Corporations and Taxes

Corporations

Corporations are more regulated than the other forms of businesses and are considered separate entities under the income tax laws.The company name is usually followed by the word Limited or Inc. Unincorporated companies may not use these designations. The affairs of the company are governed by a board of directors and the company's financial reporting is usually guided by generally accepted accounting principles.(GAAP). They are also usually more expensive to set up.Because of its structure the owner is usually shielded from the liabilities of the company. The exception might be when criminal activities are involved. Also in the initial stages, for purposes of obtaining financing, the owner may be required to accept some kind of personal responsibility.

Advantages of a Corporation

  • Limits personal liability
  • More tax deductions
  • Lower taxes
  • Flexibility of activities
  • May be easier to raise funds
  • Shelter income
  • Leverage of other people's money and time
  • Income splitting opportunities

Disadvantages of a Corporation

  • More regulated
  • More expensive start up costs
  • Detailed records required
  • More responsibilities
  • Higher professional fees

The amount of tax deductions which a limited company or firm may claim is extensive and along with other corporate tax incentives can be used to offset considerable amounts of income. In addition, corporate tax rates are generally lower than personal tax rates resulting in less taxes payable. In short,this type of enterprise has the most deductions to reduce income and pays taxes at a lower rate on its taxable income, thus sheltering more income from the tax man.

Limited companies usually have employees who do the actual work and help the company to meet it's objectives. The companies are responsible for remitting all government taxes and payroll deductions on behalf of their employees. The company can also pay benefits or offer employee incentives. Some of these benefits may be taxable to the employee.

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An incorporated firm has the ability to raise money by issuing shares. The funds may be used for ongoing operating expenses, to finance existing debt or as compensation for services or products received. Publicly traded companies may issue their shares on several markets, where they are bought and sold on a secondary markets by investors and speculators. Investors may be individuals or institutions. The price of the share will fluctuate for a variety of reasons, including supply and demand, stability and financial health of the company or the health of the general economy.

Corporations can merge, buy or partner with other companies and have the ability to engage in several activities simultaneously. They may operate under several trade names, each as a separate division. A company may be inactive, but continues to exist until it is dissolved.

The profits from a company may be reinvested in the business or can be paid out to shareholders in the form of dividends. Disposition of company shares may result in capital gains/ losses.

Many large companies started out as small home-based businesses

The company that started out on the kitchen table or in the garage is a story we hear quite often these days.

Although companies generally have more than one individual,in recent years, changes to the tax laws have allowed some high income earners like doctors, lawyers and other professionals to incorporate themselves. The benefits of doing so depends on the individual's circumstances. In any event, the merits of incorporating or not should be properly assessed, preferably,with the help of a tax professional.

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