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INC.TXT
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1994-10-26
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Why You May Want To Incorporate Your MLM Business
About 80% of America's small businesses are
unincorporated, according to government statistics.
Many of these businesses could reduce their income tax
bills by incorporating, because the corporation is
still America's best small-business tax shelter.
Let's look at a small retail business that is
jointly owned by a husband and wife, Max and Rosie
Profits. The business has gross sales of over $415,000
and a net income of about $48,800. The Profits also
earn about $4,000 in interest and $1,200 in dividends.
Out of this, they have to pay self-employment tax
of about $6,900. They also pay medical expenses of
almost $10,000. Because they can deduct only medical
expenses that exceed 7.5% of their adjusted gross
income, $6,300 of their medical outlay is included in
their itemized deductions. Their federal income taxes
are about $3,800.
Now suppose the Profits incorporate the business.
The first thing the corporation lets them do is
establish a medical-expense reimbursement plan under
which the corporation pays their medical expenses. The
payments are tax-free to the Profits and deductible by
the corporation.
Other expenditures, such as automobile purchases,
could also be paid for by the corporation. The value
of the vehicles would have to be included in the
Profits' gross income, but the expenses would be
deductible by the corporation -- and it is cheaper to
include them in gross income than to pay for them with
after-tax income.
The Profits draw salaries from the corporation,
but they will not need to draw the $48,800 they are
netting as proprietors, because the medical and other
expenses are paid by the corporation. By taking
salaries totaling about $35,000, they eliminate $2,110
in Social Security self-employment taxes. The standard
deduction and personal exemptions cut their taxable
income to $22,850. Their federal income taxes for the
year are $3,428. Total tax savings from incorporating
so far are about $2,500.
Eventually, the Profits can have the corporation
set up a pension fund and other benefit programs for
them. They can also get more tax-advantaged cash out
of the corporation by buying business assets themselves
and leasing them to the corporation. The corporation's
taxable income up to $50,000 is taxed at its 15% rate,
but most small corporations can keep the taxable income
around zero.
Some disadvantages of forming a corporation are
that another set of tax returns must be filed and that
business licenses must be obtained. To maximize tax-
reduction possibilities, the Profits might need a
lawyer or accountant to set up the benefit plans. They
must be sure to keep the corporation's money and
records separate from their own. Also, some, though
not all, of the corporation's tax breaks will apply
only to personal service corporations, such as those
established by doctors, lawyers, accountants,
consultants, etc. Thus, not everyone can get all the
tax benefits of incorporating.
But the savings will compound year after year and
grow as the business grows. Another advantage is that
when cash is tight the Profits might be able to borrow
from their retirement plans. Unincorporated business
owners cannot do this; loans from Keogh plans by
business owners are treated as distributions and are
subject to taxes.
Eventually, when the taxable income of the
corporation is in the $150,000 to $200,000 range, the
Profits will want to consider converting to an S
corporation (a tax election which taxes the corporation
as if it is a partnership).
For information on a highly-recommended national
service that can form a corporation for you in any
state, write to Incorporation Information Package, 818
Washington Street, Wilmington DE 19801.