This time of year, most business owners are thinking about their small business taxes: how much they owe, what they need to do to file them, whether they have enough to pay what they owe.
But did you realize that if you incorporate a business, how you file your small business taxes and how much you pay can sway in your favor (depending on the corporate structure you choose)? Let’s take a look at how incorporating affects your taxes.
Small Business Taxes and the C Corporation
As I said, being incorporated can be better for you taxwise, but not always. If you incorporate as a C Corporation, there’s actually some drawback to your tax situation. Essentially, you’re taxed twice on profits: you’re taxed on the profits of the corporation, then you as a shareholder are taxed on your dividends that you receive from the company. And the tax rate for a corporation can be higher than what it is for a sole proprietor.
Small Business Taxes and the S Corporation
For that very reason of double taxation, many businesses opt to incorporate as an S Corporation. While there are some drawbacks to the S Corporation, especially if you want to have more than 100 shareholders, from a tax perspective, the S Corp can’t be beat. You’re taxed only once on profits, and you report your business profit and loss on your personal income tax statement. So you only file taxes once. This is called “pass through taxation,” and it’s why so many of our customers choose the S Corp business structure.
Reduce the Chance of an Audit
If you continue to operate as a sole proprietor, the chance of the IRS auditing you is much greater than if you’re incorporated. Even if you keep meticulous records of your expenses and receipts, many sole proprietors don’t, and the IRS is more likely to scrutinize tax filings from individuals operating as sole proprietors.
Being incorporated, by its very nature, requires more stringent paperwork and compliance, and therefore, there is less need for the IRS to give your tax return a second look. That’s just one more reason why you should consider incorporating your business.
