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 service.
However, 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.
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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.
