Copyright © 2005 Kate Smalley
Connecticut Secretary
http://www.connecticutsecretary.com/
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 corporation
is 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.
