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Save on Taxes by Forming a Company

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Forming a company has many advantages to simply operating a business as your self or as a sole proprietor. Some of these advantages include personal asset protection, brandability, credibility, deductible expenses, perpetual existence, access to capital and legal liability. Depending on your actual business you may even be required to form a company. However another important element that is equally important is tax flexibility. In other words, by forming a company you can actually save thousands to hundreds of thousands of dollars in tax payments.

Here how it works

If you are a business owner operating as Sole Proprietorship and make about $60,000 a year, you pay self employment tax and regular income tax. As a business expense, you can deduct half of that self employment tax. This is a simple calculation.

Profit as Sole Proprietorship: $60,000

Total Gross Income: $60,000

Half of self employment tax: -$4,500

Adjusted Gross Income: $55,500

Total self employment tax: $9,000

Income Tax: $8,880

Total Taxes paid: $17,880

However if you convert your business to a company, you don't have to pay the self employment tax and instead you pay Social Security and Medicaid tax which is almost half the rate of self employment tax. Here is the calculation of possible taxes.

Profit as a company: $60,000

Salary Paid to yourself: $25,000

Profit left after salary paid: $35,000

Total Gross Income: $60,000

Social Security and Medicaid Tax: -$1,912.50

Your Adjusted Gross Income: $58,087.50

Total SS and Med. Tax: $3,825

Income Tax: $9,294

Total Taxes paid: $13,119


Of course as a business owner you would like to save taxes.

Corporations and LLCs are both separate legal business entities that enjoy certain protections under the law and important benefits. Incorporating, or forming a Limited Liability Company (LLC), allows you to conduct your business without worrying that you might lose your home, car, or personal savings because of a business liability.

By allowing to create an LLC or Corporation for the operation of your business, you can potentially save thousands in taxes each year. The cost of creating the LLC or Corporation is a mere couple hundred tax deductible dollars. Add to the tax benefit the limitation of your personal liability for the debts and liability of the company and there is no reason not to change your business structure. is a useful source for information and the creation of an LLC or Corporation. Unlike a document processing service, the work at is performed by attorneys with years of hands on experience.


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