CD ROM Paradise Collection 4/CD ROM Paradise Collection 4 1995 Nov.iso/business/sba952.zip/F302.SBE

Text File | 1995-03-15 | 39KB | 1,001 lines

@Q01

             ┌───────────────────────────────────────────┐
             │   TO INCORPORATE OR NOT TO INCORPORATE:   │
             │          THE PERENNIAL QUESTION           │
             └───────────────────────────────────────────┘

  Please enter the name of your business (or your proposed
  business):

@TX
01\Q02

@Q02

  QUESTION:  Is this a business that you have already started
             (or acquired)?

@YN
01\Q03
02\Q10

@Q03

  QUESTION:  If you were to sell your business (or the stock
             of your incorporated business) today for its fair
             value, how much of a taxable gain or a loss would
             you have on the sale?  (Make your best guess.)

              .  1 - A gain of over $1 million
              .  2 - A gain of $500,000 to $1 million
              .  3 - A gain of $100,000 to $500,000
              .  4 - A gain of $50,000 to $100,000
              .  5 - A gain of about $0 to $50,000
              .  6 - Breakeven, more or less
              .  7 - A loss of less than $50,000
              .  8 - A loss of $50,000 to $150,000
              .  9 - A loss in excess of $150,000

@MC\09
01\Q04
02\Q04
03\Q04
04\Q04
05\Q04
06\Q04
07\Q04
08\Q04
09\Q04

@Q04

  QUESTION:  Is the business in question already incorporated?

@YN
01\Q05
02\Q10

@Q05


  QUESTION:  Is the corporation an "S corporation"?

@YN
01\Q06
02\Q22

@Q22

  NET OPERATING LOSS OR TAX CREDIT CARRYOVERS:  A C corporation
  that incurs net operating losses or has more tax credits than
  it can use in the current tax year can generally carry the
  losses or unused tax credits back to any of its 3 preceding
  tax years, to obtain refunds of taxes paid in those years.
  However, for a new corporation, or one that has no profitable
  prior years to carry losses or credits back to,  there is no
  other choice but to carry the net operating losses (NOL's) or
  credits over to future years, in the hope that it will even-
  tually have taxable income against which the NOL or credit
  carryovers can be offset, reducing taxes in those future
  years.  (Most NOL's or unused tax credits can be carried for-
  ward for up to 15 tax years after the year incurred.)

  QUESTION:  Does your C corporation have substantial unused
             net operating loss or tax credit carryovers at
             present?

@YN
01\Q06
02\Q06

@Q06

  TAX LOSSES: Start up losses incurred by a regular ("C") cor-
  poration cannot be passed through to shareholders, but must
  be carried forward until (if ever) they can be used to off-
  set future taxable income of the corporation....And a more-
  than-50% change in stock ownership of the corporation can
  severely reduce the corporation's right to use a large part
  of any such tax loss carryovers.

  An S corporation election can be very useful in the early sta-
  ges of a business if it is losing money, due to the fact that
  the losses an S corporation incurs can be "passed through" to
  its  shareholders and, in many cases, deducted on their indiv-
  idual tax returns. An S corporation can also pass through cer-
  tain tax credits, such as the targeted jobs credit and various
  other business credits, which might not be utilized currently
  in a C corporation that has little or no net taxable income.

  QUESTION:   Is your corporation generating tax losses (Or do
         you expect it to?) in amounts you consider substantial?
@YN
01\Q21
02\Q07

@Q21

  The usability of your corporation's tax losses, even if it is
  an S corporation, depends upon whether those losses (and/or
  tax credits) can be passed through and utilized by the stock-
  holders. Thus, such losses may not flow through to your indi-
  vidual tax return if, for instance, they are "passive activi-
  ty" losses; you or the S corporation are not considered "at-
  risk" with respect to the losses; or you lack sufficient "tax
  basis" in your S corporation stock to utilize any further
  losses.  Or, even if the losses or credits flow through to
  your individual return, you may not be able to use them cur-
  rently, due to insufficient taxable income of your own in the
  current year (or preceding 3 years) against which the losses
  can be applied, or else credits may not be usable by you due
  to such factors as the alternative minimum tax (AMT).

  QUESTION:  To the best of your knowledge (only your tax
             adviser can tell you for sure about this one),
             do you think you could utilize your corpora-
             tion's tax losses if it is an S corporation?
@YN
01\Q12
02\Q12

@Q07

  QUESTION:  How much annual PRE-TAX profit do you expect the
             corporation to earn each year in the near future
             (assuming you limit owner salaries to no more
             than $100,000 a year per owner, as a maximum) ?

             .  1 - None:  We expect to have losses, or very
                    minimal net profits, under $10,000 (as
                    defined above)
             .  2 - Between $10,000 and $100,000 profit (as
                    defined above)
             .  3 - Between $100,000 and $335,000 profit (as
                    defined above)
             .  4 - Over $335,000 pre-tax profit (as defined
                    above)

@MC\04
01\Q12
02\Q12
03\Q12
04\Q12

@Q10

  TAX LOSSES:  Start-up or other losses or tax credits earned
  by an unincorporated business (a sole proprietorship or part-
  nership) can generally be passed through to the owner or ow-
  ners, to be claimed on their individual income tax returns.
  (Unless the deductions or credits are suspended due to at-
  risk or passive activity loss rules, or on account of insuf-
  ficient tax basis.)  Such losses or credits cannot be used
  if the legal form of the business is a C corporation, but
  must instead be carried over to another year in which the
  corporation has taxable income.

  QUESTION:  Will your business generate tax losses or tax
             credits in the next tax year (or two), in
             amounts that you consider substantial?

@YN
01\Q12
02\Q11

@Q11

  QUESTION:  How much pre-tax profit (per owner, if more
             than one owner) do you expect the business to
             earn, on average, for the next few years
             (assuming the business is not incorporated)?

             .  1 - None:  We expect to have losses, or not
                    over $50,000 profit (as defined above)
             .  2 - Between $50,000 and $100,000 profit (as
                    defined above)
             .  3 - Between $100,000 and $335,000 profit (as
                    defined above)
             .  4 - Over $335,000 pre-tax profit (as defined
                    above)

@MC\04
01\Q12
02\Q12
03\Q12
04\Q12

@Q12

  Medical insurance, medical reimbursement plan expenses, and
  other "fringe benefits" such as disability insurance and
  group-term life insurance are generally not deductible expen-
  ses for owners of unincorporated business or shareholders
  (owning 2% of the stock or more) of S corporations.  By con-
  trast, a C corporation that pays for such benefits for its
  employees, including owner-employees, is generally able to
  deduct such expenses, with the value of such coverage gener-
  ally NOT being taxable to the employees (except for the
  value of group-term life insurance coverage in excess of
  $50,000 for a given employee).

  QUESTION:  Do you (or does your business) plan to purchase
             medical coverage, disability insurance or group-
             term life insurance for you or the other owners
             of the business?

@YN
01\Q20
02\Q20

@Q20

  DIVIDENDS-RECEIVED DEDUCTION.  A C corporation may sometimes
  be used advantageously to hold dividend-paying stocks, since
  the federal tax law allows the corporation to avoid paying
  tax on 70% of the dividends it receives (80% if your company
  owns 20% or more of the stock of the company paying the divi-
  dends).  This deduction is NOT allowed to an S corporation
  that gets dividends.  Putting securities in your corporation
  is not always a wise idea, however, despite the 70% dividends-
  received deduction.  Taking the stocks (or proceeds from their
  sale) back out of your corporation can result in taxable gains
  at the corporate level and dividend or taxable gain to you as
  a shareholder, to the extent of the value of whatever you take
  out of the corporation.  Thus, it can be costly if the situa-
  tion changes and you take the stock back out of the corporation.

  QUESTION:  If you have significant dividend income from stocks,
         and in light of the foregoing discussion, would you be
         likely to benefit from the dividends-received deduction
         if your business, as a C corporation, held stocks?
@YN
01\Q13
02\Q13

@Q13

  QUALIFIED PERSONAL SERVICE CORPORATIONS:  Certain personal
  service businesses, if incorporated and engaged in rendering
  services in certain fields such as law, health, accounting,
  actuarial sciences, architecture, engineering, performing
  arts   or consulting, are considered "QUALIFIED personal ser-
  vice corporations." ("QPSC") (If substantially all the stock
  is owned by employees or retired employees, etc.)  Note that
  this definition is slightly different from the definition of
  "PERSONAL SERVICE CORPORATIONS" that applies to determine a
  corporation's permissible tax year & tax accounting method.

  A "QPSC" is taxed at a higher tax rate, generally (35% flat
  rate), than other C corporations (whose tax rates start at
  15%). Obviously, this is a major disadvantage of being a QPSC.

  QUESTION:  To the best of your knowledge (we realize this is
       a VERY technical definition), is your business one that
       will be considered a QPSC, if operated as a corporation?

@YN
01\Q14
02\Q14

@Q14

  PENSION PLANS:  Both incorporated and unincorporated busines-
  ses may maintain qualified pension or profit-sharing plans,
  and the limits on contributions, benefits, etc., are now
  roughly the same for corporate, Sub S and Keogh (noncorpor-
  ate) retirement plans.  There are a few differences that re-
  main, however, despite the "parity" rules that have generally
  put corporate and noncorporate plans on an equal footing in
  recent years.


  QUESTION:  Does (or will) your business maintain qualified
             pension and/or profit-sharing plans for the
             owners and employees?

@YN
01\Q15
01\Q16

@Q15

  BORROWING FROM YOUR PENSION PLAN:  The tax law allows a par-
  ticipant in a qualified pension or profit sharing plan, in
  some cases, to borrow against his or her account in the pen-
  sion or profit sharing plan, up to as much as $50,000 in
  some cases.  But such borrowing is effectively prohibited
  in the case of certain types of qualified pension or profit
  sharing plans.

  QUESTION:  How important, on a scale of 1 to 5 (with 5 being
             most important, 1 being least), is the ability to
             borrow from your company's pension plan to you
             (or to your co-owners in the business)?

@MC\05
01\Q16
02\Q16
03\Q16
04\Q16
05\Q16

@Q16

  LIMITED LIABILITY.  One reason many businesses incorporate is
  to limit the liability of the owners, in the event the busi-
  ness fails.  However, for most small businesses, lenders will
  usually require that the shareholders of a corporation person-
  ally guarantee repayment of any loans made to the corporation,
  since the lender is looking primarily to the owners, rather
  than the assets of the corporation itself, for security.

  Thus, for many types of liabilities typically incurred by a
  small or medium-sized business, incorporation will not serve
  to limit the owners' liability if the business bellies up--
  except against unsecured creditors, such as vendors who have
  extended credit to the business.

  QUESTION:  How important to your business is the ability
             to limit liability by incorporating (on a scale
             from 1 to 5, with 5 being VERY important)?

@MC\05
01\Q17
02\Q17
03\Q17
04\Q17
05\Q17

@Q17

  PERSONAL HOLDING COMPANY STATUS:  If your business derives 60%
  or more of its "adjusted ordinary gross income" from certain
  types of income, such as rents, royalties, interest or divid-
  ends, and operates as a C corporation, any net income that it
  fails to distribute as dividends to its shareholders may be
  subject to federal "personal holding company tax" of 39.6%,
  at the corporate level.  This penalty tax does NOT apply to
  an unincorporated business or to an S corporation; nor to a C
  corporation unless over 50% of the stock is held (directly or
  indirectly) by five or fewer people.  (A company with 50% or
  more of its "ordinary gross income" from a single passive cat-
  egory, such as rents, mineral/oil/gas royalties, copyright
  royalties, produced film rents, or active business computer
  software royalties, MAY be able to avoid personal holding com-
  pany status if various other technical requirements are met.)

  QUESTION:  Based on the brief description above, do you be-
             lieve your business will be a "Personal Holding
             Company" if operated as a C corporation?
@YN
01\Q18
02\Q18

@Q18

_______________________________________________________________________

@BR\18
01\Q19

@Q19

@STOP
@RD\01

  RECOMMENDATIONS:  Based on your responses to the foregoing
  questions, the "EXPERT" has come to a tentative conclusion
  as to which legal form of business appears most advisable
  in your particular situation.  (See below.)

  CAUTION:  The following recommendation has been arrived at
  by weighing and assigning points to various known factors
  regarding your business, in an algorithm that attempts to
  quantify the unquantifiable.  Since there are always numer-
  ous pros and cons in evaluating the optimum choice of legal
  entity, the process used by the program is a lot like com-
  paring 3 oranges with 2 apples and concluding which is
  better.

  Accordingly, you should not regard the following recommenda-
  tion as a definitive judgment, since it involves some very
  subjective choices and conclusions by the author of the pro-
  gram, and is also based on far less than complete informa-
  tion about your situation.  However, it does represent an
  serious attempt to model the thought processes the author,
  an attorney and CPA, would go through in advising a client
  as to choice of legal entity, based on the key facts just
  elicited from you.  Just remember that, in making "fuzzy"
  decisions of this type, no computer program is an adequate
  substitute for the considered judgment of a competent, ex-
  perienced, and intuitive professional adviser with a full
  grasp of the facts and circumstances relating to you and
  your business.

       RECOMMENDATION AS TO FORM OF BUSINESS:

     |VAR|

@RD\02

  RECOMMENDATIONS:  Based on your responses to the foregoing
  question and answer session, the program is unable to ident-
  ify any clear "Best" choice of legal entity for your busi-
  ness.  While various weightings have been given to each of
  the three basic entity choices (unincorporated entity, C
  corporation and S corporation), and points assigned to each
  alternative, based on the largely subjective rating system
  devised for this program, there does not appear to be any
  clearly preferable entity choice in this case.

  However, for your consideration, we have provided the scores
  developed in our internal system of analysis.  These numbers
  have no real meaning, and essentially represent an attempt
  to quantify our "hunches" about the optimum legal entity for
  your situation, based on the limited data we have on your
  business.

  (Note that there is |VAR| difference in the scores we
  developed, for the first- and second-best choices.  Since
  there is a considerable lack of precision in our "fuzzy
  logic" methodology on which these scores are based, this
  one is definitely too close to call.)

@RD\03

  More useful, in our opinion, will be your consideration of
  the various pros and cons of incorporation vs. not, C cor-
  poration vs. S corporation, etc., which are listed below,
  all of which are derived from our analysis of what you have
  told us about your particular company.

@RD\04
   . Operating in unincorporated form is, to begin with, of-
     ten much simpler and less costly administratively than
     operating your business as an incorporated entity.
@RD\05
     And, as you have probably already learned from experi-
     ence, operating as an S corporation is even more compli-
     cated than as a regular C corporation, due to the com-
     plexity of the tax laws governing S corporations and the
     need for expert accounting and tax help to maintain the
     S corporation properly.

@RD\06
   . Since your business expects to incur substantial operat-
     ing losses for awhile, being unincorporated would give
     you a better chance to derive some current tax benefit
     from those losses, providing you (or your co-owners, if
     any) can personally utilize the losses or tax credits
     generated.  As a C  corporation, by contrast, any such
     losses (or tax credits) as are generated could not be
     utilized currently (by either the corporation or you),
     |VAR|.
     (An S corporation, of course, could generally pass
     through any such operating losses to the owner(s), much
     the same as an unincorporated business.)

@RD\07
   . From the responses you have given, it appears that it
     could be advisable to consider liquidating your corpora-
     tion, and recognizing a substantial tax loss on the li-
     quidation of your stock.  Of course, if the loss is
     treated as a capital loss, you will only be able to de-
     duct $3,000 a year against your other income (unless you
     have capital gains the loss could offset).  However, if
     your stock is eligible for "Section 1244 Stock" treat-
     ment, you may be able to treat the first $50,000 (or
     $100,000 on a joint return) of any loss on liquidation
     as an ORDINARY loss, which ought to be fully deductible
     in many cases.  (There are a number of technical quali-
     fications in order to actually take such a loss, so con-
     sult a good tax lawyer or other competent tax adviser
     before concluding that you ought to liquidate your cor-
     poration, |VAR|.)

@RD\08
   . You may want to liquidate your C corporation and operate
     as a sole proprietorship or partnership, or else elect S
     corporation status, in order to avoid high marginal cor-
     poration tax rates, which it appears in this case would be
     39% (Federal), compared to marginal tax rates of ranging
     from about 31% to 39.6% if the business income were taxed
     at individual income tax rates, rather than C corporation
     rates.  (However, there might be significant taxes to rec-
     ognize by the corporation upon any such liquidation, so
     electing S corporation status may be a better tactic.)

@RD\09
   . It appears that at your company's level of profitability,
     a C corporation would probably be in a marginal income
     tax bracket of 39%.  Thus an unincorporated business
     could possibly save some current federal income taxes,
     since individuals are taxed at federal income tax rates
     ranging from about 31% to 39.6%, as a general rule, at
     this same general income level.

@RD\10
   . An unincorporated business will also save on Federal and
     state unemployment taxes on the earnings of the owners,
     since as owner-employees of a corporation, unemployment
     taxes would apply to wages or salary paid to the owner--
     but no such tax applies to the business earnings of a
     partner in a partnership or to a sole proprietor, who
     take a "draw" rather than salary or wages.

   . Unincorporated businesses do not have to be concerned with
     the possible double taxation of profits, unlike C corpora-
     tions (and, to a lesser extent, some S corporations).

   . An unincorporated business does not have to be concerned
     with either of the corporate penalty taxes, the personal
     holding company tax or the accumulated earnings tax, both
     of which apply only to C corporations.

@RD\11
   . One other important benefit of starting out a business in
     unincorporated form is increased flexibility, from a tax
     standpoint.  An unincorporated business can always incor-
     porate, but if you have already incorporated, liquidating
     in order to dis-incorporate can give rise to potentially
     huge capital gains taxes.

@RD\12
   . Operating as a C corporation can be a real drawback in the
     case of your business, since you have indicated that your
     particular type of business is one that may be considered
     a Personal Holding Company.  If so, and you are unable to
     zero out its income each year through salary payments or
     other operating expenses, you could be in the grim situa-
     tion of incurring double taxation on the corporation's
     net income.  That is, not only would the corporation pay
     tax on its pre-tax income, but there would also be a se-
     cond tax on the remaining after-tax net income:  either
     the 39.6% personal holding company tax, or, if all of the
     after-tax net income is paid out as dividends to the
     shareholders, individual income tax on the dividend pay-
     ments.  This is not a problem if you operate the business
     in unincorporated form, or as an S corporation.

@RD\13
   . Perhaps the most common and pervasive reason for a busi-
     ness to be incorporated is to achieve some degree of lim-
     ited liability.  While such limited liability may not be
     absolute, particularly where creditors of the corpora-
     tion, lessors, etc., require the owners of the corpora-
     tion to personally guarantee repayment of corporate loans
     or leases, limited liability can still be a big advantage.
@RD\14
     You have indicated that limited liability is VERY import-
     ant for |VAR|.

@RD\15
     You indicated, however, that limited liability is NOT very
     important for |VAR|.

@RD\16
   . Liquidating a corporation where there is a taxable gain
     on the transaction can be costly, particularly since it
     is often difficult to determine the fair value of a going
     concern (and since the IRS may argue that your taxable
     gain is much larger than you thought it was).  Since you
     have indicated that you would probably have a substantial
     gain on liquidation of your existing corporation, the re-
     sulting tax liability you would personally incur is one
     good reason NOT to dis-incorporate by liquidating.  Also,
     the corporation itself may incur additional tax upon any
     liquidation if it holds assets (including intangibles
     like "goodwill" that may not even be on its books) that
     have a value in excess of their tax basis.

@RD\17
   . Because you have indicated your business is incurring
     operating losses, an S corporation would have advantages
     for you, as compared to a C corporation, since some or
     all of such corporate tax losses may be "passed through"
     to you as a shareholders, and thus should be currently
     utilizable by you in reducing your personal income tax
     liability.  By contrast, start up losses incurred by a
     corporation cannot be used to offset income, unless car-
     ried over and used to reduce the corporation's taxable
     income in future years, when (or if) the corporation ev-
     entually becomes profitable.  A deduction today is usu-
     ally worth more than a possible deduction some years in
     the future.

@RD\18
   . For a business operating at an annual profit level of
     less than $100,000 or so (after owners' salaries), a C
     corporation may provide an income-splitting opportunity
     which can reduce, or at least defer, overall taxes.
     This can be done by leaving some profit (under $75,000
     a year, preferably) in the C corporation, shifting such
     income out of the owners' 28% or 31% tax brackets into
     the lower corporate tax brackets of 15% on the first
     $50,000 and 25% on the next $25,000 of corporate taxable
     income.  This won't work if the corporation is a "qual-
     ified personal service corporation," which is subject
     to tax at a flat rate of 35% on all its net income. But
     you have indicated that the business may have profits
     of less than $100,000 a year, and that it will not be
     considered a "qualified personal service corporation"
     if operated as a C corporation, so you may be able to
     benefit to some extent from income-splitting by using
     |VAR| as a second taxpayer.

@RD\19
   . Unlike a sole proprietorship or partnership, a corpora-
     tion has continuous existence and does not terminate
     upon the death of a stockholder or a change of ownership
     of some or all of its stock.  Creditors, suppliers, and
     customers often prefer to deal with an incorporated busi-
     ness because of this greater continuity of the enterprise
     that is provided by the corporate form.  Of course, like
     other forms of business organization, a corporation can
     be terminated by mutual consent of the owners, or even
     by one shareholder in some instances.

   . A corporation also provides advantages, particularly when
     compared to a partnership, of centralized control, since
     state corporate laws typically provide rules for election
     of a board of directors by the shareholders and selection
     of a president and other corporate officers to manage the
     everyday affairs of the business, by the board of direc-
     tors.  Lines of authority are usually much clearer and
     more formal than in the usual partnership arrangement.

@RD\20
   . The ability of participants to individually borrow
     against their accounts under a pension plan can be a sig-
     nificant benefit of having a pension plan for your em-
     ployees.  However, borrowing is allowed only in the case
     of a "qualified" pension or profit sharing plan of a C
     corporation.  Such borrowing is subject to a "prohibited
     transactions" penalty tax in the case of a plan main-
     tained by unincorporated business (Keogh plan) or by an
     S corporation.  You have indicated that the ability of
     the participants to borrow from your company's pension
     or profit sharing plan is|VAR| important to you.

@RD\21
   . The corporate "dividends-received deduction," under
     which a C corporation (but not an S corporation) can
     exclude 70% or more of dividends it receives from cor-
     porate stock investments from taxable income, is a val-
     uable potential tax benefit of operating a business in
     the form of a C corporation.  You have indicated that
     this may be an important tax benefit in your case.

@RD\22
   . The federal tax laws permit corporate employers (except
     for S corporations) to provide a number of different
     fringe benefits to employees who are owners (shareholder-
     employees), on a tax-favored basis.  Generally, the emp-
     loyer is allowed to deduct the insurance premiums or oth-
     er payments it makes on behalf of the employee, while
     the employee is not taxed on the value of the benefit
     provided.  Thus, being incorporated (as a C corporation)
     has important advantages for your business if you wish
     to obtain group-term life insurance, health/accident
     coverage (insured or otherwise), or disability insurance
     coverage for the principals in your business, since you
     will not be able to obtain this favorable tax treatment
     as an S corporation, or as a partner or sole proprietor
     in an unincorporated business, with regard to these
     kinds of fringe benefit plans.

@RD\23
   . Because your C corporation has substantial unused net op-
     erating loss (NOL) or tax credit carryovers, liquidating
     the corporation would have a major disadvantage:  Those
     NOL or credit carryovers, which might otherwise be used
     to offset future taxable income of the corporation some-
     day, would vanish forever if your corporation were li-
     quidated and turned into an unincorporated business.
     Also, if S corporation status were elected, those carry-
     overs would then become useless until after the corpora-
     tion elected to revert back to C corporation status once
     again--they cannot be used to shelter any income earned
     while operating as an S corporation.

@RD\24
   . You have indicated that your business is a professional
     service firm.  As a C corporation, you will incur a ma-
     jor disadvantage, since all of the taxable income of a
     "qualified professional service corporation" is subject
     to a flat federal tax rate of 35%.  This is higher than
     the individual tax bracket (except for high-income indi-
     viduals) and a serious disincentive to operating a pro-
     fessional firm as a C corporation.

@RD\25
_______________________________________________________________________

         S CORPORATIONS VS. C CORPORATIONS:

         Advantages of C Corporations over S Corporations--

   . C corporations are generally less complex entities to
     maintain, from a tax standpoint, than S corporations.

   . C corporations (except for certain "personal service cor-
     porations"), can offset losses from passive activities
     against active business income.  S corporations cannot.

   . C corporations are entitled to the dividends received de-
     duction on any dividend income they receive; S corpora-
     tions are not.

@RD\26
   . C corporations are separate taxpaying entities, so at
     certain levels of corporate net income, generally under
     $100,000, a C corporation may be used advantageously to
     split income, paying tax at rates lower than if the in-
     come were all taxed to individual shareholders, as in
     the case of an S corporation.

@RD\27
   . Shareholder-employees of C corporations have advantages
     over S corporation shareholders (who own over 2% of the
     stock) with regard to excluding from income the cost of
     certain fringe benefits for owners, such as health care
     coverage, group-term life insurance, and long-term dis-
     ability insurance.

@RD\28
   . Owner-employees may borrow from their qualified pension
     or profit sharing plans, if the plans are sponsored by
     a C corporation.

@RD\29

         Advantages of S Corporations over C Corporations--

   . S corporations do not usually have to be concerned about
     possible double taxation of corporate profits, since
     their profits are generally taxed only once, to their
     shareholders.

   . Also, S corporations are not subject to corporate penal-
     ty taxes, such as the personal holding company tax or
     the accumulated earnings tax, which apply only to C
     corporations.

@RD\30
   . If a new corporation is incurring losses, shareholders
     of an S corporation may be able to utilize the tax los-
     ses currently, while a C corporation can only carry the
     losses over till it eventually (if ever) becomes profi-
     table.

@RD\31
   . Conversely, at relatively high levels of taxable income
     (generally between $100,000 and $335,000),  S corporation
     shareholders may pay tax at a lower rate than a C corpor-
     ation (which is in a 39% marginal bracket at that income
     level) would pay on the same income.

@RD\32
   . It appears that at your company's level of profitability,
     a C corporation would probably be in a marginal income
     tax bracket of 34%. (The 35% rate doesn't begin until $10
     million for corporations.)  This is a lower rate than for
     an unincorporated business, since individuals are now
     taxed at federal income tax rates of at least 39.6%, as a
     general rule, at taxable income levels of over $250,000.

@HELP

@H\01

   Type in the name of your business,
   then press "Enter" key.

@H\02

Enter "Y" ("Yes")  if you are already in
business.   If you are still planning to
start or acquire the business, enter "N"
("No").

@H\03

Note that if you were to sell your stock
in an S corporation,  your tax basis for
the stock is likely to be something more
or less than your  original cost,  since
income  or contributions  to  capital of
the corporation will have increased your
tax basis,  and tax losses and distribu-
tions will have decreased your basis. So
you need to use your ADJUSTED  tax basis
for your stock,  not its original basis,
in "guesstimating" your gain  or loss on
stock of an S corporation.

@H\04

 Answer this question "Y" for "Yes" or
 "N" for "No."

@H\05

An "S corporation" is a corporation that
has made an election (on Form 2553)  for
Federal income tax purposes to have most
or all of its income & all of its losses
taxed directly to its shareholders,  in-
stead  of paying  tax  at the  corporate
level.   A corporation  that is NOT an S
corporation is called a "C corporation."

Corporations may also elect treatment as
S corporations for state income tax pur-
poses, in all but a few states.

@H\06

Answer "Y" ("YES") if you anticipate tax
losses by your corporation,  EVEN IF you
anticipate that such losses might not be
currently utilizable for some reason, by
a C corporation, or if passed through to
you by an S corporation.

@H\07
In computing your firm's estimated pre-
tax  profits for  the purposes  of this
question, make the hypothetical assump-
tion that  each owner  will take out no
more than $100,000 a year in salary.

Thus, for example,  if you actually in-
tend to take  out $150,000  salary next
year, add back  $50,000 to pre-tax cor-
porate income to do this calculation.

@H\10

Answer "N" ("NO") if you anticipate sub-
stantial losses, or credits but for some
reason, such as passive activity loss or
at-risk loss restrictions, or insuffici-
ent "tax basis," you do not expect to be
able to immediately use those losses (or
credits)  on your individual  income tax
return.

@H\11

In computing pre-tax profit for purposes
of answering this question,  do not sub-
tract draws or  salary taken  out of the
business by you (or by other owners).

@H\12

Medical, disability, and group-term life
insurance fringe benefits for the owners
of a C corporation are treated very fav-
orably for tax purposes.   Not  only  is
the amount paid for such insurance most-
ly nontaxable to the employee-owner, but
the benefits (insurance payments,  etc.)
are generally tax-free to the recipient,
as well, except for  disability benefits
(which are generally  taxable to the em-
ployee, if the premiums were paid by the
corporation).

@H\13

To be a QPSC, a corporation must be en-
gaged almost  exclusively in  rendering
services in  one of the fields  listed,
and must be "substantially" (95%) owned
by its employees, retired employees, or
the estate of either (or by an heir, up
to 2 years after death).

The definition of a Qualified  Personal
Service Corporation is very complex and
difficult to explain to  anyone but tax
lawyers. At this point, you may wish to
exit to the menu of consulting subjects
and go thru the Q & A routine on QPSCs.

@H\14

Note that a  Keogh plan, a Section 401K
plan, or an ESOP is a qualified plan.

However, an "SEP" ("Simplified Employee
Pension  plan"), in which  the employer
contributes  to IRA accounts set  up on
behalf of employees,  is NOT considered
a qualified  plan for purposes  of this
analysis.

@H\15

In general,  a participant in a pension
or profit sharing plan may borrow up to
$50,000 from the plan, but not over the
larger of the following two amounts:

   . One-half of his or her vested
     benefits under the plan; or

   . $10,000.

An owner-employee  is  prohibited  from
borrowing at all from an  S corporation
plan, or from a Keogh plan (of an unin-
corporated business).

@H\16

Some types of corporations, such as typ-
ical professional  corporations  in many
states, provide little, if any,  limita-
tion on liability since the laws in many
states provide that such corporations do
NOT limit liability  for claims  such as
professional malpractice damages,  which
are a  major area of  exposure for  most
types of professional corporations.

@H\17

"Adjusted Ordinary Gross Income"  is the
ordinary GROSS income (excluding capital
gains) of a corporation,  before any de-
ductions, except for certain adjustments
applicable to  rental income and mineral
and oil and gas royalty income (such  as
depreciation or depletion, property tax,
interest and rents paid), and other mis-
cellaneous  adjustments that  apply only
to  certain  kinds of  special taxpayers
and types of income.

@H\20

Note that if your C corporation borrows
money to finance or carry its purchases
of dividend-paying stocks,  in order to
benefit from the dividends received de-
duction, its interest deduction will be
reduced.  It cannot deduct interest in-
curred to buy tax-free investments.

@H\21

Note that losses passed through by an S
corporation to its shareholders are not
necessarily deductible by a shareholder
if the shareholder has  used up all the
"tax basis" of his stock (plus loans he
has made to the corporation).   Nor can
such losses be used if they are consid-
ered "passive activity" losses, and the
shareholder  does not  have income from
other  passive activities  that he  can
offset the passive losses against.

@H\22

Note that your  corporation may be very
profitable,  with  significant  taxable
income and  tax liability,  and yet may
still have significant tax credits that
it is carrying forward, due to the com-
plex interplay between  tax credits and
the alternative minimum tax ("AMT") un-
der the  tax law.   Liquidation  of the
corporation would cause any such carry-
overs,  as well as  any NOL carryovers,
to be lost forever.

@END