New S-Corp

[Unregistered]

I have a new S-Corp coming in this next week. I just want to be sure of a few things. I need to see the papers the lawyer filed and make sure the S-Corp election was filed.

Any assets transferred to the S-Corp that have deeds or titles must have been deeded to the S-Corp. If they were not then they do not belong to the S-Corp, they can only be leased to the S-Corp by the individuals, unless they want to get the deeds/titles changed, now. Correct?

Assets that do not have deeds or titles can be transferred to the S-Corp, but the client needs to understand that they will belong to the S-Corp when there is a sale of that asset. Assets that have been constructed on real property that does not belong to the S-Corp (such as corrals) can be transferred into the S-Corp. Correct?

Any business that was done prior to the filing of the Corp papers must be divided and put on a Sch F, like they have reported the income/expense in prior years. Correct?

How is the stock set up and a value determined? Is that something that the attorney would have done when he filed the Incorporation papers?

Any advice would be appreciated. Advice regarding anything that I need to be extremely careful with would also be appreciated. This is not going to be a difficult S-Corp, so it would be a good one for me to do. I only have one other S-Corp that has very little activity and I did not set it up.

[Bees Knees]

I assume we are talking about a farm or a horse ranch or cattle ranch or something along these lines.

I would keep all real estate out of the corporation, including buildings and structures attached to the real estate, such as buildings, single purpose structures and corrals. It isn’t a requirement, but look at it this way. If they want to sell the real estate, don’t you think the buyers are also going to look at the structures and assume they get that too? Anything that looks big and permanent is something a buyer will want. And so you complicate things when you try to say the land is owned by so and so, but so and so’s S corporation owns that fence over there.

Another issue has to do with appreciation of assets. You want to keep the appreciable assets out of the corporation, such as the real estate and structures on the real estate. The reason is that if they later decide to liquidate the corporation and keep the real estate and structures for themselves, they would have to pay tax on the liquidation. The FMV of those assets at the time of liquidation over their cost basis is a taxable gain, even though the shareholder never really sold them.

Another issue: This is a good way to pull cash out of the corporation without going through payroll and payroll taxes (FICA, FUTA, etc.) The shareholder rents these assets (real estate and structures) to the corporation and reports the rental income on Schedule E. You can’t do that with equipment because IRS will say it is a Schedule C rental business subject to SE tax if the Shareholder is providing services to the corporation.

You also asked about deeding title to the corporation on various assets. That will not be necessary if the types of assets that need a deed (such as the real estate) are kept out of the corporation.

Basically, use the corporation as the income vehicle. The corporation owns the business operations that generate income. The corporation buys and sells the inventory, owns the rights to business contracts, pays operation expenses, and collects income. It can rent the big stuff from the shareholders to do those things. If the shareholders decide they don’t want to be a corporation any more, really, the only thing left in the corporation to liquidate is the cash in the checkbook and some inventory and small equipment, like maybe a computer and stuff. Those are easy to liquidate. Real estate is not.

Your question about dividing activity between the corporation and Schedule F from before and after the formation of the corporation is correct.

As to the value of stock, you add up the fair market value of all assets that are being contributed to the corporation (cash, inventory, equipment, etc.) and then issue stock in exchange for those assets. Depending on the state of incorporation, you may have franchise taxes to pay per share of stock. Ask the lawyer about that. In Minnesota, it doesn’t matter. So I always advise my clients to say $1 per share. If they put $10,000 worth of stuff into the corporation, they get 10,000 shares of common stock.

I think that covers all of your questions.

[Unregistered]

Bees Knees

Thank you so much for your clear answers. Answers like this are worth your wieght in gold.