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For Single Shareholder Corporation, is compensation required for the CEO?

Sacramento, CA |

As sole shareholder for a single person corporation (have not created it yet), am I forced to pay myself a salary?

Currently in business as sole proprietor but not enough revenue to pay myself anything and I'm still giving my own money to the business to pay for some business needs (business records show them as investments and they will stop when business can pay its own bills without my help). I really want to change to corporation before I hire people but don't want to do that if that means all money the business makes I have to give to myself for reasonable compensation.

Put simply, can I create the corporation and continue growing the business by doing work for the business and not paying myself anything? Once the business is able to afford to pay a reasonable salary I will do so.

Great answers everyone, thanks. Here's the reason I'm considering this option: I've read that taxes are better for the business (less to pay) with the business entity as a corporation instead of a sole proprietorship. I want the right business entity in place before I begin hiring staff. The main issue for me as the owner is the business is still in start up phase and cannot afford to pay me any salary at this time so I'm caught between getting the entity I'd like and lack of restrictions as a sole proprietor because as a sole proprietor, I can choose not to pay myself anything.

Attorney Answers 4

Posted

You would be an officer in your corp., and officers are required to be paid salary under current tax law. Typically, in your situation, you would be required to have some form of written deferred compensation agreement with minutes approviing the agreement. Incoporating also creates additional costs and fees which you need to determine if you can afford.

THESE COMMENTS ARE NOT LEGAL ADVICE. They are provided for informational purposes only. Actual legal advice can only be provided after consultation by an attorney licensed in your jurisdiction. The answer to question does not create an attorney-client relationship or otherwise require further consultation. Mr. Smith is licensed to practice law throughout the state of California with offices in Los Angeles County. He is authorized to handle IRS matters throughout the United States, and is also licensed to practice before the United States Tax Court. His phone number is 323-292-4116 or his email address is philsmithjr@worldclasslawyers.com.

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3 comments

Dana Howard Shultz

Dana Howard Shultz

Posted

I have seen this requirement with respect to S, but not C, corporations. Can you please comment?

Phillip Monroe Smith

Phillip Monroe Smith

Posted

I am not sure what you mean by "this comment" but I will assume that you may be referring the requirement of having salary as a corporate officer. A corporate officer is an "employee" of the corporation if he is managing its affairs. If he receives compensation he would receive it as an employee subject to payroll taxes or as a dividend if he is not employed which is not likely in this instant, given this is a one person corp. Please refine your question if you want a more specific response.

Phillip Monroe Smith

Phillip Monroe Smith

Posted

Dana. On further reflection, a corporate officer is a staturory employee under the California Labor Code wherther C or S.

Posted

There are ways that you can structure your business in a format that you can have the business as a corp invest in your own business and hire people without eventually create issues in the future with IRS and other agencies.
A lawyer that knows not only how to structure a corp and adjust your present entity can assist you and give you viable and economical solutions for your issue.
Your present legal entity and documents in reference to your issues must be reviewed in order to have a viable and beneficial solution

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Posted

Mr. Phillips gives his customarily great answer.

I would add, before creating an entity, make sure a CPA is also on your team to discuss tax issues (unless you are lucky to find someone like Mr. Phillips who adds tax analysis.) Setting up your company online to "save a few bucks" is an error. You will not issue your shares correctly (or membership interests if you determine that an LLC is less advantageous) you will probably not observe corporate formalities, and you won't have someone who knows you and your business to discuss the many law related questions that frequenly arise.

Good luck in you venture.

The above is general legal and business analysis. It is not "legal advice" but analysis, and different lawyers may analyse this matter differently, especially if there are additional facts not reflected in the question. I am not your attorney until retained by a written retainer agreement signed by both of us. I am only licensed in California. See also avvo.com terms and conditions item 9, incorporated as if it was reprinted here.

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Posted

I have to respectfully disagree with my colleague. In the eyes of the IRS, an officer of a corporation is generally an employee, but an officer who performs no services or only minor services, and who neither receives nor is entitled to receive any pay, is not considered an employee. Refer to "Who Are Employees?" in Publication 15-A, Employer's Supplemental Tax Guide (PDF).

In the eyes of the California EDD, corporate officers are considered "statutory employees." This typically comes into play when an officer is trying to avoid payroll taxes and be paid by the corporation as an independent contractor - thus, the EDD had nipped that temptation in the bud.

Further, it is my understanding that the "paying a reasonable wage" requirement is primarily, if not exclusively, for "S" corporations who have chosen to make distributions to their shareholders (owners) or other provide other benefits in lieu of wages - again, primarily to avoid paying employment and payroll taxes.

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