Small corporations and tax benefits

What type of corporation should a new small business with five employees establish? What are the tax benefits?

Professor's Perspective
Small corporations and tax benefits

The same answer applies here as in the previous question. There's no significant difference, for federal income tax purposes, between the S-corp and the LLC. Some states have somewhat higher annual filing fees for LLCs than they do for corporations -- a few hundred dollars' difference in one case that comes to mind, but that's about it.

For every $1,000, how much should a new small-business owner put aside for tax payments?

Again, someone who understands the tax numbers has to help with this. The business owner has to pay income tax on "taxable income," which is net income computed by the tax rules. Knowing that the business has $1,000 of gross receipts does not help anyone know what the tax liability will be -- we need to have a feel for deductible expenses. Depending on the type of business, the answer will vary. A business that sells retail goods will have very little of the $1,000 dropping to the bottom line, because the cost of goods sold will likely be a big percentage of the gross receipts. A personal service activity would likely have more net income per $1,000.

Some "experts" offer a simple rule of thumb: A self-employed person should set aside 10 percent of gross income or 20 percent to 25 percent of net income for estimated payments. Any businessperson would probably have a good idea of what the gross income is at any moment, but he or she might need some help estimating net income.

Eli Bortman
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Eli C. Bortman

Lecturer in law



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