One of the key features of the recently-enacted 2017 Tax Cut and Jobs Act legislation is the steep reduction of the corporate tax from 35% to 21%. Despite the controversial nature of the bill, this reduction provides a unique opportunity for a number of creative professionals who may choose to incorporate and thus take advantage of this reduced tax rate.
Since the passage of the tax bill, a number of people have contacted our office about whether or not they should incorporate. This article will help guide that decision. We are happy to answer further questions in a free phone consultation.
Should you incorporate because of the 2017 tax bill? The answer depends upon a number of factors.
What Does The 2017 Tax Bill Do?
The 2017 tax bill has gotten a ton of press because it represents a fundamental shift in American tax law. Some will benefit from this shift, others will not. Our goal here is not to debate the merits of this bill, but to provide a sober assessment that will help small business owners and creative professionals decide which course of action will help them now and in the long-run. Accordingly, our focus is on the part of the tax bill that reduces the corporate tax rate from 35% to 21%.
For more general information on the 2017 tax bill, please see this Snopes article and a simple summary from Townhall.com.
Should I Set Up A Corporation?
Setting up a corporation is an important decision made between a business owner, a tax professional and a licensed attorney in the state in which you wish to incorporate. The decision whether or not to incorporate will depend upon a variety of factors, chiefly but not completely: your income, the nature of your income, the types of deductions that you are taking, and your marital status.
The best move would be to seek the advice of a tax professional (preferably one who has experience working with business owners and creative professionals – if you don’t know one, we can provide recommendations). Ideally, the tax professional will look at your tax situation and help you to project your tax liability under a variety of scenarios so that you can compare what your taxes would be if you are taxed as an individual or as a corporation.
If it turns out that there would be a tax savings if you incorporate, you will want to seek advice from a licensed attorney. While it might be tempting to go directly to a filing service, this route can be hazardous as many filing services are unable to offer the necessary legal advice on how operate and maintain a corporation. Smart business owners generally have an attorney on board to know the right moves to make not just with corporate setup, but with the myriad other legal issues that come with running a business.
What Else Should I Know About Setting Up A Corporation?
Many business owners choose to incorporate for reasons that may have nothing to do with tax. One of the main reasons to set up a corporation is to limit personal liability stemming from your business activities. In essence, a corporation becomes a shield that can keep your personal assets safe in the event that something goes wrong in your business. It is also the foundation of a business that you can one day sell.
Beyond that, many business owners find the corporate form to be a wonderful tool for attracting investment and offering equity to founders, partners and employees. Since a corporation can offer shares to owners, it allows a great deal of flexibility – and that is what underlies its enduring popularity.
Do keep in mind that while a corporation will have some administrative tasks that must be done to stay in good standing, they can easily be addressed by consulting with an attorney who can assist in getting everything set up and help you to make sure that all required filings are done and all appropriate actions are taken.
Also, certain licensed professions – such as doctors, lawyers, accountants and architects – may need to form a California professional corporation or similar entity.
Ultimately, the choice to start a corporation will depend upon a combination of your potential tax liability and the way that you do business. For some businesses, this choice will be a no-brainer even considering legal and tax professional fees.
We would be happy to talk with any of you further. Just set up a phone call using our calendar and we can walk you through this. It can be confusing, but we are here to help you.
This article is posted for informational purposes only. Nothing here is intended as tax or legal advice. Before deciding whether or not set up a corporation, definitely check in with both a tax professional and a licensed attorney in your jurisdiction to ensure that you are making the right choice. Every business is different and it is important to get advice that is tailored to your specific situation.
