If you own a business you already know you need an entity to maximize deductions and provide a degree of protection. For asset protection purposes the corporation is easily penetrated by creditors and should not be used to hold significant assets.

Although the sole proprietor is the most common method of business formation, it is also the very worst for tax deductions.

The corporation is very well established and should be strongly considered (can also be an LLC taxed as a corporation). When you file with the IRS you need to specify how the corporation will be taxed, S or C (some states require professionals to use a P-Corp). Let's discuss some of the advantages and disadvantages of each:

C-Corporation (Taxed at separate tax rates)

Advantages

• Lower tax brackets
• Fiscal year planning
• Substantial medical, dental, and vision deductions under section 105
• Section 179 deductions on business equipment
• Meals, travel, lodging, entertainment deductions
• Life insurance, disability insurance
• Pension plans

Disadvantages

• Separate tax return requirements with a possibility of double taxation
• Required paperwork for minutes, meetings and resolutions

 S-Corporation (Considered a flow-through entity for federal tax purposes)

Advantages

• Losses flow through to individual shareholders offsetting income in the current year
• Avoids double taxation
• Not subject to personal holdings tax or accumulated earnings tax
• Generally no corporate tax on liquidation or sale of corporate assets

Disadvantages

• Shareholders are subject to tax on profits (even if funds are not distributed)
• Limited to 75 shareholders
• Generally only persons or select trusts may be shareholders
• Shareholders names must be revealed to the IRS
• Must be a calendar year taxpayer
• Limited tax deductions

The C-Corporation has quite the advantage when it comes to deductions. For those who are W2 employees with a small side business the S-Corporation may be sufficient since you do not have to worry about many of the medical, dental and insurance costs of full time business owners.

The C-Corporation is ideal for maximizing tax deductions and can save you thousands. The C is more complicated when it comes to meetings and paperwork, but the savings, if done right, far outweigh costs. The laundry list of deductions available in the C-Corporation are significantly larger than other entities, you should have a conversation with your accountant about the options available to you.

For more information on properly drafted Limited Partnerships see our website at http://www.protectwealth.org/