Re: [tlug] Yes! Another argument about the GPL! You knew you wanted it....

[Curt Sampson <cjs@example.com>]

On 2009-08-12 21:42 +0900 (Wed), Stephen J. Turnbull wrote:

> No, the main point of being a corporation is limited liability for
> owners in case the business goes under.

Right. That's exactly why we incorporated.

> Now that alternative ways of limiting liability are becoming common
> and well-understood they are increasingly popular compared to
> full-blown corporations, which suggests to me that Curt is right about
> the overall tax bite. Furthermore, note that most corporate income is
> implicitly taxed twice, first at the explicit rate, then what's left
> is taxed again at the personal rate (if received as dividends) or at
> the capital gains rate (if received as a capital gain).

Well, here's the real breakdown of how you're going to contribute a
lot more to society (and correspondingly less to your own retirement
fund) if you start a company rather than, say, run as a sole proprietor
(basically, just an individual).

1. There are generally minimum corporate taxes that you pay regardless
of how much money your company makes or loses; these amount to a few
thousand dollars a year. That's just gone; there's nothing you can do
about it.

2. You're going to be paying lawyers and accountants several thousand
dollars a year to deal with the setup, maintenance, and accounting for
the company. Consider this your contribution to keeping the economy
going.

3. As mentioned above, the double taxation thing is the big whammy if
you're making any money. If you want to build capital for later use,
you really don't want to do that by keeping retained earnings, because
you're taxed as a company when you retain them (at a rather high rate, I
might add--close to 40%) and again a few years later when you take (what
remains of) the money out.

The impact of #3 is usually dealt with through getting a bit clever with
your use of tax law and so on, but don't take that to mean that you're
going to do better than an sole proprietor. A typical strategy would be
to nominally pay the money out to the owners as salary, but actually
not pay them, so that the owners are lending money to the company. This
avoids the tax burden on the company, because the salary is an expense
and thus the company makes little profit, but the owner still has to pay
personal taxes on that income, even though he never saw the money. And
if, in the long run, the company doesn't pay back that loan, good luck
trying to get back the personal tax you paid on that money you never saw!

I'm amazed at the naiveté of those who think that businesses and their
owners have all sorts of tax loopholes that make them overall taxed less
than others. The reality is that the tax authorities are not that dumb,
and while you can reduce the pain, they get what's theirs. In this case,
being clever is the difference between being mildly worse off than a
sole proprietor and being truly screwed over.

> I don't know what the actual incidence of VAT is, but it amuses me to
> mention that of course NONE of that is paid by individuals, in the
> sense that it is entirely collected from businesses.

I don't get this. VAT, sales tax, and the like appear to me to be paid
only by consumers of goods, mainly individuals.

Let me set up an example from which for us to work. I go and spend $500
on PC parts to make a server for someone, and pay an additional $50
in VAT. I then hack away at it, assembling the pieces, installing the
OS and applications, polishing it with a clean rag, etc. (there's my
value-add), and eventually come up with a something more than the sum of
its parts that I sell for $1000. As required by the government, I charge
$100 in VAT on this item. I give this to the government, but they in
turn give me a credit for the $50 in VAT I've already paid, so really I
only pay them $50.

In short, the consumer pays $100 in tax, and is stuck with that. I paid
$100 to the government, but also collected $100 from the consumer, so
I'm even. I've done a tax collection job for the government (to the tune
of $50), but I didn't pay that tax myself.

Any business that collects more in VAT than it spends effectively
pays no VAT on anything. So even if VAT is "entirely collected from
businesses," isn't it fair to say that only consumers pay it?

cjs
-- 
Curt Sampson       <cjs@example.com>        +81 90 7737 2974
           Functional programming in all senses of the word:
                   http://www.starling-software.com