Are you starting a small incorporated business? Fee-based financial planning may seem like a concept that is many years away, but, in reality, the more you prepare now for future profits and losses, the more stability you can create for yourself over time. How can you plan your finances as the owner of a small corporation? Here are a few key methods.

Choose Corporate Status

Corporations under American law generally fall into two categories: S corporations and C corporations. C corporations pay taxes at the corporate level and pass profit on in the form of dividends (which are taxed at the individual level as well). S corporations generally pass on all profits to shareholders, who pay the only income taxes as individuals. 

While it may seem like you save on taxes as an S corp, keep in mind that you are taxed on profits regardless of whether or not they are distributed. If you don't need the extra funds, consider using C corp status and only taking as dividends what you need. Reinvest the money into the company for as long as you can and plan to take out more later when you need it.

Choose How You Receive Income

As a shareholder, you generally can also work for the corporation as an employee. This freedom gives you leeway to tailor your earnings to the best advantage as an individual. When paid as an employee of a C corporation, for instance, the corporation pays half the cost of payroll taxes — Social Security and Medicare — on your behalf. If you are paid from an S corp, though, you will owe the full amount.

Consider, also, dividing your annual financial needs between a salary and dividends. Dividends are not subject to payroll taxes, so you will be liable only for standard income taxes on these. But you also need to ensure that you report adequate payroll taxes to qualify for Social Security and Medicare when you retire. The right combination ensures that you don't overpay but also have a retirement safety net. 

Time Payments

With many corporate payments, you have choices about when to receive distributions. Unless this is contracted in the corporate documents, consider the best time to take out money.

If you receive dividends, for instance, can you time them around the same time when you can harvest losses from other investments? Many investors sell poor-performing assets at the end of the year, using those losses to offset gains in corporate dividends. A cash-method taxpayer can often delay or advance things like bonuses and salary so as to include these earnings in one year or the following — depending on which year you expect a lower tax rate or a better tax situation. 

The freedom you get as a shareholder of your small corporation gives you creative — but legitimate — ways to reduce your personal tax burden. The more money you save on taxes, the more you can use to create a solid financial future.  

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