The Benefits of Incorporating Your Business
by Kate Smalley
Published on this site: April 6th, 2005 - See
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What do General Motors, Microsoft, AT&T and many other
major businesses in America have in common? They’re corporations.
A corporation is a separate legal entity that functions separate
and apart from its shareholders or owners. You can incorporate on
your own without an attorney, although it wouldn’t hurt to
seek legal advice. And you can incorporate in your home state or
any other state of your choosing.
More than half a million business entities have their legal home
in business-friendly Delaware, including more than 50 percent of
all U.S. publicly-traded companies and 58 percent of the Fortune
500. Nevada, New York, California, Arizona and Florida are also
magnets for businesses wanting to incorporate.
Protection Against Personal Liability
Incorporating offers a variety of legal and tax advantages. For
one, it’s one of the best ways a business owner can protect
his or her personal assets. As a separate legal entity, a corporationis
responsible for its own debts. Shareholders of a corporation are
generally not liable for the obligations of the corporation. Therefore,
creditors of a corporation can seek payment from the assets of a
corporation, but not the assets of its shareholders.This means that
business owners can conduct business without risking their homes
or other personal property.
Tax Advantages
Many businesses choose to incorporate for tax advantages. Corporate
profits aren’t subject to Social Security, Medicare, workers
compensation and other taxes, which adds up to 15.3 percent in taxes.
An individual proprietor would need to pay all of these taxes, commonly
referred to as “self-employment taxes” on all income earned
by the business. But with a corporation, only salaries are subject
to these taxes.
C-corporations provide even greater tax flexibility when
it comes to profits. By simply dividing income between the
corporation and the shareholders, businesses can save thousands
of dollars each year on taxes. With a C-corporation, the first
$50,000 in profits is taxed at only 15 percent -- plus, there
are no Social Security or Medicare taxes.
If you incorporate in a tax-free state like Nevada or Delaware,
there are no state income taxes. Therefore, if you’re in the
28-percent tax bracket and shift $50,000 of your personal income
into a corporation, you could save about $14,000 per year. (This
figure includes the money saved by not paying social security and
Medicare taxes).
Corporations also enjoy the ability to deduct business operating
losses. In fact, they have very few restrictions on operating and
capital losses. You can generally carry losses back three years
forward for 15 years. But sole proprietorships have stricter rules.
They’re also subject to a higher probability of a tax audit
if there are losses.
Speaking of audits, that brings us to another benefit of incorporating.
Corporate returns have fewer "red flags" than individual
returns. Consequently, the IRS conducts fewer audits on corporations
than individuals.
Fringe Benefits and Other Deductions
Corporations also enjoy a variety of fringe benefits and other
deductions. A corporation can set up a 401(k), for example, that
would allow you to exclude a higher amount of income than a regular
IRA. And employee savings may also be doubled with a corporate matching
program. Corporations also can deduct 100 percent of the health
insurance premiums paid on behalf of an owner-employee.
Additionally, a corporation can deduct other expenses like automobile
insurance, education benefits and life insurance. But for sole proprietors,
these expenses are subject to strict limitations (if deductible
at all) and can be "red flags" that trigger an audit.
Kate Smalley, Connecticut SecretaryFreelance Secretarial
and Transcription Services http://www.connecticutsecretary.com
mailto:[email protected]
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