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Should You Incorporate?
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Article 2: Primary Benefits Of Incorporation
Incorporation offers two main benefits:
The individual’s personal liability for losses is limited to the amount of his or her capital investment There may be tax benefits to incorporation
“A corporation is a separate legal entity from the owner in the eyes of the IRS. It incurs business debts or liabilities on its own behalf,” says Keith Hall, a Dallas-based CPA and a tax consultant with the National Association for the Self-Employed (NASE). “It’s this distinction [known as the “corporate veil”] that shields corporate owners from personal liability.”
This means that as a shareholder, the individual is not personally liable for the business’ debts and obligations if the business can’t pay them or is sued. Note, however, that this applies only to the business’ financial obligations.
Also keep in mind that directors of corporations can be held personally liable, especially if they’ve personally guaranteed loans for the corporation.
In addition, shareholders of corporations will still generally be held liable for their own actions in their profession. Physicians, for example, can still be sued for malpractice, regardless of their corporate status.
Depending on what type of business you own, incorporating may offer significant tax benefits. These include:
A potentially lower tax rate, depending on the business’ net income. More flexibility in deducting fringe benefits and other expenses, including salaries, bonuses, health and life insurance premiums, retirement plan contributions, education benefits and dependent care assistance. Savings on self-employment taxes. Subchapter S corporation (discussed later) income is not subject to Social Security or Medicare taxes — a total tax savings of 15.3 percent on all earned income. Only salaries paid by a corporation are subject to these taxes.
If you choose to incorporate as a Subchapter S corp, Hall cautions against paying yourself an unreasonably low salary in an effort to save more money on self-employment taxes.
“The IRS actively pursues corporations that pay what it considers to be arbitrarily low salaries to owners trying to lower self-employment taxes,” says Hall. So be sure that you’re paying yourself what would be considered reasonable compensation for your position in the company.
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