Factor to Consider
With the reduction in the corporate tax rate to a permanent 21%, many business owners are wondering if now is the right time to incorporate. While incorporation offers distinct advantages, there’s no universal answer, and the decision ultimately depends on several key factors.
Personal Asset Protection and Limited Liability
A primary non-tax advantage of incorporating a business is personal asset protection. Forming a corporation or LLC allows business owners to protect personal assets from business-related liabilities. In a well-structured and managed corporation or LLC, owners enjoy limited liability for debts and obligations incurred by the business. This separation is a significant incentive for those who want to shield personal assets, such as savings and property, from business risks.
Continuity of Business
Incorporation also provides the benefit of perpetual existence, unlike sole proprietorships, which end if an owner dies or leaves, corporations and LLCs can continue operating regardless of changes in ownership or management. This continuity is advantageous if you envision your business outlasting you or transitioning to new owners or family members in the future.
Tax Considerations
For businesses currently filing Schedule C, E, or F, incorporating may not always yield significant tax benefits, particularly if the primary concern is retaining deductions. Most deductions for business expenses remain available to owners, landlords, and farmers. Additionally, certain noncorporate businesses (such as sole proprietorships, partnerships, and S corporations) classified as pass-through entities may qualify for a 20% Qualified Business Income (QBI) deduction.
On the other hand, regular C corporations are subject to “double taxation”—the corporation pays taxes on its income, and shareholders pay taxes on dividends. In contrast, pass-through entities only incur tax on the owner’s individual tax return, eliminating corporate-level taxation.
Business Type and Other Operational Factors
The decision to incorporate also depends on the type of business, gross income, asset structure, and employee benefits. Different business types may benefit from varying tax and liability protections based on these factors.
Before making any decisions, consult Gleason Tax Advisory. Let Bruce Gleason help you understand the implications of incorporation and guide you toward the structure that best aligns with your goals, industry, and growth potential.
