© The Medical-Legal News 2007
Question: What type of legal business structure affords me the most tax deductions?
Answer: A corporation is your best bet. With a corporation, you’ll receive the same tax benefits as Bill Gates’ Microsoft and the Sam Walton family’s Wal-Mart.
Common business legal structures in the U.S. include:
• Sole proprietorships with minimal business deductions (filed with your personal income tax);
• LLCs (limited liability company) with a few more tax deductions (filed with your personal income tax);
• Corporations (professional and general) with the maximum business tax deductions (filed as a separate entity and not included in your personal income tax).
All states have similar (but different) laws that govern business legal structure. In most states, attorneys can form a professional corporation or association. I know of no state, however, where the department of commerce laws allow nurses to form a professional corporation. The nurse must form a general corporation.
There are a few situations where an LLC is advantageous. Wal-Mart’s trucking company is a good example of this. A partnership that has members joining and leaving frequently may benefit from the LLC legal structure.
The legal structure of your business has a huge tax impact, and it has an impact on your credit rating. Self-employment status (sole proprietor and LLC) may hurt your credit rating and make getting financing or a mortgage difficult (or the interest rate higher). Mortgage companies want you to have a job. If your company is incorporated, you will have a job with your company and your employment status will be employee. You will receive your personal wages through the company payroll.
Another advantage of incorporation is that the corporation will pay your benefits with pre-tax corporate money. For example, you want your company as your employer to pay your medical expenses and co-pays, prescription costs, insurance (life and health) premiums, vacation time and retirement benefits, among others.
Another benefit of incorporating is that the corporation can pay you rent for your home office. The office rent is a business expense (pre-tax money) and is much more beneficial than the home office tax deduction.
All corporations start as a general or C-corp. You can file an additional form with the IRS to be an S-corp. As an S-corp your business income or loss will be rolled over to your personal income and you will not be involved with the payroll process or payroll taxes at the corporate level. However, the S-corp status decreases the amount of tax business deductions available to the company. Your tax professional can best advise you on which is best in your personal situation.
When incorporation is discussed, many people express concern about double taxation with a C-corp. Double taxation involves giving dividends, paying corporate tax and then personal tax when you receive the dividend. The president and board determine if a dividend is given. A small corporation typically does not give dividends, so double taxation should not be a problem.
Another concern is that being incorporated is complex and takes additional time and money to maintain. You are professionals and have a vast amount of legal knowledge. Once you research the details, I feel certain you will not be hindered by the process, the time or the cost.
In summary, to benefit from the same tax deductions as the big boys (Bill Gates and Sam Walton), you need to incorporate. The small investment in time and money required to close your business’s current legal structure and reopen the business as a corporation is well worth the benefits. Consult with your tax preparer or CPA.
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