Now That You've Paid Your Taxes... It's Time to Incorporate!

April 15th is gone!...but it's not too late to reap the tax benefits of incorporating your business and to take advantage of the many tax benefits afforded to Corporations and LLCs. Keep in mind that different corporate entities have different tax benefits, and certain states may better accommodate your business goals. This article will cover the benefits of incorporation, types of corporate entities, and common questions regarding where to incorporate.

Why Should You Incorporate?

Tax Deductions: Since you have just paid your taxes, you are keenly aware of how expensive taxes can be. One of the most important benefits of incorporation is greater tax deductions for your business, your employees, and potentially for family members of business owners. Even if you are the only shareholder and employee of your business, benefits such as health insurance, life insurance, travel and entertainment expenses may be deductible. Incorporating may also eliminate self-employment taxes and lower social security tax and Medicare tax payments. Your individual tax liability may also be reduced, as you will become an employee of the corporation. Corporations may also be taxed at a lower rate than unincorporated entities. Additionally, corporations often provide an increased tax shelter for qualified pension plans or retirement plans (e.g. 401Ks). Favorable tax treatment for fringe benefits can also be a compelling reason to incorporate your business.

Business Loss Deductions: With incorporated entities, there are no limits or restrictions on the amount of capital or operating losses that may be carried back or forward to subsequent tax years. Unincorporated entities, however, are subject to more stringent rules regarding corporate losses.

Income Shifting: "Income Shifting" – the act of dividing income between a corporation and its shareholders in a manner that lowers overall taxes – is often considered one of the greatest benefits of incorporating. Profitable, small businesses with shareholders in higher tax brackets stand to benefit the most from the practice of income shifting. Interestingly, smaller corporations (those with fewer than 100 employees) are not necessarily concerned with corporate tax rates since profits are usually paid out as tax-deductible salaries and fringe benefits to corporate employees. However, paying out ALL profits may not be viable for a corporation that 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 the initial tax rate of only 15%. It is this ability to retain earnings within the business, without imputing tax liability to shareholders that provides an invaluable tax advantage to growing corporations that is not available to S-Corporations and unincorporated businesses.

Leasing Assets to your Corporation: Leasing personally owned property (real estate, automobile, or even a domain name) to a corporation may provide tax savings. 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 your corporation). This benefit of incorporating is similar to "Income Shifting," as discussed above.

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Which Type of Corporate Structure Is Right for You?

C-Corporation (General for Profit): When choosing a corporate form, it is important to be aware that the profits of a C-Corporation are subject to double taxation, and therefore earnings are taxed twice, once at the corporate level, and again when profits are distributed as dividends to the shareholders. However, a corporation meeting certain requirements (set by the IRS) may file for Subchapter S Corporate status. This corporate election allows owners of an S Corporation to elect to be taxed only at the personal level, thus avoiding tax at the corporate level.

S-Corporation: An S-Corporation is a tax designation only. This type of corporation is typically for smaller companies. It provides the benefits of incorporation, while eliminating double taxation. In that instance, the corporation's profits and losses are recognized in the shareholders' personal returns.

Limited Liability Company ("LLC"): A limited liability company is a separate legal entity like a corporation, but an LLC is not subject to double taxation. The owners of an LLC, called members, are not personally liable for the debts and liabilities of the LLC. LLCs are often a favored corporate entity because they are considered very flexible and simple to run, and the LLC forms can be completed fairly easily and quickly.

To learn more about which type of corporate structure is right for your business, Click Here!

Where Should You Incorporate?

Delaware: Delaware's advantages as a place of incorporation range from the comparatively liberal Delaware General Corporation Law to the flexibility built into the corporate formation process. Incorporating in Delaware is generally less expensive than most other states. There is no Delaware corporate income tax for corporations that are formed in Delaware so long as they do not transact business in Delaware. Delaware law also allows for a version of the Limited Liability Company called a Serial LLC. Traditionally, an LLC is relatively simple to form and maintain. It is similar to the formation of a sole proprietorship or a partnership, but also provides a layer of protection (the corporate shield) as a limitation of liability. Unlike regular LLCs, Delaware's "Serial" LLC allows different lines of business to be treated separately from each other from a liability standpoint.

Nevada: Nevada began with corporate statutes based on Delaware, and went further to establish a corporate structure that allows investors and owners of Nevada corporations to remain completely private. The Supreme Court of Nevada has consistently taken a very strong stand in the protection of corporate privacy, even when a corporation fails to adhere to basic corporate formalities. Unlike most other states, Nevada does not require corporate stockowners to disclose personal information to the general public. In fact, the information is not kept on file with the state. Additionally, to ensure privacy, Nevada allows its corporations to use bearer stock certificates, which make it virtually impossible to prove the ownership of a Nevada corporation. Accordingly, owners or investors utilizing bearer shares can have complete control and ownership while remaining anonymous. Nevada also does not tax the income of its corporations or its state's citizens. A Nevada corporation is also not subject to any other hidden taxes such as franchise taxes, capital stock taxes, or inventory taxes. Sales tax applies only to products sold within the state.

Your Home State: For most small businesses, however, it may still be best to incorporate in the state where that business is based. Even though some factors favor incorporating in the "friendly" states of Delaware or Nevada, it may be more expensive and more of a hassle to incorporate a smaller business out of state. For this reason, it is important to consult with your attorney or accountant about the pros and cons of incorporating out of state before making your final decision.

The above-mentioned 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. For this reason, it is important to consult your accountant or attorney about your particular situation. If, based on your current financial composition, he/she advises you to incorporate or form an LLC, visit today and we'll be more than happy to assist you with your document filing needs.

To learn more about where to Incorporate your Business, Click Here!

How Can MyCorporation.com Help You?

MyCorporation.com offers a full line of document filing services in any state:
Form a NEW Corporation
Form a NEW LLC
Visit our FREE Online Trademark Search Facility
Other Corporate Filings/Services Include:

Initial/Annual Report Filings for Corporations and L.L.C.s

DBA/Fictitious Business Name Filings

Change Corporate Name

Foreign Qualifications for Corporations and L.L.C.s

Registered Agent Services (any state!)

Corporate Kits

LLC Kits

Customized Corporate Minutes and Bylaws

Custom Corporate Seal/Embosser

Stock Membership Certificates

LLC Customized Operating Agreement

Articles of Dissolution

Certificates of Good Standing

Federal Tax Identification Number

Name Availability Checks

Name Reservation Requests

Although MyCorporation.com is happy to assist you with all of your document filing needs, I strongly urge you to speak with a licensed professional who can provide you with sound advice as to the form of entity that best suits your particular needs.

Good luck in all your business endeavors!

Deborah Sweeney, Esq.
Vice President of Business and Legal Affairs
My Corporation Business Services, Inc.

About the Author:
Deborah S. Sweeney is a licensed attorney and a member of the California State Bar. She is a member of the San Fernando Valley Bar Board of Trustees, and serves on the alumni board for Pepperdine University's Center for Entrepreneurship. Ms. Sweeney is currently the Vice President of Business and Legal Affairs for MyCorporation Business Services, Inc.