| The advantages are incorporating your small business | | | | income tax return and are therefore only taxed once. |
| are many. | | | | And once is enough, don't you think? |
| For starters, you'll be protecting yourself and your | | | | Of course, any article on Choice of Entity must contain |
| family from the possibility of a business ending lawsuit. | | | | the old disclaimer, "Consult your tax professional" -- I |
| Forming a corporation is Step One on the path known | | | | am not prescribing a one-size-fits-all approach to this |
| as "Asset Protection" -- you are moving from the | | | | issue. But for many small biz owners and |
| world of unlimited liability to the world of limited liability. | | | | self-employed folks, the "S" Corporation is a good fit |
| From a tax standpoint, there are both advantages and | | | | because it provides protection from personal liability |
| disadvantages to incorporating. Yes, forming a | | | | and avoids the nasty tax trap of double taxation -- |
| corporation can either reduce your taxes or increase | | | | two great benefits worth checking into. |
| your taxes, depending on what type of corporation | | | | Should you incoporate your sole proprietorship and |
| you create. | | | | then decide that the "S" Corporation is the right fit, you |
| There are two main types of corporations: "C" | | | | must inform the IRS that your corporation is choosing |
| Corporations and "S" Corporations -- and which type | | | | "S" Corporation status by filing Form 2553, which is, in |
| you choose can make all the difference in the world of | | | | effect, an application to become an "S" Corporation. |
| taxes. | | | | IMPORTANT: If you incorporate and do not file Form |
| NOTE: The question of "C" Corp vs. "S" Corp has no | | | | 2553, you are automatically considered to be a "C" |
| effect on the asset protection provided by your | | | | Corporation by the IRS. In other words, to be a "C" |
| corporation. This is a tax issue, not a legal issue. | | | | Corporation, you just incorporate; there is nothing you |
| A "C" Corporation can lead you into a Tax Trap | | | | have to do to inform the IRS you want to be a "C" |
| known as "double taxation". Yes, this type of | | | | Corporation. |
| corporate income can be taxed twice -- once when | | | | There are critical rules regarding how and when to file |
| it's earned on the corporate level and again when it's | | | | Form 2553, so be sure to read the instructions |
| paid to you, the shareholder, in dividends. | | | | carefully, or check with your tax pro. |
| There are several ways to avoid double taxation. | | | | Failure to file Form 2553 on time or filing Form 2553 |
| Often the easiest way is to tell the IRS that you | | | | incorrectly results in a rejection of your corporation's |
| choose to be an "S" Corporation, whose profits are | | | | "S" Corp application, and the corporation is then by |
| not taxable to the corporation. Instead, those profits | | | | default treated as a "C" Corp, subject to double |
| are reported directly on the shareholder's personal | | | | taxation, the very trap you were trying to avoid. |