BUSINESS & CORPORATION
If you’re thinking of incorporating your business, it’s important to know exactly what “incorporating” means. When you incorporate a business you are officially making it legal in the eyes of the state in which you reside. It becomes its own entity, separate from you as an individual owner.
What Does It Mean to Incorporate?
It really comes down to your long-term goals and your funding options. LLCs are simple to implement and are super flexible. However, they have a number of limitations as well as C and S Corporations. If you hope to become a public corporation, that is the way to go, but if you sell, there will be major tax consequences. However, LLCs and S Corporations are more similar and each has its own advantages. It is important to assess the advantages and disadvantages of everyone and consult the team around you before making the decision.
Incorporating a company could be an excellent choice for you. In addition to tax benefits, the constitution of your company opens many doors and opportunities and also protects you against unlimited personal liability.
Here's a list of the top 7 tax advantages you receive from incorporating your business:
• Spreading Out Tax Losses
• Business Expense Deductions
• Social Security Tax Deductions
• Benefit Deductions
• Protect Personal Assets
• Credibility
• Income Flexibility
LLCs and S Corporations are more similar and each has advantages over the other. It is important to assess the advantages and disadvantages of everyone and consult the team around you before making the decision.
Tax Flexibility of an LLC
- Setting up a limited liability company (LLC) is a much simpler process than setting up a corporation and generally requires less paperwork.
- LLCs are created under state law, so the process of forming one depends on the state where it is being filed. Once an LLC is formed, it is good practice to create roles and responsibilities of every member by setting up an operating agreement to define these roles.
The Internal Revenue Service (IRS) does not view an LLC as a separate vehicle for tax purposes, which allows for greater flexibility. Members can choose how they are taxed. They can be treated as a sole proprietorship, a partnership, or a corporation. The most common tax option of an LLC is taxation similar to a sole proprietorship. A member has to pay taxes themselves on the profits of the LLC as opposed to the LLC paying the taxes. The profits and losses of an LLC are passed through the business to the owner. The owner then has to report the profits or losses on their own personal tax returns. The LLC itself does not pay any corporate tax. This method avoids double taxation, which is a drawback of corporations.
Advantages of a Corporation
Although an LLC is easy to administer, there are significant advantages to using a corporate legal structure. Two types of companies can be set up.
Companies C have the advantage of leaving profits to the company and paying them in the form of dividends to shareholders. Furthermore, for companies seeking to issue shares, a company C can easily issue shares to raise capital to further expand the company.
Corporations offer greater flexibility in terms of their excess profits. Whereas all income in an LLC flows through to the members, an S corporation is allowed to pass income and losses to its shareholders, who report taxes on an individual tax return at ordinary levels. Therefore, an S corporation does not have to pay corporate taxes, which saves money, since corporate taxes are higher than ordinary taxes. Shareholders may also receive non-taxable dividends upon compliance with certain regulations.
An S corporation is a pass-through entity, like an LLC, where the owners are taxed on profits and losses of the corporation.
A C corporation is taxed at the corporate level, separately from its owners, through a corporate income tax.
C corporations are the most common type of corporation.