Question

A lot of small companies file their tax returns as a 1040 Sch C (Sole Proprietor) Since corporate tax rates are lower than Individual tax rates, doesn't it make sense to create a corporation, and file your small business taxes as a corporation Form 1120? What are some of the issues and benefits of filing as a corporation instead of as an Individual? One solution that has been discussed is to create another tax rate for individuals who file their business taxes as a pass-through on their individual income Sch C tax return - would this work?

Answer 1

The primary benefits of a corporation over an incorporation of sole proprietorship are as follows:

• A corporation offers flexibility in the management process
• Valid protection is offered to the personal assets of the owner and they can’t be seized in any kind of debt scenario
• There is no concept of double taxation
• No ownership restrictions involved, so foreign money can be invested in the company

The issues of a corporation over a sole proprietorship business are:

• There will be lack of control of the owner
• Profits need to be shared