Smart TaxesSmart Taxes

You probably shouldn't incorporate

Liability protection? Doubtful, and you'll get to spend more on your lawyer and accountant.

By Jeff Schnepper Mar 29, 2010 10:17AM

Don’t incorporate!


Only the lawyers and accountants make money when you incorporate.


Your attorney and CPA aren’t giving you the full story.


Decades ago, you could put aside and deduct more pension money for retirement if you were incorporated. That’s no longer so.


Incorporating and electing Subchapter S status may reduce your taxes. A Subchapter S corporation is treated like a partnership as a flow-through entity. But, all corporate income, after deducting any salary paid to you, is taxable as dividends, not subject to payroll taxes. Had you not incorporated, all income, both what you took as salary and the income of the corporation after the salary deduction, could be subject to payroll taxes. The difference escapes payroll taxation.


Two problems -- your salary must be “reasonable” in the eyes of the IRS. Plus, that same IRS has announced that it is targeting Subchapter S corporations for audit this year.


Today, most people who incorporate do so for limited liability purposes. They seek to protect their personal assets from creditors, especially given the litigious nature of our society. Their advisors have told them that corporations and limited liability companies give them limited liability.

They lie!


Well, maybe they just leave out some details. “Limited liability” in this context means that you can’t be sued as the owner of the corporation. Just as stockholders in Toyota will be insulated from any liability from sudden acceleration suits, you will be insulated as the owner of the corporation or limited liability company from any suits against your company.


But, the company will be sued. And the assets of the company will not be protected.


More important, the person who messed up, who committed the negligent or bad act causing the suit, will also be sued. And, if you’re that person, or you manage that person, or you are found to have negligently hired that person, you’re going to be sued. Sorry.


If you have lots of employees, or are not the only owner, incorporation may give you some asset protection. But, if you’re the only owner/employee, incorporation only feeds your attorney and accountant. You have absolutely no limited liability. If your corporation gets sued, it has to be because of something you did or failed to do. They’re going to come after you.




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