4/04/2005

Advice from Nashville's leading Financial Aid Advisor Dave Ramsey

 
Dave Says
By Dave Ramsey
Author of:
Financial Peace and
The Total Money Makeover

"Tax breaks for sole proprietor?"

Dear Dave,

I started a staffing firm not long ago as a sole proprietorship. It’s grown quickly and now I’d like to incorporate for tax purposes. What would you recommend?

Carlos in Houston, TX



Dear Carlos,

There is no good reason to incorporate for tax purposes. A C-Corporation will actually cost you more in taxes and an S-Corporation will not save you on taxes. The idea that there are bunches of tax breaks for incorporating is a myth.

There are other good reasons to incorporate, however. If you operate as a sole proprietorship, the assets of the company are your personal assets. In that case, your property is at stake in the event of a law suit. For instance, if you have $300,000 worth of house, cars and money and you don’t want someone to sue your company and take your personal belongings, then you’d want to incorporate. That’s a good liability reason to incorporate. It’s why I created a sub-S Corporation.

I say a C-Corporation is worse because you pay taxes on your net profit. Then, when you pay those profits out to the shareholders, they pay taxes again on it. So if you’re the sole shareholder in your C-Corporation, you’ll pay taxes on those profits twice – once for the corporation and once personally. So, you never want to create a C-Corporation for a sole proprietorship. They are only good for very large companies or one that looks like its going public.

-Dave

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