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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: < 25,000 ................
2.63% 25,000-99,999 ........... 1.13 > 100,000 ...............
1.36
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.
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 if have 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
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