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Isn't Once Enough? Don't Let The IRS Tax Your Small Business

Article:

Have you been thinking about incorporating your small business

or self-employment activity? The advantages are many!

For starters, you'll be protecting yourself and your family from

the possibility of a business ending lawsuit. Forming a

corporation is Step One on the path known as "Asset Protection"

-- you are moving from the world of unlimited liability to the

world of limited liability.

(NOTE: For further insight into the legal advantages of

incorporating, check out the article: "It Can Happen To You: Why

Any Sole Proprietorship Is A Risky Business" at

http://www.YouSaveOnTaxes.com/happen-to-you.html)

From a tax standpoint, there are both advantages and

disadvantages to incorporating. Yes, forming a corporation can

either reduce your taxes or increase your taxes, depending on

what type of corporation you create.

There are two main types of corporations: "C" Corporations and

"S" Corporations -- and which type you choose can make all the

difference in the world of taxes.

NOTE: The question of "C" Corp vs. "S" Corp has no effect on the

asset protection provided by your corporation. This is a tax

issue, not a legal issue.

A "C" Corporation can lead you into a Tax Trap known as "double

taxation". Yes, income from a "C" Corporation can actually be

taxed twice -- once when it's earned on the corporate level and

again when it's paid to you, the shareholder, in dividends.

There are several ways to avoid double taxation. Often the

easiest way is to tell the IRS that you choose to be an "S" Corp

instead of a "C" Corp. The profits of an "S" Corp are not

taxable to the corporation; instead, those profits are reported

directly on the shareholder's personal income tax return and are

therefore only taxed once.

And once is enough, don't you think!

Of course, any article on Choice of Entity must contain the old

disclaimer, "Consult your tax professional" -- I am not

prescribing a one-size-fits-all approach to this issue. But for

many small biz owners and self-employed folks, the "S"

Corporation is a good fit because it provides protection from

personal liability and avoids the nasty tax trap of double

taxation -- two great benefits worth checking into.

Should you incoporate your sole proprietorship and then decide

that the "S" Corporation is the right fit, you must inform the

IRS that your corporation is choosing "S" Corporation status by

filing Form 2553, which is, in effect, an application to become

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an "S" Corporation.

IMPORTANT: If you incorporate and do not file Form 2553, you are

automatically considered to be a "C" Corporation by the IRS. In

other words, to be a "C" Corporation, you just incorporate;

there is nothing you have to do to inform the IRS you want to be

a "C" Corporation.

There are critical rules regarding how and when to file Form

2553, so be sure to read the instructions carefully, or check

with your tax pro.

Failure to file Form 2553 on time or filing Form 2553

incorrectly results in a rejection of your corporation's "S"

Corp application, and the corporation is then by default treated

as a "C" Corp, subject to double taxation, the very trap you

were trying to avoid.

To download a copy of Form 2553, go to:

http://www.irs.gov/pub/irs-pdf/f2553.pdf

The instructions for filing Form 2553 are found here:

http://www.irs.gov/pub/irs-pdf/i2553.pdf

About the author:

Wayne M. Davies is author of 3 tax-slashing eBooks for small

business owners and the self-employed. For a free copy of

Wayne's 25-page report, "How To Instantly Double Your

Deductions" visit http://www.YouSaveOnTaxes.com