We know first-hand what it’s like to invest in starting a small business and making it grow. That’s why we are so passionate about helping small business owners make the right choices. If you own a small business, one of the choices you should consider making is incorporation. This is primarily for four reasons.
First, incorporation can save you a lot of money in the form of a reduced tax bill. To see how this works in your situation, you really should take some time to consult with a qualified CPA. The best CPAs are those rare practitioners that check in with their clients throughout the year – not just at tax time. A good CPA like that can help you work proactively to minimize the size of those checks to the IRS and the FTB. In our experience, it’s not uncommon for a sole proprietor who incorporates to save $5,000 or more in unnecessary taxes. The total savings will of course depend on how much revenue your business generates and the quality of the advice your CPA gives you.
Second, in addition to saving money, incorporating also gives you increased protection against audits. According to the most recent numbers from the Internal Revenue Service, if your business is an S-Corporation, you are 9.95 times less likely to be audited than a sole proprietor. And, for those S-Corporations who have at least $100,000 in gross receipts, the odds of being audited are even more favorable at 10.26 times lower.
Third, incorporation provides exciting opportunities for retirement planning. That’s because a corporation has more flexibility and more options in establishing retirement plans. For instance, a corporation can form a 401(k) with a Roth option. If it does, the owner's contributions will not be treated as reductions of income, but all of the account’s earnings and principal can be pulled out tax-free.
Fourth, depending on your industry and how it's regulated, incorporation can help you shield your personal assets from your business liabilities. Many business owners fail to incorporate before they get sued as a result of contractual arrangement gone awry or an employee’s mistake. It's too late at that point for those owners to protect themselves and their families.
If you are interested in knowing more, we would be glad to talk to you. In fact, we are each offering an hour of our time (without charge) to any sole proprietor who mentions this article and wants to find out how incorporating could benefit them specifically.
Incorporating your business could be the smartest financial move you make in 2008.
David Airola and Brian Wyatt coauthored this article. David is an experienced CPA who interacts regularly with his small-business clients to ensure that they minimize their tax obligations. His firm specializes in providing advice and services to business owners. You can reach David at (916) 932-7110 or dga@airolacpas.com. Brian is a business and estate planning attorney who develops life-long relationships with his clients. Those clients have great confidence that the planning he does for them will work when it's most needed. You can reach Brian at (916) 273-9040 or brian@wyattlegal.com.
Pursuant to recently-enacted U.S. Treasury Department Regulations, we are now required to advise you that, unless otherwise expressly indicated, any federal tax advice contained in this communication, including attachments and enclosures, is not intended or written to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.
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