Putting a Business in Your Spouse's Name

It's one way to avoid the penalties of collecting Social Security early, but there's a catch

Q: I'm 62 and want to start collecting Social Security. If I put my sole proprietorship in my wife's name, can I reduce my business income enough so that it doesn't cut into my Social Security benefits? — Tom Johnson, San Jacinto, Calif.

A: Let's start with the Social Security piece. Since you're not of full retirement age (65 to 67, depending on your birth year), you'll have to forfeit $1 in benefits for each $2 you earn over the annual limit, which is $14,160 for 2009.

You can avoid the penalty if your wife becomes the sole proprietor, but there's a catch: She must take on more job responsibility. "You can't just randomly put the business in her name and make her a figurehead in order to avoid Social Security penalties," says John Graziano, an accountant with Future Financial Planners in Bayonne, N.J. This can work if you run a business where she can easily assume a bigger role and claim more income—say, a clothing boutique. But this won't work if you run a legal, dental, or other professional practice where you, not your wife, bring in the bulk of revenue.

If that's the case, there are still ways to reduce your taxable income and avoid a loss in Social Security benefits. For instance, you could deduct home-office expenses (if applicable) or set up a qualified retirement plan, Graziano says. You could also form a C corporation, which can be costly but allows profits to be taxed to the company.

Remember, once you hit full retirement age, you can collect Social Security without penalty. But up to 85% of those benefits could be taxable depending on your income, says Jack Chite, a financial planner with J. Chite Associates in Sayville, N.Y.

Q: We'd like to sell therapeutic toys to the clients at our pediatric therapy clinics. Do we need resale certificates? If so, do we need them just for our state or for other states where we plan to open clinics? — Andrea Rogers, Chicago

A: Before you spend the money to start this operation, see whether this business idea is even feasible. "Create a simple, 10-question survey that asks your clients' parents if they would buy your toys and at what price range," says Bob Phibbs, a retail consultant in Coxsackie, N.Y. "Remember, mall toy stores with hundreds of people passing by each day are having a rough go of it."

Even if parents are eager to buy, you'll have to spend time and money adding toys to your clinic. You're correct that you'll need a resale certificate. This standard form (available for free on your state's Web site) lets you buy merchandise from a wholesaler without paying sales tax, as you'll ultimately collect sales tax from your customers. You'll want to speak to a business attorney in each state where your clinic plans to sell toys, since the requirements vary by location. You may need to get a business license, obtain product liability insurance, and establish a refund or return policy for the toy sales. There may also be regulatory, safety, and third-party payer issues if clients plan to bill their health insurance for the toys, says David Kalifon, who heads the health-care practice at the Los Angeles law firm of Jeffer, Mangels, Butler & Marmaro. "If a lot of money will be involved, you might form a separate legal entity that would shield your therapy practice from any lawsuits resulting from the toy sales," he says. You might also consider a separate online toy store, which could be cheaper, too.

For Karen Klein's ongoing column series, go to businessweek.com/go/sb/smartanswers

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