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