Tax Advantages: Why You Should Incorporate Your Business
You finally came up with an amazing name for your business, your business plan is carefully written and you’re ready for take-off! But as you read up on starting your business you stumble across a word that just keeps coming up: incorporating. Then, at your networking event, people keep asking you if you have decided to incorporate or not. You try not to panic as you swiftly explain that you are still considering your options.
You run to the library, checking out all of the books you can possibly find on this very subject, but you’re still slightly confused, especially when it comes to talking about “taxes and numbers”.
We get it, it can be a lot to take in. We’ll give you the best reasons for incorporating your new business based on tax benefits and give you the information you need to incorporate. And don’t worry, we know it can be complex and we’ve made it easy to understand so you can make the best choice is for your business.
What Does It Mean to Incorporate?
If you’re thinking of incorporating your business, it’s important to know exactly what “incorporating” means. When you incorporate a business you are officially making it legal in the eyes of the state in which you reside. It becomes its own entity, separate from you as an individual owner.
It’s relatively simple to become incorporated, all you have to do is fill out an application with your state. This application asks for information about your business, including the business name, your personal contact information, the purpose of your business, and whether or not you will be providing stock options. By incorporating your business, your business can go on without an expiration date, which means that even if you pass away your business still exists.
Remember to consult a professional if you are considering incorporating your business. A professional can help you understand the benefits and drawbacks of each type of incorporation and understands what it takes to set your business up for success.
Incorporate Today: 7 Tax Advantages
When making the decision to incorporate your business, you want to think about what it will look like to run your business. Ultimately, one of the best reasons for incorporating your business is because it keeps your company and its assets separate from your personal ones, but there are great advantages when it comes to the big “T” word too.
Here’s a list of the top 7 tax advantages you receive from incorporating your business:
1. Spreading Out Tax Losses
As a business, you’ll likely have some losses, especially at first — most businesses do. Unlike, filing your taxes as an individual, a business you can spread out their tax losses over time. As an individual, you’re forced to take the loss right away, but as an owner of an incorporated business, you can defer your taxes. More specifically, if as an individual you have a high marginal tax rate and you personally don’t need the funds, you’re able to leave money for your business and take back the money at a later date when your personal tax rate levels out.
2. Business Expense Deductions
Keep track of all your costs. This includes start-up costs, operating costs and capital expenses (land, business equipment, commercial property, etc.). These expenses can be deducted during tax time and can add up to big money for your business. And as a bonus, you’re at a lower risk of being audited as an incorporated business.
3. Social Security Tax Deductions
By incorporating your business, you’ll only have to pay social security taxes on the income salary that you personally receive. This saves you a big chunk of tax money and allows you to separate your social security tax from your entire business income.
4. Benefit Deductions
Incorporated businesses are able to deduct the benefits they pay their employees too. As an unincorporated business who has outside people helping you, you’re unable to deduct those benefits.
Another deduction included is the insurance you provide to employees.
5. Protect Personal Assets
It’s always a wise idea to keep your business and personal assets separate, this includes bank accounts, property, etc. As an incorporated business, you’re able to protect your personal assets — it’s critical to have this asset protection in the unfortunate case that something goes wrong in your business.
For example, if you’re sued as an incorporated business, you’re not personally being sued, only your business is liable. Since incorporating your business classifies it a separate entity, your businesses’ assets are in jeopardy, not your personal home, vehicle or property.
When your business is incorporated, you’re more likely to be taken seriously as a business owner. You become more credible in the community and in the tax world, and when that’s the case, you’re more likely to earn money from people who trust you and your business.
7. Income Flexibility
Another tax advantage of incorporating is that you can lower your tax bill by taking income in dividends rather than salary, which allows you to be flexible with your income decisions from your own company. With income flexibility, you’re able to run your business in a more creative way and can meet a diverse set of needs that may be necessary, especially when you’re just starting out.
The Bottom Line on Incorporating
Incorporating a business might be a great choice for you. In addition to tax advantages, incorporating your business opens up many doors and opportunities.
Need help incorporating? Contact us today to get started!