| As a general rule, you can incorporate
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| | completely wrote off, its basis is zero.
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| your business with no tax cost as long as
| |
| | If you financed the truck with a $15,000
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| you contribute all of your business's
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| | bank loan and none of the loan has yet
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| assets and liabilities to a corporation
| |
| | been paid off, the liabilities exceed the
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| you control.A sole proprietor who
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| | adjusted basis of the truck by $15,000.
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| incorporates his or her business,
| |
| | In this case, incorporating triggers a
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| therefore, should be able to incorporate
| |
| | $15,000 gain. Ouch.Incorporation Tax Trap
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| tax-free. So should a partnership. And a
| |
| | #3: Lack of ControlOne other thing. You
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| limited liability company that makes an
| |
| | need to be in control of the business
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| election to be treated as a C corporation
| |
| | after you incorporate.Often, control
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| or as an S corporation should also be
| |
| | should not be a problem. If a sole
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| able to make these "incorporation"
| |
| | proprietor incorporates her business,
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| elections tax-free.But all rules,
| |
| | becoming a one-woman corporation, she's
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| including general rules, can be broken.
| |
| | obviously still in control.If a three-man
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| And when it comes to incorporating your
| |
| | partnership incorporates and after the
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| business, three big tax traps await
| |
| | incorporation, the business still has
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| unwary business owners, managers and
| |
| | only the same three owners, the old
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| entrepreneurs.Incorporation Tax Trap #1:
| |
| | partners still control the new business.
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| Goofy LiabilitiesIf a shareholder
| |
| | So, again, no problem.In situations where
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| transfers liabilities to a newly minted
| |
| | an incorporation means new owners are
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| corporation and there's no business
| |
| | brought into the business, you need to
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| purpose to support all of the transfers
| |
| | measure whether the old owners own 80% of
|
| or if the liabilities are transferred to
| |
| | all the corporate stock in the new
|
| avoid taxes, then all the transferred
| |
| | entity. If they do, no problem. If they
|
| liabilities are treated as boot. And that
| |
| | don't, big problem: The incorporation is
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| can be a disaster because the boot can be
| |
| | treated as if the old owners sold the old
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| taxed.In general, liabilities incurred in
| |
| | business's assets to the new corporation
|
| the normal course of a business's
| |
| | for the fair market value of the stock
|
| activities should easily pass the
| |
| | received. If the adjusted basis of those
|
| "business purpose" and "no tax avoidance"
| |
| | assets is less than the fair market value
|
| tests. But if you transfer personal
| |
| | of the stock, the incorporators will pay
|
| liabilities to a corporation (like a
| |
| | income taxes on the difference.Closing
|
| personal credit card balance), you're in
| |
| | CaveatsTwo closing caveats: Incorporating
|
| trouble. Similarly, if you transfer
| |
| | a partnership and particularly a limited
|
| business liabilities that were really
| |
| | liability company that's been treated as
|
| used to fund personal expenditures (like
| |
| | a partnership can create some tax
|
| a business credit line drawn down to pay
| |
| | complexities that are way, way beyond
|
| for a daughter's college tuition), again,
| |
| | this short article.Also, the rules for
|
| you're in trouble.Incorporation Tax Trap
| |
| | incorporating a business in a tax-free
|
| #2: Excess LiabilitiesIf a shareholder
| |
| | manner are complicated if you'll later
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| contributes both assets and liabilities
| |
| | move pieces of the business outside the
|
| to the new corporation and the
| |
| | US. For these reasons, if your
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| liabilities exceed the shareholder's
| |
| | incorporation plans involve a partnership
|
| adjusted basis in the property-even if
| |
| | or foreign operations, consult with a
|
| all the liabilities are legitimate
| |
| | knowledgeable tax practitioner.LLC
|
| business debts--the shareholder
| |
| | formation expert & CPA Stephen L. Nelson
|
| recognizes gain on the excess of the
| |
| | is the author of both Quicken for Dummies
|
| liabilities over the adjusted basis. And
| |
| | and QuickBooks for Dummies and an adjunct
|
| this is another easy trap to fall
| |
| | tax professor for Golden Gate
|
| into.For example, if your only business
| |
| | University's graduate tax school.
|
| asset is a truck you bought and
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| |
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