# Incorporation vs Sole properietorship



## Young&Ambitious (Aug 11, 2010)

Hi everyone,

Another thread but unrelated to the meals&entertainment one I posted...

Anyways, I am familiar with the various benefits and disadvantages of corporations and sole proprietorships and I am looking at this solely from a cost/tax savings view. 

Some background: either way I would do my own accounting and tax preparation, if I were to incorporate I would pay out essentially all income as salary post expenses therefore little opportunity at this point in time for tax deferral, highly unlikely losses would be incurred and as such the ability to transfer losses is of minimal consideration. My income is expected to increase (and thus tax brackets) annually above inflation rates and may likely include stock benefits. 

The interesting factor: I am student with annual minimum tuition of $6k (approx 2-3 yrs to go), almost $1k in annual professional membership dues with additional dues/memberships to come, and public transportation annual costs of approx $850. As a sole proprietor I would get a credit for these whereas as a corporation I could expense the entire amount as an employee reimbursement. 

The question: Assuming incorporation expenses and annual filings totaling $500 (the corp. would be very basic and uncomplicated), would be worth it to incorporate in order to expense more items instead of receiving credits?

I look forward to hearing everyone's input, feedback and advice


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## FrugalTrader (Oct 13, 2008)

The main benefit of a corporation would be liability protection and tax deferral of retained earnings. If you plan on paying everything out of the corp via salary, I don't see the benefit of having a corp, esp with the added costs and paperwork.


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## Young&Ambitious (Aug 11, 2010)

Thanks FrugalTrader for your input.

I crunched the numbers this morning and it doesn't make sense from a financial perspective. 

For example:
Deduction savings ($7,850 * 25% marginal bracket= $1,962.50)
Credit ($7850*.22=$1,727) 

Difference is minimal.


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## heyjude (May 16, 2009)

I agree with Frugal Trader. When I incorporated in 2002 I did the math and at that time the breakeven point was ~$60K in retained earnings annually. Lower retained earnings = no financial benefits. 

OTOH if corporate income significantly exceeds your personal expenses, retained earnings are high and the tax deferral benefits are very significant. You can also employ family members to do bookkeeping, etc, and pay them a reasonable salary, which becomes a corporate expense. And you can expense your health expenses.


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## Young&Ambitious (Aug 11, 2010)

Thanks heyjude! Although sole props. can now expense PHP's (personal health plans) which is a nice change!


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## Four Pillars (Apr 5, 2009)

heyjude said:


> I agree with Frugal Trader. When I incorporated in 2002 I did the math and at that time the breakeven point was ~$60K in retained earnings annually. Lower retained earnings = no financial benefits.
> 
> OTOH if corporate income significantly exceeds your personal expenses, retained earnings are high and the tax deferral benefits are very significant. You can also employ family members to do bookkeeping, etc, and pay them a reasonable salary, which becomes a corporate expense. And you can expense your health expenses.


What about the capital gains exemption? Ie if you have a corporation with no retained earnings, but you end up selling it for a lot of money - would the capital gains exemption make it worthwhile?


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## raptor235 (Mar 16, 2011)

Hey heyjude, would you mind posting how you did the calculation? With the changing corp tax rates it would be great for anyone to do the calculation themselves... thanks so much



heyjude said:


> I agree with Frugal Trader. When I incorporated in 2002 I did the math and at that time the breakeven point was ~$60K in retained earnings annually. Lower retained earnings = no financial benefits.
> 
> OTOH if corporate income significantly exceeds your personal expenses, retained earnings are high and the tax deferral benefits are very significant. You can also employ family members to do bookkeeping, etc, and pay them a reasonable salary, which becomes a corporate expense. And you can expense your health expenses.


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