Hi everyone-
My wife and I have just filed our Arcticles of Incorporation and we keep going back and forth trying to decide if we shoud be a “C” or “S” corp.
A little backup info: For the past two years we have operated as a sole proprietorship while we continued to work for others. I have recently left my job in order to fully concentrate on our business. Our goal is to have a closely held, two person corporation concentrating on remodeling projects and/or spec homes.
When we review the different corporate structures we are excited about an “S” corp’s ability to pass through initial losses, eventhough we do not have many start up costs. But, we are also excited about the ability to borrow from a “C” corp’s pension fund (created with proceeds from Dale’s 401k) in order to fund the building of spec homes on a couple lots we own.
What do you guys think we should do?
Thanks in advance for your wisdom.
Dale
Replies
i think you should talk to your accountant about the pros & cons of each..
we chose "s" with no regrets.. but "c" had some attractive features.. and then there is "llc" which a lot of small businesses are going to..
Mike Smith
Rhode Island : Design / Build / Repair / Restore
Mike-
Thanks for the quick reply. Up to this point I've been our accountant and we're looking for someone to replace me. We looked into becoming an LLC, but this type of corporation is not allowed for contractors located in California. Thanks again for your input. Dale
I agree with Mike, talk to any good accountant. If my understanding is right the "S" is much better tax-wise, and the "c" gives better protection. If this is the case then umbrella insurance (a couple million should not be to expensive) should breech the gap and keep you from being taxed twice.
I agree with Mike. This is a decision you want to make with an accountant's input. It is my understanding that an "S" Corp avoids the double taxation. It has always been my assumption that there must be certain criteria that prevent a Corp from being "S", otherwise all corps would be "S"
One interesting comment from my lawyer while we discussed which way to go was that it is difficult to get property out of a corporation. Getting property out is much easier with an LLC.
It is quite possible that you would want to set up two different entities. One to own the properties, another to do the work on them. Talk to your accountant.
Rich Beckman
Rich, Mike, Pete & Paul-
I called my insurance broker, received a reference for an accountant and plan on setting up a meeting for the week after the 15th. I will let you guys know what the accountant says. Thanks again for everyone's input.
Dale
dale.. shopping for an accountant is a tough one... i get twice the service from our present accountant that i pay $500 a year to.. compared to the one's i used to pay $3000....
a lot of it has to do with how they are organized and who the majority of their clientel is.... if you insurance broker is a similar sized business to yours.. probably a good mix.. if he's a heavy hitter... you may be just another small frog in a very big pond...
our first accounting firm i latched onto because they did the accounting and audits for our town... not a good matchMike Smith
Rhode Island : Design / Build / Repair / Restore
S corporation works very well for me. I salary myself up to the Social Security Tax level, which is $84,900 for this year. I bonus anything else and that's not subject to Social Security Tax.
I file a Corporate Tax return, deadline is March 15, but there is no tax due, as everything rolls over to the personal return. I do my own payroll - a Quickbooks program makes it easy. I wasted money for years paying a payroll service. It's not that hard.
The best way to select a Tax Accontant or CPA is from referrals from similar trades or business owners.
Good luck. Greg.
Why salary yourself so high? One of the beautiful parts of an S corp is the ability to avoid that double SSI and Medicare taxation. You would be much better off in the long run taking that nearly 16% tax and putting it into your own retirement fund. I believe IRS will want to see a "fair" salary level for the position. While 84,900 might seem fair for carpenter/whatever you are, I doubt it is the normal wage.
Greg,
I have to agree with muggsy. My father-in-law who owns a S-Corp was told after an audit that the fair and reasonable salary level was $25k per year. If you pay yourself the maximum according to the Soc. Sec. schedule then you haven't accomplished sheltering your $$ against double taxation that the S-Corp provides. My suggestion would be that you pay yourself the minimum and draw the rest out as dividends to yourself.
Well, now I'm going to have to confess to what I really do . . .
and thank you to Mugsy and Fletch for their input.
I'm a self-employed Independent Contractor. I'm aligned with only one
company, and they 1099 me directly without any withholding, no benefits, nothing - I pay my support people and all of my own expenses. This is a fairly large insurance sales office with annual premium volume of about $2.2 million.
I belong here in this forum because I own some residential rental property that I maintain myself, and I take on some pretty ambitious projects from time to time. I have a small farm and I maintain all of the equipment and buildings. I manage some timber land, too.
Right now, I'm erecting a circa 1932 Aermotor 45 foot windmill on the farm. This will be a true water-pumping windmill, which I disassembled in 1974.
I don't think a much lower salary would pass the acid test of IRS, but you've certainly raised an area for questioning my CPA. We may have to address what is fair and reasonable. You guys might have just saved me some big bucks . . . which is the other reason I'm here in this forum !
Greg.
Edited 4/12/2002 5:39:39 PM ET by Greg Gibson
Greg,
One aspect not mentioned is that your Keogh, SEP etc. is figured off your salary. If you pay yourself a small salary to avoid paying the SS etc. you might be worse off in the end. Granted you'll get more money in the pass through profit sharing but that would have to be invested in a taxable mutual fund. In my case I worked backwards from what I wanted to put in the Keogh and made sure I had enough income to cover the payroll and expenses. It still left money for K1's so all is well.
P.S. I have a great accountant who reads my Quickbooks directly via email. Can't say enough for getting a good fit with your accountant since they'll be with you forever. I'm a S corp BTW.
Mike-
Thanks for your comments regarding shopping for an accountant. I've taken your advice, spoken with my broker's son (who has his own business) and will be meeting with his accountant after he gets back from vacation.
Thanks again.
Dale
My wife and i incorporated last spring. We elected for an S corp to avoid double taxation. If you profitibility is constant and steady you can fine tune salary to avoid corporte profits. With a c corp health insurance can be a fully deductible business expense (that is a good thing). One downside of corporte payroll VS sole proprietor is the evil, unethical federal unemployment tax of about $440 per annum. We get to pay this unethical federal tax but can never file for unemployment.
joe d