Sunday, December 7, 2014

Can People be Corporations?

"Corporations are people my friend!"

People should incorporate themselves.
(This post was excerpted and edited for length from the Washington Post)

If companies are claiming the rights and privileges of people, maybe people should start claiming the rights and privileges of corporations. "Rights harmonization" should flow in both directions, since we’re now all indistinguishable and equally protected “persons” in the Supreme Court’s eyes.

Corporations enjoy tons of rights and privileges that real human beings don't also enjoy. The most obvious place to start is taxes. Companies save billions from loopholes that don’t apply to individuals (at least, not yet). People pay taxes on their worldwide incomes. Corporations do not, as long as they don’t bring the foreign profits back into the United States. And tax attorneys have come up with clever ways of booking an unexpectedly high share of corporate income abroad.

Businesses, for example, can transfer their “intangible” property — things like patents or trademarks — to holding companies in tax havens. That means a company such as Apple could assign ownership of its patents to a subsidiary in Bermuda, and any profits resulting from those patents would get taxed in Bermuda only. Unless and until those profits were repatriated to the States, Uncle Sam wouldn’t get a cut.

And if individuals were treated like corporations, we could set up an affiliate called "[your name here] Inc" and have it pay our college tuition and then declare that the affiliate owns the resulting degree. We could then tell the IRS that everything we earn above the average high school grad’s wage should be recorded as income in Bermuda, since it’s all derived from a Bermuda-based asset. Until we decide to repatriate those diploma-derived earnings, we’ve built ourselves a tax-free IRA.

On federal tax returns, individuals can deduct either the sales taxes they paid or their state income taxes, but not both; for companies, these deductions are all-you-can-eat. If people were treated like companies, we could also start deducting the first dollar we spend on health care, rather than just the medical spending that exceeds 10 percent of our adjusted gross incomes.

Home-buying would also become more attractive. Right now there are limits to how much mortgage interest humans can deduct. But if you analogize your primary residence to a “corporate headquarters” and your vacation homes to “branch offices,” you can deduct the full interest on every McMansion you ever buy.

If people were treated like corporations, perhaps we’d be able to “merge” with whomever we want without worrying about restrictive marriage laws. We could also choose to abide by the family law in whichever state we like best, regardless of where we live. Companies, after all, can incorporate in the jurisdiction with the most favorable corporate governance laws, regardless of where they operate. That’s one reason Delaware is home to more businesses than people.

But the best perk of being treated like an corporation? [* It's called "Limited Liability"] Even if you killed someone, stole a house, funded a genocidal regime or terrorize the global economy, you wouldn’t go to jail. At worst, you’d pay a fine. Sure, you could be executed for your crimes — sort of — by having your charter revoked or by being driven to bankruptcy by onerous penalties; but you could always return from the dead with a different name — but much of the same DNA. To err is human; to err and bounce back unscathed, you really need to be a company.

* Editor's Note: If you want to become a corporation (and be above the law) it's easy. Simply fill out form 1120-S by clicking on this IRS link. I posted on this topic before: "Don't like Corporate Taxes? Then Un-incorporate!" (Excerpts below)

Corporations and LLCs (limited liability companies) are both separate legal entities (business structures) that also enjoy many certain protections under the law, and very important benefits. Most people form a legal business structure to safeguard their personal assets.

Incorporating, or forming a Limited Liability Company (LLC), allows them to conduct their business without worrying that they might lose their home, their car, or their personal savings -- because any business liability, such as a lawsuit for wrong-doing or negligence (Republicans want "tort reform" so corporations can't be sued at all, or only be held accountable with very low caps put in place on any liability).

Corporations and LLCs allow owners (CEOs, shareholders, etc) to separate and protect their personal assets. Owners have also enjoyed limited liability for business debts and obligations. This way bankruptcy and/or "bailouts" work out very well for them whenever they need to restructure burdensome debt or dissolve labor contracts. The CEOs (and shareholders, which are usually one and the same) are exempt from any personal financial risk at all. They have the best of both worlds: less personal risk while enjoying lower personal tax breaks.

Corporations and LLCs also have "perpetual existence" and continue to exist, even if ownership or management changes. (Although, the Republicans and the Supreme Court believe "corporations" are real people.) Sole proprietorships and partnerships usually just end if an owner dies or leaves the business.

Corporations and LLCs also have a lot of tax flexibility. Example: The United States allows a foreign tax credit by which taxes paid to foreign countries can be offset against U.S. tax liability attributable to foreign income.

Though profit and loss typically pass through* an LLC and get reported on the personal income tax returns of owners, an LLC can also elect to be taxed as a corporation. Likewise, a corporation can avoid the so-called  double taxation* of corporate profits and dividends by electing Subchapter S* tax status.

  • Deductions - Corporations and LLCs have deductible expenses. They may deduct normal business expenses, like salaries, before they allocate income to owners.
  • Pass-through taxation - Rather than tax the income of the entity, taxation is "passed through" to the individual shareholders in S Corporations (and LLCs). Income or losses are declared on their individual tax returns.
  • Double taxation - Double taxation refers to corporate and shareholder taxes. Corporations must pay taxes on their earnings. Individual shareholders must also pay taxes on any dividends they receive.
  • Stock options:
    • Incentive stock options (ISOs) - Pay for "performance" in which the employee is able to defer taxation until the shares bought with the option are sold. The company does not receive a tax deduction for this type of option.
    • Nonqualified stock options (NSOs) in which the employee must pay income tax on the 'spread' between the value of the stock and the amount paid for the option. The company may receive a tax deduction on the 'spread'.
  • Subchapter S tax - S corporations are corporations that elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income.

To qualify for S corporation status, the corporation must meet the following requirements:

  • Be a domestic corporation
  • Have only allowable shareholders
    • including individuals, certain trust, and estates and
    • may not include partnerships, corporations or non-resident alien shareholders
  • Have no more than 100 shareholders
  • Have one class of stock
  • Not be an ineligible corporation i.e. certain financial institutions, insurance companies, and domestic international sales corporations.

Small Business Entrepreneurs

A sole proprietor is someone who owns an unincorporated business by himself or herself. However, if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation. Then the owners would pay either a regular income tax or a self-employment tax, based on the current tax brackets for gross income.

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