Do you own a small business with one or more employees? Do you want to take advantage of tax benefits and possibly lower your payroll taxes? If so, you may want to consider incorporating your business. A corporation is a distinct legal entity. It is separate and apart from the people who own, manage and operate the corporation. Corporations can exist in perpetuity — that is, indefinitely. By contrast, a limited liability company (LLC) is a type of business organization that provides limited liability protection to its owners. There are many reasons to incorporate your business, but here are six of the top benefits.
1. Limited Liability Protection
As a corporation, your assets are protected if your business is sued. This is not the case with a sole proprietorship or partnership. When your business is sued, the plaintiff is only entitled to seize your assets inside the business. This means that if you own a corporation and someone sues your business, they can only take assets inside the corporation and not your assets. If you are the sole owner of a business, your assets are at risk.
2. Pass-Through Taxation
A sole proprietorship, a partnership, and most LLCs are considered pass-through taxation entities. This means that the income from your business passes through to you personally. You are responsible for paying taxes on the income. However, this is not always advantageous. If your business pays tax at a higher rate than you pay personally, it is beneficial to receive the income through a corporate structure. With corporate tax rates at an all-time low, incorporation can be a smart tax move. You will be taxed at a higher rate than what you pay personally, but your corporation can save tax dollars that translate into increased profits.
3. Losses Can Be Used to Lower Your Tax Liability
Losses from a business can offset your tax liability. These losses are often called “passive activity losses” and can be used to offset taxable income from other sources. Passive activity losses are losses that come from passive activities, which are businesses in which you don’t materially participate. For example, if you own an Etsy store or a small consulting company and you don’t materially participate in the business, you can use passive activity losses from the business to offset your income from other sources.
4. Paperless Filing
The Inland Revenue Authority of Singapore (IRAS) offers a paperless filing option for corporations. This means that you can file your corporate tax return electronically. This can be faster and more efficient than filing a paper return. When you file electronically, you can also use e-payment to have your tax payment sent directly from your bank account. According to the digital incorporation experts at Sleek.com, it’s important to learn more about the paperless filing process before making a decision. It’s important to note that corporations are required to file an annual information return. This return includes information about the corporation’s income, deductions, and credits.
5. Expenses Can Be Paid with Tax-Free Funds
As a corporation, you can pay for business expenses with tax-free funds. This means that you can use money from the corporation to pay for expenses such as rent, advertising, and supplies without having to include that money in your income. With an LLC or a sole proprietorship, you have to include the money you use to pay for business expenses in your income. For example, if you own a rental property and you rent it to your corporation, you can use money from the corporation to cover the costs of the rental property.
6. Ease of Transferring Ownership
When you own a corporation, it is easy to transfer ownership to another individual or entity. This is not always the case with other types of businesses. If you want to sell your business, it is much easier to do so if it is a corporation. The business can be sold as a whole entity, meaning that you assign all of your rights to the corporation and then sell the corporation. Alternatively, you can sell individual shares of the corporation to another party. This makes it easy to transfer ownership of the business, which can be important if you want to retire or if you experience a change in ownership.
If you are planning on starting a business, it is important to consider whether or not incorporating your business makes sense. The benefits of incorporation depend largely on the type of business you plan on starting and on your tax situation. However, several benefits apply to all businesses, such as the ability to pay for expenses with tax-free funds and the ease of transferring ownership. If you are unsure whether or not incorporation is the right choice for you, speak with a tax professional to determine whether it makes sense for your business.