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View Full Version : Going Inc. ????????


FS Lawn
04-05-2003, 08:29 PM
What is everyones opinion on going Incorporated ? What are the pro & cons......

FS Lawn
04-05-2003, 10:59 PM
I am thinking of going "Incorporated" and have been told some good and bad things about it. I was wondering if there are any other business out there that have ( 1st hand ) experience with this. Please share your experience with me and help with this dilemma..........:confused:

Turfdude
04-06-2003, 08:37 AM
I just incorporated this winter. I have been in biz since 1988 (boy I waited too long).

Good points. The corporation is its own entity. You get separation from the corporation should there be a legal problem (e.g. if you're sued, they cannot touch your personal assests). Tax wise, there are some advantages, but review them w/ an accountant first.

Cons: I had to re-register all 4 of my vehicles and place trucks in corp. name. Although I did not have to pay sales tax, It cost me over $800 at the DMV to do this and not one truck was really due for registration. I also had to purchase new uniforms for my staff at just under $1000.00 which was for T's, staffs & sleeveless T's only (sweats & jackets would have killed me now). My trucks have to be re-lettered at approx $200.truck. My workmans comp will go up as I now get a check, but I will be classifying myself as a "salesman" as I do have enough staff to claim this. If ever you do go to court (small claims or otherwise), you'll need legal representation.

You'll have to weight it out for yourself, but in the end it's worth it. We incorporated then elected to change to an S-corp - which is the proper way to select this type of corporation.

KenH
04-06-2003, 09:46 AM
I Incorporated in 1993 on the advice of my accountant. Instead of switching all belongings to the corporation, I still own everything and rent them to the corp. I know in CT, an officer of the corp. cant collect unemployment. Check what your corp. dues are pre year to the state, and you have to hold an annual corp meeting, with notes taken and filed.

So far I havent seen a downside.

rodfather
04-06-2003, 10:03 AM
You may also want to consult with an attorney of going LLC instead. We did 2 years ago instead of Inc.

John Allin
04-06-2003, 04:56 PM
There are numerous reasons for going one way or the other. Protecting assets is the major "pro"... however, you should take a personal inventory of just what your assets are that you need to "protect".

Do you have a large bank account (6 figures), a home with alot of equity, lots of "toys" in your own name (again, 6 figures worth), stocks or accumulated dividends or substantial stock options, or ownership in another business. Most people don't have that kind of equity that requires protection within the first few years starting out. And, if you're growing the business most of your "assets" are tied to the business anyway.

The Government can (effectively) force you into incorporating (in some fashion) if you carry a substantial inventory (which most of us don't due to the nature of the business). They do this by requiring accrural basis accounting (and in our industry, large inventory assets [generally when inventory gets to mid 7 figures] can trigger that to happen).

There are substantial tax benefits to staying Sole Prop for quite sometime, if you don't have that much personal asset to protect.

These are questions to ask an accountant. Forget asking an attorney - they ALL want you to go some sort of corporate structure. And, keep in mind that an accountant and/or an attorney are just "advisors". See what they say (or what a couple of them say) but make your own decision. They work for YOU, not the other way around.

I think Bruce Lansbery (Bruces) can shed more light on this one, as he's much more well versed in such things than anyone else I know who posts here.

LawnLad
04-06-2003, 05:49 PM
To add to John's point about size of risk... regardless of your bank account size, what is your aversion to risk? What are you willing to loose? You might not require $100K in the bank to justify being incorporated.

Run the numbers. One of the advantages of being incorporated is that you can avoid self employment taxes on draws that you take which amounts to a 15% savings. Avoiding payroll taxes on all your profit/income is an advantage, particulary the larger the number.

If you're a sole proprietorship and you have a profit/income (no distinction with SP) of $50,000, you will pay self employment tax of approximately $7500.

If you're incorporated and take a salary of $25,000 and then draw the remaining $25,000 you'll save $3,750.00 in self employment taxes.

Is this the only reason to incorporate? No. As long as you're making the profit to justify it along with the other numerous advantages, it is seriously worth considering.

bruces
04-06-2003, 10:53 PM
Originally posted by LawnLad
To add to John's point about size of risk... regardless of your bank account size, what is your aversion to risk? What are you willing to loose? You might not require $100K in the bank to justify being incorporated.

Run the numbers. One of the advantages of being incorporated is that you can avoid self employment taxes on draws that you take which amounts to a 15% savings. Avoiding payroll taxes on all your profit/income is an advantage, particulary the larger the number.

If you're a sole proprietorship and you have a profit/income (no distinction with SP) of $50,000, you will pay self employment tax of approximately $7500.

If you're incorporated and take a salary of $25,000 and then draw the remaining $25,000 you'll save $3,750.00 in self employment taxes.

Is this the only reason to incorporate? No. As long as you're making the profit to justify it along with the other numerous advantages, it is seriously worth considering.

This is true, to an extent. This works for an S corporation. However, the IRS long ago caught on to the scheme of taking a 25,000 salary and 25,000 in distributions to keep from paying payroll taxes on the full 50,000 of earnings.

If they deem that you are not taking a reasonable salary for your work for the corporation they will charge you payroll taxes on the amount up to what they deem to be a "reasonable compensation".

Obviously, this is not going to happen unless you get audited, but it is a definite risk if you are not taking a reasonable salary and have significant profits that you are taking out in the form of distributions.

What is a reasonable salary? It depends on what you do, the size of the company, and many other factors. But it can be painfully obvious to when a company is making a profit of 100,000, the owner is taking a salary of 25,000 and distributions of 75,000 that maybe the salary is low.

Reasonableness of compensation varies from situation to situation, the benefits of incorporating or not vary also. You should review your situation with your tax advisor primarily (from a dollar and cents standpoint) and your attorney, from a legal standpoint,

And, as John Allin said, I'll almost guarantee the attorney will recommend some status other than a sole proprietor.

They will want you to be something that you have to pay them to set up.

There are also some pluses to taking a larger salary that can somewhat offset the cost of the payroll taxes.

One is an increased pay in to social security for future benefits.

Another is an increased base for retirement plan contributions.

Bottom line is it all depends on your particular situation. What is good for some doesn't work for others.

Try to get some good advice and weigh all your options.

Mike Bradbury
04-07-2003, 01:05 PM
Originally posted by LawnLad
To add to John's point about size of risk... regardless of your bank account size, what is your aversion to risk? What are you willing to loose? You might not require $100K in the bank to justify being incorporated.

Run the numbers. One of the advantages of being incorporated is that you can avoid self employment taxes on draws that you take which amounts to a 15% savings. Avoiding payroll taxes on all your profit/income is an advantage, particulary the larger the number.

If you're a sole proprietorship and you have a profit/income (no distinction with SP) of $50,000, you will pay self employment tax of approximately $7500.

If you're incorporated and take a salary of $25,000 and then draw the remaining $25,000 you'll save $3,750.00 in self employment taxes.

Is this the only reason to incorporate? No. As long as you're making the profit to justify it along with the other numerous advantages, it is seriously worth considering.

But you can only draw what you have basis for. You can't take 25k in draws unless you've contributed 25k in investment for that year. At least that's what my acct says.

John Allin
04-07-2003, 01:54 PM
I love these kinds of discussions....

LawnLad
04-07-2003, 02:12 PM
Yes Bruces, you're absolutely right. I neglected to mention "reasonable" in my post. Thanks for clarifying the point so eloquently.

Here'e a hypothetical for your Bruce...

A Sub S Corp has sales of $750,000. Owner takes $50,000 in salary. Company profits another $150,000. Owner takes $75 K in draw. Reasonable?

Better question for you is do you have insight as to how the IRS determines reasonable? If you're paying yourself what you'd have to pay someone else to do your job - would this be reasonable even if the draw is larger than the salary? How does the relationship between the two effect the equation of reasonable?

Thanks...

bruces
04-07-2003, 02:39 PM
Originally posted by Mike Bradbury
But you can only draw what you have basis for. You can't take 25k in draws unless you've contributed 25k in investment for that year. At least that's what my acct says.

Not exactly right. You are limited to accumulated basis that you haven't previously drawn. It could be previous earnings, not just investment.

Example, year one, profits not drawn of 25,000.

Year two, profits in corporation of 20,000.

You could draw up to $45,000 in year two.

And, you can draw in excess of basis, but that can have tax consequences.

Rules get somewhat complex here, but generally, as long as you have not drawn more than your initial investment plus profits, less losses, you are ok.

Basis is generally initial investment, plus profits, less losses, less distributions.

Loans from the shareholders also enter into basis, but like I say, that discussion is fairly complex.

bruces
04-07-2003, 02:51 PM
Originally posted by LawnLad
Yes Bruces, you're absolutely right. I neglected to mention "reasonable" in my post. Thanks for clarifying the point so eloquently.

Here'e a hypothetical for your Bruce...

A Sub S Corp has sales of $750,000. Owner takes $50,000 in salary. Company profits another $150,000. Owner takes $75 K in draw. Reasonable?

Better question for you is do you have insight as to how the IRS determines reasonable? If you're paying yourself what you'd have to pay someone else to do your job - would this be reasonable even if the draw is larger than the salary? How does the relationship between the two effect the equation of reasonable?

Thanks...

As far as insights, in general, how much time is spent on job, what comparable people in comparable companies make, size of company, etc. would be some things they would look at.

What you would have to pay someone else to do the job is a good guideline to determine if compensation is reasonable.

Also, do you have a set method of compensation? Salary plus bonus based on profits, sales, etc. Is compensation documented in board minutes?

Another thing, the closer you get to the FICA wage limit, the less exposure you have. The dollar amount of any adjustment will be minimal if you are talking about the medicare tax (2.9% total) on any amount that they want to classify as salary.

Another issue, if more than one shareholder, are salaries in proportion to stock holdings or are they based on other factors?

In your scenario, seems that your example numbers are reasonable, without really knowing more about the particular operation.

And reasonable can be different from one IRS auditor to the next. That is why they have an appeals process.

The best thing to remember is that "hogs get fat and pigs get slaughtered".

In other words, be agressive, but not stupid. Don't take a $10,000 salary and $100,000 in draws.