Corporations
A Corporation is a “person” under the law. By forming a corporation, the officers and directors generally insulate themselves from personal liability provided they act in accordance with the Michigan Corporation Act and the corporate provisions. A corporation may not be the preferred business form in all circumstances.
There are three common types of corporate insulation in Michigan:
1. A regular or “C” corporation;
2. A “S” corporation; and
3. A Limited Liability Company (LLC).
In many cases, however, the corporation for a small to medium business will provide a number of advantages over a sole proprietorship or a partnership. For details on partnerships, joint ventures, and sole proprietorships please contact Charles Kleinbrook, P.C.
THE ADVANTAGES OF INCORPORATION IN MOST CIRCUMSTANCES ARE:
DEDUCTIBILITY OF ATTORNEY, TAX PLANNING, AND START-UP FEES;
LIMITED LIABILITY OF SHAREHOLDERS, OFFICERS AND DIRECTORS;
PERSONAL TAX RATES APPLY IF SUBCHAPTERS CORPORATION;
A MULTITUDE OF FRINGE BENEFITS CAN BE PAID DIRECTLY BY THE CORPORATION AT SUBSTANTIAL SAVINGS TO THE SHAREHOLDERS. EXAMPLES INCLUDE MEDICAL, OPTICAL, AND DRUG PLANS, AUTO, LIFE, AND DISABILITY INSURANCE, PROFESSIONAL EXPENSES, TRAVEL, CERTAIN EDUCATIONAL REIMBURSEMENTS, AND MORE!
These plans must follow strict requirements under the Internal Revenue Code. To summarize the code, plans must not discriminate between shareholders and employees with certain exceptions, see your CPA for particulars. Medical, optical, drug, and dental reimbursement plans MAY exclude employees who have not completed three years of employment, who are not 25 years old, who work less than 35 hours a week, or who are seasonal, or union members covered by a separate contract. Many subchapter S corporations can find these exceptions helpful. Please be certain to consult your accountant to determine which business election is best for your situation and which tax benefits may apply.
In addition, any current variable life insurance policies could grow more money tax-free through the use of a split-dollar contract. Please contact me for forms and applications if you wish to take advantage of this corporation benefit.
SUB “S” CORPORATIONS:
Chapter “S” of the Internal Revenue Code permits small, qualifying corporations to elect not to be taxed as corporations, but instead to be taxed, generally speaking, in the same manner as a partnership. The corporation’s taxable income is passed through to the stockholders; the corporation itself is not subject to tax.
Each shareholder must take into account his or her pro rata share of each item of the Chapter “S” corporation’s income, loss, deduction, or credit that could affect the shareholder’s tax liability, in addition to a pro-rata share of the corporation’s income or loss that is not required to be separately allocated. The details of Chapter “S” taxation become extremely complex, and I can provide a checklist. This is one of those elections that must be made shortly after the corporation is first formed: be sure to contact your tax adviser for filing deadlines.
Be sure to call the Michigan Department of Commercial Services at 517-241-6470 and order the FREE brochure called “Entrepreneur’s Guide” and Be sure to call your state representative to order the free brochures called “Michigan Guide to Business Information” and the “Consumer Protection Resource Guide”, which, taken together, cover anything from credit reporting to consumer fraud to laws affecting worker’s comp and unemployment.