Incorporating the going business;

              Incorporating the Going Business
by CARROLL L. WEBB, JR. Partner, Dallas Office
Presented before the Eighteenth Annual Meeting of the Ten­nessee
Institute on Federal Taxation, Memphis—December 1967
ACCORDING to recent figures released by the Treasury Department, as
reported by one of the well-known tax periodicals, more and more unincorporated businesses are changing to corporate form. During the years 1961 to 1964, the number of sole proprietorships decreased by about 49 thousand and the number of partnerships decreased by about 17 thousand, while the number of corporations increased by about 184 thousand.
Now, what might be some of the reasons for this shift in the form of doing business? Well, of course, we are all aware of the limited liability to individual stockholders afforded through the use of incorpo­ration.
Another reason might be additional fringe benefits available, such as deferred compensation through qualified pension and profit-sharing plans, medical payment plans, exempt sick pay, tax-free group life insurance, and health and accident coverage. Of course, limited tax-deductible retirement plans for the self-employed are now available to the businessman whose business is unincorporated but, generally speak­ing,
they will be less beneficial than the corporation plans. In this regard, Revenue Ruling 66-218 makes it clear that a pension or profit-sharing plan for a Subchapter S corporation will not be denied approval just because shareholder-employees are eligible to participate in the plans. This means that shareholder-employees of Subchapter S corpo­rations,
in effect, get a current deduction from taxable income for contributions to such plans. A word of caution is in order at this point with respect to medical-payment plans covering only officer-stockholders of closely held corporations. A recent Tax Court case, Larkin,1 indicates possible trouble in this area and should be checked before employing such a plan. Sometimes the difference between income tax rates of individuals and those of corporations alone makes incorporation desir­able,
and usually enough business reasons can be shown to substantiate the incorporation. If Treasury figures are a true indication, the enact­ment
in 1958 of Subchapter S of the Internal Revenue Code is the greatest single factor contributing to the increase in the number of cor-
1 Larkin, 48 TC No. 59.
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