Will Incorporating Benefit Your Business?
Business owners incorporate to protect themselves from unlimited
personal liability for their business. But the tax benefits are not
Karen E. Klein
I am a sole proprietor working as a 1099 commission-only
consultant. I make between $150,000 and $200,000 annually and
have had to pay as much as $30,000 in income taxes. If I
incorporate, would it lower my tax bill?
—T.R., Long Beach, Calif.
Incorporation is a complex issue and there are so many variables that it
is difficult to answer your question without getting many more details
about your company. This is a situation you should discuss with an
accountant who is privy to your financial records, and who can lay out
the pros and cons for you based on those specifics, to enable you to
make an informed decision.
Generally, however, most companies won't find significant tax
advantages to be gained by incorporating. "The marginal tax rates for
corporations with taxable incomes between $75,000 and $335,000 are
actually higher than the marginal tax rates for an individual with
equivalent earnings," says Mark T. Nash, a partner based in Dallas in the
private company services practice. "Assuming
you withdrew most or all of the earnings from the corporation as salary,
the income would be taxed to you personally in any case."
James O'Connor, tax manager at AVZ, an accounting firm based in
Hauppauge, N.Y., agrees. "Merely incorporating, without doing
anything more, usually will not achieve any savings. Regular corporate
earnings are generally subject to two levels of taxation—once at the
corporate level, and again when the net earnings are withdrawn from the
corporation by the shareholder," he says.