Questions about switching sole prop to s-corp

[scook]

Hi everyone,

I currently have a sole prop business doing software development and I am considering switching to an s-corp. One of the reasons I want to do this is because I make a fair bit of money and that would save me a lot in self-employment taxes.

Currently, since me and the company are the same entity, I transfer money out of the business bank account every few months to invest or move it to a higher interest personal account.

1) Once I switch to an s-corp, I’ll pay myself a salary, but how do I access the income above that? Do I pay myself dividends? If so, is that taxable? Can I pay myself a dividend whenever I feel like it?

2) I saw that a sole prop and partnership dissolve when they stop doing business but a corporation is forever. Does that mean I’ll have to file s-corp tax forms for the rest of my life even if I stop doing business in a few years? Is there anyway to get rid of the company?

3) Eventually my company’s income will dwindle off. What happens when my yearly income is less than my salary? Can I give myself a paycut? Surely I don’t want to pay tax on a $80,000 salary when my company only makes $10,000.

4) Currenly I will be the only share holder. But what if I want to sell to another company or get investment from another company? I saw only individuals can be owners in an s-corp. Can I switch back to a c corp at anytime?

That’s all I can think of for now. Any ideas/help/suggestions/comments would be greatly appreciated.

Thanks!

[scook]

Well, I found out some answers in case anyone is interested.

1) I'll make estimated tax payments throughout the year on the company's income and once that the tax on that income has been paid, I can give a tax free dividend to myself.

2) There is a way to shut down a corporation. You have to file a bunch of crap stating the company will no longer do business.

4) You can either switch the company back to a C corporation or file for LLC.

Originally Posted by rhys

Hi everyone,

1) Once I switch to an s-corp, I’ll pay myself a salary, but how do I access the income above that? Do I pay myself dividends? If so, is that taxable? Can I pay myself a dividend whenever I feel like it?

2) I saw that a sole prop and partnership dissolve when they stop doing business but a corporation is forever. Does that mean I’ll have to file s-corp tax forms for the rest of my life even if I stop doing business in a few years? Is there anyway to get rid of the company?

3) Eventually my company’s income will dwindle off. What happens when my yearly income is less than my salary? Can I give myself a paycut? Surely I don’t want to pay tax on a $80,000 salary when my company only makes $10,000.

4) Currenly I will be the only share holder. But what if I want to sell to another company or get investment from another company? I saw only individuals can be owners in an s-corp. Can I switch back to a c corp at anytime?

That’s all I can think of for now. Any ideas/help/suggestions/comments would be greatly appreciated.

Thanks!

A1) "All" net taxable income is passed through from an S-corp to the shareholders regardless of how much cash you take out. You Must take a W2 salary (unless the company lost money) which reduces the company taxable income that will be reported by form 1120s-k1 that you show on your 1040 Sch-E, pg2. Distributions of the profits above salary may be taken out anytime you feel like it.

A2) A corp is regulated by state law. Each state has procedures to follow to properly end a corp. Most states require you to file an annual report and pay a fee. If you don't pay the fee your corp is canceled by the state and you simply liquidate the corp and file a final tax return showing liquidation. The 1120s tax form has a box you check for final.

A3) Salary of officers is determined by the board of directors (you) and you can pay yourself whatever is "reasonable". Salary can vary from month to month, week to week, day to day, or even once a year. Some pay themself a small monthly salary with a big bonus at the end of the year after profit is determined.

A4) There are procedures and time limits but basically you can cancel the S-corp election at the beginning of each year for the new year. Once you cancel the S-corp you may not elect again for 5 years. There are many reasons why you would not want to drop the "S" election unless you intended to stay a C-corp.

Regarding sale of the company, that is a large item to discuss. Basically you currently own stock and if you want to sell it and can find a buyer then it is the same as if you sold stock on the NY stock exchange. You would have a capital gain or loss determined by your basis and sale price. In most cases a sale of stock in an S-corp will terminate the "S" status. In most cases the buyer will not want to buy your stock but would rather buy the corp assets.