Startup of Sub S Corp

[djack1040]

I am not going to try to provide advice to this company (relative); however I am curious about several factors in starting a new Sub S Corp.

Single shareholder, $300 initial capitalization. Business will operate as a commission agent for a national freight forwarding concern. The national firm will "advance" all operating costs for first six month up to a maximum of $50,000.

Company is required to hire two inside customer service reps and will have payroll expenses of approx $20,000 by year end. Sole shareholder will operate as an outside sales rep with car/travel/entertainment expenses and with office rent/telephone/etc will incur another $10,000 in operating costs.

Revenue is generated as a sharing (65%-35%) of profit generated on shipments and the 35% to S-Corp is paid 30-45 days after shipment. Best guess is revenue received by end of year will be around $10,000; earned could approach $15,000 (accrual basis).

Simply stated, the business will have a loss of of at least $20,000.

Some questions:
1) Will the "advance of operating costs" possibly be considered income?
2) Can the stockholder take a non-reportable "draw or advance or loan" from the company in an equivalent salary amount-say $20,000? (ok with national company)
3) Will the "loss pass thru" be limited to his basis, i.e. $300?

This individual has extensive experience in the freight industry as a sales rep and his peers with this particular freight service are regularly earning $80-$120k annually after covering their operating expenses. Will appreciate you comments. Thanks!

[Bees Knees]

Question 1) Under the cash method of accounting, the advances are reported as income when received, assuming these advances are figured into the equation when the 65% - 35% revenue sharing arrangement is settled. The only way the advances would not be treated as income would be if there were loan documents with principal and interest calculated on the repayment schedule. I doubt that is what you are referring to when you say “advances.” To me, an advance is like a retainer you earn for services to be performed in the future. The only other way the advances are not income is if the customer is investing in the company and calling it capital contributions. I doubt that too.

Question 2) If the stockholder wants $20,000 out of company, pay it as a wage. It is kind of hard justifying the corporation can afford loaning money to the stockholder but cannot afford paying the stockholder a wage for services.

Question 3) If the stockholder only put $300 into the corporation, then the most he can deduct in accumulated losses is $300.