - Types of Corporations, Interest Rate Hikes, Home Values Drop
Topic Breakdown - Types of Corporations
Introduction
The four primary forms of corporations are Limited Liability Companies, sole proprietorships, C-Corporations, and S-Corporations. C-Corps are the most common type of corporations. For a C-Corp, the board of directors is in charge of running the company. They are in charge of making important business choices as well as recruiting, dismissing, and supervising officers who make day-to-day business decisions. Officers are in charge of the company's day-to-day operations. C Corporations get taxed twice: the company pays corporate income tax and shareholders pay federal income taxes through dividends. S-Corps are somewhat similar to C-Corps, but for federal tax purposes, S companies choose to pass through company income, losses, deductions, and credits to their shareholders. Owners may only disclose business revenue and losses on their personal income tax filings. On their personal tax filings, most S Corps can deduct up to 20% of their business revenue. If you have a S Corp, you may be able to deduct your company losses on your personal tax return. LLC is an abbreviation for limited liability company. This implies that if a business owner is implicated in a lawsuit, an LLC protects their personal assets. A limited liability company (LLC) can be taxed as a sole proprietorship, a S corporation, or a partnership. An LLC can have a limitless number of members, as opposed to an S-Corp, which can only have 100 stockholders. Finally, a sole proprietorship is a form of business owned and operated by a single person with no legal distinction between the owner and the business organization.
Advantages of Each Corporation
Advantages of a C-Corp: Liability is limited. This is true for board members, officers, stockholders, and workers. Exists forever, even if the owner quits the business, increased credibility, and potential for unlimited expansion. Because of the stock offering, there's a lot of potential for growth. Advantages of an S-Corp: Limited liability, pass-through taxes (owners declare their share of profit and loss on their individual tax returns), elimination of double taxation, numerous investment options, and indefinite existence, and there is a yearly tax reporting obligation (versus C-Corps, which must file quarterly). Advantages of an LLC: No US residency needed, legal protection, pass-through taxes, and increased trustworthiness. Advantages of a sole proprietorship: Less paperwork is required to get started, processes are simplified, and there are less obligations for corporate taxes. Registration costs are also reduced, and the business ownership is simplified.
Disadvantages of Each Corporation
Disadvantages of a C-Corp: Double taxes, high start-up costs, numerous laws and procedures, and no deduction for corporate losses. Disadvantages of an S-Corp: S-corporations have a strict management structure, yearly fees and taxes, cannot have more than 100 shareholders (all of whom must be US citizens), and shareholders of S-corporations can be seized and sold through court action more easily than shareholders of other corps. Disadvantages of LLCs: Limited possibility for expansion (LLC owners cannot issue stock to attract investors), self-employment tax, and taxes on appreciated assets. Disadvantages of a sole proprietorship: there is no liability protection, financing and corporate credit are more difficult to get, and it is more difficult to sell your company.
Financial Trends
Fed Chair Powell Vows to Raise Interest Rates
The ongoing battle with inflation remains as last Thursday, Federal Reserve Chair Jerome Powell emphasized the importance of reducing inflation immediately before the public become accustomed to higher prices and expecting them as the future norms. There has been hardly any changes in the early going on Wall Street as treasury yields still produce higher results, along with interest rates rising by nearly five basis points to 3.49% (one basis point = 0.01 percentage point). So far, the Fed has raised benchmark interest rates four times, with the fed funds rate set in a range between 2.25% to 2.50%. In fact, the chances of a third consecutive 0.75 percentage point increase this month has risen to 86% during Powell’s remarks, reported by CME Group’s FedWatch tracker of fed funds futures bets.
One of the reasons for the Fed's decision to act aggressively with raising interest rates is ensuring that inflation running around its highest rate in over 40 years doesn’t become ingrained in the nation’s consciousness. According to Powell, “The Fed has the responsibility for price stability, by which we mean 2% inflation over time. The longer inflation remains well above target, the greater the risk the public does begin to see higher inflation as the norm, and that has the capacity to raise the costs of getting inflation down”. There have been some indications recently that the monthly rate of inflation is abating, with gas prices steadily falling after increasing well over $5 a gallon.
Home Valuations Drop
Several homeowners are losing their wealth due to high mortgage rates weighing on home values, as the once red-hot housing market is quickly cooling down. This has been trending for the last several months of homes not selling, as their prices have dropped by more than 0.77%, reported by Black Night, a software, data and analytics company. Now it may not seem like a huge dropoff, but it was the largest monthly decline since that of January 2011 and the first monthly drop of any size in nearly 32 months. More than 85% of major markets in the U.S. have seen prices fall from their peaks during July, with one third of them dropping more than 1% and roughly 1 in 10 homes falling by 4% or more.
During the first two years of the COVID-19 pandemic, homeowners gained trillion of dollars in home equity collectively, but now the tables have turned, as homeowners are starting to lose theri home equity. However, homeowners are still far more flush (having a large amount of money) compared to the last time that the housing market went through a major correction. During the mortgage crash that began in 2007, leading to the unforgettable Great Recession, home values plummeted by nearly half of its value in major markets. However, this is not the case currently as homesellers own just 42% of their home’s value on both first and second mortgages, which is the lowest average in the housing market’s history.
Financial Guidance
“It is not the man who has too little, but the man who craves more, that is poor.” - Seneca
When we think of rich people, we generally associate extravagant lifestyles, luxuries, etc. However, if you cannot be satisfied with what you have, that creates a mindset of feeling like you never have enough, and thus creates an endless cycle of being “poor”.
Term of the Week
Corporations - Corporations are legal entities that are separate from their owners. They enjoy many legal rights as individuals do, but also serve a benefit in the sense that liabilities to individuals are limited. Corporations are not always associated with creating a profit, it can be formed by individuals or people with a shared vision or goal.