Incorporating
Advantages of Incorporating
1. Reduces Personal Liability
Incorporating helps separate an individual’s identity from that of his or her business. Insurance may still be necessary, but incorporation contributes an added layer of protection.
2. Tax Savings
Careful planning of entity type can result in lower overall tax rates.
3. Anonymity
A Corporation can be established in such a way that shareholders/owners remain anonymous. Often this same anonymity can be accomplished for officers and directors.
4. Adds Credibility
A corporate structure communicates permanence and credibility. Even a company with only one stockholder and employee may incorporate.
5. Easier Transfer of Ownership
Through the sale of stock, ownership of a corporation may be transferred without substantially disrupting operations.
(This information is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, consult with your professional advisor.)
Advantages of C Corporations
1. Lower tax rate on profits of the corporation
Profits of a C corporation are taxed at a relatively low rate. The corporation is taxed at 15% on amounts up to $50,000.
2. Unlimited number of Shareholders
C corporations are not limited to a maximum number of shareholders as opposed to S corporations where there can be no more than 100 shareholders.
3. Not limited in the type of Shareholders
C corporation owners can be individuals, trusts, non-resident aliens, corporations, partnerships or LLC’s. Owners of S corporation shares can only be individuals, estates or certain types of trusts.
4. Ability to choose a fiscal tax year
C corporations have flexibility in electing a fiscal tax year that best matches the company’s business cycle. S corporations have a number of restrictions in choosing a year-end other than December 31.
C corporations can also use a fiscal tax year to defer taxes. S corporations are required to make payments reflecting any tax deferral.
5. Expenses are deductible on the corporate level
Expenses like charitable contributions can be deducted. S corporations pass charitable expenses through to the owners, who might not be able to deduct them.
6. Use of Net Operating Losses
Federal Losses can be carried back or forward to other year’s tax returns. This can generate tax refunds or offsets to future taxable income.
(This information is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, consult with your professional advisor.)
Advantages of S Corporations
1. Double taxation is avoided
Double taxation occurs when a corporation pays income tax on corporate net income, and then the shareholders pay tax on any dividend income they receive from the corporation (This often occurs with C corporations). Double taxation hits particularly hard when a company is sold.
By becoming an S corporation, profits and losses flow directly through to the owners in proportion to their ownership percentages. For example, a 10% owner would pay income tax on 10% of the profits or losses at their personal tax rate.
Since profits and losses flow through and are taxed on the individual level, there is generally no federal income tax on the corporation itself. Various state taxes could still apply.
2. Avoidance of self-employment tax by the shareholder of the corporation
Sole proprietors and independent contractors are subject to self-employment tax at a rate of over 15%. A self-employed person who forms an S corporation and becomes an employee of that corporation is no longer subject to self-employment tax on the net income.
(This information is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, consult with your professional advisor.)
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