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Memorandum

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When considering what business form you would like the company to take, there are several pros and cons that one must weigh against each other. This company has become quite profitable considering its small size, and as such, you have been considering changing business forms to lessen the disadvantages that come along with a sole proprietorship. There are many avenues of approach to accomplish this, but after analyzing your situation I believe that incorporating into an S-corporation would be the ideal solution for a number of reasons. To begin with, you expressed concerns about liability of your company with regards to personal assets. By incorporating, you protect your personal assets from being liable for any damages that your company may incur. Incorporation turns your company into its own legal entity, and as such, all profits and losses will stay within the company. As you currently are a sole proprietorship, if a lawsuit did happen and your company’s insurance was unable to cover it, your personal assets would be out there in the open for the plaintiff to take. Incorporating remedies this problem, the only assets that would be able to be touched would be those of the company. You stated that profits before taxes are estimated to be about $600,000. As a sole proprietorship, all income you receive is taxed as personal income, which unfortunately receives one of the highest tax rates. By incorporating, you would be able to benefit from quite a lower tax rate, as corporations are their own legal entity, and as such receive a lower tax rate. Normally corporations have to suffer from something called “double taxation”. Basically, profits stay within a corporation until the board of directors decides to pay out dividends to its shareholders. Corporations get taxed the first time when they receive their profits, this is where it gets the lower corporation tax.

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