Incorporation & Business Start Up Planning
Set-up.
Reliance has helped many of our clients set up corporations.
Reliance charges approximately $700 - $900 to incorporate
a business. Our fee includes:
- Incorporation
paperwork and fees to the State of Illinois
- Incorporation
paperwork with county
- Apply
for EIN #
- Apply
for S Status
- Apply
for Illinois Registration #
- Apply
for Illinois Unemployment # (if Payroll)
- Apply
for Sales Tax # (if taxable sales)
- Minute
Books
- Initial
Board Meeting Minutes
- Setting
up corporate book
There are
many business circumstances that have led to the increase
in legal formations:
- Many
individuals continue to be downsized out of their corporate
jobs and end up starting or purchasing a business.
- Corporations
continue to reclassify employees to independent contractors
for a number of business reasons.
- Many
industries (like insurance and real estate) begin their
salesman as an employee and than convert them to independent
contractor status.
Below is
basic summary outlining some of the topics individuals will
face when starting up a new business.
Employee
- Employer
incurs employer portion of FICA, unemployment insurance
tax and withholds federal and state taxes from employee
- Employee
W-2
- Employee
usually receives fringe benefits (health insurance, vacation
pays etc.)
- Employee
deducts any work related expense on Form 2106 of his
tax return (which flows to schedule A and is subject
to a 2% AGI limitation)
- If
insurance not provided by employer, employee can deduct
but is subject to 10% AGI limitation.
Independent
Contractor - Can operate as sole proprietorship,
corporation (S or C), LLC
Sole
Proprietorship
- Advantages
- Easy
to form/simple to operate
- Less
administration
- Disadvantages
- No
corporate liability protection
- Double
FICA tax – Earnings of the SP are subject to
self employment tax
S-Corporation
- Advantages
- Corporate
liability protection
- Distributions
from the S-Corporation are exempt from payroll taxes
(assuming adequate compensation to employee shareholders)
- Pass
through entity – taxed at individual’s
tax rates
- Disadvantages
- Individual
tax rates may be higher than corporate tax rates
C-Corporation
- Advantages
- Corporate
liability protection
- Corporate
rates may be less than individual tax rates
- Disadvantages
- NOL’s
are not used immediately
- Double
taxation – less flexibility in terms of distributions
than S-Corps.
LLC
- Advantages
- Similar
benefits as Sub-S Corporation
- Corporations
and P-ships can be members of LLC
- Disadvantages
- Higher
costs (initially and annually)
- Relatively
new – tax laws may change
Lease vs.
Buy – Which is better? Depends on the economics of
the deal.
- If Lease – deduct
lease payments x % used for business
- If Purchase
- Option
1 – Use IRS mileage rate (includes
gas, maintenance, depreciation etc.)
- Business
miles (not commuting miles) x standard rate
as a deduction on Schedule C (SP) or corporation
return (S, C or LLC)
- Better
than other options if driving a lot of miles
- Technically
need to record miles
- Option
2 – Purchase car and depreciate
- Only
depreciate % of car used for business
- Can
also deduct gas costs
- Depreciate
recapture if do not trade in
- Deduct
Actual Costs
- Keep
receipts for maintenance costs of car
Insurance
(premiums) on owner of SP, S-Corporation & LLC are deductible
on individual’s return as an adjustment to AGI (not
subject to 10% limitation)
- Sole
Proprietorship
- Owner
- No
payroll filings necessary
- Estimated
payments required 4 times a year
- Need
to estimate tax liability on earnings
of company – penalties if payments
do not match income
- Employee
- Will
need to file Form 941, IL-941, UI-3/40 (IL unemployment
compensation) quarterly. 940EZ (federal unemployment
annually)
- Deposits
more frequent for federal withholding and FICA depending
on size of payroll (if federal withholding + FICA
are > $2,500 than must deposit monthly with your
bank)
- S-Corporation
- Owner & Employees
- Will
need to file Form 941, IL-941, UI-3/40 (IL
unemployment compensation) quarterly. 940EZ
(federal unemployment annually)
- Deposits
more frequent for federal withholding and FICA
depending on size of payroll (if federal withholding
+ FICA are > $2,500 than must deposit monthly
with your bank.
- Advantages:
- Owner
- If no office and you use part of your home exclusively
as an office can deduct the % (square footage of
home office/total square footage of home) amounts
paid for costs associated with the home.
- Can
depreciate the % of house used for business (39 years)
- Disadvantages
- Depreciation
recapture upon sale of house
- Set
up corporation (if applicable)
- Usually
$1,000 capital contribution + incorporation costs
- Register
with County
- Register
with Illinois
- Set
up new checking account in corporate/business name
- Obtain
credit card in corporate/business name
- Track
personal payments in/out of corporation
- Track
business meal & entertainment
- Liability,
renters (furniture etc.) and workers compensation insurance
(if employees)
Don't
worry, Reliance can break it down so you don't have to. Whether
you are just starting out, or have come to the realization
that you need a strong accountant in your corner, don't hesitate
to call Reliance today!