Different Types Of Business Incorporations
If you are setting up a corporation, you have to decide if you want it to be a separate legal entity and pay corporate taxes, a C-Corporation, or not. To make an S-Corporation, form a C-Corporation, you have the shareholders sign and submit a form 2553 to the IRS, to request that status.
That can be done some point of time later than the actual formation of the corporation.
Benefits of having a corporation include being able to purchase tax deductible benefits such as health care, childcare etc. for the shareholders and employees and count them as a corporate expense. If you are operating a sole proprietorship business, it may be necessary to form either an S-Corporation or a C-Corporation.
Both of these corporate forms will protect your personal assets if you get sued or go bankrupt. Furthermore, if your business is to expand, you need a corporate form to properly deal with outside investment in your business, and attracting shareholder money.
Selling stock shares is a lot easier and cheaper than getting expensive bank loans if you want to expand your business.
You may want to bring in other participants in the business who are part-owners, not just employees. It's a serious issue to think about. Even if you provide contract services you could be sued over an automobile accident involving your business or even over a disagreement on costs.
Concerning corporate tax issues, by changing to an S-Corporation you avoid having to pay corporate taxes and your corporation is changed into a pass-through entity for tax purposes.
Many owners of small business are afraid to incorporate because, in the case of a C-corporation, they also have to pay taxes on corporate profits, as well as personal income taxes.
There are easy solutions to this problem. Say you have your own business as an architect, and you form a C-Corporation, in order to attract outside investment. You can still have your corporation, which you control, pay you the fair market value of an architect as a salary.
From your point of view this is income, and you must pay personal income taxes on it.
However, from the viewpoint of the corporation, which is a separate legal entity, this salary is an expense. Other expenses are health care and child care as mentioned above. Also, hiring employees counts as a corporate expense.
As a sole-proprietorship, you have to pay all of your Social Security and Medicaid charges, about 15.3-percent, but in a Corporation, half of this becomes a corporate expense, which can be a big advantage.
That can be done some point of time later than the actual formation of the corporation.
Benefits of having a corporation include being able to purchase tax deductible benefits such as health care, childcare etc. for the shareholders and employees and count them as a corporate expense. If you are operating a sole proprietorship business, it may be necessary to form either an S-Corporation or a C-Corporation.
Both of these corporate forms will protect your personal assets if you get sued or go bankrupt. Furthermore, if your business is to expand, you need a corporate form to properly deal with outside investment in your business, and attracting shareholder money.
Selling stock shares is a lot easier and cheaper than getting expensive bank loans if you want to expand your business.
You may want to bring in other participants in the business who are part-owners, not just employees. It's a serious issue to think about. Even if you provide contract services you could be sued over an automobile accident involving your business or even over a disagreement on costs.
Concerning corporate tax issues, by changing to an S-Corporation you avoid having to pay corporate taxes and your corporation is changed into a pass-through entity for tax purposes.
Many owners of small business are afraid to incorporate because, in the case of a C-corporation, they also have to pay taxes on corporate profits, as well as personal income taxes.
There are easy solutions to this problem. Say you have your own business as an architect, and you form a C-Corporation, in order to attract outside investment. You can still have your corporation, which you control, pay you the fair market value of an architect as a salary.
From your point of view this is income, and you must pay personal income taxes on it.
However, from the viewpoint of the corporation, which is a separate legal entity, this salary is an expense. Other expenses are health care and child care as mentioned above. Also, hiring employees counts as a corporate expense.
As a sole-proprietorship, you have to pay all of your Social Security and Medicaid charges, about 15.3-percent, but in a Corporation, half of this becomes a corporate expense, which can be a big advantage.