Business & double taxation issues.

[The Big Squeegee]

I incorporated my business so that I could protect my personal property from being seized if I ever got sued or something like that.

Unfortunately, the business has not done well and what I took out of the business is a little less than what I went into debt with the business accounts. Looking at the overall picture, it amounts to borrowing from one lender to pay another.

Since one lender is associated with the business and the other with my personal debt, I have to declare the borrowed money as income. I also have to give my personal guaranty on the business loans. If my business fails then I will have to pay income on the money I earn to pay back the money I borrowed.

Does anyone have some suggestions on how I can change my business structure so that I don't have to pay income taxes on borrowed money?

 

[ddarlak]

I incorporated my business so that I could protect my personal property from being seized if I ever got sued or something like that.

a common misconception when incorporating.

if not incorporated and properly insured, and something does go wrong, lawyers will go after the insurance, not your personal property. they want the easy money.

once incorporated, by law you must be properly insured, or they can come after not only your property, but criminally....

so as i see it, unless your doing over a million in sales a year, incorporating is not for you. the fee's you have to pay a lawyer and account to get the advantages you get are not going to surface if you company is hitting $300,000-400,000 per year sales.

long story short, drop the incoprporation and stop living in fear... you have more chance of losing you stuff through bankruptcy than lawsuits....

 

[Fred Weiss]

I would take a look at whether or not you can make a Subchapter S designation for your corporation at this point in time. That provides you most of the benefits of a straight corporation but your income is not double taxed ... rather it comes through to your personal income tax form as unearned income.

 

[threads1]

+ 1 what Fred said

 

[The Big Squeegee]

I think unearned income refers to dividends. It does not solve the problem if the corporation has a negative income. It would only work if I could pay out dividends on debt. I don't think that would be the best solution.

 

[Fitch]

YUK... I am on the other side of the world and all I can say is, I dips me hat to anyone that has a go, has all bases covered and at the end of the day when someone says " did you try this" , "did you try that" if in all sincerity say "yes" that you tried everything and are honest, and say it with good heart, more a victim of circumstance ( whatever that may be [GFC etc], then I can only wish you good luck and a painless outcome.

Fair wind and following winds, Godspeed and all that stuff from "DownUnder"

Cheers - G

 

[Fred Weiss]

I think unearned income refers to dividends. It does not solve the problem if the corporation has a negative income. It would only work if I could pay out dividends on debt. I don't think that would be the best solution.

Being an S corporation is as close as you can get to a sole proprietorship form of accounting. If you have a loss it is either deductible from current income or it is carried over to the next year. Your accountant would know for sure. For example, if you had a loss after salary in The Big Squeegee, it is either carried forward and available to deduct from profits next year or it can be passed through in the current year and deducted from unearned income from other sources such as dividends on other personal investments.

The kind of accounting issue raised by your original post is, I think, handled by our CPA as "loans from stockholders". So, in essence, there are three ways money comes out of the corporation:

• As salary - payroll taxes and FICA withheld and submitted.
• As unearned income - profit or loss, Schedule K, entered on personal income tax form as distributed to stockholders. Subject to personal income tax as dividends but not to FICA.
• As loan repayment - not subject to any tax

One caveat ... according to our CPA, the IRS is changing a lot of rules and procedures and making tax preparers a lot more accountable for the way they handle these issues. So what has been acceptable in the past may be changing as we speak.

 

[G-Artist]

once incorporated, by law you must be properly insured, or they can come after not only your property, but criminally....

I have been around for a few years and I do try to keep up but I have never
heard what you say is the law.

So, I need to ask, what level would that be at? State or Federal?

Any statute numbers you could cite to make a search less weary?

 

[Fred Weiss]

I have been around for a few years and I do try to keep up but I have never
heard what you say is the law.

So, I need to ask, what level would that be at? State or Federal?

Any statute numbers you could cite to make a search less weary?

The only insurance requirements I've ever heard of are at the state or local level as specified for a given business regulated under the various contracting professions as well as workman's compensation. Of course, he could be referring to unemployment insurance which is both state and federal. None of which has anything to do with Dale's double taxation question.

 

[G-Artist]

I am no accountant but I can tell you how my banker would handle the income/loan thing and that is with double-entry bookkeeping.

One side of the ledger has the loan as an asset (you have the cash in-hand) and the other side of the ledger has it as a liability (a debt to be paid). They wash at that point in time. No tax liability there.

Single-entry bookkeeping is so much simpler. But they are all kinds of creative accounting schemes one can do with double-entry.

Don't forget that an LLC for a single owner has the same sort of protection a Sub-s does and you can elect to use a Schedule C or file on Form 1120 or Form 1120S if you elected to be taxed as a corp.

Cheap protection for any entity is to not own anything. You buy a printer or a plotter it is held in the name of a holding co. You lease it from said holding company.

If you got a judgment against my shop and come by with the Sheriff to seize my assets you'd get a half-empty container of the following: paper clips, rubber bands, laserjet paper; several 1/2 pints of one-shot; plus some used pens, pencils and a few worn-out squeegees (they need new blades); some old latex paint; about a dozen used roller covers in various sizes and repair and a beat up and somewhat rusty legal-size filing cabinet.

 

[petrosgraphics]

as fred stated, S corp. is the way to go.... let a lawyer handle it......

 

[JimJenson]

Its a single page, 16 line form with instructions to become a sub s corp.

Instead of a lawyer, DIY and spend the money with an accountant who specializes in tax preparation.

http://www.irs.gov/pub/irs-pdf/f8869.pdf

 

[briankb]

My company was setup a an S corporation in Florida. I did everything myself including the shareholders agreement. However I wouldn't recommend doing the shareholder's agreement without a good lawyer, we've had to do it over.

If you don't have partners this isn't an issue. There are other issues though to continue even as an S. You must file an annual report and have regular meetings with your shareholders, even if it's just one. See if you can ditch the corporation as someone suggested and go back to a sole proprietor. Spend your money on an excellent CPA or tax specialist to help you pay the required taxes (read: LEAST AMOUNT POSSIBLE).

As far as debts. Unless you are a large C corporation or have a lot of capital you will always have to guarantee your loans. It's your business and the bank expects you to have a level of involvement in the loan as well. Just last year I applied for a lease and even with a very healthy P&L and money in the bank my business partner and I were still being required to sign as guarantor's.

Best advice as also suggested earlier is to find a good CPA/Tax rep you can trust and let them help you navigate all this stuff.

 

[binki]

Since one lender is associated with the business and the other with my personal debt, I have to declare the borrowed money as income. ...Does anyone have some suggestions on how I can change my business structure so that I don't have to pay income taxes on borrowed money?

Huh?

I guess I don't get that part.


A C-corp offers virutally unlimited cash and other benefits tax free. No other entity can do that. You just have to offer the same to all of your employess.

The S corp and LLC are very similar although the S corp has been very much abused and is the subject of scrutiney by the IRS when your pay is not normal for the business that you are in but you have dividends, thus avoiding payroll taxes. The LLC on the other hand can have distributions that are not subject to payroll taxes and the IRS has not ruled on this matter as far as I know.

A few places to look for info would be taxguru.org and creditboards.com.

 

[JimJenson]

The S corp and LLC are very similar although the S corp has been very much abused and is the subject of scrutiney by the IRS when your pay is not normal for the business that you are in but you have dividends, thus avoiding payroll taxes.

A responsible account or CPA would object signing the paperwork if you only paid yourself in dividend income. While it looks like an advantage to be able to do this, social security, Medicare, and Medicaid don't take too kindly to not paying yourself at least a normally acceptable fee for the position. You will find yourself trying to defend the position in an audit, and losing.

There are abuses in every structure. C corps are not immune by any means.

 

[binki]

A responsible account or CPA would object signing the paperwork if you only paid yourself in dividend income. While it looks like an advantage to be able to do this, social security, Medicare, and Medicaid don't take too kindly to not paying yourself at least a normally acceptable fee for the position. You will find yourself trying to defend the position in an audit, and losing.

There are abuses in every structure. C corps are not immune by any means.

My point on the S corp is that they have been abused and that not paying a salary while paying dividends will get a visit from the IRS. The LLC structure does not have dividends and it is unclear if distributions from an LLC are required to have payroll taxes taken out. The IRS has in the past refused to rule on this.

The title of this thread had double taxation in it and I don't see that issue anywhere and I don't understand the loan being taxable.

My point on the C corp is not to take dividends over salary but to create a benefit plan that includes tax free benefits such as reimbursing all non-covered medical expenses. There are also payments that can be made that are not subject to payroll taxes such as rent. It is also the only entity that can have retained earnings where the others are flow throughs so if you have a good year you are going to have a big income with fewer options to shield that income from taxes.

We rely on our CPA to give us proper direction given what we want to accomplish. I would not recommend running a biz of any size without one. We stopped doing our own taxes the year it took me 4 months working 4 hours a night to complete our taxes. Never again. It is worth the $1000 I pay the guy each year to do them.

Take information on taxes and business formation types here as a guideline but speak with someone who does it for a living for your sanity check.

The C corp is not so complicated that one cannot use it.

A very good resource for tax information is at taxguru.org.

From a credit perspective, there is a very good business credit sub forum at creditboards.com.


One last note, tax avoidance is not against the law, tax evasion is. Have a legitimate business purpose each action of your entity, what ever it is, and you will be fine.