Why Incorporate Before the End of 2005?

Business planners always advise their clients on alternative legal business structures. They often pay no attention to timing unless it relates to when the business enterprise is scheduled to begin seeking capital. However, for the existing business enterprise many factors play a role in the decision to incorporate before the end of the fiscal (calendar) year. Income taxes, Social Security and Medicare deductions, raising capital and costs associated with incorporation impact the decision.

Income Taxes

If you are a sole proprietor or a sole proprietor functioning as an LLC your federal income taxes are being treated as pass-through to the individual. Converting to a corporation before the end of the year will change the tax treatment on the company's income for that remaining time period to that of a separate entity. For example, sole proprietors cannot deduct charitable contributions against income before taxes. As a corporation, donating the old computer equipment, furniture and other items to a qualified 501(c)3 (i.e. nonprofit organization) will be deducted from your taxable income.

More valuable information on how entity type can affect taxes can be found at MyCorp's Tax Advantage Page.

If you are not certain of the income tax implications by shifting to corporate status, we strongly suggest you seek the advice of a tax accountant.

Social Security & Medicare

All sole proprietors are keenly aware of their obligation to pay out 15.3% of net income to Social Security (12.4%) and Medicare (2.9%) for the first $90,000 earned during the year. Many first-time proprietors don't learn this reality until the end of the tax year. If you are in that category review IRS Publication 533.

Can you save money by incorporating now? Absolutely. For example, if you form an S corporation , a portion of your income during the remainder of this year can be accessed as dividend distributions. You will pay income tax on the dividend, but not Social Security or Medicare. Furthermore, the benefits portion deducted from your newly established wage or salary will be half of that 15.3%. The other half will be deducted from company income before taxes.

Furthermore, who knows what the future holds. Self-employment tax on income in 2004 was for a maximum of $87,900. It rose to $90,000 for 2005. That represents an increase of $321. Who knows what 2006 will bring.

Raising Capital

Income taxes are always on the minds of investors. It is not uncommon for a successful venture capitalist or angel to seek an investment opportunity before the end of the year to cut down income tax exposure. If you are raising capital it won't be accomplished unless you are incorporated, preferably as a C corporation . VC's and angels typically want a "piece of the action." You can't distribute shares of stock as a proprietor or unincorporated LLC.

Does your company rely on seasonal sales in the winter and spring? Do you need to raise capital? Then incorporation is a necessity if seeking that private investor.

Want to Avoid Costs? Don't Worry!

Okay, so if all these reasons for incorporating are not enough to overcome the costs -- you aren't looking for investors; income, Social Security and Medicare taxes are insufficient to warrant incorporation until the end of the year; you don't want to pay 2005 annual fees on top of the incorporation fee; etc. -- then opt for delayed filing.

MyCorporation.com can arrange for your incorporation documents to be submitted on or after January 1, 2006.

For more information view the FAQ's of incorporation. If you have questions about this or any other form of legal business help go to the Live Help page. Finally, when you are ready to proceed, go to the Incorporate Now page.