'Corporation' not just for the biggies
By DANIEL MEYER
Whether you purchased an existing business or decided to launch your own company, one of the first decisions to make is which form of organization or business entity will be the best fit when evaluating your financial needs.
There are several business types to choose from, each of which has advantages and disadvantages, especially as they relate to taxes.
A growing trend is forming a corporation. While most may view it as a giant operation that earns big revenues and has hundreds or even thousands of employees, financial experts say that forming a corporation is one of the greatest tax advantages available these days, including solo entrepreneurs identified by most as small-business owners.
But is it the best business plan for you, no matter how small your business may be? According to local tax attorneys, CPAs and personal financial planners, taking time for a professional consultation to determine which type of business is most beneficial to your particular situation is critical.
Weighing the pros and cons of forming your own corporation is a detailed process that can pull on some people's emotional heartstrings, as well as their financial pursestrings.
"While there certainly are some advantages, the big downfall to forming your own corporation is having to deal with two levels of taxation," says Joseph Falbo Jr, partner in Tronconi Segarra & Associates LLP. "Not everyone realizes that when you start a business and become your own employer, if you're paying taxes as a sole proprietor, you have to pay twice as much payroll tax as you used to pay as an employee. That means that approximately 15 percent of your total business income is going to go toward paying payroll taxes."
One way to reduce self-employment tax liability is to incorporate your business into what is known as an S corporation. The tax advantages are a primary reason why this type of business structure has become one of the most popular choices for small businesses looking to incorporate.
The biggest advantages are:
- Pass-through taxation
- No corporate income tax
- Reduction in self-employment tax liability
The decision to form a corporation may also have an image and aesthetic purpose for sole entrepreneurs looking to take the next step and increase their business and bottom-line return.
"One of the reasons to incorporate your business could actually address the idea of credibility, not only with consumers and the general public but also with lenders, as seeking capital in the form of future business loans becomes inevitable for anyone looking to achieve success through the growth of their business," says John Penna, a principal of Sage Investment Group, a Williamsville financial planning firm. "Image can play a factor for incorporation for some business owners who choose to go that route."
Experts agree that the primary advantage of a corporate form of business is that an established corporation is a stand-alone entity, meaning the owner is not personally liable for the assets and debts. Incorporating helps to protect your personal assets from potential lawsuits, debt collection and other business issues that may arise.
But is forming a corporation the key to future success? Simply put, there is no concrete answer to the question that will reveal fame and fortune for anyone who takes the plunge to incorporate.
"Frankly, there really is no one-size-fits-all scenario," Falbo says. "Each evaluation has to be done on a case-by-case-basis after close consultation with your accountant and your attorney. You really have to answer the question on: Is a corporation right for you based on your individual financial needs and goals? And then measure it in some way against your business plan for your company."
One disadvantage of a corporation is the cost associated with running a corporate form of business, but those expenses could be absorbed if long-term benefits outweigh the early investment of your hard-earned profits.
"The extra costs incurred can be significant for some trying to keep their budgets tight but, in the long run, the ability to have liability protection and limit your personal costs can be viewed as insignificant when you look at the whole process of incorporation and the other benefits you receive," Penna says.
Similar to other forms of business, a corporation has advantages and disadvantages, so evaluating all of the elements of a corporate form of business is crucial to determining if it is the right choice for your company.
"There is no magic formula," he says. "You really need to do your research and rely on those who you know have experience. My best advice? Talk to the experts."
Daniel Meyer is a freelance writer from Hamburg.