well, that Schedule C requires formal registration of the single proprietorship, right? Does that not fall into the concept of “incorporation”?
no and no
this isn’t even in WAG territory.
Incorporation involves filings at the state level to form a separate legal entity that is the business.
Simplistic view:
A sole prop the money = your money for all purposes.
Corp business money = not your money for most purposes.
For example, lets say I owe someone $10K. They can get a judgement and attempt to levy my personal accounts but they cannot easily touch the money in the corp accounts and vice versa.
Its kinda like forming a legal person out of your company with its own bank accounts, tax status, etc. Also makes it nearly impossible to claim that the $15K a month your business brings in is your gross earnings for things like child and spousal support when you are only taking home $2K of that $15K.
Unless you count filing the Sch C with your tax return as “formal registration of the single proprietorship”, no. Now sure, it is often best if you file for a DBA, but the Feds do not require it.
Well…it is kinda funny, if you read it in the voice of the Iraqi Information Minister. Still wrong, though.
For the OP:
Find a local individual who can help you. There aren’t any reputable chains that do this kind of thing. Just look for someone with a CPA or EA designation. (EA means Enrolled Agent. They’re tax specialists licensed by the IRS. They may not know all the details about incorporation law but they will know all of the tax issues). Many people turn to a lawyer for incorporation, but I don’t recommend it unless you’re also working with a CPA or EA. Lawyers will not finish the process and do not know as much about taxes as they think they do. (If you can’t find a local person, IM me; I’m a CPA and help people pick the right incorporation/election options about 20 times a year. I may not know your state-specific issues, though, so a local is always best.)
You’ve had good answers on the double taxation issue, and it refers specifically to dividends paid to shareholders of a C Corporation, not to salaries in any way.
It was asked why you don’t just set salary equal to compensation. The tax code requires that officers be paid “reasonable compensation.” This is open to interpretation - apparently several million dollars is reasonable for bankers who cause major financial catastrophes - but the idea behind the law is that you cannot simply make your salary equal to profits.
Finally… to correct some other comments, corporate tax rates are NOT always lower than individual rates. Many small C Corporations are classified as Personal Service corporations that automatically pay income tax in the 35% bracket. I don’t have a single client who pays less tax because they have a C Corp - they’ve opted it because of rules for retirement plans, shareholder qualifications or other non-tax issues.
Ironically, a sole proprietor is what you are if you DON’T formally register. From a federal perspective, there is no registration process for a sole proprietor. Even state requirements to get a business license aren’t required to make yourself a sole proprietor. If you fail to register, you’re just a sole proprietor who failed to get a business license.
Incorporation kind of walls off your business asa separate entity. Liability is one reason. Lower taxes on corporations are another reason. The tax individuals pay on corporate dividends is much lower, to rflect the tax already paid on that profit by the corporation.
In Canada though, they distinguish between active corporations and passive ones. An active corporation does stuff - plumbing, contracting, trucking, computer contracting, whatever. It keeps only enough assets to continue the business. It pays taxes on profits, then pays out those profits or most of them as dividends. The profit tax plus divident tax are about the same as personal tax rates in Canada, so there is not much benefit unless the business is really big and you want liability protection.
A passive corp accumulates assets - it trades stock or real estate or other assets, making money. The theory is that the assets growth accumulate as a corporate instead of personal income, so the tax is much lower. Then you pay out that capital as dividends when retired, when your total income is lower and so is you personal tax rate. The government compensates for this by taxing passive corporations at a higher rate.
As others said - NO TRUE. Your income as Joe the Plumber or Fred the Computer Guy is less any valid expenses. You can even (in Canada) claim a reasonable percentage of your house expenses, if you use that percent of your house as a workshop or office in your business. You can even pay your wife a (reasonable!!) amount to do the books. So the incentive to incorporate is much less here for a one-man show. It works out about the same tax-wise.
As for double-taxing, to get back to the original post - there is a lower tax rate on income from dividends in Canada, to reflect the fact it’s already been taxed as profit. The government is always monkeying with the rules, to plug loopholes and encourage investment in Canadian firms. Why let some other country collect the corporate tax and give a break to your local citizens who receive the dividends? Buy local. Otherwise, everyone would park their corporation in the Bahamas and declare their income as dividends. (If they could arrange the business that way…)
And estate taxes? Why not? If your family business is worth $3.5M, why should that escape taxes? If it is worth $3.5M then Junior can well afford the taxes if he’s ben part of the business, and he should have seen the taxes coming for a long time. What did Henry Ford III ever do for his money, besides announce layoffs? I like the quote I saw once by some rich guy, “I want to leave them enough money so they can do anything, but not so much that they can do nothing…”
This is the General Questions forum, code_grey. You really shouldn’t make blanket statements like this without doing at least a tiny bit of basic research. Let the people who know something about the subject answer the question.
[Not speaking as a moderator, just as a long-time user of GQ]
Although I might be treading into GD territory, I do want to point out an important difference reason why taxes on dividends is a little different than taxes on sales or income. (Disclosure: I get very minimal income from dividends and don’t in the least object to paying income taxes on it.) The dividends are distribution of profits to the owners of the company and those profits have already been taxed at the company level. If I am part owner of a company, then value of my share of the company is reduced by taxes on profit, and my personal income is again reduced by taxes on the same profit, even though there was no additional transaction other than the company writing me a check for a share of the profits that were already mine to begin with. This is fundamentally different than an economic transaction of me getting paid a salary for my job, or buying goods and services.
The lesson here is that the government can tax any damn thing they want as long as they don’t tax so many people so deeply that they can’t get re-elected.
Similarly, let me make a point about estate taxes and income taxes. With estate taxes, and also gift taxes, the person giving a gift is taxed just to be able to give money away. And although, yes, there is an exclusion (Disclosure: My estate when I die will be under the exclusion, and I do not stand to be the heir of an estate that exceeds the exclusion), but the tax rate for estates is 46%, which is much higher than the highest marginal income tax bracket of 35%. This is virtually confiscatory.
As to the rich bastards who don’t want to pay taxes, "The wealthiest 1 percent of the population earn 19 percent of the income but pay 37 percent of the income tax. The top 10 percent pay 68 percent of the tab. Meanwhile, the bottom 50 percent—those below the median income level—now earn 13 percent of the income but pay just 3 percent of the taxes." So the people paying tax on their millions are making it possible for you to pay much less tax on your thousands.
It’s critical to point out that those percentages only apply to federal income tax, not to “taxes.”
Those in the brackets paying little to no federal income tax pay much higher percentages of their total incomes in FICA and sales taxes than those above pay in total taxes.
You cannot conduct a fair debate in “taxes” without talking about all taxes, not just the federal income tax.
Also, while it is generally true that the donor pays the gift tax, there are a huge number of exclusions and exemptions that the IRS allows, which means that you have to give out gifts larger than the take-home incomes of those lucky poor people the rich subsidize before any real taxes ensue.
This argument ignores the fact that under the law, corporations are not just income-producing assets owned by the stockholders, but individuals in their own right. Individuals, even corporate ones, are subject to taxes. When profits are transferred from one individual to another, from the corporation to the stockholder, taxes are due just as they are on income that is paid from one individual to another. It cannot be argued that corporations are individuals when it is convenient for the stockholders (to shield them from legal responsibility), but not individuals when profits change hands. You cannot have it both ways.
Confiscatory from whom? The dead guy? Ok, confiscate away!
as has been pointed out, this is only federal income tax.
as a rejoinder, we have this:
http://graphics7.nytimes.com/images/2003/01/20/business/21DOUBLE.chart.jpg
when considering all taxes paid, the top quintile pays 19% of their income out in taxes. the bottom quintile pays 18% (2nd quintile, 14%; 3rd, 16%; 4th, 17%)