Skip to main content

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 IRS.gov 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?

+ Read More

Attorney answers 5

Posted

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.

Asker

Posted

Mr. Wagner, I just converted the LLC into a Corporation, and no profit is being made at this time. I will go with the CPA advise and go with filing as a S-Corp, until my Corporation makes a profit. When my Corporation starts to make a profit will I be able to change the tax election to a C-Corp?

Thomas J. Wagner

Thomas J. Wagner

Posted

I'm not sure there is any point in doing anything until you start to make a profit.

Asker

Posted

Mr. Wagner, is me using my own money and placing it inside my Corporation be considered as "My Corporation Making Profit"? So there's no way around NOT paying myself and withholding taxes as a Corporation Officer? If not, I would just take my changes and file as a C-Corp and not issue any dividends to myself as the solely Shareholder, and just hire some Officers instead and place them on payroll and withhold taxes for them.

Thomas J. Wagner

Thomas J. Wagner

Posted

Investment of your money into the corporation is not profit. Profit is made by operations: selling products or services and when the gross income from selling is greater than reasonable and necessary business expenses. You don't have to pay yourself a salary, especially if the corporation is not making a profit. Corporation profits will be taxed one way or the other. The question is going to be what form of corporation and form of permissible compensation will result in the highest post-tax increase in wealth.

Asker

Posted

Mr. Wagner, my business hasn't made a profit since I started the business in March of 2011. My business only had business expenses. I formed a C-Corp so I can keep the money in my business and use it to market my company music albums. If profit is made, my company splits the profit with the independent contractor.

Robert Jan Suhajda

Robert Jan Suhajda

Posted

If your company is not forecasted to make a profit it should be an S-corp so the loss is recognized on your tax return. When your corp makes a profit you can change to C-Corp.

Asker

Posted

Mr. Suhajda, Thank you for your advice. I will take your route.

Posted

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

Asker

Posted

Mr. Sayed, thank you for your advice, but I was trying to place myself as an Officer as well since I couldn't find any employees to hire and place as an Officer. The only people I found that are talented enough and affordable is workers overseas. But don't I need to create a business entity in their country to be able to hire them as employees or can I do it here in the U.S.? By the way, their going to be more like Virtual Assistant, they will be working at home via threw computer and internet connection.

Kevin Matthew Sayed

Kevin Matthew Sayed

Posted

You probably don't need a foreign entity to hire a foreign employee, but advise an accountant or tax attorney who can research for payroll type taxes for you.

Robert Jan Suhajda

Robert Jan Suhajda

Posted

If your company is not forecasted to make a profit it should be an S-corp so the loss is recognized on your tax return. When your corp makes a profit you can change to C-Corp.

Asker

Posted

Mr. Suhajda, Thank you for your advice. I will take your route.

Posted

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.

Asker

Posted

Mr. Wade, thank you for your advice. I will consult with a CPA on this.

James D. Wade

James D. Wade

Posted

Glad to help and good luck on your business.

Robert Jan Suhajda

Robert Jan Suhajda

Posted

If your company is not forecasted to make a profit it should be an S-corp so the loss is recognized on your tax return. When your corp makes a profit you can change to C-Corp.

Asker

Posted

Mr. Suhajda, Thank you for your advice. I will take your route.

Posted

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.

Asker

Posted

Mr. Harris, I appreciate your advice and compliment, but still kind of in the balance on the part about you stating "I'm only knowledgeable enough to be a danger to myself"? Or was you using that statement metaphorically to advise me on getting professional help?

Robert Jan Suhajda

Robert Jan Suhajda

Posted

If your company is not forecasted to make a profit it should be an S-corp so the loss is recognized on your tax return. When your corp makes a profit you can change to C-Corp.

Asker

Posted

Mr. Suhajda, Thank you for your advice. I will take your route.

Posted

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.

Asker

Posted

Mr. Kelly, I converted my LLC into a Corporation, I started my business in 2011. So is I'm eligible to elect my Corporation to file as a S-Corp? My business hasn't made any profit, instead of me inputing my personal money into the business. So does that mean I still need to pay myself "some" compensation and withhold taxes on the compensation? I've spoken to a CPA and he stated I don't need withhold taxes due to no profit is being made?

John P. Kelly

John P. Kelly

Posted

From what I can tell from your comment, to be treated as an s corporation in the current year you needed to make the election for S-status when you made the conversion from an LLC to a Corporation. Since you did not do that, you cannot elect to be treated as an S corporation for the current year. You can till make the election, but if you make an election now, it will apply to the next calendar year. If you don't have any income in the corporation, being an C Corp or S corp will not matter. The issue with paying yourself compensation from the Corporation is not just an income tax withholding issue - the IRS is also concerned about FICA taxes. The issue of whether compensation should be paid to the owner of the corporation is not just a matter of whether or not you made any money. The issue is the amount of work and the effort you exert on behalf of the corporation. If you don't have a lot of activity and have only a small amount of revenue, this probably would never be an issue for you. On the other hand, if you have a very active business with substantial revenue and exert your full time on behalf of the corporation, whether you pay yourself compensation is an entirely different matter. John P. Kelly Kelly & Kelly, PC www.kellykellylaw.com john@kellykellylaw.com 422 E. Main Street Northville, MI 48167 Phone: (248) 348-0496 Fax: (248) 348-3761 This message contains confidential information intended only for the use of the intended recipient(s) and may contain information that is privileged. If you are not the intended recipient, or the person responsible for delivering it to the intended recipient, you are hereby notified that reading, disseminating, distributing or copying this message is strictly prohibited. If you have received this message by mistake, please immediately notify us by replying to the message and delete the original message immediately thereafter.

John P. Kelly

John P. Kelly

Posted

From what I can tell from your comment, to be treated as an s corporation in the current year you needed to make the election for S-status when you made the conversion from an LLC to a Corporation. Since you did not do that, you cannot elect to be treated as an S corporation for the current year. You can till make the election, but if you make an election now, it will apply to the next calendar year. If you don't have any income in the corporation, being an C Corp or S corp will not matter. The issue with paying yourself compensation from the Corporation is not just an income tax withholding issue - the IRS is also concerned about FICA taxes. The issue of whether compensation should be paid to the owner of the corporation is not just a matter of whether or not you made any money. The issue is the amount of work and the effort you exert on behalf of the corporation. If you don't have a lot of activity and have only a small amount of revenue, this probably would never be an issue for you. On the other hand, if you have a very active business with substantial revenue and exert your full time on behalf of the corporation, whether you pay yourself compensation is an entirely different matter. John P. Kelly Kelly & Kelly, PC www.kellykellylaw.com john@kellykellylaw.com 422 E. Main Street Northville, MI 48167 Phone: (248) 348-0496 Fax: (248) 348-3761 This message contains confidential information intended only for the use of the intended recipient(s) and may contain information that is privileged. If you are not the intended recipient, or the person responsible for delivering it to the intended recipient, you are hereby notified that reading, disseminating, distributing or copying this message is strictly prohibited. If you have received this message by mistake, please immediately notify us by replying to the message and delete the original message immediately thereafter.