Before the clock strikes midnight on December 31, there is one more thing you should accomplish: incorporate your company.
Right now might not seem like the best time to be undertaking new business expenditures but in fact, taking the time to incorporate your business before the end of the year will save you money in 2011. The economy is slowly reviving and December has seen the biggest rally since 1991.
This means that coming into the new year, people will have more confidence in spending money and as a result, will spend more. Incorporating now will help you keep more of that money consumers are spending with you and here’s why:
1) While the tax changes set to take place in 2011 are ambiguous at best, one thing is almost certain: taxes are going up next year for high income earners.
This higher personal tax can create a chilling effect in the world of small business if you let it. Any business that is not registered with the state is considered a sole proprietorship, and the money a sole proprietor makes in the business must be recorded on his or her personal income tax return.
Business taxes and personal income taxes are charged at different rates so in many cases, recording the income of the business might push the sole proprietor into the next tax bracket, resulting in a higher tax liability. Incorporating before the start of 2011 will avoid the taxation on your personal income tax return and allow you to avoid this extra taxation.
2) Starting your business now also provides you the opportunity to offset your personal income taxation on your future tax returns with your net operating losses from the first few years of running your business.
Most companies experience loss in the first year or two and using this loss to your advantage will reduce your personal tax liability when the higher tax rate kicks in, allowing you to avoid some of this extra taxation. Since you are already running a business, or at least thinking about it, using your incorporated business to your advantage is an easy next step.
3) In 2011, investors will see an increase in the taxation rate on capital gains they pay on money earned as an investor in a business so finding investors now will be easier than in the next few years.
Choosing the right incorporated business entity will also allow your investors to use your net operating losses on their own personal income returns, encouraging investment in your start-up business.
4) Incorporating now will allow you to take advantage of the Small Business Jobs Act of 2010.
The Act provides for numerous small business tax breaks, including doubling the annual deduction allowance for new and used property assets, increasing the deduction for entrepreneurs’ start-up expenditures, and creating deductions for cell phone usage and health insurance costs.
The Act also created a new $30 billion small business lending fund and improved state small business programs better, providing small businesses with better access to financing. This program currently only applies to the 2010 and 2011 tax years so incorporating now is important if you want to take advantage of this program.
The last few days of the year are frequently slow for many businesses because people are focusing on family and the holidays, but don’t let your big plans for New Year’s Eve ruin your chances of saving money in 2011. As the saying goes, it takes money to make money, and incorporating now will give you an edge in saving money that you can use to expand your profits. 2011 could be the year for you and your business, start it out on the path to success.
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