I need a book

[PressurePros 249]

What are the financial advantages to incorporation?

You can be much more creative with a corporation than you can as a sole proprietorship. I also disagree that a C corp is a bad idea. You can drain a C corp of it's profits at year end rather easily if you know what you are doing. This will avoid the feared double taxation by paying out dividends to shareholders.

Excerpted:

Self-Employment Tax Savings

Corporate profits are not subject to Social Security, Medicare, Workers Compensation and other taxes - a combined 15.3% in taxes. An individual proprietor would need to pay all of the foregoing taxes (commonly referred to as “self-employment taxes”) on all income earned by the business. With a corporation, only salaries are subject to these taxes.

For example, if a sole proprietor earned $60,000 from the business, a 15.3% tax would have to be paid on $60,000. Let's assume that the owner of a corporation pays himself or herself $40,000 a year in salary, and $20,000 is left over as corporate profits. In this case, the 15.3% tax would only be paid on the salary ($40,000). This saves the owner of the corporation over $3,000 per year!

Please note that a stockholder-employee must pay himself or herself a reasonable salary, or else the IRS could re-characterize some or all of the corporate profits as salary.

15% Tax on Corporate Profits

C-corporations provide even greater tax flexibility. By simply dividing income between the corporation and the shareholders, businesses can save thousands of dollars each year on taxes.

For the 2001 tax year, after the first $27,500, personal rates are 27% and increase based on income up to 38.6%. In addition, individuals must pay Social Security taxes (12.4%), Medicare taxes (2.9%) and, in many cases, state and local income taxes.

With a C-corporation, the first $50,000 in profits are taxed at only 15% -- plus, there are no Social Security or Medicare taxes. And if you incorporate in a tax-free state like Nevada or Delaware, there are no state income taxes. Therefore, if you are in the 28% tax bracket and shift $50,000 of your personal income into a corporation, you could save about $14,000 per year. (This amount includes the money saved by not paying social security and Medicare taxes).

How do you avoid the double taxation associated with C-corporations? Never distribute dividends directly to the shareholders, or simply pay out dividends in the form of a bonus. Since most corporations are not limited to any particular business activity, corporate profits can be re-invested in other business ventures. Corporate profits can also be spent on employee perks.

Ability to Deduct Business Operating Losses

Corporations have very few restrictions on operating and capital losses. Losses are generally carried back three years and can be carried forward for 15 years. Sole proprietorships not only have stricter rules, but also are subject to a higher probability of audit if there are losses.

Fringe Benefits and Medical Insurance

Retirement: Retirement plans, such as a 401K, can be set up through a corporation that would allow you to exclude a higher amount of income than a regular IRA. With a corporate entity, savings may also be doubled with a corporate matching program.

Medical Insurance: Corporations can deduct 100% of the health insurance premiums paid on behalf of an owner-employee. As a sole proprietor filing an individual return, only 60% of the medical premium is currently deductible.

Fringe Benefits and Deductions: With proper structuring, a corporation may deduct other expenses such as automobile insurance, education benefits and life insurance. These expenses are subject to strict limitations for sole proprietors (if deductible at all). Moreover, these expenses can be "red flags" that trigger audits for individuals. For example, an individual proprietor who wants to deduct expenses from a home office can trigger IRS scrutiny.

Lower Chance of an IRS Audit

On a percentage basis, the IRS conducts fewer audits on corporations than individuals. Corporate returns also have fewer "red flags" than individual returns.

Overall, incorporating is one of the best ways a business owner has to protect his or her personal assets, while saving thousands of dollars in taxes. Since individual situations differ, please consult a qualified tax or legal professional to discuss your specific circumstances and to maximize your tax benefits.

Be smart with your business and incorporate.

About AccountingWEB:

AccountingWEB is an online community designed for and dedicated to the accounting profession. Their approach is to use the best of the Internet technology available today, and mix it with some good old-fashioned human insight to help direct you to the information and resources you need to stay informed.

[Don Phelps 85]

I'm no arm chair accountant, but my s-corp does everything that I need it to do.

[PressurePros 249]

I'm no arm chair accountant, but my s-corp does everything that I need it to do.

S Corps are great. I'm still :lgbugeyes

[Mike Williamson 198]

I'm no arm chair accountant, but my s-corp does everything that I need it to do.

Exactly. Though I'm not an armchair accountant either, I actually do accounting for part of my living. That being said, I'm not a tax account or a CPA, but I do know that for the vast majority of small businesses, S-corp is the way to go.

I also disagree that a C corp is a bad idea. You can drain a C corp of it's profits at year end rather easily if you know what you are doing. This will avoid the feared double taxation by paying out dividends to shareholders.

I didn't say it was a bad idea, I said it was stupid for most of us (pressure washers). I'm sure there are possible work-arounds to some of the problems, but why not just file the S-corp election form, and not worry about how to work around the rules? Are there benefits to being a C-corp that would benefit your typical one-shareholder pressure washing company that aren't available to an S-corp? I don't know of any. Since you "know what you are doing", enlighten me!

[PressurePros 249]

whatever works for ya, Mikey.:cheers:

[Mike Williamson 198]

................................

[Don Phelps 85]

We've taken this thread way off topic. If the 'debate' needs to go on, it would be better to start another thread.

[Mike Williamson 198]

We've taken this thread way off topic. If the 'debate' needs to go on, it would be better to start another thread.

Nope, I think we've taken it as far as it needs to go.

[PressurePros 249]

.....................

[Beth n Rod 1,279]

There is some great info on corporate structure and taxes here. How about starting another thread for it?

Thanks...

Beth

[capitalpoolservice 14]

Hey Don,

Does that offer apply for anyone else near you? I am in Tampa starting a new pressure washing company.