View Full Version : Incorporate or not incorporate; that is the question

07-20-2006, 10:35 AM
First, let's get this straight, "Real Corporations" are taxed far less than individuals. By "real corporations" I mean those that do not file a 2553 form "sub-S Election", those that file an 1120 tax return and pay their own taxes.

"Blasphemy, that cannot be true. All my friends, Many accountants, even tax attorney's have said that corporations pay higher taxes!!!" . . .Let's take a look -- The tax rates for corporations seem to parallel the personal income tax rates for individuals: 15, 25, 34, 35% for corporations, while Individuals are taxed 15, 25, 28, 33, 35%. However, corporations are taxed on "Net" Profit, and individuals are taxed on . . . Adjusted Gross Revenue.

But Wait, that's not all, a Corporation pay NO Social Security, NO Medicare, NO Unemployment, and NO Workers Comp on its income. If we just use the Self Employment Tax (or FICA) at 15.3% of TRUE Gross, with no deductions, no discounts and no rebates, then the effective tax rate for the business owner really starts at 30.3% and goes up to 50.3%. AND SE/FICA is a gross tax in that you get the privilege of paying that on what the Federal Gov't takes out of your check, and if you have a state tax, you also get to pay it on the state tax. So the effective tax rate is really closer to 31.5% and going up.

"But I don't pay that much in tax, I get Deductions". . . Well, you don't get deductions on all of the money you earn just the first money you earn, so the last money is just taxed at the gross rate. AND if you are successful you lose your deductions, if you are successful in Business you have to calculate the AMT, if you are successful at personal income your deductions "phase out". Real Corporations don't have an AMT, and Real Corporations don't experience Phase Out.

"Well Okay, I guess the corporation doesn't pay as much in tax, but when I take the money I have to Pay taxes too (Two), that makes it a double tax!" . . .Hmm, sorry grasshopper, the only thing that I can find that would be double taxed would be dividends or disbursements at dissolution. If you want the money, you could take it as salary; there is no double tax on salary. Salary is an expense to the corporation no tax on that side.

"But if I take it as salary that would be the same as being a sole proprietor, what good is that?". . . you are right, there is no tax advantage there, but you have to agree there is no tax disadvantage to operating as a Real Corporation. the nice thing is that a real corporation allows you the choice to take the money personally or not, not of the other entities do that.

Additionally, individuals only pay 15% on dividends now, so even if you take it as a dividend, you're still saving at least .3% over paying the SE tax on the money.

"What could you do with the money if you leave it in the corporation?" . . . Well, you be able to buy more inventory for every dollar earned. Let me explain, you sell a widget for $250 your cost is $150 so you have $100 in taxable profit, as an individual, we know your gonna pay 15.3% in SE taxes, plus at least 15% in Federal taxes (and possibly a state tax, but we'll assume the State tax rate is the same for a Corporation and individual). As a corporation, that would be a total tax owed of 15% (Less than $50,000 of net profit); As an individual you can buy $69.70 worth of new inventory, while your corporate competitor can buy $85 of new inventory. Whose Business will grow faster? Is a faster growing business a bad thing?

"Well, yah, inventory, but I'm not an inventory based business?" . . . Are you Profitable? if so, do you want to spend more of the money you earn? then the corporation will allow you to pay lower taxes, thereby having more to spend after taxes.

"But, I'm just investing in the stock market" . . . Well your investments will grow faster if you have to withdraw less to make your payments on your taxes. AND as an added feature, Corporations that receive dividends, only pay tax on 30% of the dividends they receive. That is an effective 4.5% tax on dividend income.

"Yah, but I want the money, I gotta have the money, give me the money". . . what do you want to do with the money?. . . Do you want to buy a boat? let the corporation buy the boat, and you'll have a much nicer boat in your driveway because the corporation had more of your hard earned money to spend on it.

"Whoa, Hold up there! A corporation can't buy a boat, My Accountant/CPA/EA/Brother-in-law says there is no way to justify that expense!!!". . . Let me clear a few points. I didn't say you were making it a tax deductible expense, you are going to pay the taxes ont he money first, then you'll use the net after tax profit to buy the boat. Since it in not in the "tax-deductible" column the IRS doesn't care. they got their money already, once the taxes are paid the corporation can choose to "INVEST" in anything from Real estate to worm farms, from manufacturing equipment to Stereo equipment, From automobiles to. . . come to think of it, the last time I bought a car, I bought it from a real corporation (the dealership), that bought it from the some corporation (the manufacturer) well, gosh I guess corporations can and do own vehicles as a matter of everyday business. Now the last boat I bought, was from an individual, but HE bought it from a real corporation.

We could start talking about deductions, but let's keep this thread on this topic and we'll start another thread about corporate deductions vs individual deductions.

You can contact me if you can't believe it is that simple, or refuse to believe your accountant could be wrong for so many years. My name is Richard and my alias is the domain.

03-04-2014, 12:00 AM
This looked very much copy-pasted on one-hand. On the other, it was a very interesting read. Thanks for the information.

05-22-2014, 05:22 PM
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