FORMING A BUSINESS STRUCTURE

Business incorporation has become synonymous with responsible business ownership. Yet, so many misconceptions and rumors exist about the benefits of business incorporation. So it’s no wonder that even the savviest entrepreneurs are at a loss as to whether incorporation is right for them, what it will cost, and where to start.
Business incorporation (which, by the way, is an umbrella term for a number of business structure options) may be right for some business owners, but it isn’t for all. So it’s worth doing some stepping back and ascertaining whether incorporation is right for you.
Here are some points to consider:
What is Business Incorporation?
As mentioned above, business incorporation is a loose umbrella term that covers a variety of options for legally structuring your business.  These options include becoming a limited liability company (LLC), corporation, S-corporation, non-profit 501(c)(3), cooperative, and so on.
Whatever business structure you choose needn’t be set in stone, and can be changed as your business matures. For example, many small business owners start out as sole proprietorships or partnerships with formal incorporation taking place at a later date.
Of the many business entities that owners consider, LLCs and Subchapter S Corporations (S-Corps) are two of the most popular. Read “Should My Company be an LLC, an S-Corp or Both?“ to determine which features are most important to you and your company.
The Benefits of Incorporation

 

Here are some of the benefits you can realize if you decide to incorporate your business:

• Personal Liability Protection – An incorporated company affords protection from any personal liability for your business debts and obligations. For example, if someone sues your company they can only go after your company’s assets, not your own (although there are exceptions – see below**under “The Disadvantages of Incorporation”).
• Tax Benefits – If you incorporate you may gain tax benefits, although only under certain circumstances. This is one area to discuss with an accountant, as the marginal tax rates for corporations with taxable incomes in some cases can be higher than those for an individual in the same scale. Read more about the tax implications of incorporating from the government here.
• Corporate Identity – Incorporating can give a greater sense of credibility to your business.
• Raising Capital – You can raise capital more easily through the sale of stock and securities if your business is incorporated.
• Unlimited Life – Your corporation can have an indefinite life and outlive you. Do note that LLCs have a limited duration. Get more information on business structure differences from the SBA.

The Disadvantages of Incorporation
Some of the disadvantages of incorporation, particularly for the small business owner, include:

• Paperwork - Depending on the structure you choose, you may need to file two tax returns (one for you, one for your business) and keep good records.
• Cost - The fees associated with initial incorporation and ongoing maintenance can put a strain on start-ups. However, LLCs (a hybrid-type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership ) can be a more economic alternative to incorporation.
• **Liability may not be as limited as you think – The limited liability advantages of incorporation can be challenged by personal guarantees and credit agreements. For example, when a corporation has insufficient assets to secure a loan, banks often insist on personal guarantees from the business owner. This can result in personal liability for repayments if your corporation can’t meet its obligations.

Is Incorporation Right for My Business?
At the end of the day, choosing the right business structure for your small business comes down to several factors such as your risk of liability, your tax obligations, business objectives, and so on.
Because the needs of every business are different, and the law varies from state-to-state, it’s worth an hour or two with a knowledgeable attorney to investigate all of the issues that will affect your decision.
Getting Started with the Process of Incorporation
All business incorporations must be filed with your state government. Whether you choose to pursue this through an attorney or choose an online legal service is up to you. But try to get referrals and recommendations from other businesses that have been through the process.
If you operate in multiple states, read “Which State is best for My Small Business?” to determine which state is the friendliest to corporations and incorporate in that state.
Additional Resources
Business.gov Incorporation Guide – This Web guide draws information from across government to provide small business owners with vital information and resources about what incorporation is and how it can work for your business.

Nnamdi E. Armstrong
+23408122735908
C.E.O
Sloane International Investments Ltd

 

HOW CORPORATIONS ARE TAXED

are taxed differently than other business structures: A corporation is the only type of business that must pay its own income taxes on profits. In contrast, partnerships, sole proprietorships, and limited liability companies (LLCs) are not taxed on business profits; instead, the profits "pass through" the businesses to their owners, who report business income or losses on their personal tax returns.

Understanding Corporate Taxation

Because a corporation is a separate legal entity from its owners, the company itself is taxed on all profits that it cannot deduct as business expenses. Generally, taxable profits consist of money kept in the company to cover expenses or expansion (called "retained earnings") and profits that are distributed to the owners (shareholders) as dividends.

Tax-Deductible Expenses

To reduce taxable profits, a corporation can deduct many of its business expenses -- money the corporation spends in the legitimate pursuit of profit. In addition to start-up costs, operating expenses, and product and advertising outlays, a corporation can deduct the salaries and bonuses it pays and all of the costs associated with medical and retirement plans for employees. To be sure you don't miss out on important tax deductions, see the Business Tax & Deductions area of Nolo's website.

Corporate Tax Payments

The corporation must file a corporate tax return, IRS Form 1120, and pay taxes at a corporate income tax rate on any profits. If a corporation will owe taxes, it must estimate the amount of tax due for the year and make quarterly payments to the IRS in April, June, September, and January.

Shareholder Tax Payments

If the corporation's owners work for the corporation, they pay individual income taxes on their salaries and bonuses like regular employees of any company. Salaries and bonuses are deductible business expenses, so the corporation does not pay taxes on them.

Tax on Dividends

If a corporation distributes dividends to the owners, they must report and pay personal income tax on these amounts. And because dividends, unlike salaries and bonuses, are not tax-deductible, the corporation must also pay taxes on them. This means that dividends are taxed twice -- once to the corporation and again to the shareholders. Smaller corporations rarely face this problem: Because their owners typically work for the corporation as employees, the corporation can pay them in the form of tax-deductible salaries and bonuses, rather than taxable dividends.

S Corporation Taxes

The scheme of taxation described in this article applies only to regular corporations, called C corporations. By contrast, a corporation that has elected S corporation status pays taxes like a partnership or limited liability company (LLC): All corporate profits or losses "pass through" the business and are reported on the owners' personal income tax returns. To learn more about S corporations, see S Corporation Facts.

Benefits of the Separate Corporate Income Tax

Although reporting and paying taxes on a separate corporate tax return can be time consuming, there are some benefits to having a separate level of taxation. Here we explain a few of them, but you should see a tax expert for a complete explanation of the pros and cons of corporate taxation as it applies to your situation. This is a very complicated area, and for some companies -- especially those that may experience losses, are involved in investing, or may soon be sold -- corporate taxation can be a real disadvantage.

Retained Earnings

Many corporations will want or need to retain some profits in the business at the end of the year -- for instance, to fund expansion and future growth. If it does, that money will be taxed to the corporation at corporate income tax rates. Because initial corporate income tax rates (15% to 25% on profits up to the first $75,000) are lower than most owners' marginal income tax rates for the same amount of income, a corporation's owners can save money by keeping some profits in the company. (This does not apply to professional corporations, however, as they are taxed at a flat rate of 35%.) In contrast, owners of sole proprietorships, partnerships, and LLCs must pay taxes on all business profits at their individual income tax rates, whether they take the profits out of the business or not.
The IRS will allow you to leave profits in your corporation, up to a limit: Most corporations can safely keep a total of $250,000 (at any one time) in the corporation without facing tax penalties (some professional corporations may not retain more than $150,000).

Fringe Benefits

Another tax benefit of forming a corporation is that the company can deduct the full cost of fringe benefits provided to employees -- almost always including the business's owners -- and the owner-employees are not taxed on these benefits. Other types of business entities can also deduct the cost of many fringe benefits as a business expense, but owners who receive these benefits will ordinarily be taxed on their value.

Nnamdi E. Armstrong
+23408122735908
C.E.O
Sloane International Investment ltd