Shelters

[geekgirldany]

Client came in today asking me several questions about Sheltering the corporation money.

He asked if he could move money from the corporate bank to another personal bank account. He is concerned about liablity issues in which there is alot of money in the corporation bank account and if sued all the money could possibly be gone.

I told him the only way he could take that out was by Shareholder Distribution and/or Payroll. He could also have the company contribute some to a retirement account. Now I explained about being careful on shareholder distributions that I need to make he could do it. He didn't even want to think about doing it as payroll. He just basically wants to take the money out.

I told him it would have to be done as I described... there has to trail and the money has to be accounted for as to where it went to. He then went into how someone he knew was moving the money to a personal account. Asking me how big corporations do it. That they couldn't possibly keep all that money in the bank.

I told him the IRS were going after illegal tax shelters. That I wasn't going to tell him to just take out alot of money like that without accounting for it.

Am I missing something? Isn't this the only ways the money could be taken out? I have read about the IRS cracking down on tax shelters. What about the bigger corporations?

Thank you

[taxmandan]

Shelters

Is this C-Corp or S-Corp? Sounds like a C-Corp. in which case the money belongs to the corporation until such time as it is given to the shareholders as dividends or spent on corporate activities. If he is a single shareholder a retirement plan would be a good place to park some money and have some protections from judgements.

If an S-Corp, then he can distribute any profits to shareholders as cash flow allows.

My first advice to any business owner is to make sure that they have lots of liability insurance in place to handle any legal actions. Insurance attorneys will fight real hard to avoid paying any judgements and they premiums are cheap compared to hiring a lawyer after the lawsuit is filed. The first thing any lawyer does anyway is try to pierce the corporate veil to get at the owners personal assets. I would be asking alot of questions about what kind of legal trouble he is in, sounds like he has something going in the court system already?

[geekgirldany]

Its is quite possible. It is a S-Corp. Maybe I am just not explaining correctly regarding the shareholder distributions. I try my best to explain to people about the retained earnings and if there is enough there they can take the money out as a distribution. He hasn't been doing a payroll but I had him do one for 2005. After that I told him he could take shareholder distributions.

I had one client leave me because they had a friend tell them they could take money out of the S-Corp and put it into a LLC company. Then they would be able to take it out tax free and deduct it at the same time. I told them at the time it didn't sound right to me. They did not come back the next month telling me they needed someone who knew how to do the LLC.

I am upfront and honest with people. If I am not sure on a subject then I tell them I will research it. I will tell them my findings. If they still believe they should go the other way... then they need to go to someone else.

[OldJack]

1+1=2 not 1+1=1

As it is a S-corp he can take it all out anytime he wishes.... with maybe some taxes to pay. The "friend" was obviously a tax expert just like a 5 year old is a tax expert.

This client needs to know that he is NOT the S-corp and can't just take things from the S-corp or hid the S-corp assets. Big corporations don't do that. He only has voting rights. Until he gets it through his head he will be a problem to himself. Maybe you don't need this client especially if he insists you do things his way.

[geekgirldany]

Thank you both for answering. If he keeps on I will have to. He kept on saying today it was his money and he could take it out anytime. I told him no it was the corporation's money. He could take it out as a distribution or a payroll. Yes he could take out all the money as a distribution but him not doing a payroll... well we all know the reasonable payroll thing I told him just because someone else says they are doing it doesn't make it right or in some cases legal.

Thanks again for the comments. Helps to talk this stuff through. I just wanted to make sure I wasn't missing something.

[Bees Knees]

Moving money from a corporation to a personal account without going through payroll or showing it on the books as a distribution would be one reason a judge could pierce the corporate veil.

TTB, page 18-3 “If a shareholder does not maintain a clear delineation between personal activities and business activities, an adverse party may pierce the corporate veil. Small corporations are particularly vulnerable to this problem because of intermingling personal and business money and other assets, and failing to create a clear line between personal and corporate activities. If the corporate veil is pierced, the shareholder’s personal assets may be at risk to satisfy liabilities of the corporation.”

I would print out page 18-3 and give it to your client and tell him to read that. And then ask him to provide a citation in writing from a publication that says the way his friend says to do it is OK.