I'm bragging on TTB

[Peachie]

Bees, What a great explanation

I love how you explained how becoming an LLC gives people that want to be a corporation the same status without all of the problems involved in becoming a corp. I have tried to explain this to many people that want to do this with so little thought as to why. They don't even know the difference between the entities. I have been able to steer a few to LLC status. Your explanation is just what I need and it's clear as mud .

Thanks.

Peachie

[Zee]

When someone tells me they filed their own paperwork and now they are a corporation, I ask them did they transfer anything into the corporation in exchange for stock.

Answer: “Huh? What do you mean?”

Me: “Did you open up a corporate checking account, transfer money into it and then have the corporation make out stock certificates in exchange for that money?”

“No.”

“Then you have not yet conducted business as a corporation. You are still a sole proprietor.”

Then I proceed to explain all the corporate minutes they need to take, the extra fee I will charge them for bookkeeping since no matter how hard they try, their quickbooks will not be enough. Then I proceed to explain all the extra fees I will charge for a separate corporation return, the extra fees I will charge for payroll taxes. The requirement to make periodic deposits of those payroll taxes, the additional taxes they must pay to the state for unemployment, etc. etc. etc.

Then I ask: “Why did you want to be a corporation?”

“Because of liability protection.”

I explain in Minnesota, there is no annual fee for being an LLC. You can continue to be taxed as a sole proprietor, meaning none of those added fees from me for extra tax returns, or added taxes or added payroll junk or corporate minutes, etc. In fact, you can simply just continue to run your business as you always have without any extra paperwork involved.

Plus you get the same limited liability protection as you do as a corporation.

Their response is "How do I switch to an LLC?"

“Easy, you never transferred anything into the corporation, so there is nothing involved in closing it. Simply call IRS and say you never operated as a corporation and you want to cancel your EIN (if they even managed to get one). Then go online and become an LLC and re-apply for a new EIN as an LLC.

Works every time. I don't have corporate clients anymore.

NICE...I like the scenario

[ChEAr$]

And.....

be sure to file articles of dissolution for the corporation with the Secretary of State.

[Bees Knees]

Many folks don't "go to a lawyer" to form their Corporation and elect S status (thanks for the clarification) , they often do it themselves and it's not done properly. Or, they "go to a lawyer" and it's still not done properly. Go figure.

When someone tells me they filed their own paperwork and now they are a corporation, I ask them did they transfer anything into the corporation in exchange for stock.

Answer: “Huh? What do you mean?”

Me: “Did you open up a corporate checking account, transfer money into it and then have the corporation make out stock certificates in exchange for that money?”

“No.”

“Then you have not yet conducted business as a corporation. You are still a sole proprietor.”

Then I proceed to explain all the corporate minutes they need to take, the extra fee I will charge them for bookkeeping since no matter how hard they try, their quickbooks will not be enough. Then I proceed to explain all the extra fees I will charge for a separate corporation return, the extra fees I will charge for payroll taxes. The requirement to make periodic deposits of those payroll taxes, the additional taxes they must pay to the state for unemployment, etc. etc. etc.

Then I ask: “Why did you want to be a corporation?”

“Because of liability protection.”

I explain in Minnesota, there is no annual fee for being an LLC. You can continue to be taxed as a sole proprietor, meaning none of those added fees from me for extra tax returns, or added taxes or added payroll junk or corporate minutes, etc. In fact, you can simply just continue to run your business as you always have without any extra paperwork involved.

Plus you get the same limited liability protection as you do as a corporation.

Their response is "How do I switch to an LLC?"

“Easy, you never transferred anything into the corporation, so there is nothing involved in closing it. Simply call IRS and say you never operated as a corporation and you want to cancel your EIN (if they even managed to get one). Then go online and become an LLC and re-apply for a new EIN as an LLC.

Works every time. I don't have corporate clients anymore.

[Zee]

Many folks don't "go to a lawyer" to form their Corporation and elect S status (thanks for the clarification) , they often do it themselves and it's not done properly. Or, they "go to a lawyer" and it's still not done properly. Go figure.

[ChEAr$]

Let's clarify

OK. I give up! "Uncle".

I'm surprised more here haven't had folks that elected to be treated as an S Corporation (with a single shareholder) after operating a sole proprietorship and failed to establish a new bank account for a portion of the tax year using their sole proprietorship account instead.

My guess is some accountants treat such expenditures as a loan cautioning there clients such treatment might be disallowed and suggesting a corporate checking account be established immediately.

Would that subject the accountant to a possible preparer penalty? I suppose. So, maybe those engaging in that practice should discontinue. It's probably too risky with the new preparer penalties.

People (folks) don't elect "to be treated as an S corporation." They go to a lawyer
who takes them through the steps to form a corporation, which is a distinct and
separate legal entity from any single shareholder. We need to keep this in mind
and remind our client that after the corporation is formed, when he and I are sitting at
the table, there are actually three people under the law present at that table.

A husband/wife partnership once upon a time had the lawyer form a corporation (or so
they said since I never saw a copy of the articles of incorporation), but continued business
as usual; same bank account, no notifications to customers, suppliers, or the public
that there was a corporation at that address. Yes, I dropped them quicker than you
could say "jack rabbit."

[Zee]

OK. I give up! "Uncle".

I'm surprised more here haven't had folks that elected to be treated as an S Corporation (with a single shareholder) after operating a sole proprietorship and failed to establish a new bank account for a portion of the tax year using their sole proprietorship account instead.

My guess is some accountants treat such expenditures as a loan cautioning there clients such treatment might be disallowed and suggesting a corporate checking account be established immediately.

Would that subject the accountant to a possible preparer penalty? I suppose. So, maybe those engaging in that practice should discontinue. It's probably too risky with the new preparer penalties.

[WhiteOleander]

I'm sorry, I shouldn't have used the term "lots of", and used "some".

Thanks for the reference to the court case on TTB 8-13. Bees, I don't mean to be a PITA (honest). But, this case disallowed the deduction by the "employee", not the Corporation since it was a Corporate expense. It doesn't say it wouldn't be deductible to the Corporation.

Weren't we talking about a sole shareholder paying corporate expense with a personal check?

It is still the same thing. A shareholder cannot pay a debt for a corp and deduct it themself. They did not owe the debt. The corp owed the debt. They are two separate entities. Remember, that this is not a partnership where the partner can deduct certain expenses not paid through the partnership.

The corp would have to reimburse the shareholder for the expense and then deduct the expense on the corp return.

Lets say you are a shareholder in GE and you pay an expense for them. (something I'm sure they would aprreciate nowadays.) You would not be able to deduct that expense on your tax return because it was not your expense.

[Zee]

I'm sorry, I shouldn't have used the term "lots of", and used "some".

Thanks for the reference to the court case on TTB 8-13. Bees, I don't mean to be a PITA (honest). But, this case disallowed the deduction by the "employee", not the Corporation since it was a Corporate expense. It doesn't say it wouldn't be deductible to the Corporation.

Weren't we talking about a sole shareholder paying corporate expense with a personal check?

[Bees Knees]

As I've said before, lots of small one-person S-Corporations fail to establish a Corporate Account. I haven't heard of the any situations where the transactions have been disallowed for this reason only, but I'm sure it's happened. Can someone provide some examples, or court cases?

Where do you get this lots of small one-person S Corporations doing this? Every S corp I have ever worked with has its own separate corporate account. I make sure of it before working with them on their taxes.

As to court cases, see TTB page 8-13 under the heading "Paying Expenses of an Employer." The court case cited was where a shareholder / employee of his / her corporation paid corporate expenses out of his / her personal account. The court ruled these expenses non-deductible because they were expenses of the corporation, not the shareholder / employee.

[AJsTax]

Very disappointing

I was involved in one this year where my client was talked into investing money into a Roth IRA account without any questions about income, etc. Come tax time he gives me the information and I have to tell him that he is not eligible to do a Roth due to income phase out rules. Had him call, actually his wife called the company, not even the local broker/sales person and tell them the situation. The customer service rep for this national company said that she had never heard of such a thing!! She did not believe it but would check around and call the client back. Now my client had a bit of doubt about me, though not much as they have been with me for many years. Lo and behold, a couple hours later the service rep called back and admitted that I was right and they would take steps to roll the contribution to this year. Wait a minute!! that won't work if income is the same as last year. Well, I don't know what we can do for you then, I will get back to you..All that from the corporate office a company out there selling these plans every day!! (They did finally come up with a solution).
This is not the first time I have had trouble with those selling retirement plans not knowing the rules and causing trouble for my clients. I know there is a learning curve with any business, we all started somewhere, but the rules on income limitations and contribution limitations should be the very basic knowledge required.

[geekgirldany]

Regarding brokers and staff not knowing on the SEP... alot of them don't know much about the differences or limitations. I had one customer that sent money to his broker/investment advisor through the year back in 2006 I believe. Customer had a SIMPLE and the limit was $12,500... he had sent in $19,000. When I talked to the advisor she was telling me the rules for 401K not Simple. So I had to email information with the differences. It was corrected and the overage was put towards the next year. Customer is no longer with that investment advisor

[Zee]

How are they pulling that off? If they receive a check for income made out to XYZ Corp, how are they depositing into the personal account. Doesn't the bank balk at this?

Good point. Perhaps I've mispoken.

The situation most often encountered is the payment of expenses from a personal account for an S Corporation, not deposits. I've generally recommended such transactions be structured as loans in the Corporate minutes.

But, I suppose it's be possible to open a business checking account (not a personal account) and operate with a business identity that does not identify the Corporation status. Of course, this wouldn't be prudent since it would negate the liability benefits of a corporation.

[WhiteOleander]

How are they pulling that off? If they receive a check for income made out to XYZ Corp, how are they depositing into the personal account. Doesn't the bank balk at this?

[Zee]

OK. Let's assume a personal checking account (not in the S-Corporation name) is utilized solely for the S-Corporation income & expenses and nothing else.

I would agree the IRS could require the business to be taxed as a Schedule C (if they so desired). However, I would think that if the business operated and reported as an S Corporation in all other respects, the IRS probably would not pursue this action.

As I've said before, lots of small one-person S-Corporations fail to establish a Corporate Account. I haven't heard of the any situations where the transactions have been disallowed for this reason only, but I'm sure it's happened. Can someone provide some examples, or court cases?