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Thread: Considering incorporating as opposed to a sole proprietorship, to save on taxes.

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    Senior Member Bambibabe's Avatar
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    Default Considering incorporating as opposed to a sole proprietorship, to save on taxes.

    Basically a sole proprietorship has you taxed as an individual, and it is fairly highly. Incorporating can also be done as an individual, and is considered a smart choice if your business brings in more revenue than you need for living expenses. I believe escorting falls under that category! You are paid by your company for your living expenses, on which you are taxed with personal income taxes, while the rest of the $$$ is taxed as a corporation. This way you keep more of your money, and legally.

    Has anyone else done this? Do you think it would be worth it? How do I use the money that I've earned through my business/corporation for my personal investments?

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    God/dess Zofia's Avatar
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    Default Re: Considering incorporating as opposed to a sole proprietorship, to save on taxes.

    A corporation is a legal entity that is separate from you personally. As such, a corporation can be taxed on its own. That is it files its own tax return and pays taxes on it's own net income. That is important because a corporation deducts all its ordinary and necessary business expenses before calculating it's income. Then it is taxed on its income. The key here is ordinary and necessary business expenses. Not personal expenses, not living expenses. Just ordinary and necessary business expenses. Once a corporation is taxed on its net income, then it can declare a dividend and the owner gets to include that as a qualified dividend and get taxed again! That is for what we call a "C" corporation.

    There is the option of making the sub-chapter S election. Then, the corporation files an informational return again deducting its ordinary and necessary business expenses and reporting its net income. That is then included on the owner's income taxes and is taxed just once at the owner's rate.

    A corporation may elect to pay the shareholder a salary and deduct that salary as an ordinary and necessary expense as all wages are. But, the salary must be reported by the individual as salary. Of course, the corporation is required to withhold from the employee/owner's salary. The corporation then can declare a dividend to pay the shareholder/employee. Depending on if this is an S or C corporation, will determine the tax rate for the dividend. As I wrote above, a taxed C corporation dividend will be treated as qualified dividend and taxed at a lower rate than one from an S corp. But, the C corp will get double taxed even though the dividend is taxed at a lower rate.

    There are also LLCs which fail the corporation test. They may (most do) have to file an informational return. But, they do avoid the double taxation problem of a C corporation. You can still run the salary and distribution gambit with a LLC but all that really does is increase your social security income when you retire. Which may be a good thing.

    In the end, the only way to know for sure which is best for you is to run the numbers assuming C, S or LLC.

    HTH
    Z

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    God/dess shanna dior's Avatar
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    Default Re: Considering incorporating as opposed to a sole proprietorship, to save on taxes.

    ^OP is in Canada, so I wonder what the differences (if any) are compared to the US.

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    Featured Member ava$'s Avatar
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    Default Re: Considering incorporating as opposed to a sole proprietorship, to save on taxes.

    I have been looking into doing this as well, Im wondering how much more it would cost in taxes per year and if the dividends are taxed? I was looking into doing an s corp cause it is not double taxed, as stated above you pay yourself a salary and a dividend and your salary is taxed at your tax rate but Im wondering can you keep money in your s corp account and not have to pay taxes on i? not sure about this.

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    God/dess Zofia's Avatar
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    Default Re: Considering incorporating as opposed to a sole proprietorship, to save on taxes.

    Quote Originally Posted by shanna dior View Post
    ^OP is in Canada, so I wonder what the differences (if any) are compared to the US.
    Well, she did not say that. Further, she doesn't have "Canada" in her location, so how should I have known?

    As to the difference, Canada has a partial single taxation system for corporations. So they don't have the Sub-S election issues. Up to a point, corporation earnings are taxed and then the sole shareholder gets to deduct the corporate taxes paid. The result is single taxation. OP needs to consult a Canadian Chartered Accountant.

    HTH
    Z

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    Default Re: Considering incorporating as opposed to a sole proprietorship, to save on taxes.

    Quote Originally Posted by ava$ View Post
    I have been looking into doing this as well, Im wondering how much more it would cost in taxes per year and if the dividends are taxed? I was looking into doing an s corp cause it is not double taxed, as stated above you pay yourself a salary and a dividend and your salary is taxed at your tax rate but Im wondering can you keep money in your s corp account and not have to pay taxes on i? not sure about this.
    What happens is the S-corp files an informational return every year. The net income figure from the informational return (not money in the company bank account) is reported on your income tax return and you are then taxed on that net income at your ordinary rate. It does not matter if the corporation paid a dividend or not. You are taxed the year the corporation earns the money. The good news is, if the corporation doesn't distribute every dollar in the year it is taxed, it can be distributed tax free in subsequent years. Of course you have already paid the tax on that money when it was earned.

    I use the dividend and salary as a means to increase my Social Security earnings and thus my ultimate Social Security payout when I retire. Because my company is a "pass through entity" dividends are not regarded as "qualified" and thus are taxed at my ordinary income rate.

    HTH
    Z

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    God/dess shanna dior's Avatar
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    Default Re: Considering incorporating as opposed to a sole proprietorship, to save on taxes.

    Quote Originally Posted by Zofia View Post
    Well, she did not say that. Further, she doesn't have "Canada" in her location, so how should I have known?
    I didn't mean it in an accusing way -- I certainly wouldn't expect anyone to just know where an OP is located. I only brought it up since you had so much knowledge about the US system, so I thought you might know some of the differences.

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    Default Re: Considering incorporating as opposed to a sole proprietorship, to save on taxes.

    Aside from the OP, for all others who may be interested in the same issue as the OP, the decision as to whether or not to form a corporation and the type should be made after consulting with a CPA or a tax attorney. If one is located in the United States, then keep in mind that there are state (and local) tax considerations in addition to federal tax considerations. However, my limited knowledge regarding tax and business entity law is that forming a corporation is not primarily intended as a way to mitigate one's tax liabilities, but is really intended to mitigate one's potential legal liabilities by forming a corporate shield for the shareholder(s) against potential creditors. At the end of the day, taxes for income will need to be paid. Whether such taxes are paid by the shareholder, the corporation, or divided between the two and taxed accordingly will depend on the type of corporation or business entity that one elects to form.
    Last edited by Danny Ocean; 10-25-2015 at 07:12 AM.

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    Default Re: Considering incorporating as opposed to a sole proprietorship, to save on taxes.

    Quote Originally Posted by Zofia View Post
    What happens is the S-corp files an informational return every year. The net income figure from the informational return (not money in the company bank account) is reported on your income tax return and you are then taxed on that net income at your ordinary rate. It does not matter if the corporation paid a dividend or not. You are taxed the year the corporation earns the money. The good news is, if the corporation doesn't distribute every dollar in the year it is taxed, it can be distributed tax free in subsequent years. Of course you have already paid the tax on that money when it was earned.

    I use the dividend and salary as a means to increase my Social Security earnings and thus my ultimate Social Security payout when I retire. Because my company is a "pass through entity" dividends are not regarded as "qualified" and thus are taxed at my ordinary income rate.

    HTH
    Z
    I never knew that the income wouldn't be taxed if it wasn't distributed in the year it was made but if your an s corp, you wouldn't have had to pay taxes on the s corp $$, your only taxed once its been passed through to the shareholders and claimed on each person's taxes individually. So I wonder if you could hold $ in your s corp account and distribute it the next year, basically avoiding tax? IDK I probably need to see an accountant, there are so many details. Im really trying to figure out how to pay the least amount of taxes I could possible, my tax bill is no joke :/

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    Default Re: Considering incorporating as opposed to a sole proprietorship, to save on taxes.

    Quote Originally Posted by ava$ View Post
    I never knew that the income wouldn't be taxed if it wasn't distributed in the year it was made but if your an s corp, you wouldn't have had to pay taxes on the s corp $$, your only taxed once its been passed through to the shareholders and claimed on each person's taxes individually. So I wonder if you could hold $ in your s corp account and distribute it the next year, basically avoiding tax? IDK I probably need to see an accountant, there are so many details. Im really trying to figure out how to pay the least amount of taxes I could possible, my tax bill is no joke :/
    Remember, the income is taxed the year it is earned. If it is later distributed, it is not taxed again.

    HTH
    Z

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    Default Re: Considering incorporating as opposed to a sole proprietorship, to save on taxes.

    Right, but is it ok to keep all that $$ in your s corp account and not distribute it to yourself? Like it doesn't all have to be distributed to shareholders as the corp makes profits?

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    Default Re: Considering incorporating as opposed to a sole proprietorship, to save on taxes.

    Quote Originally Posted by ava$ View Post
    Right, but is it ok to keep all that $$ in your s corp account and not distribute it to yourself? Like it doesn't all have to be distributed to shareholders as the corp makes profits?
    It's called retained earnings. Yes, you can keep the money in the corporate account. Lots of businesses do. They use the money instead of borrowing.

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    Default Re: Considering incorporating as opposed to a sole proprietorship, to save on taxes.

    AS Zofia noted most single person entities are pass through, meaning there is not a tax advantage per se in the entity. An S corp can pay taxes to employees[you] where a proprietorship cannot pay payroll to itself. You can choose to not pay SS taxes on distributions and pay less taxes there with an S corp. S Corps and LLCs have yearly filing fees, so make sure there is enough of an advantage to make it worth it.

    S Corps are somewhat less likely to be audited[I don't know if it is on the IRS side, or that more idiots run proprietorships]

    S Corps have a small privacy advantage

    You can register a car to the corporation, making you a little less stalkable

    I assume most of your income is cash, so I don't know if there is an advantage to a more sophisticated corporate structure.

    I have been running a significant small business for a quarter century as essentially a proprietorship, and it has not bit me, yet. I may change to an S Corp so I can write payroll to myself so that April is not so ugly

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