How to choose the best entity


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How to choose the best entity

  1. 1. How to Choose theBest Business EntitybyAlan D. CampbellPh.D., CPA, CMA, CFP®alancampbell@elmore.rr.comAuthor of the forthcoming bookTax Savings Prescriptions
  2. 2. 2Objectives• Explain how tochoose the bestbusiness entity:– Sole proprietorship– Partnership– Limited liabilitycompany– S Corporation– C Corporation
  3. 3. 3Sole Proprietorship
  4. 4. 4Characteristics• Easy to form andoperate• The owner hasunlimited liability• The owner haslimited ability toraise capital
  5. 5. 5Formation• The owner mayoperate under afictitious name(a d/b/a)• The owner mayhave to file afictitious nameregistration with thecounty or parish
  6. 6. 6Formation• The individual ownerowns the assets• No owner recognizesany gain or loss onthe transfer ofpersonal use assets tothe business
  7. 7. 7Income Tax Treatment• Only one level ofincome tax• Income and expensesretain their character• The net income istaxed at the owner’smarginal tax rate
  8. 8. 8Income Tax Treatment• The owner reportsincome and expenseson Form 1040,Schedule C• Losses (except passivelosses) are deductibleagainst the owner’sother income
  9. 9. 9More Than One Business• Income and expensesfrom each differentbusiness are reportedon separateSchedules C• A net loss from oneactive business mayoffset net incomefrom other businesses
  10. 10. 10Self-Employment Tax• Reported on Form1040, Schedule SE• The net income ismultiplied by 92.35%• The resulting amountis multiplied by theSE tax rate of 15.3%• Half of the SE tax isdeductible for AGI
  11. 11. 11Passive Losses• A passive loss may bededucted only againstpassive income forboth income tax andself-employment taxpurposes• Unused passive lossesare carried forward
  12. 12. 12Employing One’s Children• Can reduce incometaxes and the self-employment tax• Wages paid to one’schildren under age 18are exempt fromemployment taxes
  13. 13. 13Employing One’s Spouse• Salaries are subject toincome taxes andemployment taxes• Can be useful in savingself-employment tax onhealth insurancepremiums and incometax and SE tax onmedical expensereimbursement plans
  14. 14. 14Employing One’s Spouse• Can make businesstravel costs for theaccompanying spousedeductible• Can provide thespouse with earningsthat can be taxsheltered withpension plans such asa SIMPLE plan
  15. 15. 15Section 179 Deduction• The Section 179deduction reducesincome tax and theself-employment tax• Wages count asbusiness income forpurpose of theincome limitation
  16. 16. 16Net Operating Losses• May generally becarried back twoyears and forward forup to 20 years forincome tax purposes• Are not deductiblefor self-employmenttax purposes
  17. 17. 17Transferring the BusinessThe owner cannottransfer a part of theequity in the businesswithout first changingit to another type ofentity
  18. 18. 18Sale of the Business• A sale of a soleproprietorship istreated as a sale ofits assets• Part of any gainwill be ordinaryincome
  19. 19. 19Transferring theBusiness to Reduce Estate Taxes• Bequeath thebusiness to thesurviving spouse• Sell the businessoutright and makeannual gifts fromthe proceeds
  20. 20. 20Transferring theBusiness to Reduce Estate Taxes• Sell the businessfor a privateannuity• Sell the businessfor a self-cancelinginstallment note
  21. 21. 21Partnership
  22. 22. 22Characteristics• General partners haveunlimited liability• Partnerships have agreater ability to raisecapital than do soleproprietorships
  23. 23. 23Characteristics• Partnerships haverelatively simpleadministration and filingrequirements comparedto corporations• Partnerships are oftenmuch more complex fortax purposes than areother entities
  24. 24. 24Formation• Transfers of property to apartnership in exchange foran interest in thepartnership are generallytax deferred• The receipt of apartnership interest forservices is taxable asdetermined under Section83
  25. 25. 25Tax Year• The partnership mustuse the same tax yearas used by partnersthat own more than50% of the interest inthe partnership• If not possible, use thetax year of all theprincipal partners
  26. 26. 26Tax Year• If not possible, use thetax year with the leastamount of incomedeferral• The IRS may approvea different tax year if abusiness purposeexists
  27. 27. 27Tax YearThe partnership mayelect a different tax yearif the partnership makesthe required paymentand the deferral period isthree months or less
  28. 28. 28Income Tax Treatment• Partnerships have a greatdeal of flexibility inallocating incomebetween or among thepartners• Single level of taxation• Partners, not thepartnership, pay taxes
  29. 29. 29Income Tax TreatmentIncome is taxed to thepartners even if thepartnership makes nodistributions of cashor other assets
  30. 30. 30Employment Tax TreatmentFor general partners,the distributive shareof ordinary incomeand any guaranteedpayments are subjectto the self-employment tax
  31. 31. 31Reporting Partnership Income• The partnershipmust file Form1065• Income is reportedto each partner onSchedule K-1• Ordinary income or(loss)
  32. 32. 32Reporting Partnership Income• Separately reporteditems includeportfolio income,capital gain/loss,and the Section 179deduction• Net earnings fromself-employment
  33. 33. 33Losses• Losses flow throughto the partners to theextent of eachpartner’s– Amount at risk– Adjusted basis in thepartnership interest,which includes thepartner’s share of thepartnership’s debts
  34. 34. 34Losses• Passive losses aredeductible only to theextent of passiveincome• Losses from a limitedpartnership interestare generally passivelosses
  35. 35. 35Distributionsfrom the Partnership• Distributions includedistributions of cashand other assets• A net decrease in apartner’s share of theliabilities is treated asa cash distribution
  36. 36. 36Distributionsfrom the Partnership• Distributions aredeemed to occur atthe end of the year• All other items thataffect basis are takeninto account beforedistributions
  37. 37. 37Distributionsfrom the PartnershipDistributions ofproperty reduce thebasis in thepartnership interestby the adjusted basisof the property to thepartnership
  38. 38. 38Distributionsfrom the Partnership• Distributions of cashare a reduction in thebasis of the partner’sinterest in thepartnership• Distributions of cashin excess of basisresult in a recognizedgain
  39. 39. 39Sale of a Partnership InterestA sale of apartnership interest istreated as a sale of acapital asset except tothe extent of “hotassets”
  40. 40. 40Optional Basis Adjustment• The partnership mayelect to adjust apartner’s outside basiswhen– A partner acquires theinterest of anotherpartner or– The partnershipdistributes property toa partner
  41. 41. 41Sale of theAssets of the Business• The partnership cansell the assets of thebusiness• The gain or loss oneach asset must becalculated andcharacterized
  42. 42. 42Termination of a PartnershipA partnershipterminates for legalpurposes on thedeath, withdrawal, orbankruptcy of anypartner
  43. 43. 43Termination of a Partnership• A partnership terminatesfor tax purposes– When at least 50% of theinterest in the partnershipis transferred in any 12-month period or– When no business activityis carried on by anypartner
  44. 44. 44Transferring theBusiness to Reduce Estate Taxes• Form a family limitedpartnership• Make a lifetime gift ofthe general partnershipinterest or sell it• A corporation or LLCcould be formed to bethe general partner
  45. 45. 45Transferring theBusiness to Reduce EstateTaxes• Retain a limitedpartnership interest• The value of theretained interest willreceive discounts for– Lack of marketabilityand– Lack of control
  46. 46. 46Four Types of EntitiesMay Be Taxed as Partnerships• General partnership• Limited liabilitypartnership (LLP)• Limited partnership• Limited liabilitycompany (LLC)
  47. 47. 47General Partnership• All partners haveunlimited liability• Each partner is taxedon the partner’sdistributive share of– The partnership’sordinary income– The separately stateditems
  48. 48. 48Limited Liability Partnership• Used byprofessionalservices firms• All partners haveunlimited liabilityfor the normalbusiness debts ofthe partnership
  49. 49. 49Limited Liability PartnershipPartners are not liablefor the professionalnegligence of anotherpartner unless theother partner is undertheir directsupervision
  50. 50. 50Limited Partnership• Limited partners havelimited liability• Limited partnerscannot take part inmanagement• Limited partners areoften a source of alarge amount of capital
  51. 51. 51Limited Partnership• Must have at leastone general partner• The general partner isoften a corporation orLLC• Limited partners payself-employment taxon guaranteedpayments only
  52. 52. 52Limited Liability Company (LLC)
  53. 53. 53Characteristics• None of themembers ispersonally liable forthe debts of the LLC• All members havethe legal right toparticipate inmanagement
  54. 54. 54Characteristics• LLCs may have anunlimited numberof members• Any taxpayer canbe a member of anLLC (corporations,non-resident aliens,trusts, partnerships)
  55. 55. 55State Law• Little established caselaw exists to interpretthe various statestatutes• Uncertainty exists forLLCs that operate inmore than one state asto which state’s lawwill prevail
  56. 56. 56Formation• Transfer of propertyto an LLC inexchange for anownership interest is– Generally governed bythe partnership taxprovisions(Subchapter K)– Generally tax deferred
  57. 57. 57Income Tax Treatment• One member LLCis taxed as– A disregardedentity (soleproprietorship)– A corporation if theLLC so elects
  58. 58. 58Income Tax Treatment• LLC in the USAwith two or moremembers is taxedas– A partnership– A corporation if theLLC so elects
  59. 59. 59Employment Tax TreatmentIf the LLC elects to betaxed as a corporation,the salaries of themembers who work forthe LLC will be subjectto FICA tax and incometax withholding
  60. 60. 60Employment Tax TreatmentIf the LLC elects to betaxed as a corporation,the LLC will be subjectto FICA tax andunemployment taxes
  61. 61. 61Employment Tax TreatmentIf an LLC owned byone individual is taxedas a disregarded entity,all of the net incomewill be subject to self-employment tax
  62. 62. 62Employment Tax TreatmentIf an LLC is taxed as apartnership, themembers who areequivalent to generalpartners will be subjectto self-employment taxon their distributiveshare and on anyguaranteed payments
  63. 63. 63Employment Tax TreatmentMembers who areequivalent to limitedpartners will be subjectto self-employment taxonly on their guaranteedpayments
  64. 64. 64LLCs Taxed as Partnerships• The flexibility of apartnership• The limited liabilityof a corporation
  65. 65. 65LLCs vs. S Corporations• LLCs are NOTsubject to the taxeson built-in gains andexcessive passiveincome• LLCs are NOTlimited as to thenumber of members
  66. 66. 66Selling the Assets of theBusiness and Liquidating the LLC• The gain or loss on eachasset must be calculatedand characterized• The treatment ofliquidating distributionsdepends on how theLLC is taxed
  67. 67. 67Sale of a Membership in the LLC• If the LLC is taxedas a partnership, theinterest in the LLCis a capital asset• Capital gain or lossresults, except tothe extent of thesale of “hot assets”
  68. 68. 68Sale of a Membership in the LLCA loss on the sale of amembership in anLLC taxed as apartnership ordisregarded entitycannot qualify forordinary losstreatment underSection 1244
  69. 69. 69Sale of a Membership in the LLC• If the LLC is taxed as acorporation, the sale ofthe LLC membershipshould result in capitalgain or loss• Possible limited ordinaryloss treatment underSection 1244
  70. 70. 70S Corporation
  71. 71. 71Eligibility Requirements• Must be a domestic(USA) corporation• Must be eligible toelect S status (not aninsurance company ornon-qualifying bank)
  72. 72. 72Eligibility Requirements• Shareholders are only– Individuals– Estates– Tax-exempt organizations,and– Seven kinds of trusts• No more than 100shareholders
  73. 73. Eligibility Requirements• A husband and wifecount as oneshareholder• Certain familymembers may elect tobe treated as oneshareholder, up to sixgenerations73
  74. 74. 74Eligibility Requirements• Only one class of stock• Stock with differentvoting rights is allowed• Disproportionatedistributions can bedeemed to indicate thatthe corporation has morethan one class of stock
  75. 75. 75Eligibility Requirements• Generally, nonresidentalien shareholders areNOT allowed• An exception applies ifthe nonresident alien ismarried to a U.S. citizenor resident alien and electsto be taxed as a residentalien
  76. 76. 76Trusts That CanOwn S Corporation Stock• Grantor trusts• Voting trusts• Testamentary trusts• Qualified Subchapter S trusts• Qualified retirement plantrusts• Small business trusts• Beneficiary-controlled trusts
  77. 77. 77Characteristics• Limited liability• Unlimited life• Centralized management• Limited transferability ofinterests without losingthe S election• Subject to moregovernment regulation
  78. 78. 78Formation• The transfer of assets inexchange for thecorporation’s stock is taxdeferred if the personswho transfer property own80% or more of the stockimmediately after thetransfer• The transfer of assets forthe debt of the corporationis taxable
  79. 79. 79Formation• The receipt of stock inexchange for servicesis taxable asdetermined underSection 83• Service provider maymake election underSection 83(b) if stockis restricted
  80. 80. 80Making the S Election• File Form 2553with the IRS• All shareholdersmust consent• The election mustbe timely andproperly filed
  81. 81. 81Deadline for the S Election• The corporation maymake the S election atany time in the yearbefore it is to becomeeffective• The corporation maymake the S election onor before the 15th day ofthe third month of thetax year of the year it isto be effective
  82. 82. 82Deadline for the S Election• A new corporation maymake the S election onor before the 15th day ofthe third month of itsfirst tax year• The first tax year beginson the day thecorporation has assets,shareholders, or beginsbusiness
  83. 83. 83Deadline for the S ElectionIf the corporation makesthe S election late, theIRS may treat theelection as timely if thecorporation hadreasonable cause
  84. 84. 84Deadline for the S Election• The election is faulty ifthe corporation failed toqualify or did not obtainshareholder consents• However, the IRS mayhonor the election if thecorporation corrects theproblem within areasonable time
  85. 85. 85Tax Year• An S corporationgenerally must use thecalendar year• A fiscal year is allowed ifit has a business purpose• The corporation may alsouse the same year as usedby shareholders who ownmore than 50% of itsstock
  86. 86. 86Tax Year• The S corporation mayalso elect to use adifferent tax year• The maximum deferralof income is threemonths• Requires payments tothe IRS to compensatefor the deferral
  87. 87. 87Ownership of C Corporations• A C corporation mayNOT own stock in an Scorporation• However, an Scorporation may ownstock in a C corporation• No consolidated returnallowed with a Ccorporation
  88. 88. 88QSubs• An S corporationmay have qualifiedS corporationsubsidiaries(QSubs)• The QSubs aredisregarded for taxpurposes
  89. 89. 89QSub Criteria• Must qualify as an Scorporation• The S corporationparent must own allof its stock• The parent elects totreat it as a QSub
  90. 90. 90Income Tax Treatment• No corporate incometax except for– Built-in gains– Excessive net passiveincome– LIFO recapture tax– Recapture ofinvestment tax credit
  91. 91. 91Penalty Taxes• An S corporation IsNOT subject to– The accumulatedearnings tax or– The personalholding companytax
  92. 92. 92Income Tax Treatment• The S corporationmust file Form 1120Sby March 15th• Income is allocated tothe shareholders onSchedule K-1
  93. 93. 93Income Tax Treatment• Income is taxed to theshareholders at theirmarginal tax rates• Capital gains, tax-exempt income, andother separately stateditems retain theircharacter
  94. 94. 94Income Tax Treatment• Income is taxed to theshareholders on a pershare per day basis• Therefore, Scorporations are notas flexible aspartnerships
  95. 95. 95Splitting Income• S corporation stock can begiven to family membersto split income among thefamily members• However, the Scorporation must payreasonable compensationto family members whoprovide services or capitalto the corporation
  96. 96. 96Splitting IncomeThe IRS may ignore gifts ofstock to family members ifthe IRS determines that thedonor retains the economicbenefits and control of thestock
  97. 97. 97Dividends Received DeductionUnlike a Ccorporation, an Scorporation is NOTentitled to thedividends receiveddeduction
  98. 98. 98Treatment ofCertain Fringe Benefits• Statutory fringebenefits are includedin the gross income ofmore than 2%shareholders• The S corporationmay deduct the fringebenefits as businessexpenses
  99. 99. 99Employment Tax Treatment• Shareholders who workfor the corporation areemployees• Salaries are subject toFICA tax and income taxwithholding• The corporation Issubject to FICA tax andunemployment taxes
  100. 100. 100Reducing Employment TaxesThe S corporation canreduce employmenttaxes by paying thelowest amount of arange of reasonablesalaries toshareholder-employees
  101. 101. 101Treatment of Losses• Losses flow throughto the shareholders toextent of eachshareholder’s:– Basis in stock– Basis in loans tothe S corporation
  102. 102. 102Tax Planning forLoss DeductibilityThe shareholder canloan money to the Scorporation or make acontribution to capitalbefore the end of theyear if necessary todeduct the loss currently
  103. 103. 103Treatment of Losses• The treatment oflosses is favorable fornew businesses thatare likely to incurlosses• When the corporationbecomes veryprofitable, theshareholders canrevoke the S election
  104. 104. 104Treatment of Losses• Losses subject to– Amount at riskrules– Passive activityloss rules– Hobby loss rules
  105. 105. 105Treatment of Losses• Losses of an Scorporation are oftenmore limited than arelosses of a partnership• The basis in apartnership interestincludes the partner’sshare of the debts ofthe partnership
  106. 106. 106Treatment of Distributions• Distributions are atax free recovery ofbasis to the extentof the shareholder’sbasis in the stock• The basis in debtdoes NOT absorbdistributions
  107. 107. 107Treatment of DistributionsDistributions inexcess of the basis ofa shareholder’s stockresult in gainrecognition to theshareholder
  108. 108. 108Treatment ofDistributions of Property• Distributions ofappreciated propertyresult in gainrecognition by thecorporation• However, no lossesmay be recognized
  109. 109. 109Treatment ofDistributions of Property• The amount of thedistribution ofproperty is its– Fair market value– Minus any debtsassumed or takensubject to by theshareholder
  110. 110. 110Former C Corporations• Former C corporationswith accumulated earningsand profits (E&P) keep anaccumulated adjustmentsaccount (AAA)• AAA is the total of incomeand loss from the S period(except tax-exemptincome and relatedexpenses)
  111. 111. 111Former C Corporations• Distributions comefirst from the AAAand reduce the basisin the shareholder’sstock• Distributions comenext from E&P andare taxable
  112. 112. 112S Election RemainsUntil Revoked or Lost• Voluntary revocation is easy and requires theapproval of a majority of the shareholders• Involuntary revocation occurs when– A new shareholder with over one half of the stockrefuses to consent to the election– The corporation no longer qualifies as a smallbusiness corporation– The corporation does not meet the passiveinvestment income limitation
  113. 113. 113Termination of the S Electionfor Excessive Passive Income• Passive incomegreater than 25% of itsgross receipts for threeconsecutive years and• C corporation earningsand profits exist foreach of the three years
  114. 114. 114Preserving the S Election• Management andshareholders shouldknow the factors thataffect S status• Avoid passiveinvestment incomelimitation violations• Restrict transfer of stockto avoid loss of S status
  115. 115. 115Inadvertent Terminations• The IRS maycontinue to allow theS election if– The termination isinadvertent and– The corporation takesthe necessary steps tomeet the eligibilitycriteria within areasonable time
  116. 116. 116New Election• If the S election isterminated, thecorporation must– Wait five years tomake a newelection or– Obtain the consentof the IRS
  117. 117. 117Sale of the Business• You can structurethe sale of thebusiness as– A sale of stock or– A sale of assetsfollowed by acorporateliquidation
  118. 118. 118Sale of the Business• A sale of the stockshould result incapital gain or loss• Possible limitedordinary losstreatment underSection 1244
  119. 119. 119Liquidation• Liquidation of an Scorporation isgoverned by theprovisions ofSubchapter C• No double taxoccurs except to theextent of built-ingains
  120. 120. 120C Corporation
  121. 121. 121Characteristics• Limited liability• Unlimited life• Centralizedmanagement• Free transferability ofinterests• Subject to moregovernmentregulation
  122. 122. 122Characteristics• Unlimited numberof shareholdersallowed• Often used for agrowing businessthat is reinvestingits profits in thebusiness
  123. 123. 123FormationThe transfer of assets tothe corporation inexchange for its stock istax deferred if thepersons who transferproperty own 80% ormore of the stockimmediately after thetransfer
  124. 124. 124Formation• The transfer of servicesto the corporation inexchange for its stock istaxable as determinedunder Section 83• The transfer of propertyin exchange for thecorporation’s debt istaxable
  125. 125. 125Fringe Benefits• Many fringebenefits aredeductible by thecorporation• They are often taxfree or tax deferredto the shareholders-employees
  126. 126. 126Passive Activity Loss Rules• Apply only to– Personal servicecorporations– Closely heldcorporations
  127. 127. 127Net Operating Losses• Do NOT flowthrough to theshareholders• Can generally becarried back twoyears and thenforward for up to20 years
  128. 128. 128Capital Losses• Are deductible onlyto the extent ofcapital gains• Are carried backthree years and thencarried forward forup to five years
  129. 129. 129Special Deductions• Organization costs• Dividends receiveddeduction• Charitablecontributions
  130. 130. 130Sale of the Business• Sale of stock– No corporate tax– Shareholderrealizes capital gainor capital loss– Possible limitedordinary losstreatment underSection 1244
  131. 131. 131Sale of the Business• Sale of assets– Corporationrecognizes gain orloss on sale of eachasset– Distributions aretaxed to theshareholders ascapital gain or capitalloss
  132. 132. 132Double Taxation• Income is taxed atthe corporate level• Dividends are taxedto shareholderswhen distributed
  133. 133. 133Reducing Double Taxation• Avoid distributingdividends• Make cashpayments to theshareholders thatare deductible bythe corporation
  134. 134. 134Reducing Double Taxation• Make cashpayments to theshareholder that area tax free recoveryof basis• Make the S election
  135. 135. 135Deductible Cash Payments• Lease payments• Reasonablecompensation• Interest
  136. 136. 136Cash Payments That Area Tax Free Recovery ofBasis• Principal paymentson debt• Stock redemptionstreated as a sale• Liquidatingdistributions
  137. 137. 137Penalty Taxes• Accumulatedearnings tax• Personal holdingcompany tax
  138. 138. 138Double Tax on the Saleof the Assets of the Business• The corporationrecognizes gain orloss on the sale ofthe assets• The shareholdersrecognize capitalgain on thedistribution of theproceeds
  139. 139. 139Conclusion• The best entity for ayour business dependson many factors,including state incometax rules• You should make thedecision with guidancefrom your attorney andtax professional
  140. 140. Bonus Material11 Reasons You MayNOT Want to Incorporate
  141. 141. 1. Banks Require Cosigners• Banks will usuallyrequire majorshareholder(s) toconsign any corporateloans• Thus, there would beno limited liability forbank loans141
  142. 142. 2. Piercing the Corporate Veil• Most corporations keeppoor records such asminutes and resolutions• Many stockholders ofsmall corporationscommingle personal andcorporate assets142
  143. 143. Shareholders Become Liable• A plaintiff’s attorneymay be able to piercethe corporate veil• If so, the shareholderscould be personallyliable for anycorporate debt143
  144. 144. 3. Defending aLawsuit Is Expensive• Even if a corporationkeeps good recordsand does notcommingle assets• The corporation wouldhave to pay to defenda lawsuit, except to theextent that aninsurance companywill pay 144
  145. 145. 4. Breach of Fiduciary Duty• Even if the corporationkeeps good records and doesnot commingle assets• You can be suedindividually for breach offiduciary duty as a directoror officer of the corporation• You can insure such risk,but it can be expensive145
  146. 146. 5. Foreign Corporation Fees• A corporation is anartificial person that hasreceived a charter from aparticular state• To do business in anotherstate, the corporationmust register with thatstate and pay a fee as a“foreign corporation”146
  147. 147. 6. Few Additional Deductions• Section 162 authorizesdeductions for businessexpenses• It applies to all types ofbusinesses• There are few deductions acorporation may claim thatare not allowed to othertypes of business entities147
  148. 148. 7. Employment Taxes forChildren Under Age 18• If your children areunder age 18 and theywork for your soleproprietorship, theirwages are not subjectto employment taxes• If your children workfor your corporation,their wages are subjectto employment taxes 148
  149. 149. 8. MoreGovernment Forms to File• If you operate as acorporation, you have tofile more forms and paymore fees to federal andstate governments• Complying with all therules takes additionaltime and money awayfrom your business149
  150. 150. 9. Can Lose Stockto Personal Judgments• A court may not forcea creditor to be apartner with someone• If someone gets ajudgment against anLLC member orpartner, usually all thecreditor gets is acharging order150
  151. 151. Judgment Creditor CanSeize Stock to Satisfy Judgment• A personal judgmentcreditor of ashareholder may beable to take the stockto satisfy the judgment• You can buy personalumbrella liabilityinsurance to hedgeagainst this risk151
  152. 152. 10. Payroll TaxPenalties on Your Own Salary• If your corporation paysyou a salary and doesnot deposit the payrolltaxes timely, thecorporation could besubject to large penalties• And you as an individualcould be subject to thetrust fund recoverypenalty 152
  153. 153. 11. Possible Tax onTransfer of Appreciated Assets• If you transferappreciated assets to acorporation that youcontrol and if you donot comply withSection 351• You could oweincome tax just forplacing the assets in acorporation 153
  154. 154. Conclusion• Think carefully andget excellent advicebefore you form acorporation• Corporations do havesome benefits• But many of thealleged benefits aremyths and half truths154
  155. 155. CreditsThis presentation was created usingPowerPoint® presentation graphics program,a Microsoft® software. PowerPoint® is aWindows®-based and Mac®-basedapplication. All clip art is used with permissionfrom Microsoft®. Microsoft®, Windows®, andPowerPoint® are either registered trademarksor trademarks of Microsoft Corporation in theUnited States and/or other countries.155
  156. 156. DisclaimersAlan D. Campbell (d/b/a CampbellEducation) is an independent entity and is notaffiliated with, nor has he been authorized,sponsored, or otherwise approved byMicrosoft Corporation.156