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

Asked 10 months ago - 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.

Additional information

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)

  1. Phillip Monroe Smith

    Contributor Level 18

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    Answered . 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... more
  2. Michael Charles Doland

    Contributor Level 20

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    Answered . 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... more
  3. Athina Karamanlis Powers

    Pro

    Contributor Level 17

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    Answered . 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

    Disclaimer:Attorney and Fraud Examiner.One of few that are Certified Fraud Examiners (CFE). The information... more
  4. May Lynn Harris

    Contributor Level 10

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    Answered . 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.

    The information that has been provided on this website, including information contained in any link or... more

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