How To Prevent Double Taxation Of One’s Small Business Profits

April 26, 2013 robot Uncategorized

For starters, you will end up defending yourself and your household from the possibility of a company ending suit. Forming a corporation is Step One on the course referred to as “Asset Protection” — you are moving from the world of unlimited liability to the world of limited liability.

(NOTE: For further insight into the legal benefits of incorporating, have a look at…

Are you currently thinking about adding your online business or self-employment exercise? The advantages are many!

First of all, you will be defending your self and your loved ones from the chance of a company closing suit. Forming a corporation is Step One on the course known as “Asset Protection” — you are moving from the world of unlimited liability to the world of limited liability.

(NOTE: For further insight into the legal advantages of incorporating, check out the article: “It Sometimes Happens To You: Why Any Sole Proprietorship Is Just A Risky Business” at a tax perspective, there are both disadvantages and advantages to incorporating. Yes, forming a corporation may often lower your taxes or increase your taxes, depending on what sort of corporation you create.

There are two main forms of corporations: “C” Corporations and “S” Corporations — and which form you decide on will make all the big difference on earth of taxes.

NOTE: The problem of “C” Corp versus. “S” Corp doesn’t have influence on the asset protection supplied by your organization. This can be a tax issue, not really a legal issue.

A “C” Corporation can lead you right into a Tax Trap known as “double taxation.” Yes, revenue from a “C” Corporation can actually be taxed twice — once when it’s gained on the corporate level and again when it’s paid for you, the investor, in returns.

There are many approaches to prevent double taxation. Often the easiest way is always to tell the IRS that you decide to be an “S” Corp in the place of a “C” Corp. The profits of an “S” Corp are not taxable to the corporation; rather, these profits are reported entirely on the shareholder’s individual income tax get back and are for that reason only taxed once.

And once is enough, don’t you think!

Obviously, the old disclaimer must be contained by any article on Choice of Entity, “Consult your tax professional” — I’m not prescribing a one-size-fits-all way of this issue. But for many small industry owners and self-employed persons, the “S” Corporation is an excellent match as it provides protection from personal liability and avoids the nasty tax trap of double taxation — two great gains worth checking into.

Must you incoporate your sole proprietorship and then determine that the “S” Corporation is the right match, you should tell the IRS that your organization is selecting “S” Corporation status by filing Form 2553, which is, in effect, a request to become an “S” Corporation.

IMPORTANT:

If you include and do not file Form 2553, you’re automatically regarded as being a Corporation by the IRS. Put simply, to be a Corporation, you only incorporate; there’s nothing you’ve to do to tell the IRS you wish to be a “C” Corporation.

There are essential rules regarding how and when to file Form 2553, therefore make sure to see the instructions vigilantly, or seek advice from your tax pro.

Failure to file Form 2553 on time or filing Form 2553 incorrectly results in a denial of one’s corporation’s “S” Corp software, and the business is then by default treated as a Corp, subject to double taxation, the very trap you were attempting to avoid.

To down load a of Form 2553, go to: instructions for filing Form 2553 are found here:

useful source jt foxx