According to Mr. Trent Lee, a corporate credit concepts consultant, one major reason that small business owners make the choice to incorporate their small businesses is the tax advantages available to corporations under both Federal and state tax laws.  The other available forms of business ownership, such as sole proprietorships or partnerships, simply do not offer the numerous tax advantages offered by incorporation.

Corporations are in the position to offer superior fringe benefits to their employees, since corporations enjoy more favorable tax treatment of deductions from for employee benefit plans.  The less than favorable tax treatment of employee benefit plans for other forms of businesses generally results in an increased tax bill for both the employee and the employer (business owners).

Under Federal tax law a corporation is are allowed to allocate its total taxable income among its shareholder (owners). This shifting of pre-tax profits to the individual shareholder results in a tax savings, since in most cases the individual’s tax is lower than the corporation’s tax rate. This represents a big tax savings to both the corporation and its individual shareholders.

Another advantage of incorporation is that it allows owners to take advantage of corporate credit concepts planning, since an incorporated business is a completely separate entity from its owners. This separation of the owners from the business also provides protection of the owner’s personal assets from any legal liability that the business may incur.  Mr. Trent Lee recommends structuring small business corporations to take full advantage of the concept of business income shifting and lower corporate tax rates.

Another tax advantage is the fact that corporations are allowed unlimited business losses, as opposed to the very rigorous restrictions on business losses that apply to all other forms of businesses.  While no one wants to lose money on their business incorporating allows a business to carry forward unlimited losses from business operations to apply against future profits.  This is one of several corporate credit concepts that should be considered in deciding if incorporation is for your business.

Another benefit of incorporation is the ability to delegate income. In addition to the ability to elect the allocation income among shareholders, a corporation can decide when income is paid to shareholder (owners). This allows a business owner to allocate both business and personal income to achieve the maximum benefit under Federal and state tax laws.

Mr. Trent Lee states that the small business tax deduction, which results from incorporating a small business, and currently is 16% on your first $200,000 in profit, is definitely a deduction a small business owner should consult their accountant or corporate credit concepts professional about. This consultation is necessary in order to fully understand the prospective benefits to their business.

Author: Trent and Chad Lee