BENEFITS OF INCORPORATING
Have you been told you do not need to incorporate your business? What are the benefits of incorporating? How will your business be taxed if you incorporate? Will you still be able use expenses and take deductions? Do you make enough money to Incorporate? If you choose to incorporate, who is going to help you learn how to operate as a corporation?
Ray Kroc (McDonalds), Sam Walton (Wal-Mart) J.L. Turner (co-owner Dollar General) and many more successful businessmen have ask the same questions. How did they do it? They incorporated the business, securing their future, by making every single dollar count! And with our help you can do just that! We will guide you every step of the way. We will explain in plain language how it is done, in simple layman’s terms.
What are the benefits of incorporating? If you have already incorporated your company, what advantages of being incorporated are available to you? The short answer is, there are many advantages of being incorporated, both legal and financial! This article will focus on one type of corporation, the 1120s. Why? In my professional opinion, the 1120s is the most beneficial type of corporation based on taxation, partner buy ins, maneuverability and more.
HOW WILL MY BUSINESS BE TAXED? Let us first talk about individuals in business who have not yet incorporated. They are called Sole Proprietors (Sole Prop). Sole Proprietors are people who own a business that have not formed a corporation. When a Sole Prop makes a profit, the profit is subject to Self-Employment Tax. The Self Employment tax rate is 15.3%! How does this affect the business owner? When it comes time to file your tax return, Sole proprietorships are required to file a Schedule C (profit or loss from business), which is included on the business owner’s 1040 personal tax return. The tax liability for a profitable business could be overwhelming. For instance, on a 2014 tax return, schedule C, Sole Prop with a net profit of $200,000 the tax liability to the Internal Revenue Service (IRS) would be approximately $64,556. If you live in a state with state income tax such as Georgia, you would owe an additional $11,371. This results in a combined tax liability of $75,927! Now if you were incorporated and had the same net profit of 200K, your federal tax liability would only be $47,344. That is a difference $17,212, just by changing your business from a Sole Proprietorship to an 1120s corporation! Officers of a corporation are required to take a reasonable salary, but the overall tax liability of an 1120s corp will be far less than a sole proprietor.
EXPENSES & DEDUCTIONS. Can a corporation take deductions that are not available for a sole proprietorship to take on a tax return? Yes. There are more deductions available for a corporation. Also, with deductions that are allowed for both types of entities, the corporation often times can take a higher percentage of that same deduction. Bottom line: Corporations have more legitimate tax deductions than sole proprietors do.
AUDIT RISK. Corporations have a much lower audit risk than sole proprietorships. (Cpa at Law, 2014). That’s not fair you say! In saying that you would be right, but that does not change the fact that two businesses, identical in operation down to the amount of income and expenses, one incorporated, one a sole prop, the sole proprietorship has a higher possibility of being audited by the IRS than the corp does. In 2012 the audit rate of personal returns with business activity (Sch C) was 3.4%. To contrast this figure, the same year the audit rate of 1120s returns was 0.5%. (pselaw, 2013) What you can take from this is that by simply changing your type of entity can reduce your chances of being audited.
ASSET PROTECTION. What if your company is sued and you lose? Your corporate assets are at risk, but not your personal assets. Unless, gross negligence can be proved. What does this mean? If there is a slip and fall in your store, the claimant would have to sue your corporation. They could not sue you personally unless it could be proved that you were aware of the danger personally and neglected to correct the hazard, knowing that it could result in injury. Otherwise only your company can be sued. Incorporating will separate your personal assets from your business assets. Every suit is different and being incorporated does not mean that you are indefinitely protected, but not incorporating does automatically leave both your business and personal assets at risk. There are ways of structuring corporate and personal assets that should be instituted before you ever have need of protection. The point? Incorporate to protect all you have worked for.
LONGEVITY & SURVIVORSHIP So you’ve been working for years building your business and making it profitable and solvent. What happens to your business if you or another shareholder should have an untimely death? If your business is not set up correctly, the State in where you do business could take receivership of your company by way of State Probate. Probate can take months and sometimes years. The way to navigate away from probate is in the way your stock certificates are issued and held. How should they be held? That depends on each individual’s needs and the desires of all the shareholders. The important thing to know is that there are ways of holding shares (stock) that when a shareholder dies, that individual’s share will be reissued to the remaining shareholders or other designees. This avoids state probate all together, but you must issue the stock appropriately. Each companies needs are unique. If you need help knowing how to issue your stock certificates, give us a call or email us.
DO YOU MAKE ENOUGH MONEY TO INCORPORATE? Some people think corporations are only for those businesses who are making millions of dollars a year. There is an idea that owning a corporation is difficult, complicated and just plain scary. This type of thinking is just simply wrong. If I had a 20 year old client that was cutting lawns in his neighborhood, I would incorporate him. The tax reporting is not much different than what a business already does. In fact, most business owners day to day operations do not change in the least. There are countless benefits to incorporating your business.
If you want to know more email us @ firstname.lastname@example.org
We never charge a fee for answering questions and would be happy to tell you more.
LOOK FOR OUR FUTURE ARTICLE ABOUT THE BENEFITS OF THE VARIOUS TYPES OF ENTITIES.
Audit Risk. http://www.cpaatlaw.com/2013/09/file-1120s-instead-of-schedule-c.html