I have a new client that claims he set up his business as a Corporation. But instead, the return he filed on his own last year was as a sole proprietor and all business transactions were reported on a Schedule C. He doesn't have any employees, and there are no other owners. How big of a problem do you think this is? After explaining to him all of the extra cost of filing corporate returns and amending his personal return, he wants to continue filing on a Schedule C. Is there anyway to say he isn’t a corporation until he actually starts filing a corporation tax return, and forget about fixing the prior year returns?
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Corporation
It is possible that he didn’t actually transfer any assets to the corporation in exchange for stock. If he just went to an attorney, signed some papers, and then went home and continued to conduct business as normal, then nothing happened.
You have to act like a corporation to be treated as a corporation. Holding stockholder meetings, issuing stock for assets, setting up a corporation checkbook, applying for federal ID numbers, etc. are all stuff you do after visiting the lawyer.
If he didn’t do those things, his business is still a sole proprietorship. -
There are more than just tax issues involved. Most people form corporations for liability protection. If the person incorporates for liability protection, but doesn't go through all the motions to act like a corporation, they may have zero liability protection. Incorporating isn't a substitute for insurance, but it can help shield the shareholders, but only if it's done right.
I'd ask the attorney. Three guesses what the answer will be.Comment
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