S-Corp Question

[WhiteOleander]

Have a client that operates a masonry business as an s-corp. He is the only shareholder. He also makes jewelry and wants to begin selling that. I suggested he just begin that as a Sch C.He wants to operate it through the s-corp.
Anyone know if this is allowed. I read that it may depend on the articles of incorporation.

Any experience or info re: IRS position on this?

Thanks much.

[ChEAr$]

Have a client that operates a masonry business as an s-corp. He is the only shareholder. He also makes jewelry and wants to begin selling that. I suggested he just begin that as a Sch C.He wants to operate it through the s-corp.
Anyone know if this is allowed. I read that it may depend on the articles of incorporation.

Any experience or info re: IRS position on this?

Thanks much.

Look to your copy in your files (??) of the articles of incorporation. You'll probably read the paragraph as to purpose of the business. Here's a sample:
"This corporation is formed for the purpose of operating a masonry business (or words to that effect) and may engage in any other business legally permitted by the state of Texas"

The last phrase is a general purpose one just about always added by the lawyer who did the paperwork.

(You DO have a copy of the articles for your client, don't you?)

[Gretel]

Have a client that operates a masonry business as an s-corp. He is the only shareholder. He also makes jewelry and wants to begin selling that. I suggested he just begin that as a Sch C.He wants to operate it through the s-corp.
Anyone know if this is allowed. I read that it may depend on the articles of incorporation.

Any experience or info re: IRS position on this?

Thanks much.

Yes, he can have different businesses under one Corporation. If the Articles don't provide for it they can be amended.

The real issue is his liability. It's always a good idea to separate businesses if liability protection is sought. If something happens in his masonry business, the jewelry business is at stake too.

[WhiteOleander]

Thanks for the answers. I don't think it is wise to run the businesses together either because of the liability issues. But, sometimes, clients think corps are the answer to everythiing.

[BHoffman]

A few things:

The NAICS codes will be different. The jewelry making could be considered manufacturing and the masonry could be considered construction contracting.

Different tax credits might be allowed to the jewelry making - research and development? What about the DPAD? How will you split that up? What about the jewelry inventory?

The IRS, if there's ever an audit, might consider the jewelry making to be a hobby depending on whether he makes or loses any money at it.

What about transaction privilege tax (sales tax) reporting? I don't know about your state, but AZ treats construction very differently than retail sales.

[WhiteOleander]

A few things:

The NAICS codes will be different. The jewelry making could be considered manufacturing and the masonry could be considered construction contracting.

Different tax credits might be allowed to the jewelry making - research and development? What about the DPAD? How will you split that up? What about the jewelry inventory?

The IRS, if there's ever an audit, might consider the jewelry making to be a hobby depending on whether he makes or loses any money at it.

What about transaction privilege tax (sales tax) reporting? I don't know about your state, but AZ treats construction very differently than retail sales.

I wondered about the same things. I also wonder about problems if the s-corp has more than one shareholder. If for instance, the other s/h had no participation in the jewelry business, would this be creating different classes of stock? Can all s/hs receive income/expenses from the business they don't participate in? If it becomes unequal, is that a different class of stock?

[geekgirldany]

I had a client that ran two businesses out of one S-Corp. He was already doing this before I started preparing his returns. One was an entertainment business and the other was building houses. The entertainment business was very much prone to lawsuits as it would be easy for someone to get hurt. I told him my opinion of dividing the two businesses. I made sure to keep everything separate for the businesses. He said that if the entertainment biz started making more money he would break it off. I stressed how they could come after the whole S-Corp. Well the building houses crashed and the entertainment biz took off. He did start another S-Corp.

I believe in your situtation it would be okay. I believe you can do a Q-Sub. I looked into that with this client but it was too late to make the election. You will need to research that. As I said it would be okay but stress to the client about Sche C, LLC. It seems like there is low liability with making/selling jewelry. I don't know But just make sure everything is separated, two P&Ls, two Balance sheets, etc.

[Gary2]

I wondered about the same things. I also wonder about problems if the s-corp has more than one shareholder. If for instance, the other s/h had no participation in the jewelry business, would this be creating different classes of stock? Can all s/hs receive income/expenses from the business they don't participate in? If it becomes unequal, is that a different class of stock?

By "participation" I assume you mean labor for that business line. The compensation for that is salary, paid on the W-2, and is unrelated to the quantity of stock owned. There's no requirement that a shareholder in an S-Corp do any labor for the corporation at all.

It's certainly possible to mess up and effectively create two shares of stock. But as long as the salaries paid are fair and reasonable, the fact that they're different has no relevance to the stock.

[Snaggletooth]

Conglomerate

This is do-able. The difficulties raised by BHoffman are real, and can only be solved with separate bookkeeping/accounting, and then plugging both activities into each other for tax reporting.

The difficulties associated with authority classifications (NAICS, other Business descriptins) is usually solved by ascribing the activity with the major volume of business. If the size of activity of one dwarfs the other, you may report the revenue as "Other Income" in the Income section of the tax return on page 1.