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I'm using my SSI to capitalize my C-Corp music business, so what should my music business file as for taxes, C-Corp or S-Corp?

Saginaw, MI |

The website states "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". So does this mean I can place myself as a Officer and not pay myself, so I won't withhold taxes from myself?
I'm the only Shareholder and Director of the C-Corp with 51% of the Common Stock, and I'm putting my own money in my C-Corp to capitalize the business.
Earlier I've spoken to a CPA and he explain to me to file as a S-Corp, this way I can avoid withholding taxes. But a tax attorney told me to stay as a C-Corp if I want to keep the money in the business.
I want to avoid withholding taxes but keep the money inside the business to capitalize it. HELP?

Attorney Answers 5

  1. The main advantage of the S corporation structure is to avoid double taxation involved in a C corporation. An S corp is a pass through organization. Any profit made by the S corp is taxed to its shareholders whether or not it is distributed to them. A C corp must pay taxes on the profit at the corporate rate and the shareholders must then pay taxes on the corporation's profits distributed in the form of dividends. In both forms you probably should pay yourself a salary (assuming that there is a profit before the salary) and the corporation should withhold the usual taxes. A potential advantage of an S corporation is that if the corporation makes a profit over and above your salary that income is not subject to self employment tax (social security and medicare. None of this matters at all unless and until the corporation makes a profit.

  2. Generally an Scorp is better, but if you talked to a tax attorney the attorney usually considers other important reasons you structured as a Ccorp. Ask the attorney why you aren't using an Scorp(sometimes prohibited based on citizenship and many other reasons).

    This answer is based on general legal principles only and is not intended to provide specific legal advice. This answer is for informational purposes only and does not constitute the formation of a lawyer-client relationship. Any reader of this answer should not make decisions based upon in without first directly consulting with an attorney

  3. The big issue you will need to deal with is what is reasonable compensation. Officers of a corporation are treated as employees, as you are well aware. However, the IRS does audit returns and if the IRS agent determine that you are not paying yourself enough in wages he or she will adjust your return. This requirement is the same for either an S-Corp or C-Corp. For a time tax accountants were instructing individuals to form S-Corps and to pay themselves only a small amount of wage income which resulted in shielding most of a S-Corp shareholders income from social security taxes though the shareholder would still be on the hook for income taxes. Compare this with an partnership, sole proprietor, or LLC, under those entities all income is subject to both income tax and social security taxes. The IRS got wise to this scheme and has since come down hard on shareholders who do not pay themselves a reasonable wage.

    Additionally, while it is true that you are not going to pay social security taxes on your proportionate share of the S-Corp's income, both C-Corps and S-Corps (through the individual shareholders) are required to withhold and remit estimated federal and state income taxes if there is an estimated balance due at year-end. So you are not going to avoid any withholding requirements either.

    I know this further muddies the water on which entity to choose but choice of entity is not easy and you really should hire an accountant to help you crunch the numbers based on your tax situation and estimated earnings from the business. I think once you do that you should have an easier time deciding what entity is the best.

  4. Okay, you have talked to people. You have also posted on Avvo, a very worthy site. You have had the advantage of the sage advice of professionals. However, as I see your problem you haven't hired anyone to own your situation. That's what's needed now. Hire an accountant, or a CPA, or even a tax attorney and let them take responsibility for their advice. With your present knowledge, you are too smart to be snookered but only knowledgeable enough to be a danger to yourself.

    The above response is general information ONLY and is not legal advice, does not form an attorney-client relationship, and should NOT be relied upon to take or refrain from taking any action. I am not your attorney. You should seek the advice of competent counsel before taking any action related to your inquiry.

  5. If you are a C-Corp, you cannot file as an "S-Corp" unless you make an election to be treated as an S corp. If this is a new C Corp, you need to make the election within 60 days of creating the corporation, but if you are an existing C Corp you need to make the election by March 15 of the year you wish to be treated as an S Corp. Once you make the election, you cant go back to a C corp for 5 years. Generally, I like an S corp over a C corp, but in either case you still need to pay yourself "some" compensation and withhold taxes on that compensation.

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