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View Full Version : incorporate or sole prop?



jimmyb45
11-07-2010, 08:51 PM
what are the main differences besides liabilty?

Business Attorney
11-07-2010, 09:47 PM
There are several other differences. A corporation is a separate entity and therefore has its own tax consequences (and its own tax return). If the corporation elects to be treated as a small business corporation (S corp) the income and losses flow through to the tax returns of the shareholder. If the corporation is a C corp, then its income will potentially be subject to taxation twice, once at the corporate level and again when distributed as a dividend to the shareholder. However, at low levels of income (under $75,000) the corporation's graduated rates may actually be lower than the individual's tax rates, so in some cases where a small corporation needs to accumulate profits to build up its assets, the C corporation may still make sense. Also, most closely held corporations can justify paying most or all of the excess cash to the shareholder as salary or bonus since he or she is often the key employee who generates the revenues. That reduces or even eliminates any income tax liability for the corporation.

Also, corporations must pay the shareholder a reasonable salary. That salary is subject to social security and unemployment taxes (whereas sole proprietors pay a similar tax on self-employed income). The entity's payroll taxes have their return filing requirements, while a sole proprietor simply reports his self employed income on his own Form 1040.

I have a chart on my website that highlights some of the differences between S corporations, C corporations and LLCs (http://www.limitedliabilitycompanycenter.com/llc_vs_corp.html).