What do General Motors, Microsoft, AT&T and many other major businesses in America have in common? They're corporations.

A corporation is a separate legal entity that functions separate and apart from its shareholders or owners. You can incorporate on your own without an attorney, although it wouldn't hurt to seek legal advice. And you can incorporate in your home state or any other state of your choosing.

More than half a million business entities have their legal home in business-friendly Delaware, including more than 50 percent of all U.S. publicly-traded companies and 58 percent of the Fortune 500. Nevada, New York, California, Arizona and Florida are also magnets for businesses wanting to incorporate.

Protection Against Personal Liability
Incorporating offers a variety of legal and tax advantages. For one, it's one of the best ways a business owner can protect his or her personal assets. As a separate legal entity, a corporation is responsible for its own debts. Shareholders of a corporation are generally not liable for the obligations of the corporation. Therefore, creditors of a corporation can seek payment from the assets of a corporation, but not the assets of its shareholders. This means that business owners can conduct business without risking their homes or other personal property.

Tax Advantages
Many businesses choose to incorporate for tax advantages. Corporate profits aren't subject to Social Security, Medicare, workers compensation and other taxes, which adds up to 15.3 percent in taxes. An individual proprietor would need to pay all of these taxes, commonly referred to as “self-employment taxes” on all income earned by the business. But with a corporation, only salaries are subject to these taxes.

C-corporations provide even greater tax flexibility when it comes to profits. By simply dividing income between the corporation and the shareholders, businesses can save thousands of dollars each year on taxes. With a C-corporation, the first $50,000 in profits is taxed at only 15 percent -- plus, there are no Social Security or Medicare taxes.

If you incorporate in a tax-free state like Nevada or Delaware, there are no state income taxes. Therefore, if you're in the 28-percent tax bracket and shift $50,000 of your personal income into a corporation, you could save about $14,000 per year. (This figure includes the money saved by not paying social security and Medicare taxes).

Corporations also enjoy the ability to deduct business operating losses. In fact, they have very few restrictions on operating and capital losses. You can generally carry losses back three years forward for 15 years. But sole proprietorships have stricter rules. They're also subject to a higher probability of a tax audit if there are losses.

Speaking of audits, that brings us to another benefit of incorporating. Corporate returns have fewer "red flags" than individual returns. Consequently, the IRS conducts fewer audits on corporations than individuals.

Fringe Benefits and Other Deductions
Corporations also enjoy a variety of fringe benefits and other deductions. A corporation can set up a 401(k), for example, that would allow you to exclude a higher amount of income than a regular IRA. And employee savings may also be doubled with a corporate matching program. Corporations also can deduct 100 percent of the health insurance premiums paid on behalf of an owner-employee.

Additionally, a corporation can deduct other expenses like automobile insurance, education benefits and life insurance. But for sole proprietors, these expenses are subject to strict limitations (if deductible at all) and can be "red flags" that trigger an audit.



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