Jul. 30--Whether your business is small or large, incorporating is a worthy consideration under Obama's new administration. Many think of Obama's administration as small business friendly, however, there is a new mandate to close the $400 billion tax gap and empower the IRS to get every penny it is entitled. Now, more than ever, small business owners need to consider the concept of adding, "Inc." to their name.

I often advise clients to consider incorporating their business once profits reach a steady $100,000 plus per year. Beyond the tax consequences, the legal aspects of incorporating should be discussed with one's attorney. The tax consequences, as well as the ability to function within a more restricted structure, should be discussed with one's tax pro. Employee benefit packages and retirement plans should also be studied for comparison with existing strategies.

--Income Splitting

When it comes to the income tax picture, income splitting is the primary reason to incorporate as a C Corporation. As a sole proprietor, you are the business. You declare your sales and subtract business expenses on Schedule C of your individual income tax return. Then you pay both income taxes and self-employment tax (15.3 percent) at the individual level.

By incorporating as a "Sub S Corporation," no tax is paid at the corporate level and all income flows through to your personal income tax return. Since the self-employment tax does not apply to dividends, you will also enjoy some tax savings.

Incorporating gives birth to a legal entity which will exist at arm's length from your personal finances. If structured as a C corporation, this entity files its own tax returns and pays its own taxes.

Americans enjoy -- using the term loosely -- a progressive tax system, in which the more you make, the higher your rate and the more you pay. So if your income is cut in half and allocated between your C Corporation and your individual income tax return, you are likely to save a lot of money. You pay taxes on this income at the individual level when you draw income from the corporation in the form of wages, dividends, rents, etc. There may be other non-taxable forms of income, such as employee benefits and expense account reimbursements.

For example, the net profit after paying yourself a reasonable wage, is $100,000. You take a qualified dividend of $50,000 which is subject to a tax rate of 15 percent through 2010. The C Corporation pays corporate tax on the remaining $50,000 at a rate of 15 percent and you have no self-employment tax to worry about. The overall tax rate is 15 percent.