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Tax
Advantages of Operating a Corporation
Corporations
are afforded a series of tax benefits and advantages
by the IRS that are not available to sole proprietorships
and other forms of small business. The following tax
benefits may or may not apply to you. In particular,
some of the benefits described apply only to C-Corporations,
whereas others apply only to S-Corporations.
Please seek proper advice as to which entity is appropriate
for your particular needs.
Income
Shifting
The ability to divide income between the corporation
and its shareholders in a manner that lowers overall
taxes is referred to as Income Shifting. This practice
is by far one of the greatest benefits of operating
a C-corporation. Profitable small businesses with
shareholders in higher tax brackets stand to benefit
the most from the practice of income shifting.
However,
paying out ALL profits may not be viable for a corporation
who plans to retain earnings to expand its product
line or increase its advertising budget next year.
Fortunately, profits retained within a corporation
are taxed at a relatively low rate. The
ability to retain earnings within the business, without
imputing tax liability to shareholders, provides valuable
tax savings to growing corporations that is not available
to other business types.
Fringe
Benefits
While startup businesses in an unpredictable economy
may be less eager to offer fringe benefits to employees,
corporations are afforded favorable treatment over
non-corporate entities in the area of fringe deductions.
For example, corporate retirement and corporate medical
plans can offer greater contribution limits and more
flexibility than unincorporated entities. Thus, favorable
tax treatment for fringe benefits can be a compelling
reason to incorporate your business. Did you know
that corporations have the flexibility to adopt a
medical reimbursement plan and allow deductions for
medical expenses not covered by insurance policies?
Leasing
Assets to your corporation
Leasing your personally owned property (real estate,
automobile, or even a domain name) to a corporation
may provide tax savings to many individuals. Please
note, however, that the IRS will often scrutinize
this type of leasing arrangement. Therefore, the lease
terms must be fair to both parties in the transaction
(to you and to your corporation). This benefit of
incorporating is rather similar to the "Income
Shifting" discussed above.
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