Tax Advantages of Incorporating
Incorporating a business is something any business can do, regardless of its size or number of employees. Incorporating allows business owners to separate their personal identity and financial assets from that of their business. When a company is not incorporated, creditors or partnerships can seize the business owners' personal assets, such as homes, savings, or cars. However, when a business is incorporated, only the money put into the business can be seized or lost in the event the business tanks or cannot support itself financially.
There are many advantages to incorporating. In addition to separating personal identity from business identity, incorporating gives a business credibility. A corporate business, regardless of the size, that has "inc" or "corp" at the end of its name conveys a sense of credibility. Incorporating also allows capital to be raised in an easier manner; investors are more likely to invest in a company that separates its owner's personal assets from his or her business assets.
However, one of the biggest advantages of incorporating involves tax breaks, which is a main reason many business owners decide to incorporate. Some of these tax advantages include:
- Income shifting. Income shifting occurs when the total income of the corporation is divided equally among the members of the corporation. This is one of the most advantageous reasons for incorporating a business. As a result of income shifting, the total tax required is much lower than it would be otherwise - only about 15%.
- Small business tax deduction. Once a business is incorporated, a small business tax deduction equal to 16% of the first $200,000 in income can be filed.
- Fringe benefits. When a business incorporates, it can offer more fringe benefits to it employees, which then allows the company to get larger tax deductions on benefits like medical, dental, and retirement plans than they otherwise would.
- Separate entity. When you incorporate a business, it becomes a separate entity from your other personal assets. This allows you lower tax rates on your business, since personal assets are not included in the company's net worth.
- Income delegation. This allows the business owner to declare when income is received personally as opposed to income received towards the business, resulting in lower taxes.
- Self Employment tax benefits. With a corporation, only earnings that have been paid to an owner for his or her services can be taxed. Whatever money is left in the business for reinvestment or distributed to the shareholder is not subject to payroll taxes or self-employment tax.
Incorporating a business requires a number of steps. Certain licensing, paperwork, and fees are required in order to declare your business as a corporation. There are several types of incorporations that can be made, including international, in-state, and out-of-state, so there are many factors to consider before deciding to incorporate.
Making the decision to incorporate can ultimately offer the business owner greater savings and more protection of personal assets. In addition, there are many tax advantages that are associated with incorporating a business. However, they don't apply to all types of corporations; for example, some tax breaks only apply to C-corporations, while others only apply to S-corporations. Before making the decision, it is best to discuss your options and the complete advantages and disadvantages with your accountant before making the final decision on whether or not to incorporate.