Proposed tax unlikely to have negative impact on business incorporation

Proposed tax unlikely to have negative impact on business incorporation

As entrepreneurs celebrate the recently passed Small Business and Infrastructure Jobs Tax Act, which increases tax credits for startups, they also wait to see the impact of a new measure Congress has proposed. Congress plans to raise the taxes on high-income individuals, returning the top two marginal tax rates from 33 and 35 percent to 35 and 39.6 percent, respectively.

The proposed legislation has caused some debate partially because officials worry about the potential consequences of the tax increases on business formation rates. Yet many believe there will be no impact on overall incorporation – perhaps just a switch in the types of business entities formed.

Supporters believe that the tax will not impact the small business world as a report from theUrban Institute-Brookings Institution Tax Policy Center shows that less than 2 percent of small business owners have been subject to the top two marginal tax rates since 2007. Moreover, the proposed legislation does not directly change the top corporate tax rates.

If it has any impact, the TCP believes it will lead to a shift toward C corporations. C corporations and shareholders might not be the business entity least likely to be affected by the change.

Entrepreneurs starting a company may find there are a number of advantages of starting a C corporation in addition to the tax savings. According to a report from Inc.com, businesses that need substantial startup funds or expansion capital will likely find venture capitalists are more likely to invest in a C corporation.