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Tax Treatment
Whether or not you incorporate your business,
it will be subject to taxes,
including, but
not necessarily limited to:
- Income taxes, including federal, state, and
possibly local.
- Payroll taxes, such as Social Security and
Medicare.
- State and local taxes assessed on businesses
regardless of their income.
- Property taxes, if it owns real estate.
- Sales taxes. While paid by customers, businesses
collect them.
The profits of unincorporated
businesses
frequently are reported on the
owner's Federal
Form 1040, Schedule C and similar
forms for
state and local income taxes.
If multiple
people own the business, each
must pay income
tax on his (her) share of the
profits.
Corporations, on the other hand,
file their
own tax returns and pay taxes
subject to
a different scale of tax rates
than individuals
face. For a tax perspective,
the disadvantages
of incorporating include:
- at lower levels of income, corporations normally
pay more tax than individuals
- dividends are subject to "double taxation."
Corporations cannot deduct dividends from
their income, yet individuals pay tax on
dividends. The owners of an unincorporated
business, on the other hand, pay tax on its
earnings only once.
If incorporating a small business
seems attractive
from the standpoint of managing
liability
(see our discussion of incorporating), but disadvantageous from a tax standpoint,
a hybrid solution is available.
Frequently
referred to as a Subchapter S
Corporation
(after a section of the federal
tax code),
this corporate form available
for small businesses
offers:
- The limits on liability provided by corporations.
- Income that "flows through" to
the owners' individual tax returns, as if
the business were unincorporated. Income
thus is taxed only once. Withdrawals of funds
from the business are not double-taxed as
dividends.
A simplified (from a reporting standpoint)
version of the S Corporation is the LLC.
State and local governments hit
small businesses
with various nuisance fees and
taxes. Some
even charge businesses with taxes
simply
for existing, even if they earn
no profit.
This may take the form of a minimum
income
tax, regardless of actual income,
or it may
be a separate levy. These taxes
may differ
based on whether the business
is incorporated.
In all cases, seek the guidance of a qualified
tax advisor, such as a Certified Public Accountant
or a tax attorney. If you have not already
considered it, you may want to make one of
these professionals a part of your back ofice staff. |
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