How To Avoid Double Taxation Of Your Small Business Profits
Below is a MRR and PLR article in category Finance -> subcategory Taxes.
How to Avoid Double Taxation on Your Small Business Profits
Overview
Thinking about incorporating your small business? There are numerous benefits! Incorporating not only offers you and your family protection from potential lawsuits but also shifts you from unlimited to limited liability, a crucial step in asset protection.
Tax Considerations
Incorporating has both tax advantages and disadvantages, depending on the type of corporation you choose. Let's explore the two main types: "C" Corporations and "S" Corporations.
Understanding "C" vs. "S" Corporations
While forming a corporation provides asset protection, the choice between a "C" Corp and an "S" Corp impacts your taxes. A "C" Corporation can lead to "double taxation," where income is taxed at both the corporate level and again as dividends to shareholders.
Choosing an "S" Corporation to Avoid Double Taxation
To bypass double taxation, consider electing to be an "S" Corp. This means profits are taxed only once, on the shareholder's personal income tax return. This option provides liability protection while avoiding the "C" Corp tax trap.
Action Steps
If incorporating sounds right for you and you prefer an "S" Corporation, it's essential to notify the IRS by filing Form 2553. Without this form, your corporation defaults to a "C" Corp, risking double taxation.
Important Considerations
- Timely Filing: Ensure Form 2553 is filed correctly and on time. Mistakes or delays can result in rejection and default status as a "C" Corp.
- Professional Advice: Always consult a tax professional to tailor decisions to your specific needs.
Resources
- Download Form 2553: [IRS Form 2553](http://www.irs.gov/pub/irs-pdf/f2553.pdf)
- Instructions for Filing: [Form 2553 Instructions](http://www.irs.gov/pub/irs-pdf/i2553.pdf)
By carefully choosing your corporate structure and following IRS procedures, you can efficiently protect your assets and optimize your tax situation.
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