A
properly structured corporation decreases tax liabilities and increases
cash flow.
Several forms of corporate structures are available
to corporations; Schedule C Corporation, Sub Chapter S Corporation,
and Limited Liability Corporation.
James R. Hines
of the University of Michigan in Corporate Taxation, “corporate
tax obligations consist chiefly of fractions of corporate income.”
Hines goes on to state: “The taxation of corporate income encourages
entrepreneurs and managers to structure and conduct their business
operations in ways designed to avoid taxes.” Equity financing when
replaced be debt financing has the effect of reducing potential
tax liabilities.
Hines suggests
that US corporate policy affects business decision making by “discouraging
the incorporation of profitable businesses that can be organized
in noncorporate form. In the United States, business organization
whose income is not subject to corporate income taxes include small
(“S”) corporations, partnership, sole proprietorships, and limited
liability companies (p6).
Creation of the limited liability company offers corporate
shield protection and the opportunity to pass members income as
regular income, avoiding the double taxation associated with “C
Corporations.”
Firms seeking
in reducing tax liabilities should evaluate current budgets for
spending patterns; leasing real estate offers monthly deductions
fully deducible.
Investing in
real estate for leasing to other organizations offers substantial
deductions. Municipal mutual funds offers market rates with shielded
income.
Hines points out “taxation influences the timing,
magnitude, and composition of corporate investment in plant and
equipment, inventories, research, and development, and other business
assets.
Hines continues
on with a notation from Krzyzaniak and Musgrave that corporate taxation
increases the cost of corporate output and increases transfers to
the nonprofit sector through taxation. The article continues with
“if the corporate sector of the economy has a lower/capital ratio
than the noncoporate sectors of the economy, then the introduction
of a corporate tax shifts resources into the noncoporate sector
and thereby raises the demand for capital.
This discourse
allows the corporate capital model to focus on tuning the corporate
budget to optimize deductions. Optimal deductions are those
that indirectly generate income in future periods, or defer income
until future periods.
Leasing plant
and facilities is a deductible expense in the current period.
This reduces taxable income, but does not assist in building assets.
An alternative to leasing is the purchase of assets that appreciate
such as office buildings and other real estate.
Commercial real
estate offers deductions for interest and depreciation, shielding
tax liabilities for future periods.
A C Corporation
has double taxation, as when founders disinvest, in general it is
considered as regular income. A Limited Liability Company has
the ability to pass members investment or gains and accounted for
as ordinary income on the IRS 1040 return.
A properly structured company can reduce tax liability,
and one structure allows maximum return on founder’s initial investment.
Instead of issuing stock certificates for the initial investment,
it is prudent for the founders to loan the new corporation capital
at market rate.
This structure
allows the corporation to repay the loan to the founders with interest,
which is not regular income. With the proper structure, the founders
can avoid double taxation, increase capital realization, and reduce
tax consequences.
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Auebach, Alan
J 2001. Taxation and corporate financial policy, Handbook of public
economics, vol. 3. North-Holland, Amsterdam.
Hall, Robert
E. and Dale W. Jorgenson. 1967. Tax policy and investment behavior.
American Economic Review 57: 391-414.
Hines, James
R. Jr, 1999. Lessons from behavioral responses to international
taxation. National Tax Journal 52: 305-322.
Hines, James
R. Jr, 2001. Corporate Taxation. University of Michigan.
Marvin Tanner
is a published author, living in San Francisco. He has co-authored
Using Unix, Second Edition, Que Press, 1984. Mr. Tanner is
a Ph.D. Student in marketing, and works full time as a web optimization
specialist. He has taught at the University
of California, Extended Education, San
Francisco State College, Peralta
Community Colleges, and since 2001 has been facilitating graduate
workshops at the University Of Phoenix
in eBusiness and Marketing.