There are many reasons why people feel they should incorporate
their businesses. Very often these reasons are based on
misinformation about the advantages of being a corporation.
There are many reasons why people feel they should incorporate their businesses. Very often these reasons are based on misinformation about the advantages of being a corporation.
There are a number of things that being a corporation will not do for you. It will not automatically make you more profitable. It will not necessarily limit your liability on all transactions. It will not necessarily reduce your overall tax bill; it may, in fact, increase it.
If you incorporate an existing business you may find that your long-established suppliers now require new financial statement information. They may also request that you sign a personal guarantee that you’ll pay amounts owed if the corporation cannot. Most closely held corporations are required to give the personal guarantee of the major shareholders in securing a line of bank credit for corporation purposes. This guarantee has the effect of not limiting your liability in reference to those bank loans.
With a regular corporation, business profits may be taxed twice – once at the corporate level and again at the shareholder level when paid out as dividends or a liquidation distribution. The double taxation that regular corporations face is generally avoided by making a special tax election known as a Subchapter ‘S’ election. But not every corporation qualifies for S corporation status. You may find that the incorporation of your business has not only increased your income tax bill but also increased payroll taxes because the previous proprietor is now an employee of the corporation.
Incorporating your business can make a difference in the taxes you pay, the costs of doing business and the amount of paperwork and red tape you’ll have. Because of the many legal and tax considerations, anyone considering incorporating should discuss the matter with both their accountant and attorney. For assistance, call us. Visit us online at www.bianchi-lorincz.com to get more information on this and other important topics to help you make sound personal and business financial decisions.
Kris Nolan is a CPA with the accounting and business consulting firm of Bianchi, Lorincz & Co. in downtown Hollister and in Morgan Hill.
