Incorporation...

[Muad'Dib]

I'm getting ready to incorporate next quarter and the plan right now is
to go with Subchapter S Corporation. This seems to fit my business best
and will get me away from this hellish 15% self-employment tax. I do
Macintosh consulting, FileMaker and AppleScript development along with
some web and graphic design here and there. No employees or partners,
just me. I'm in NY State. Curious to hear what others are doing as far
as incorporation. What line of work are you in? Where do you don
business? What type of corp are you? Comments, thoughts etc?

[db]

Builder in New England; sole proprietor; never really considered
anything else. So why S-corp? How does that save you taxes? Is it a
profit vs income thing, keeping you partly out of the SS brackets?

[Muad'Dib]

The S Corp allows me to not take any salary, or take very little
anyway. So I would only have to pay income tax on this salary I pay
myself. The rest of the money stays in the business, free from
taxation. I also don't have to pay the 15.3% self-employment tax
because I am not technically self-employed, instead I am an employee of
the corporation. The only one actually. But with a Sole Prop everything
the business takes in is considered my income and I must first pay
15.3% of all of it right off the bat to the feds. Then pay out even
more for my state income taxes. The fact that I'm in New York might
make the Sole Prop more painful than other states. Last year I really
got nailed on the taxes.

[db]

The 15.3 % your talking about is SS/medicare right? And add income tax,
both state and federal on top of that.

[Muad'Dib]

Right, exactly. 15% to cover Social Security duties. And then state and
federal income on top. Hurts.

[Scott McReynolds]

Here's a quick article from Nolo press:

http://tinyurl.com/aelss

The advantages to the S Corp vs. Sole Prop is that SE tax is not paid
by S Corp shareholder(s) and the limited liability of a corporation.

The advantages of the S Corp vs. C Corp is that all income flows
through to the shareholder like a partnership, so there is no
Corporate income tax.

You might also look in to an LLC:

http://tinyurl.com/7make

In general, an LLC is better for a builder. You can set up an LLC for
a specific development/project. If something goes sour, the rest of
your business is protected.

These are generalities, so you'll want to see your CPA/Tax Advisor for
your specific situation/goals.

[db]

Scott,

Thanks for the info, and the reminder of www.nolo.com. I haven't been
there or a while, and had forgotten about it.

Also http://tinyurl.com is a great find. (Allows a "tiny" url which
links to a lengthier one. Free.)

[Rob]

I write Mac software and do different types of consulting and have been
in business as an S Corp for about two years now. While it does allow
you to avoid self-employment tax if you don't pay yourself a salary,
the assertion that you wouldn't pay income tax is incorrect. As Scott
pointed out above, income flows through to your personal tax return
(via schedule K-1, if that helps anyone). You'll most likely pay the
same amount of income tax whether you're set up as an S Corp or a sole
proprietorship. You can take money out of the business via property
distributions without incurring self employment tax, but only after you
pay yourself a "reasonable" salary. From what I've been told, the IRS
is watching this closely as it seems to be a common abuse (taking a
small salary and large distribution).

Personally, I find the S-Corp useful as I can leave money in the
business without incurring the self employment tax - which lets me
better plan for expenses and purchases. Although, there can be pitfalls
with that depending on where you do business. Where I'm at,
Mississippi, there's a "Franchise Tax" that taxes the assets you have
in the corporation at the end of the year - so if you leave a huge
amount of money in the business, the state will tax it (although it's a
relatively small tax).

On the flip side, I sometimes wonder if it's worth the extra paperwork.
There are many extra forms to file, extra taxes to deal with, as well
as learning to deal with payroll (assuming you want to use some of that
money you've made to actually live off of).

Rob

[Muad'Dib]

Rob, thanks for sharing that. My accountant tells me that the governent
really doesn't know what they want to do with the S-Corp at this point.
He says that the government changes the way they handle all these
different business types fairly often. This year an S-Corp could be my
best bet and then next year an LLC might be more benficial. The idea of
doing payroll is certainly a turn-off and I despise paperwork. Maybe
I'll start with an LLC and see how it goes. I'll bring it up to the
accountant next week when I file for '05. He never even mentioned LLC
and perhaps is thinking I am doing a little more business than I
actually am as he handles mostly medium sized businesses. I'm just a
one man show. I do know that setting up an LLC in NY State is actually
easier than setting up a sole prop. All they want is $200. You can
convert a sole prop to an LLC here by simply mailing in a check for
$200 with a single form with the business name on it.