Probably a Silly Question About S corps

[baowrypdx]

Hi there i am new to the site and recently opened a food cart in portland or. we are considering becoming an s corporation. my question is whether or not i and my partner who will be responsible for all day to day operations and corporate officer duties should be paid as employees or shareholders or a combination of the two. thank you for your help in advance i'm glad i found this site.

[vangogh]

Hi Molly. I'll be honest in that I don't really know the answer, but I noticed no one else had answered yet and wanted to reply just so the post would rise back to the top of the new post list and hopefully attract the attention of someone who'll know better than I do.

I would think you'd both become shareholders as part of forming the corporation and you'd have to decide how much of the corporation each of you owns. As shareholders your personal money would come out of the profits the company earns. Since there may or may not be profit I think you can hire yourselves as employees and have a salary, though the corporation would naturally need to find the money to pay you.

Keep in mind everything I just said comes from some very limited knowledge of corporations and a few minutes of research just now searching.

My guess is you can be paid either way or both and that it will mostly come down to your choice based on the pros and cons. I realize I'm not helping much, but like I said I'm mostly replying in the hopes that someone here who does know more will notice this thread and provide a better answer than my rambling.

I realized one of our members, David, has a site with lots of information about LLCs and decided to do a little more research. One of the articles compares LLCs to S Corps and may have some helpful information.

LLC vs S Corporation (http://www.limitedliabilitycompanycenter.com/llc_vs_s_corp.html)

It seems like one benefit you have with an S Corporation is only having to pay self-employment tax on the money you pay yourself as an employee. From the article I also see it say that as long as you're working in the corporation as opposed to just being an investor you have to pay yourself a reasonable salary based on industry standards.

Based on the above I think you have no choice, but to pay yourself as an employee and assuming the corporation earns additional profit you could take that as a shareholder so as not to pay self employment tax on that money.

[Business Attorney]

Molly, a corporation needs to pay its shareholders a reasonable level of compensation BEFORE it pays out dividends.

The reason is that the salary is considered wages for purposes of employment taxes (primarily social security taxes) while dividends are not. The IRS doesn't want you to avoid paying employment taxes by getting little or no wages for your work but taking a large dividend. That is particularly true of s corporations, because there is no tax at all at the entity level.

If you can pay yourself reasonable salaries and still have cash left to distribute on a regular basis, an s corporation may be a good vehicle for you. The tax savings on the portion of the company's income passed through as non-salary income will be about 15.3% up to the current social security wage base ($106,800 for 2011) less the amount paid as salary, and 2.9% for anything over that amount.

Note that in most cases, if you had an LLC, all your earnings would be treated as self employment wages and therefore subject to the tax. It doesn't matter whether you call it salary or profits - it is taxed either way. If the business will throw off just enough income for you to pay yourselves a reasonable wage, then there is little advantage to an s corporation from an employment tax standpoint.

Hope this helps clarify it a bit.

[vangogh]

Thanks David. By the way you're articles are really good. I always come away from reading one with a greater understanding than the one I had when I went in.

[Business Attorney]

Thanks, Steve. I can say the same thing about your posts on TheVanBlog (http://www.vanseodesign.com/blog/). They are really well done and very detailed explanations of whatever topic you are tackling. I find them very useful.

[savantcreative]

With an S corp there is no difference between what you pay yourself and what you take as distributions. It is like having 2 pockets in your pants that empty in the same bowl at year's end. You should talk to a good accountant. Best of luck :)

[Business Attorney]

With an S corp there is no difference between what you pay yourself and what you take as distributions. It is like having 2 pockets in your pants that empty in the same bowl at year's end. You should talk to a good accountant. Best of luck :)

The first two sentences are NOT correct. There IS a difference. The part about talking to a good accountant, however, is good advice.