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Incorporate of Form an LLC

IMPORTANT: No information on this site is intended as legal advice or as an offer of legal advice to the public.

  Elias Stassinos, Esq.   Saturday, November 01, 2008

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Tax Benefits of Incorporation or Formation of an LLC

Choosing A Business Legal Structure

Business tax issues are probably the main reason that most small business owners incorporate. You should consult with a accountant and or a tax attorney to discuss what is the best business structure for your particular tax situation. 

If you are an individual starting a business, you are called a sole proprietor unless you choose another business structure. If you operate a business under a name different from your own legal name, you will be required to file a Doing Business As (DBA) certificate, which informs the public who exactly is doing business under the DBA business name. DBA is not a corporate business structure.  But note even corporations that do business under any name other than the full legal name of the corporation, they are usually required to file a DBA form certificate as well as the corporate certificate.

By the way, our office currently does not file DBAs.  Even though we cannot guarantee worked performed by other services, we recommend using another service. There are several service companies you can use for DBA filing.  For example, Click here for an  inexpensive and professional service.  However, keep in mind that neither our attorneys, nor our law office is responsible for services not rendered by our law office.

Note that you are solely liable for all your business liability if you are a  sole proprietor.  In addition, if you are a general partnership, you are liable for your partners business liabilities as well as your own.  With that in mind, consider that choosing a favorable business structure may help you avoid all these liabilities.

First, let's agree right from the start that it is not wise to do business as a sole proprietor, especially if you have employees.  Your employees may sue you for various reasons and you will be liable if you just file a dba.  A corporation is by far a better business structure for most enterprises and small businesses starting a business. A corporation or LLC Limited Liability Company will shield your personal assets from most lawsuits or claims which could be brought against yourself and your business. Even if you are just one person owning any type of a business, you usually can incorporate or form an LLC.

There are two types of corporations. C-corporations and S-corporations. S-corporations are like C-corporations, except they have some additional legal requirements, such as limited number of shareholders and limiting who may be a shareholder. If you are a natural person (as opposed to a legal person, such as a corporation) and a U.S. Citizen, you  can be a shareholder for an S-corporation.

There difference in S-corporations and C-corporations is in the way each corporate entity is taxed.  For example, S-corporations allow small business owners the civil and debt liability protection of incorporation as well as allow the shareholders to do their corporate taxes as individuals using a social security number .


By the way, our office currently does file corporations.  Even though we cannot guarantee worked performed by other services, we recommend using another service, if you cannot afford an attorney to incorporate or form your LLC.  Use this inexpensive and professional serviceHowever, keep in mind that neither our attorneys, nor our law office is responsible for services not rendered by our law office.

Corporate Taxation

Keep in mind that if your corporation is a C-corporation, (you can file one even if you are one person) it is a separate taxable entity.  Your C-corporation must pay taxes on any income that the C-corporation has at any given year.

For example, let's assume that in your state, you pay a 25% corporate income tax rate  and your corporation had $100,000 profit for the taxable year.   After taxes, the corporation is left with $75,000.  You can leave this earnings in your corporate bank account (retain the earnings) or pay out yourself as dividends to the shareholder.  Note that you can also pay a reasonable salary for running the corporation or providing any other type of service for the corporation.   However, the salary is tax deductible to the corporation and taxable to you as income.

Now let's assume, you pay yourself, the shareholder, $75,000 in dividends out of the retain earnings.  That's when double taxation occurs.   You must pay personal income tax on these dividends as well as corporate tax (i.e., the corporation paid already $25,000 tax on these corporate earnings).    The corporation paid 25% taxes plus your rate (about 30 %) you end up paying 45% effective tax rate.   Note that the above does not include state taxes.  Some states will additionally charge you for your personal tax (in California it is about 8% ) plus another possibly  8% tax for your corporation.  That would be about 60% collective tax rate. 

If you had elected to be an S-corporation, you would have to pay only your personal federal and state tax rate.  For example, let's assume that you pay a 30% personal federal income tax rate  and your corporation had $100,000 profit for the taxable year.  You would have to pay an one time $30,000.  Also, let's assume that in your state, you pay a 8% personal income tax rate  and your corporation had $100,000 profit for the taxable year.  You would have to pay that as well.  In both cases you pay as an individual and you don't have to pay anything else whether or not you have any retains earnings or not.

The strategy to defeat double taxation is to have a policy of not paying dividends to shareholders if you have a C-corporation.   If you do want to pay out your retain corporate earnings as dividends, it may be better to form an S-corporation. 

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  • All legal articles in this site are general and informative.  The articles or any other information on this site is not legal advice nor is any information warranted or guaranteed.   Laws change over time and in different localities and jurisdictions laws may be different from any laws mentioned on this site.  It is advisable that you consult a  attorney and or an accountant in the area where your business will be located.

  • Elias Stassinos, Esquire  is a trademark and incorporation attorney that has helped thousands of  small business owners and entrepreneurs launch their first business enterprise.  He's also an entrepreneur who operates several successful businesses not related to his law practice. 

Copyright E. Stassinos, Esq. 2005. All Rights Reserved.

 

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