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Let me start off by saying we don’t provide legal or accounting advice on the internet or directly to clients.  That being said, we’re in meetings frequently where we learn interesting facts and strategies that may help other clients and contacts we work with.  Please check with your attorney since they might recommend an LLC, S Corp, LLP or C Corp depending on your specific situation.  Also, there may be tax law changes coming in the near future.  For now though, these are the key points with S Corps.

What is an S Corp?

An S corporation is a special type of corporation created through an IRS tax election. An eligible domestic corporation can avoid double taxation by electing to be treated as an S corporation.  What makes the S corp different from a traditional corporation (C corp) is that profits and losses can pass through to your personal tax return. Consequently, the business is not taxed itself. Only the shareholders are taxed.

Learn More About S Corp Basics Here

Liability
If the owner of an S corporation is sued, their stock can be seized, and if a majority of voting stock is seized, then a creditor can vote to liquidate the corporation, and subsequently seize corporate assets to satisfy his debt-claim. Using a charging order protected entity such as multi-member LLC or LP, would protect the stock from creditor attachment, but at the same time it would disqualify the corporation’s subchapter S tax status. However, if the LLC or LP was a disregarded entity, then according to an IRS Private Letter Ruling, the S corporation would not lose its subchapter S election.

Again, the rules are complex so if you find yourself being the owner of S Corp stock outright in your name, I’d speak with counsel about the risks associated with this if you happen to be sued.

Distributions

Some people choose S Corps so they can make distributions that are not subject to the approximately 3% employment tax.  There is an important caveat, however: any shareholder who works for the company must pay themselves “reasonable compensation.” Basically, the shareholder must be paid fair market value, or the IRS might reclassify any additional corporate earnings as “wages.”

As an example, lets assume Company A has $1,000,000 in net income after considering for the owner’s salary  of $250,000 (let’s assume there’s only 1 owner/shareholder).  You can then treat the $1,000,000 as a distribution assuming the $250,000 owner’s salary would be viewed as reasonable.  Since you took the $1,000,000 as a distribution and not wages, you’d save approximately $30,000 (or 3%) for employment and other taxes.

Conclusions

There are so many more characteristics and considerations for S Corps than the 3 listed above, but I wanted to focus on key areas that some people are not aware of.  To learn more about the pros and cons of S Corps, again, speak with legal counsel or conduct independent research.  Here is another posting I found discussing the pros and cons which may be helpful as well.

Regards,

Jared Toren
CEO & Founder, Proper Wealth Management

 

Proper Wealth Management’s (“Proper”) blog is not an offering for any investment. It represents only the opinions of Jared Toren and Proper . Any views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest. Jared Toren is the CEO of Proper, a Texas based Registered Investment Advisor.   All material presented herein is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. Information contained herein is believed to be accurate, but cannot be guaranteed. This material is based on information that is considered to be reliable, but Proper and its related entities make this information available on an “as is” basis and make no warranties, express or implied regarding the accuracy or completeness of the information contained herein, for any particular purpose. Proper will not be liable to you or anyone else for any loss or injury resulting directly or indirectly from the use of the information contained in this newsletter caused in whole or in part by its negligence in compiling, interpreting, reporting or delivering the content in this newsletter.  Opinions represented are not intended as an offer or solicitation with respect to the purchase or sale of any security or financial instrument, nor is it advice or a recommendation to enter into any transaction. The material contained herein is subject to change without notice. Statements in this material should not be considered investment advice. Employees and/or clients of Proper may have a position in the securities mentioned. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. Proper Wealth Management is not responsible for any errors or omissions or for results obtained from the use of this information. Nothing contained in this material is intended to constitute legal, tax, securities, financial or investment advice, nor an opinion regarding the appropriateness of any investment. The general information contained in this material should not be acted upon without obtaining specific legal, tax or investment advice from a licensed professional.

Author: Jared Toren

Jared Toren is CEO and Founder at Proper Wealth Management. Proper was born out of frustration with the inherent conflicts of interest at big brokerage firms influencing advisors to sell products that were not suitable for clients but profitable to the firm along with a consistently mixed message of who’s interest was supposed to be put first; the clients’, the firms’, shareholders or advisors.

At Proper, our clients interests come first. We are compensated the same regardless of which investments we utilize so there’s no incentive for us to sell high commission products. Since we focus on a small number of clients, we are able to truly tailor our advice to each person’s unique circumstances.

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