Should I Incorporate?

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BENEFITS

• Protection of personal assets

• Separate legal entity  C Corporation

• Added tax benefits

• “key man” life insurance deduction                    

• Medical plan deduction                            

• Flexibility in setting salary & bonuses                                    

• Reimbursement policy on expenses & fringe benefits

• Minimize taxes paid via tax planning

• Unlimited life

• Can transfer ownership via stock sales

• Non taxable incorporation via IRS Section 351

• Requires transfer of business assets to corporation in exchange for stock

• 15-35% Federal Corporate Tax Rate (Files Form 1120)

• 8.84% Calif. State Income Tax Rate (Files Form 100) 

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BURDENS

• Costly to incorporate

• Additional attorney fees to maintain corporate form

• Must apply for federal corporate EIN (Identification number) & state ID Number

• Requires separate corporate tax returns (state & federal)

• Payroll tax reporting for employees in corporate name

• Separate bank account in corporate name

• Fictitious business license in corporate name

• Additional record/bookkeeping

• Annual board meeting/minutes required

• Annual election of officers required

• Annual documentation of planning decisions (internal actions taken)

• Maintaining updated bylaws

• Stock ownership record keeping

• Sales Tax # in corporate name

• Sales tax reporting in corporate name

• Unlimited life

• Corporations must pay a minimum California franchise tax of $800 regardless of taxable income.

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LLC – Limited liability corporation 

• Blends elements of corporation and partnership features.  

• Limits liability of specific shareholders

• Pass through taxation feature at federal level to shareholders

• Pays $800 minimum Calif franchise tax regardless of income

• Fewer ongoing formalities i.e. paperwork (meeting requirements)

• Credibility (general public perception of credibility over sole proprietor)

• No restriction of the type of owners however required consent of all owners to add new members

• Not subject to $800 minimum Calif. franchise tax in year of incorporation

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S-Corporation

• Pass through taxation feature (no tax paid at federal corporate level)

• Limited to no more than 100 shareholders

• 1.5% state tax rate

• $800 Minimum Calif. franchise tax at corporate level

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