My brother and I are planning to incorporate. We've agreed that profits and losses won't necessarily be split among us according to the number of shares we own. Even though I will own 2/3 of the shares, he has agreed to give me 3/4 of the profits.
But is this allowed? And if so, how do we go about documenting this, do we put it in our bylaws?
Yes, shares and profits are per share ownership since with "S" corporations, there can only be one class of stock. You have other options for services rendered in "profit sharing" for designated employees of the company that would go to you before the revenue reaches the bottom line of net profits to possibly be distributed among the shareholders. Ideally, you will want to select a business attorney to have an initial discussion on the business plan, the business model and the management structure...in order to support any division of revenue.
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A "C" corp is not a good vehicle for you plan because you will be 1) double taxed on your profits both at the corporate level and at individual level, and 2) all the "profits" for services would be subject to payroll taxes.
You need to form a partnership in an LLC to accomplilsh the objective to seek. Partnerships allow for "special allocations" in the manner you want to agree on.
To meet the adequate records requirement, you must maintain an account book, diary, log, state-ment of expense, trip sheet, or similar record or other documentary evidence that, together with the re-ceipt, is sufficient to establish each element of an expen-diture or use. You do not have to record information in an account book, diary, or similar record if the information is already shown on the receipt. However, your records should back up your receipts in an orderly manner.Elements of expenditure or use. Your records or other documentary evidence must support all the following.
The amount of each separate expenditure, such as the cost of acquiring the item, maintenance and repair costs, capital improvement costs, lease payments, and any other expenses.
The amount of each business and investment use (based on an appropriate measure, such as mileage for vehicles and time for other listed property), and the total use of the property for the tax year.
The date of the expenditure or use.
The business or investment purpose for the expendi-ture or use.
Written documents of your expenditure or use are gen-erally better evidence than oral statements alone. You do not have to keep a daily log. However, some type of re-cord containing the elements of an expenditure or the business or investment use of listed property made at or near the time of the expenditure or use and backed up by other documents is preferable to a statement you prepare later.Timeliness. You must record the elements of an expen-diture or use at the time you have full knowledge of the el-ements. An expense account statement made from an ac-count book, diary, or similar record prepared or maintained at or near the time of the expenditure or use generally is considered a timely record if, in the regular course of business:
The statement is given by an employee to the em-ployer, or
The statement is given by an independent contractor to the client or customer.
For example, a log maintained on a weekly basis, that accounts for use during the week, will be considered a re-cord made at or near the time of use.Business purpose supported. Generally, an adequate record of business purpose must be in the form of a writ-ten statement. However, the amount of detail necessary to establish a business purpose depends on the facts and circumstances of each case. A written explanation of the business purpose will not be required if the purpose can be determined from the surrounding facts and circumstan-ces. For example, a salesperson visiting customers on an established sales route will not normally need a written ex-planation of the business purpose of his or her travel.Business use supported. An adequate record contains enough information on each element of every business or RECORDS
Chapter 5 Additional Rules for Listed Property Page 65
investment use. The amount of detail required to support the use depends on the facts and circumstances. For ex-ample, a taxpayer who uses a truck for both business and personal purposes and whose only business use of the truck is to make customer deliveries on an established route can satisfy the requirement by recording the length of the route, including the total number of miles driven dur-ing the tax year and the date of each trip at or near the time of the trips.
Although you generally must prepare an adequate writ-ten record, you can prepare a record of the business use of listed property in a computer memory device that uses a logging program.Separate or combined expenditures or uses. Each use by you normally is considered a separate use. How-ever
You and your brother should sit down with a good attorney and accountant before incorporating or setting up any entity. Based on your question i would suggest that you don't consider a corporation but rather that you consider forming a Limited Liability Company, possibly in a state other than CA. The LLC structured will allow you to do what you describe, but there may be other options. When you sit with your legal and accounting team they can learn more about you and your goals and offer good solutions to help you get there. This is important to meet with them now, before you make a mistake and form the wring entity for your business. Good luck.
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