Perhaps you've been thinking about making a change in your Choice of Entity. Maybe you've been asking, "What type of Business Entity should my business be?"
By Business Entity, I mean the legal structure of your business, and there are basically five from which to choose:
Sole Proprietorship Partnership Limited Liability Company (LLC) C Corporation S Corporation This is not a question that is easily or quickly answered. There are many factors to consider, and here's one that is often overlooked:
If you are a Sole Proprietorship, your odds of getting audited are two, three or even four times greater than the other entity types.
Take a look at the following chart of IRS audit rates for Year 2002:
INDIVIDUALS -- with Schedule C Sales: 100,000 ... 1.36
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C CORPORATIONS Assets: C CORPORATIONS
Assets: < 250,000 ... 0.22% 250,000 - 1M 0.73
S CORPORATIONS ... 0.42%
PARTNERSHIPS/LLCs ... 0.27%
Now let's analyze the numbers by comparing the Schedule C audit rates with those of the other entity types. Do you see the difference?
Depending on your sales, the audit rates for Sole Proprietors range from 1.13% to 2.63%, compared to the rates of 0.22% for small C Corporations, 0.27% for Partnerships and LLC's, and 0.42% for S Corporations.
Of course, all these audit rates are still relatively low, especially compared to previous years. And even at 1 to 2%, I hope you like the odds of not getting audited.
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But if you are looking at the pros and cons of incorporating your Sole Proprietorship, you should be aware that making a switch will improve the odds in your favor even more.
Should you form a corporation simply to lower the chances of being audited? Of course not. But if there are other compelling reasons to incorporate, these lower audit rates are the icing on the cake.
NOTE: The above statistics are taken from an Excel spreadsheet freely available at the IRS website. This spreadsheet shows audit rates for all types of returns for years 1996 through 2002. [ http://www.irs.gov/pub/irs-soi/rtctab6a.xls]
About the Author:
Wayne M. Davies is author of 3 tax-slashing eBooks for small business owners and the self-employed. For a free copy of Wayne's 25-page report, How To Instantly Double Your Deductions visit [ http://www.YouSaveOnTaxes.com]
