Setting up a business – and the future running of that business – is something that is generally aimed at creating the conditions whereby one can make as much money as possible. Although there may be any number of other, more high minded and well intentioned reasons for creating a company, the fact of the matter is that when a company is judged externally, the first instinct of most people will be to take into account how much money it made. This is affected by many things. If the management of the company has done its job correctly, the company will in all likelihood have made a great deal of money. Not all of that money is profit, however, and before you arrive at the bottom line there is more to take into account.
Aside from matters like wages, consultant’s fees, materials and the general costs inherent in running a business, it is important to take into account the issue of taxation. This is a matter that features prominently when one speaks of turning a business into a corporation. Successful business people have a way of knowing how to make more money, and chief among these techniques is the ability to lose as little of their existing pot of money as possible in the first place. There are certain creative accountancy measures that are highly illegal and if detected these can land someone in jail very quickly indeed. It is better to find a legal framework in which one can operate. Tax evasion is illegal. Tax awareness, however, is perfectly legal and practiced by the most profitable businesses.
By setting up a corporation, it is possible to avoid the requirement to pay a higher level of tax. The wording is important there – avoiding the requirement to pay tax is sound financial management. Avoiding tax – or tax evasion – is an excellent way to earn a spell in prison. There will still be taxes to pay if you form a corporation, but the tax burden will be lower. This is a way of encouraging wealth creation – who is going to try to make a fortune if they know they won’t see much of that money? – but also of discouraging sloppy business practices. Tax breaks for small business have long been a popular political tool, particularly in election years.
In America currently, the level of corporation tax is on a sliding scale, with rates at 15% of profits for businesses earning less than $50,000 a year, going as high as 35% for businesses earning more than $18.3 million. This is not unusual, but in the United Kingdom, always considered a close political partner of the United States, the sliding scale begins at 21% for businesses earning less than £300,000 (nearly $490,000), up to 28% for any business earning more than £1.5 million (close to $2.45 million). Tax rates vary around the world, but vary around the same points. In the developed world, the country with the lowest corporate tax rate is Ireland, with 12.5% as a flat rate.