When it comes to the type corporate entity you wish to have for your business, is it going to be a Limited Liability Company (LLC), or a regular Corporation (C Corp)?
When you form a corporation, you form it in the state in which you conduct business. The corporation then becomes an entity in and of itself, which makes it a “person”l from the standpoint of conducting business.
That means that the corporation conducts business, creates income and expenses, is taxed, and it can sue and be sued under its own name.
There are basically two popular forms of incorporation in most states of the USA, and those are a regular corporation, or a C Corporation, and A Limited Liability Company.
One of the main reasons for incorporating your business is to separate the assets of your business from your personal assets. This means that if a person were to sue your business, there is a good possibility that your personal assets would remain intact and separate from the lawsuit.
Also, corporations are formed for tax purposes where, if a business is earning a high income, there are certain deductions that are better taken in a corporate setting than individually.
A C Corporation is the classic corporate form of incorporating, where all income goes into the corporation and it creates its own expenses in the name o the corporation. Typically if you have been running your business as a sole proprietor, your corporate would pay you a salary, a commission, a bonus or dividends.
You would be consulting with a CPA in most cases to determine just how to handle compensation, structure, and day to day business from an accounting standpoint. You would have set the corporation with the advice of an attorney who would draw up the paperwork for the corporation.
A Limited Liability Company, or LLC, is a form of incorporation that preserves the limits of any liability that would be made against the business with out a lawsuit bleeding over into your personal assets.
However, from a taxation standpoint, this section of the law allows the business owner to be taxed as an individual, an S Corporation or as a regular C corporation, depending upon the tax brackets achieve during the course of business.
If a person is normally capable of earning an income that would place him or her in a very high tax bracket, it can be advantageous to form a corporation to split up the brackets. For example, in a corporate setting, it would be possible to have the corporation be the recipient of all fees, incomes, and money coming in due to fees and services.
First of all, all of the income and expenses are going to go through the new corporate entity, and will be recorded that way. This makes for an efficient bookkeeping and accounting procedure. Also, the expenses can include automobile leasing, travel expenses, business equipment expenses, printing, building leases, salaries (including your own) and so forth.
Normally these types of expenses would be levied against your regular personal income on a schedule C tax form, and in a case of higher incomes, it can be advantageous to have the separate corporate structure which can create a lower overall tax.
Another reason for incorporation is that a 401(k) retirement plan can be established, and the contribution limits are higher in a corporate setting that they are individually.
A business person would rely upon the advice of his or her tax advisers, the CPA, and Attorney, and the final decision will depend on listening to the advice of these types of individuals.