AOL File Library: 2,401 to 2,500/aol-file-protocol-4400-2401-to-2500.zip/AOLDLs/PC Business Library/Small Business Advisor/SBA964.exe/F114.SBE

Text File | 1996-08-23 | 4KB | 75 lines

@061 CHAP ZZ

       ┌─────────────────────────────────────────────────┐
       │ CAPITAL-INTENSIVE BUSINESSES:  CHOICE OF ENTITY │
       └─────────────────────────────────────────────────┘

In general, capital-intensive businesses, such as high-tech,
retail, and manufacturing firms, are still good candidates
for incorporating as C corporations, for several major
reasons:

      .  Limitation of personal liability is often highly
         important in these types of business (although an
         S corporation will provide the same degree of
         protection from creditors);

      .  Businesses of these types often need to retain a
         significant part of their earnings to facilitate
         expansion, pay off long-term debt, and the like.
         Accordingly, they are excellent candidates for
         splitting income, taking advantage of the low
         corporate tax rates on the first $75,000 per year
         of taxable income.  They are not subject to the
         flat rate 35% tax that applies to certain personal
         service corporations.  Also, by the very nature of
         their business, it is often possible to justify
         accumulating large amounts of earnings in such
         corporations over the years without incurring
         accumulated earnings penalty taxes, so long as the
         retained funds are used for business expansion, and
         not simply deposited in a bank account or invested
         in stocks and bonds or similar non-business assets.

      .  These kinds of businesses may still adopt fiscal
         tax years, which can be used, with proper tax
         planning, to defer taxes (by using a January 31
         fiscal year, for example, and paying January
         bonuses each year to the employee-owners).

      .  Even if they are considered "closely held C
         corporations," they may invest in activities
         that generate passive losses and fully deduct
         these losses against "net active income" (but not
         against "portfolio income") of the corporation.

      .  C corporations have the advantage of being able
         to deduct medical insurance, medical reimbursement
         plan payments, disability insurance, and group
         term life insurance paid for owner-employees,
         which S corporations and unincorporated businesses
         may not do, except on a very limited basis.

While C corporations will face the problem of double taxation
when ultimately liquidated or sold, to the extent they retain
income, and to the extent they have assets that appreciate,
the problem of appreciating assets can be controlled somewhat
by keeping assets that are likely to appreciate greatly over
time, such as real estate, out of the corporation (by having
the owners buy such assets and lease them to the corporation).
Double taxation on the retained income itself will not occur
unless you sell your stock or liquidate the corporation
during your lifetime, since the stock generally gets a
step-up in basis if it is included in your estate when you
die (at least under present law).

@IF119xx]PLANNING POINT FOR @NAME:
@IF119xx]Your firm is currently a @ENTITY:
@IF119xx]┌────────────────────────────────────────────────────────────┐
@IF119xx]│In light of the advantages of C corporation status described│
@IF119xx]│above, perhaps you should consult your tax adviser regarding│
@IF119xx]│a possible shift  to a C corporation,  if yours is a capital│
@IF119xx]│intensive business that could benefit from such an entity.  │
@IF119xx]└────────────────────────────────────────────────────────────┘