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Small Business - Tax Advantages. Because corporations are taxed on profits at a flat rate [as compared to an increasing tax rate on individuals as personal income goes up], some of the tax advantages of incorporation can be real.
There are additional corporation tax reductions in connection with capital gains taxes, postponed taxation of gains on shares, and tax-free rollovers of capital gains on qualified investments from one small business to another. Additionally, if you incorporate your business you can control when you receive income for tax purposes by choosing the date of the corporation's year-end, deciding when to pay yourself and deciding when to declare a dividend for shareholders. However, if your business operates at a loss in its early stages, you would be better off operating as a sole proprietor and deducting those losses from your personal income. If you have incorporated, you won't be able to deduct those losses. If your business makes a small profit and you don't have much other personal income, you may pay less tax as a sole proprietor than you would if you were incorporated.
If your business is really just you providing services to a third party (where you would be the third party's employee if it weren't for the corporation), the I.R.S. may consider your business to be a personal services corporation. As such, your corporation would not be allowed to claim a small business deduction. If you think your business may be a personal services corporation, be sure to check with the I.R.S. before you incorporate.
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