Why should I incorporate...
and what type of corporation would I want?
If you are self-employed, a small business owner, or simply receiving your income on a 1099 and wondering if you should incorporate or not, the answer is unequivocally YES! The real question is, 'what type of corporation would I want?' There are several types of corporations, but the primary three are LLC's, S-Corps, and C-Corps. The cost for incorporating is the same for all three. You will pay some one-time state and local fees along with our fee for a total of $350. Additionally, Alabama requires a Business Privilege Tax of $110 each year with the first payment required at the time of formation. So, your total start-up cost is $460 with $110 due each year after that. But why pay all this money?
Each type of corporation has unique differences as outlined below. If you are looking to save money, the LLC or S-Corp is the way to go as it offers tremendous tax savings. Check out the chart below to see what kinds of benefits corporations offer.
Primary types of Corporations & Their Benefits
| LLC | S-Corp | C-Corp | |
|
Taxes |
All income flows to your personal return and is taxed at your normal tax rate and may be subject to SE tax. | All income flows to your personal return but is exempt from SE tax, saving you about 14 % net | No income flows to your personal return. Instead all income on the corporate return is taxed at corporate rates. |
|
Greatest Benefits & Disadvantages |
Easiest to maintain. Provides no tax savings & minimal legal protection unless structured correctly. Excellent for specific businesses such as rental property management. | Greatest tax savings, letting you keep more of your money. Equal legal protection to the LLC. | Little to no tax savings, and equal maintenance to the S-Corp. Provides greatest amount of legal protection & is excellent for large businesses with multiple shareholders. |
After looking at the different corporations it is clear that if you want to save money by minimizing self-employment tax, you would select the LLC or S-corp. So how much money would you really save to make spending $460 up front plus $110 every year worthwhile? Let's take a look at the savings you could experience.
Tax Savings for S-Corporations Based on Income
| Net Income | Savings |
| $5,000 | $707 |
| $7,500 | $1060 |
| $10,000 | $1,413 |
| $15,000 | $2,120 |
| $25,000 | $3,533 |
| $40,000 | $5,652 |
| $60,000 | $8,478 |
An LLC can produce similar savings but it must be structured correctly. As you can see, the more money you make the greater the savings. If you make at least $5,000 a year, the costs of forming the corporation will pay for itself in just one year of tax savings.
Legal Protection
In addition to tax savings, corporations carry with them legal protection. While no one is planning on being sued or going bankrupt, if you have a corporation and face these hardships you can have your personal assets protected from lawsuits and liens against your business. If you are in a risky business, maybe a C-Corp is the one for you as it offers the greatest amount of legal protection.
Feel free to contact us for more information and a free consultation.
Our Expert Tax Planners Can Help
If you're wondering 'why should I incorporate', let us help answer that question for you. Take advantage of a free tax consultation today! Our expert tax advisors are here for you.
