"REAL BUSINESS PLANS AT WORK"

 

incorporation report

A corporation is considered a person by itself and separate from the individual personalities of shareholders, officers and directors. Nevada is suggested as a "home base" to incorporate simply because it offers more tax advantages and anonymity. Just as it is your constitutional right to declare bankruptcy without loss of rights to conduct business, so too is your right to form a corporation in any state regardless of where business is being conducted. A C-Corp is a corporation which remains a taxable entity within itself. It pays corporate income tax rates, and the profit or loss does not pass through to the individual's tax return. A C-Corp may, in fact, also be subject to personal holding company surtax on the income.  An even more serious consideration is the fact that C Corps are subject to double taxation.  The corp. pays taxes on profits, then the shareholders pay tax on dividends received. A sub-chapter S corporation is essentially a corporation which acts and looks like a corporation but is taxed on the individual's tax return (merely a tax code election). The flow-through nature of this entity makes it the preferred vehicle for many businesses.  The corp. itself does not show profits or losses, they must be passed on to the shareholders.  If the corp. has a profit of $100,000 for the year, the money is split among the shareholder percentages.  The shareholder is liable for the taxes on the dividend received.  The same goes for losses!  These are reported on form K-1 on the Fed tax return. A second reason for establishing an S corporation or LLC is that of asset protection. An S corporation is a stand-alone entity, although it is taxed on an individual's tax return. Because of this, anybody suing you as an individual would not generally be able to get to the assets of the S Corporation. On the other hand, anyone suing the S Corporation would not be able to get at the assets of the individual outside of the corporate entity. (the corporate entity must be properly maintained) Third of all, an individual should consider forming a separate corporation because it will make him a "small fish in a large pool" for audit purposes. The consensus is that corporations are less subject to audit than are individuals. This is especially true in light of the fact that an individual whose business is thriving,  will generally show a large number of transactions throughout the year and generate a large amount of gross proceeds. Huge gross proceeds will be more susceptible to audit on an individual's tax return than in a corporation. A corporation, on the other hand, is in a pool with corporations such as Microsoft, Intel, Exxon, IBM, and Coca-Cola. For this reason, tax returns with gross proceeds in the multi-millions will not even raise an eyebrow. Million dollar numbers on corporate tax returns are commonplace. For these reasons, we have frequently set up our clients in S corps, limited liability companies, and/or family-limited partnerships.     Why incorporate in Nevada? No corporate income tax No taxes on corporate shares No franchise tax No personal income tax No IRS information sharing agreement (only State in the country) Estate protection Divorce protection Nominal annual Fees Minimal reporting and disclosure requirements Stockholders are not public record Stockholders, directors and officers need not live or hold meetings in Nevada - Or even be U.S. citizens! Directors need not be stockholders Officers and directors of a Nevada corporation can be protected from personal liability for lawful acts of the corporation. Nevada corporations may purchase, hold, sell or transfer shares of its own stock. Nevada corporations may issue stock for capital, services rendered, personal property or real estate, including leases and options.  The directors may determine the value of any of these transactions, and their decision is final.   'Must haves' for legitimate corporate operation Real Business Address Telephone in CORPORATE NAME Corporate Bank Account Nevada resident agent Legitimate business purpose including "arms length" transactions with third parties. (Examples: stock trades, loans, liens, auto leases, insurance payments.)     Case Study: Employed individual with sub 'S' corporation When Aubry Phillips, a registered nurse, decided to supplement her income by forming a new medical service online by creating her own website for access to a worldwide market. She formed a Nevada corporation and elected the 'S corporation' option for taxes. One important tax test of a valid 'S corporation' is that it has a legitimate profit objective.  Whether the company profits or not, the income (or loss) effects personal ordinary income. In the first year, Aubry had a loss from the Nevada corporation of $15,000. She was able to deduct the corp.'s loss from her ordinary RN income of $60,000. Consequently, she received a federal income tax refund of $4,500 and a state income tax refund of $1,200.  Her refunds totaled $5,700 which Aubry invested into her business for year two. Similarly, year two created another loss with the tax refunds reinvested in the growth of the corporation. By the end of year three, the corp. was profitable. With the Nevada corp. Aubry was allowed several deductions based on company expenses. A car was leased for the business, paid for by the corporation (the insurance as well). She passed a corporate resolution allowing all medical expenses of the officers and directors to be paid by the corporation. Her telephone, computer, web site, internet access, advertising, legal, professional and promotional fees were all ordinary and necessary expenses of the corporation. These expenses all contributed to her corporate losses and resulted in her personal tax refunds. This brief example demonstrates the purpose of the IRS Sub 'S' treatment by helping to finance new business during their developmental stages. Also, eliminating double taxation that large corporations are required to pay via a corporation tax and shareholders' dividend taxes.