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What Type of Corporation Should I Choose?

What Corporation Should I Choose?

For your corporation, I recommend a "C" corporation.  It is best if you and another person is going to own it.

Pros & Cons of Regular "C" Corporations

Owner enjoys limited liability for business debts

Owner can "split" corporate profit, paying overall lower tax rate

Fringe benefits are deductible as business expenses

First, it's the best way to shield you from financial and legal liability.

Second, you can "split" corporate profits, paying overall lower tax rate.

Example:  you made 15K in your loan business and 15K from Investments, inc.  That's 30K.  That puts you in the 28% income tax bracket - instead of the 15% bracket.

Here is what you do to split profits and income: you leave 6K in your corporation and so you drop down to 24K and 15% tax bracket. As opposed to personal income taxes, a "C" corporation - your corporation -  pays only 15% for net profits that amount to  under $75,000  ------ that's how you split corporate profits and save on overall taxes.

Third, with a "C" corporation you receive tax deductible fringe benefits because you are an employee of the the corporation - you cannot do this with an "S" corporation because you are not an employee (you are self-employed with an "S" corp.)   

Tax deductible Fringe benefits

Employer-paid medical insurance & expenses. Employee compensation, in the form of employer payments for health insurance premiums and other medical expenses, is deducted as a business expense by employers, but isn't included in employees' gross income.

Other employer-provided insurance benefits. Many employers cover part or all the cost of premiums or payments for: (a) employees' life insurance benefits; (b) accident and disability benefits; (c) death benefits; and (d) supplementary unemployment benefits. The amounts are deductible by the employers and are excluded as well from employees' gross incomes for tax purposes.

Exclusion of employee parking expenses and employer-provided transit passes. Employee parking expenses paid for by employers are excluded from the employees' income, up to $155 a month, indexed for inflation. (Parking at facilities owned by the employer isn't counted as a tax break.)

Other fringe benefits. Several other employee benefits are not counted in employees' income, although the employers' costs for these benefits are deductible business expenses. Such exclusions include, among other things, child care, meals and lodging, ministers' housing allowances and the rental value of parsonages.

You want to go further?  Form another corporation, transfer your cars to it, and then lease them to your Inc. 

Your "leasing corporation" makes some money, you drive for free and you deduct all depreciation and expenses.  NICE LIFE!

If you want to know more about corporations, read the article below.


Understanding Corporations

A corporation offers a business owner the chance to separate himself or herself from the full weight of their business and its liabilities. Incorporation also offers business owners relief from business taxes. All corporations are legal business structures regulated by state incorporation laws, as well as by state and federal tax laws.

Under the law, an incorporated business becomes a legal entity capable of entering into contracts, incurring debts and paying taxes separately from its owners. Corporations enjoy limited liability: if a corporation gets sued, only its assetsnot the personal assets of the business ownersare at risk. Corporations also enjoy corporate tax advantages resulting in different kinds of overall tax savings (depending on the kind of corporation). For-profit corporations have the legal framework to issue ownership interests as shares of private or public stock.

Corporation rules require that all corporations establish a board of directors, write bylaws, hold "recorded"  board meetings, appoint officers,  meet legal requirements for paperwork, and file Articles of Incorporation with state agencies. For profit corporation must separate directors from shareholders (directors from stock-owning shareholders), maintaining a stock ledger, and holding an annual shareholder meeting.


Types of Corporations

There are different kinds of corporations available under state and federal law (and corporate laws vary only slightly from state-to-state). The different kinds of corporations a business owner can choose from include:


Regular ("C") Corporations: a for-profit corporation whose profits are taxed separately from its owners' under subchapter C of the Internal Revenue Code and whose owners enjoy limited liability. Because the first $75,000 of profits retained in a C corporation are taxed at a separate corporate income tax rate that is lower than the individual income tax rates of business owners, owners who work for their corporation can split business income between themselves, individually, and their business. Owners can use this technique, known as "income splitting," to achieve overall tax savings. C corporations also allow owners to deduct fringe benefits as a business expense.


"S" Corporations: a profit-making corporation, organized under state law, whose shareholders have applied for and received subchapter S corporation status from the Internal Revenue Service. Electing to do business as an S corporation lets shareholders enjoy limited liability status, as would be true of any corporation, but be taxed like a partnership or sole proprietor. That is, instead of being taxed as a separate entity (as would be the case with a C corporation), an S corporation is a pass-through tax entity in which income taxes are reported and paid by the shareholders, not the S corporation. In this way, owners can report their share of corporate profit or loss on their personal tax and use corporate loss to offset income from other sources. To qualify as an S corporation, a number of IRS rules must be met, such as having 75 or fewer shareholders who are U.S. citizens. (Note: aside from sole proprietorships, this is the only business entity that limits the number of owners.)


Nonprofit Corporations: a legal structure, authorized by state law, allowing people to come together to either benefit members of an organization (e.g., a club or mutual benefit society) or for some public purpose (such as a hospital, environmental organization or literary society). Nonprofit corporations, despite the name, can make a profit, but the business cannot be designed primarily for profit-making purposes, and the profits must be used for either the benefit of the organization or the purpose the corporation was created to help.

When a nonprofit corporation dissolves, any remaining assets must be distributed to another nonprofit. As with for-profit corporations, directors of nonprofit corporations are normally shielded from personal liability for the organization's debts. Some nonprofit corporations qualify for a federal tax exemption under 501(c)(3) of the Internal Revenue Code, with the result that contributions to the nonprofit are tax deductible by their donors.

Professional Corporations: a legal structure, authorized by state law, for a fairly narrow list of licensed professions, including lawyers, doctors, accountants, many types of higher-level health providers, and often architects. Unlike a regular corporation, a professional corporation does not absolve a professional for personal liability for her own negligence or malpractice. The main reason why groups of professions choose this organizational structure is that, unlike a general partnership, owners are not personally liable for the malpractice of other owners. (In some states, limited liability partnerships offer this same benefit and may be more desirable for other reasons.) Tax benefits are also available.

Pros & Cons

Regular "C" Corporations

  Owner enjoys limited liability for business debts

Owner can "split" corporate profit, paying overall lower tax rate

Fringe benefits are deductible as business expenses

Owner must meet legal requirements for stock registration and paperwork

Separate taxable entity 

"S" Corporations

  Owner enjoys limited liability for business debts

Owner can use corporate loss to offset income from other sources

Owner reports corporate profit/loss on personal taxes

Owner must meet legal requirements for stock registration and paperwork

Income must be allocated to owner according to ownership interest

Fringe benefits limited for owner with more than 2 percent shares 

Professional Corporations

  Owner has no personal liability for malpractice of other owner(s)

Owner must meet legal requirements for registration 

Nonprofit Corporations

  Corporation doesn't pay income taxes

Contributions to charitable corporation are fully tax-deductible

Fringe benefits are deductible as business expenses

Full tax advantages available only to group organized for charitable, scientific, educational, literary or religious purposes

Property transferred to corporation stays there; if corporation ends, property must go to another nonprofit 

If you incorporate, the bank will not need a DBA to open a bank account (checking or savings).