Nevada S Corporation
S Corporations -
Nevada
An S-Corporation or "pass-through" type corporation
is a separate entity from yourself for both tax and asset
protection purposes. The classic phrase:
"I AM NOT THE CORPORATION AND THE
CORPORATION IS NOT ME."
will guide your management of your corporation.
The corporation and its employees in the execution of their work
are liable only for the assets of the corporation and do not hold
personal liability. The corporation will file a separate tax
return US Form 1120-S, and employee those it deems necessary (ie
you) to do business. The corporation will need to file an
election to act as an S-Corporation within 75 days of its
incorporation on an IRS form 2253. If the deadline is
missed, you can apply annually to shift to S-corporation status.
The key difference for your S-Corporation is
both a good and bad thing. Any income the corporation
derives will be passed through to its owners via a K-1
distribution form from the IRS and taxed at your personal tax
rates. Good news - the corporation's income will be taxed at
your personal rates. Bad news - corporation rates (for
C-Corporations) tend to be lower than personal tax rates
for small businesses.
The IRS requires that you draw a market based
and documentable salary from your corporation. You need to
take the time to research the typical salaries for your industry
and line of work-- and document those facts in writing or notes
from telephone conversations. Websites such as hotjobs.com
and monster.com can guide you to salary surveys for your industry.
Why is your salary so important? Because there are five
other ways to take money out of your corporation, and most all of
them are far preferable to salary. In particular, your
salary is subject to FICA taxes up to a cap of
approximately $88k in tax year 2004 and your salary will be taxed
at your personal tax rates. For many small businesses,
corporate tax rates are far lower than personal tax rates:
Your S-Corporation will pass through its
income to its owners -- who will pay tax at their personal tax
rates. Cash stuck in your
corporation doesn't do you much good-- does it? What are the
other five ways to take cash out of your corporation?
- Distributions - Your corporation can
declare distributions. However, you will be taxed at 5% if you
are in the 10% or 15% personal tax bracket, and 15% if you are
in any other tax bracket. Depending on your personal tax
rates, distributions can be a good way to take money out of your
corporation (subject to market based salary rules).
- Rents - Your corporation can rent
space in your home or other commercial property and pay a
market-based and documented rent to you. Remember, you are
not the corporation, and the corporation is not you. A
formal lease should be signed for these activities.
- Loans - Some financial advisors
recommend loans as one of the best ways to take money out of
your corporation. Your corporation can loan you money at a
market based and documented interest rate-- you must make
payments on this loan. However, the loan term can be up to
5 years depending on IRS regulations (consult with your CPA).
The loan proceeds are not taxable, however, the corporation will
realize income on the interest that you pay on the loan.
- Fringe Benefits - As both primary
shareholder of your corporation, and primary employee, there are
a number of highly favorable benefit plans that you can set up
including Simple IRAs, Cafeteria
Plans, and many others. In addition, business travel
including meals is deductible subject to appropriate business
need. One key benefit not available to S-Corporation
owners is a Medical Reimbursement Plan - a popular way to derive
medical expense benefits from your closely held corporation.
- Royalties - You can license
intellectual property (copyrights, trademarks, patents) to your
corporation for a monthly fee or one-time payment.
