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What are the Tax Advantages of incorporating a business

The IRS provides tax benefits and other advantages to corporations - which are not available to Sole Proprietorships or other forms of small businesses. There are specific tax benefits which apply only to C type Corportions and not to S type Corporation - and vice versa. The benefits briefly mentioned below may or may not apply to you. Consult your tax professional for advice as to which legal entity is most appropriate for your business needs and requirements.	Corporations are afforded a series of tax benefits and advantages by the IRS that are not available to sole proprietorships and other forms of small business. The following tax benefits may or may not apply to you. In particular, some of the benefits described apply only to C-Corporations, whereas others apply only to S-Corporations. Consult your tax professional for details and for advice as to which entity is appropriate for your particular needs.
Income Shifting
Income Shifting can lower overall taxes by allowing income to be divided between the shareholders and the corporation. This is one of the biggest benefits of incorporation a business. This practice benefits small businesses with high tax bracket shareholders the most. However, it is not always feasible to payout all profits - if the corporation intends to spend money in the future - for items such as expansion or growth - or increasing their marketing budget. Fortunately, retained profits (profits kepts in the corporation) are only taxed at 15%. Income Shifting allows the corporation to retain profits in the business - while reducing the tax liability to its shareholder. Income Shifting is not available to S type Corporations or unincorporated businesses.	The ability to divide income between the corporation and its shareholders in a manner that lowers overall taxes is referred to as Income Shifting. This practice is by far one of the greatest benefits of incorporating a business. Profitable small businesses with shareholders in higher tax brackets stand to benefit the most from the practice of income shifting. However, paying out ALL profits may not be viable for a corporation who plans to retain earnings to expand its product line or increase its advertising budget next year. Fortunately, profits retained within a corporation are taxed at the initial tax rate of only 15%. It is this ability to retain earnings within the business, without imputing tax liability to shareholders, that provides an invaluable tax advantage to growing corporations that is not available to S-Corporations and unincorporated business entities.
Fringe Benefits
Startup businesses are generally less eager to provide fringe benefits to its employees, while corporations are more likely to receive favorable treatment over non-corporate entities. Corporations can offer retirement and medical plans... and generally offer higher contribution levels and offer greater flexibility than non-corporate entities. Favorable tax benefits is a compelling reason to offer fringe benefits - when you have a thriving company. Participants in Sole Proprietorships, Partnerships and Limited Liability Companies can only deduct 30% of their insurance premium... while corporated participants often deduct the 100% of the premiums.. Also, Corporations can provide more flexibility in medical reimbursement plans, and can also allow deductions for medical expenses that are generally not covered by a standard insurance policy.	While startup businesses in this unpredictable economy may be less eager to offer fringe benefits to employees, corporations are afforded favorable treatment over non-corporate entities in the area of fringe deductions. For example, corporate retirement and corporate medical plans can offer greater contribution limits and more flexibility than unincorporated entities. Thus, once your company is thriving, favorable tax treatment for fringe benefits can be a compelling reason to incorporate your business. For example, did you know that sole proprietorships, partnerships and limited liability company members can only deduct about 30% of medical insurance premiums? Corporations, on the other hand, can deduct 100% of insurance premiums with the proper insurance plan. In addition, corporations have the flexibility to adopt a medical reimbursement plan and allow deductions for medical expenses not covered by insurance policies.
Business Losses
A Corporation has no limits as to how much capital or operating losses they can carry forward to subsequent years or backward to preceding years. Unincorporated business are subject to more stringent rules regarding corporate losses. Sole Proprietors cannot claim capital losses greater than $3,000... unless they can offset the loss with capital gains.	In a corporation, there are no limits or restrictions on the amount of capital or operating losses that a corporation may carry back or forward to subsequent tax years. Unincorporated entities, however, are subject to more stringent rules regarding corporate losses. For example, an individual owning a sole proprietorship cannot claim a capital loss greater than $3,000 unless he or she has offsetting capital gains.
Dividends From Other Corporations
Corporations can get a "dividends received" exclusion... when the corporation is flush with cash - and it's shareholders do not wish to withdraw cash assets. Basically... a corporation can own stock in another unrelation corporation - and receive dividend from the other corporation - of which 70% is tax free. Though and individual may have to pay 100% of the required taxes on a $5000 corporate stock dividend, a corporation can qualifies within the "dividends received" exclusion only pays taxes on $1500. Consult your tax professional before utilizing this strategy - to ensure your corporation is eligible for the benefit.	Where a corporation is cash-heavy and shareholders do not desire to withdraw the cash assets, the "dividends received" exclusion will serve as a great benefit of incorporating. In a nutshell, a corporation can receive dividends from stock it owns in another unrelated corporation 70% tax free. In other words, where an individual may be required to pay taxes on ALL of a $10,000 corporate stock dividend, a corporation that falls within the "dividends received" exclusion is taxed on only $3000. This gets tricky.so please consult your tax professional before implementing this strategy.
Leasing Assets to the corporation
Leasing personal property such as real estate or a vehicle - to the corporation - can provide a tax savings to many business owners. The leasing terms must be fair to both you and the corporation because the IRS often scrutinizes this type of leasing arrangement. This benefit is similar to Income Shifting (mentioned above).	Leasing your personally owned property (real estate, automobile, or even a domain name) to a corporation may provide tax savings to many individuals. Please note, however, that the IRS will often scrutinize this type of leasing arrangement. Therefore, the lease terms must be fair to both parties in the transaction (to you and to your corporation). This benefit of incorporating is rather similar to the "Income Shifting" discussed above.
Self-Employment Tax Savings
For S type Corporations... compensation (salary) to the owner is subject to paytoll / self-employment taxes. Dividends to shareholders or money left for reinvestment into the business - are not subject to payroll / self-employment taxes. Example of the Self-Employment Tax Savings benefit: A business owner who operates a sole proprietorship makes a net income (gross income minus expenses) of $80,000. Throughout the year - the business owner has withdrawn $60,000 for compensation. The remaining $20,000 is left in the business to purchase new computers / equipment. As a Sole Proprietor... this business owner will pay self-employment tax on the entire $80,000 and owe $12,240 to the IRS. $80,000 x 15.3% equals $12,240 owed. If the business owner had instead - formed an S Type Corporation... and withdrew the same $60,000 - for compensation and left the same $20,000 in the business to purchase new computers / equipment... this business owner would pay self-employment taxes on $60,000 - instead of $80,000 - and owe the IRS $9,180... saving $3,060. $60,000 x 15.3% equals $9,180 owed. Consult your tax professional to obtain an up-to-date self-employment tax rate and to get their advice concerning the tax benefits of incorporating a business.	In an S-Corporation, however, only earnings actually paid out to an owner as compensation for services are subject to payroll taxes. Any money left in the business for reinvestment or distributed to the shareholder as a dividend is not subject to payroll taxes...and not subject to self-employment tax. Let's review an example: "Willie," a struggling country singer known for his exemplary tax payment history, operates as an unincorporated, sole proprietorship. Willie and his band earn a net income (gross income less expenses) of $60,000 during 2002. During the course of the year, Willie withdraws $40,000 as his personal salary leaving the remaining $20,000 in the business to purchase amplifiers and whiskey in the year 2003. If Willie operates as a sole proprietorship, he'll owe self-employment tax on the full $60,000 ($60,000 x 12.4% = $7,440). However, if Willie forms a corporation, elects S-corporation status, and withdraws the same $40,000 as compensation for his services, he would only owe self-employment taxes on the $40,000 in salary ($40,000 x 12.4% = $4,960). Thus, incorporating his business would save Willie $2,480 in payroll/self-employment taxes. To take advantage of all potential tax benefits, and if your accountant agrees, incorporate your business online today. Come tax time next year, you'll be glad you did!