Small Business Tax FAQ

Does incorporating a small business start-up offer tax breaks?

Keep in mind that most corporate tax benefits flow to profitable, established corporations, not to start-ups in their first few years. For example, corporations can offer more tax-flexible pension plans than sole proprietors or partnerships, but few start-ups have the cash flow needed to take advantage of these tax breaks.

Similarly, the ability to split income between a corporation and its owners -- thereby keeping some income in lower corporate tax brackets -- is effective only if the business is solidly profitable.

In addition, incorporating adds state fees, as well as legal and accounting charges. So unless you are sure that substantial profits will begin to roll in immediately, you may want to hold off incorporating your business.

For more on corporate taxation, see Nolo's article How Corporations Are Taxed.

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