Thursday, August 13, 2009

How Taxes Apply To Corporations

A corporation is a designated entity where the company and the individuals related to it, have different legal identities. The reason most companies prefer to incorporate is asset protection. Incorporation protects your personal assets from seizure during a lawsuit.

If you decide to incorporate your small business, you can choose the S corporation, C corporation or LLC model. Before choosing any kind of corporate model, you should look at the tax rules and regulations related to a corporation.

Tax Laws for Various Corporations
Tax laws vary from country to country and state to state. You need to go through them before and after incorporating. In general, all countries have mandatory tax requirements for companies. Your corporation needs to pay taxes on the profits it earns. Even if your corporation is registered abroad, you may need to pay taxes if you reside in your home country.

1. C Corporations have to go by standard corporate tax laws. They need to pay taxes on their profits, and are subject to certain deductions depending on their shareholding structure.

2. S Corporations are the best option if you have a startup company or a small business. S corporations do not have to pay income tax, and still get to enjoy the advantages of being a standard corporation. The eligibility condition is that your small business should have less than 75 shareholders who are all citizens of the US. To get the benefits associated with the Subchapter S Corporation, you need to file an application with the tax authorities. If you want to submit taxes under an LLC structure, you need to submit another application before the current financial year ends.

3. Limited Liability Partnerships, or LLC, are preferred by businesses that need streamlined allocation of profits and losses. This facility is not available to S Corporations. LLCs need to file form 100 ES and form 100.

S Corporation Taxes
Since this article is primarily concerned with entrepreneurs and small businesses, it would be relevant to go into the details regarding the S-corporation. If you decide to register yourself as an S corporation to avail tax breaks, you need to keep in mind the eligibility conditions. Apart from the conditions already discussed, you need to remember that you must use the calendar year as the financial year of the company. In addition, any shares your company sells must be of a single kind.

Advantages of Being an S Corporation
1) The best thing about the S Corporation status is that the shareholders shoulder the responsibility for paying the taxes as their personal income tax. Therefore, the corporation need not pay income tax twice, first as a company and secondly as individual shareholders. In fact, most S corporations do not pay any taxes.

2) It reduces the need for extensive paperwork when filing tax returns or declaring income.

Additional Help
If you wish to incorporate your small business and need more information about tax structures of various corporations, you can consult a small business advisor or tax consultant. Choose the type of incorporation carefully, as taxes will apply to your business based on that. Get yourself educated on the advantages and disadvantages of each type of incorporation according to the tax laws. This will help you reap the benefits of a corporation without having to pay huge taxes.



By : David Gass
David Gass is President of Business Credit Services, Inc. His company publishes a free weekly e-newsletter on Small Business Consulting at their web site http://www.smallbusinessconsulting.com

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