posted byBagasian LawMay 18, 2021
For those who own a business, choosing to incorporate the business can provide tax advantages that will save money and prevent double taxation.
The way in which your business is set up is just as important as any other part of the business development process.
Therefore, understanding the implications of business setup can provide a number of benefits for your business.
In this article, we will be discussing:
Tax advantages refer to investments for financial accounts that are exempt from taxation or offer some sort of tax benefits.
First, let’s define the difference between tax-exempt and tax-deferred statuses.
A tax-exempt status defines income or transactions that are free from taxation. In regards to business, tax-exempt status means that there are limits on how much of a business’s income is taxable.
For example, charitable or religious organizations have tax-exempt status.
However, businesses usually fall under a different category where they can get tax deductions.
You might be wondering, “How are tax deductions different from tax exemptions?”
Tax deductions lower a business’s, or individuals, tax liability by decreasing their taxable income. Businesses or individuals can get tax deductions for a number of reasons, such as a deduction equal to the number of business expenses an organization incurred in order to run their business.
Deductions are subtracted from an individual’s or organization’s gross income.
Tax-deferred status means that the payment of taxes is deferred, or pushed back, to a later date. In other words, the taxpayer can delay paying taxes. Future withdrawals, however, will be taxed at your ordinary-income rate.
Ordinary income is essentially any income that can be taxed, such as wages, salaries, and bonuses.
A common example of accounts that have a tax-deferred status is retirement accounts.
When forming a business for tax advantages, it is best to incorporate your business. Keep reading to explore the different types of corporations and the benefits of their business structure.
When developing a business and choosing a business structure, there are a number of options and factors to consider. Tax advantages mainly apply to corporations, therefore we are going to focus on what it means to incorporate your business.
Since the corporate tax has been reduced, all corporations have tax advantages. When forming a business, there are a few types of corporations to choose from.
First, forming an LLC, or limited liability corporation limits the liability of owners and shareholders and essentially has the elements of both a corporation and sole proprietorship.
Therefore, LLCs avoid double taxation because they are not taxed like corporations and are rather defined as formal partnerships.
More specifically, double taxation is when a source of income is taxed twice, once at the personal level and once at the corporate level. Forming an LLC helps avoid this.
Now, let’s compare LLCs with two other types of corporations: C Corporations and S Corporations.
A C Corporation describes an entity in which the corporation is taxed separately from its owners. In other words, because C Corporations are a wholly separate legal entity. Therefore, the corporation is not liable for any debts and exists perpetually even as ownership changes.
C Corporations must pay corporate income tax on their overall revenue. However corporate taxes can be decreased through tax havens, deductions, and government subsidies.
Finally, an S corporation, or S subchapter, is a corporate structure that allows the corporation’s income to be directly distributed to shareholders. An S corporation can have less than 100 shareholders to incorporate.
Similar to an LLC, an S corporation has the benefits of being a corporation while being taxed as a partnership. S corporations, therefore, avoid paying federal income tax.
Each partner within an S corporation is taxed based on their proportional gains from the corporation, therefore profit can be directly distributed to shareholders.
To sum up the differences between LLCs, C corporations, and S corporations:
There are many legal implications to forming a business and deciding what type of business structure to choose.
Therefore, hiring a professional attorney will ensure that your business is formed correctly and that this choice will provide tax advantages, if applicable.
Some other ways a professional business attorney can help include:
A professional business attorney will help you decide which business structure will suit your organization and provide tax advantages.
Los Angeles-based lawyer, Alina Bagasian, will provide the best legal services for your business. Possessing an understanding of corporate and commercial business, Alina Bagasian is ready to represent your business and provide you with excellent legal advice.
The Law Offices of Alina Bagasian have achieved 100% client satisfaction, providing clients with unlimited advice, and offering eight different services to avoid any legal complications when incorporating or forming your business.
Get the help you need today!