Tax Benefits of Incorporation
The world of business is changing. With an ever-growing number of freelance workers, many entrepreneurs are opting to incorporate their company as a way to decrease their tax burden. However, these benefits can also be traced to the non-incorporated individual worker that hires an incorporated business for the work done within his or her field. The Benefits Associated with Incorporation Are Defined as Its Legal Status and Liabilities:
#1When you incorporate, you are recognized in the eyes of state and federal law as a corporation and have legal liability protection against personal liabilities such as lawsuits or medical debts.
#2As a result of this legal status, corporations enjoy several advantages when it comes to taxes. These advantages include:
a. A corporation with assets usually pays less tax than the same assets owned by an individual.
b. Corporations have the ability to work hard on marketing and sales initiatives that would not be possible for small businesses or sole proprietorships.
c. The costs associated with hiring a lawyer and maintaining corporate accounts are significantly lower for corporations than for single-owner businesses or sole proprietorships.
#3 Since incorporation occurs at any time during a business' life, taxes can often be avoided simply by incorporating before starting a business, or even after it is formed if the corporation is still generating income.
#4 Incorporation is well known as the way that corporations are legally recognized. However, it is not always known that a corporation has the ability to protect its assets against personal liability. The most common way that corporations protect their assets against personal liabilities is by electing to be taxed separately from the owners of the corporation. The benefits of separate taxation are:
a. A business corporation is able to protect itself against negligence or fraud claims filed by employees by making a separate taxable income for each owner during its existence on paper (not for all time).
b. A business corporation pays income tax on all taxable income during any year of its existence.
c. A business corporation is able to file fewer tax returns than an individual business owner.
d. Most importantly, the corporation's separate taxable income allows it to avoid double taxation on its income by choosing whether or not to claim a proportionate share of its own income when filing a return.
#5 As corporations are created by people, they are considered as separate individuals. This means that whenever there is a lawsuit filed against an incorporated corporation, the incorporators or shareholders will not be responsible for the suit; this type of protection is called personal liability protection, or PLP.
As explained above, incorporation can provide many benefits that are not available to sole proprietorships and small businesses who choose not to incorporate their companies. The incorporation process can be broken down into three simple steps:
1. Incorporation must occur in the form of a corporation, not a sole proprietorship or limited liability company (LLC).
2. The creation of an S-corporation requires that there are no more than 100 shareholders, and that all shareholders consent to being taxed as one taxable entity. (All states have varying laws as to how many shareholders there may be before it is deemed necessary to incorporate as an S-corporation.)
3. The election of S-corporation tax treatment must be made by the corporation in its first federal corporate income tax return and it may not be revoked without IRS approval.
Incorporation can be a complex process if the steps mentioned above are not followed carefully. To avoid any delays or complications in the process, consider hiring an attorney for incorporation. This is especially important for businesses that are hoping to take advantage of being taxed separately from their owners and shareholders. When attempting to save money long-term with the benefits of tax-free dividends, hiring an attorney could provide numerous significant benefits with little to no drawbacks.
The End
#6 A corporation can continue indefinitely as long as it has at least one shareholder and its articles of incorporation do not state a duration for its existence (called perpetual existence).
#7 Shareholders can elect directors who will be responsible for the management of the corporation's daily operations and the other day-to-day responsibilities of a corporation.
#8 The benefits of incorporating your business include:
1. Solves double-taxation problems
2. Offers liability protection
3. Provides asset protection for business owners
4. Helps you focus on long-term goals and objectives, rather than short term strategies to meet overhead expenses like payroll, office supplies, etc... The end result is that your company will grow faster and become more profitable by using this program designed to eliminate tax burdens from your Small Business or Sole Proprietorship™ .
5. Ensures that the maximum amount of tax deductions are realized
6. Provides a cash flow engine to generate excess cash from taxes from operations
7. Provides an ongoing stream of personal income to you, your spouse and dependents as a dividend
8. Allows you to make decisions based on what is most beneficial for the company, not just what's best for you.
9. Provides a simple and easy way to separate yourself from your business in the event of a lawsuit or other dispute with your employees or partners
10. Allows you to hire employees and make tax exempt payments using pretax dollars
11. Provides a company vehicle for clients that reverse-lookup under your business entity name and are looking for someone who may have your qualifications for them, without actually knowing what you do.
12. All of these benefits can be yours without incurring any legal fees from a lawyer or accountant
#10 With the new tax law as of Jan 31, 2017, corporations are only taxed at 15% instead of 35% for income earned in the U.S. That means a corporation will have to pay taxes based on their revenue and not their profit margins.
#11 The rules for corporations changed significantly in 2015 under the American Taxpayer Relief Act (ATRA) which was signed into law by President Obama on Dec. 22, 2014. The most significant changes for corporations were:
1. S Corporations can have no more than 100 shareholders and all shareholders must consent to being taxed as one taxable entity.
2. Corporations with gross receipts of more than $50 million a year will be subject to the Alternative Minimum Tax (AMT).
3. Corporate tax rates were reduced from 35% to 21% and the corporate tax rate will remain at 21%.
4. Pass-through entities like partnerships, LLCs, and S corporations now cannot deduct any business expenses or losses incurred in the tax year, even if they are income in another tax year on their personal returns.
Conclusion
Incorporating a new business is both confusing and expensive. For those that are interested in saving money on taxes, here's some information that will help you avoid the cost of incorporating your business.
The best way to incorporate yourself is to first see if you qualify for an S-Corporation status as it makes all other choices much simpler. Once you're in an S-Corporation, then you can incorporate LLCs or Sole Proprietorships. The S-Corp makes all things much easier and reduces your corporation tax rate by 66% compared to a C-Corp (if you meet certain requirements).